e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC
20549
Form 10-K
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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
March 31, 2008
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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
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Commission File Number
001-33625
VIRTUSA CORPORATION
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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04-3512883
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification Number)
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2000 West Park Drive
Westborough, Massachusetts 01581
(508) 389-7300
(Address, Including Zip Code,
and Telephone Number, Including Area Code, of Registrants
Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the
Act:
Common Stock, $0.01 par value per
share
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No: þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No: þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No: o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company 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 þ
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
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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
The aggregate market value of the registrants voting and
non-voting shares of common stock held by non-affiliates of the
registrant on September 30, 2007, based on $15.00 per
share, the last reported sale price on the NASDAQ Global Market
on that date, was $131,733,030.
Indicate the number of shares outstanding of each of the
issuers class of common stock, as of June 2, 2008:
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Class
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Number of Shares
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Common Stock, par value $0.01 per share
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23,058,539
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DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive Proxy Statement for
its 2008 annual meeting of stockholders pursuant to
Regulation 14A within 120 days of the end of the
fiscal year ended March 31, 2008. Portions of the
registrants Proxy Statement are incorporated by reference
into Part III of this
Form 10-K.
With the exception of the portions of the Proxy Statement
expressly incorporated by reference, such document shall not be
deemed filed with this
Form 10-K.
VIRTUSA
CORPORATION
ANNUAL REPORT ON
FORM 10-K
Fiscal Year Ended March 31, 2008
TABLE OF CONTENTS
Part I
This Annual Report on
Form 10-K
(the Annual Report) contains forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are subject to
the safe harbor created by those sections. These
statements relate to, among other things, our expectations
concerning our business strategy. Any statements about our
expectations, beliefs, plans, objectives, assumptions or future
events or performance are not historical facts and may be
forward-looking. Some of the forward-looking statements can be
identified by the use of forward-looking terms such as
believes, expects, may,
will, should, seek,
intends, plans, estimates,
projects, anticipates, or other
comparable terms. These forward-looking statements involve risk
and uncertainties. We cannot guarantee future results, levels of
activity, performance or achievements, and you should not place
undue reliance on our forward-looking statements. Our actual
results may differ significantly from the results discussed in
the forward-looking statements. Our forward-looking statements
do not reflect the potential impact of any future acquisitions,
mergers, dispositions, joint ventures or strategic investments.
Factors that might cause such a difference include, but are not
limited to, those set forth in Item 1A. Risk
Factors and elsewhere in this Annual Report. Except as may
be required by law, we have no plans to update our
forward-looking statements to reflect events or circumstances
after the date of this report. We caution readers not to place
undue reliance upon any such forward-looking statements, which
speak only as of the date made. You are advised, however, to
consult any further disclosures we make on related subjects in
our
Form 10-Q
and 8-K
reports to the Securities and Exchange Commission (the
SEC).
Overview
Virtusa Corporation (the Company,
Virtusa, we, us or
our) is a global information technology services
company. We use an offshore delivery model to provide a broad
range of information technology (IT) services, including IT
consulting, technology implementation and application
outsourcing. Using our enhanced global delivery model,
innovative platforming approach and industry expertise, we
provide cost-effective services that enable our clients to use
IT to enhance business performance, accelerate time-to-market,
increase productivity and improve customer service.
Headquartered in Massachusetts, we have offices in the United
States and the United Kingdom and global delivery centers in
Hyderabad and Chennai, India and Colombo, Sri Lanka. We have
experienced compounded annual revenue growth of 46% over the
five-year period ended March 31, 2008.
Our enhanced global delivery model leverages a highly-efficient
onsite-to-offshore service delivery mix and proprietary tools
and processes to manage and accelerate delivery, foster
innovation and promote continual improvement. Our global service
delivery teams work seamlessly at our client locations and at
our global delivery centers in India and Sri Lanka to provide
value-added services rapidly and cost-effectively. They do this
by using our enhanced global delivery model, which we manage to
a 20/80, or better, onsite-to-offshore service delivery mix.
We apply our innovative platforming approach across all of our
services. We help our clients combine common business processes
and rules, technology frameworks and data into reusable
application platforms that can be leveraged across the
enterprise to build, enhance and maintain existing and future
applications. Our platforming approach enables our clients to
continually improve their software platforms and applications in
response to changing business needs and evolving technologies
while also realizing long-term and ongoing cost savings.
We enable our clients to use IT to accelerate time-to-market,
increase productivity and improve customer service. We are able
to reduce costs through our enhanced global delivery model. We
also reduce the effort and costs required to maintain and
develop IT applications by streamlining and consolidating our
clients applications on an ongoing basis. We believe that
our solution provides our clients with the consultative and
high-value services associated with large consulting and systems
integration firms, the cost-effectiveness associated with
offshore IT outsourcing firms and ongoing benefits of our
innovative platforming approach.
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We provide our IT services primarily to enterprises engaged in
the following industries: communications and technology;
banking, financial services and insurance (BFSI); and media and
information. Our current clients include leading global
enterprises such as Aetna Life Insurance Company, British
Telecommunications plc (BT), ING North America Insurance
Corporation, International Business Machines Corporation, Iron
Mountain Information Management, Inc., JPMorgan Chase Bank, N.A.
and Thomson Healthcare Inc., and leading enterprise software
developers such as Pegasystems Inc. and Vignette Corporation. We
have a high level of repeat business among our clients. For
instance, during the fiscal year ended March 31, 2008, 96%
of our revenue came from clients to whom we had been providing
services for at least one year. Our top ten clients accounted
for approximately 76%, 72% and 62% of our total revenue in the
fiscal years ended March 31, 2008, 2007 and 2006,
respectively. Our largest client, BT, accounted for 27% and 23%
of our total revenue in the fiscal years ended March 31,
2008 and 2007, respectively.
Our
solution
We deliver a broad range of IT services using an enhanced global
delivery model and an innovative platforming approach. We have
significant domain expertise in IT-intensive industries,
including communications and technology, BFSI and media and
information. We enable our clients to leverage IT to improve
business performance, use IT assets more effectively and reduce
IT costs.
Broad range of IT services. We provide a broad
range of IT services, either individually or as part of an
end-to-end solution, from IT consulting and technology
implementation to application outsourcing. Our IT consulting
services include strategic activities such as defining
technology roadmaps, providing architecture services and
assessing application portfolios. Our technology implementation
services include application development, systems integration
and legacy system conversion and enablement. Our application
outsourcing services include application enhancement,
maintenance and infrastructure management.
Enhanced global delivery model. We believe we
have an enhanced and integrated global delivery model. Our
enhanced global delivery model leverages a highly-efficient
onsite-to-offshore service delivery mix and proprietary tools
and processes to manage and accelerate delivery, foster
innovation and promote continual improvement. We manage to a
20/80, or better, onsite-to-offshore service delivery mix, which
allows us to provide value-added services rapidly and
cost-effectively. During the past three fiscal years, we
performed more than 80% of our total billable hours at our
offshore global delivery centers. Our onsite client service
teams comprise senior technical and industry experts, who work
on an integrated basis with our offshore teams in India and Sri
Lanka. We leverage our global delivery model across all of our
service offerings.
Platforming approach. We apply an innovative
platforming approach across our IT consulting, technology
implementation and application outsourcing services to reduce
costs, increase productivity and improve the efficiency and
effectiveness of our clients IT application environments.
As part of our platforming approach, we assess our clients
application environments to identify common elements, such as
business processes and rules, technology frameworks and data. We
incorporate those common elements into one or more application
platforms that can be leveraged across the enterprise to build,
enhance and maintain existing and future applications. Our
platforming approach enables our clients to continually improve
their software platforms and applications in response to
changing business needs and evolving technologies while also
realizing long-term and ongoing cost savings.
Services
We provide a broad range of IT consulting, technology
implementation and application outsourcing services to our
clients, either individually or as part of an end-to-end
solution.
IT
consulting services
We provide IT consulting services to assist our clients with
their continually-changing IT environments. Our goal is to help
them to continually improve the effectiveness and efficiency of
their IT application environments by adopting and evolving
towards re-useable software platforms. We help clients analyze
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business
and/or
technology problems and identify and design platform-based
solutions. We also assist our clients in planning their IT
initiatives and transition plans.
Our IT consulting services include the following assessment and
planning, architecture and design and governance-related
services:
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Assessment
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and Planning Services
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Architecture and Design Services
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Governance-Related Services
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application inventory and portfolio
assessment
business/technology alignment
analysis
IT strategic planning
quality assurance process consulting
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enterprise architecture analysis
technology roadmaps
product evaluation and selection
business process analysis and design
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program governance and change
management
program management office planning
IT process/methodology consulting
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During our consulting engagements, we often leverage proprietary
frameworks and tools to differentiate our services and to
accelerate delivery. Examples of these frameworks and tools
include our Strategic Enterprise Information Roadmap framework
and our Business Process Visualization tools. We believe that
our consulting services are also differentiated in that we are
typically able to leverage our global delivery model for our
engagements. Our onsite teams work directly with our clients to
understand and analyze the current-state problems and to design
the conceptual solutions. Our offshore teams work seamlessly
with our onsite teams to design and expand the conceptual
solution, research alternatives, perform detailed analyses,
develop prototypes and proofs-of-concept and produce detailed
reports. We believe that this approach reduces cost, allows us
to explore more alternatives in the same amount of time and
improves the quality of our deliverables.
Technology
implementation services
Our technology implementation services involve building, testing
and deploying IT applications, and consolidating and
rationalizing our clients existing IT applications and IT
environments into platforms.
Our technology implementation services include the following
development, legacy asset management, data warehousing and
testing services:
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Legacy Asset
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Data
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Development Services
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Management Services
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Warehousing Services
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Testing Services
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application development
package implementation and
integration
software product engineering
Business Process Management
implementations
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systems consolidation and
rationalization
technology migration and porting
web-enablement of legacy applications
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data management and transformation
business intelligence, reporting and
decision support
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testing frameworks
automation of test data and cases
test cycle execution
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Our technology implementation services are typically
characterized by short delivery cycles, stringent service levels
and evolving requirements. We have incorporated rapid, iterative
development techniques into our approach, extensively employing
prototyping, solution demonstration labs and other collaboration
tools that enable us to work closely with our clients to
understand and adapt to their changing business needs. As a
result, we are able to develop and deploy applications quickly,
often within solution delivery cycles of less than three months.
We provide technology implementation services across Microsoft
and Java-based, client-server and mainframe technologies.
Application
outsourcing services
We provide a broad set of application outsourcing services that
enable us to provide comprehensive support for our clients
software applications and platforms. We endeavor to continually
improve the applications under our management and to evolve our
clients IT applications into leverageable platforms.
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Our application outsourcing services include the following
application and platform management, infrastructure management
and quality assurance management services:
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Application and Platform
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Infrastructure
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Quality Assurance
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Management Services
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Management Services
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Management Services
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production support
maintenance and enhancement of
custom-built and package-based applications
ongoing software engineering services
for software companies
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systems administration
database administration
monitoring
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outsourcing of quality assurance
planning
preparation of test cases, scripts and
data
execution of test cases, scripts and
data
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We believe that our application outsourcing services are
differentiated because they are based on the principle of
migrating installed applications to flexible platforms that can
sustain further growth and business change. We do this by:
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developing a roadmap for the evolution of applications into
platforms
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establishing an ongoing planning and governance process for
managing change
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analyzing applications for common patterns and service
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identifying application components that can be extended or
enhanced as core components
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integrating new functions, features and technologies into the
target architecture
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Platforming
approach
Our platforming approach is embodied in a set of proprietary
processes, tools and frameworks that addresses the fundamental
challenges confronting IT executives. These challenges include
the rising costs of technology ownership and the need to
accelerate time-to-market, improve service and enhance
productivity.
Our platforming approach draws from analogs in industries that
standardize on platforms composed of common components and
assemblies used across multiple product lines. Similarly, we
work with our clients to evolve their diverse software assets
into unified, rationalized software platforms. Our platforming
approach leads to simplified and standardized software
components and assemblies that work together harmoniously and
readily adapt to support new business applications. For example,
a software platform for trading, once developed within an
investment bank, can be the foundation for the banks
diverse trading applications in equities, bonds and currencies.
Our platforming approach stands in contrast to traditional
enterprise application development projects, where different
applications remain separate and isolated from each other,
replicating business logic, technology frameworks and enterprise
data.
At the center of our platforming approach is a five-level
maturity framework that allows us to adapt our service offerings
to meet our clients unique needs. Level 1 maturity in
our platforming approach represents traditional applications
where every line of code is embedded and unique to the
application and every application is monolithic. Level 2
applications are less monolithic and more flexible and
demonstrate characteristics such as configurability and
customizability. Level 3 are advanced applications where
the common code components and software assets are leveraged
across multiple application families and product lines.
Level 4 applications are framework-driven where the core
business logic is reused with appropriate custom logic built
around them. At the highest level of maturity are Level 5
applications, where platforms are greatly leveraged to simplify
and accelerate application development and maintenance.
At lower levels of maturity, few assets are created and reused.
Consequently, agility, total cost of ownership and ability to
quickly meet client needs are sub-optimal. As organizations
mature along this continuum, from Level 1 to Level 5,
substantial intellectual property is created and embodied in
software platforms that enable steady gains in agility, reduce
overall cost of ownership and accelerate time-to-market.
Our platforming approach improves software quality and IT
productivity. Software assets within platforms are reused across
applications, their robustness and quality improves with time
and our clients are able to develop software with fewer defects.
A library of ready-made building blocks significantly enhances
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productivity and reduces software development risks compared to
traditional methods. This establishes a cycle of continual
improvement: the more an enterprise embraces platform-based
solutions, the better the quality of its applications and the
less the effort required to build, enhance and maintain them.
Global
delivery model
We have developed an enhanced global delivery model that allows
us to provide innovative IT services to our clients in a
flexible, cost-effective and timely manner. Our model leverages
an efficient onsite-to-offshore service delivery mix and our
proprietary Global Innovation Process (GIP), to manage and
accelerate delivery, foster innovation and promote continual
improvement.
We manage to a highly-efficient 20/80, or better,
onsite-to-offshore service delivery mix, which allows us to
cost-effectively deliver value-added services and rapidly
respond to changes in resources and requirements. During the
past three fiscal years, we performed more than 80% of our total
annual billable hours at our offshore global delivery centers.
Using our global delivery model, we generally maintain onsite
teams at our clients locations and offshore teams at one
or more of our global delivery centers. Our onsite teams are
generally composed of program and project managers, industry
experts and senior business and technical consultants. Our
offshore teams are generally composed of project managers,
technical architects, business analysts and technical
consultants. These teams are typically linked together through
common processes and collaboration tools and a communications
infrastructure that features secure, redundant paths enabling
seamless global collaboration. Our global delivery model enables
us to provide around-the-clock, world-class execution
capabilities that span multiple time zones.
Our enhanced global delivery model is built around our
proprietary GIP, which is a software lifecycle methodology that
combines our decade-long experience building platform-based
solutions for global clients with leading industry standards
such as Rational Unified Process, eXtreme Programming,
Capability Maturity Model and Product Line Engineering. By
leveraging GIP templates, tools and artifacts across diverse
disciplines such as requirements management, architecture,
design, construction, testing, application outsourcing and
production support, each team member is able to take advantage
of tried and tested software engineering and platforming best
practices and extend these benefits to clients.
We have adapted and incorporated modern techniques designed to
accelerate the speed of development into GIP, including rapid
prototyping, agile development and eXtreme Programming. During
the initial process-tailoring phase of an engagement, we work
with the client to define the specific approach and tools that
will be used for the engagement. This process-tailoring takes
into consideration the clients business objectives,
technology environment and currently-established development
approach. We believe our innovative approach to adapting proven
techniques into a custom process has been an important
differentiator. For example, a large high-tech manufacturer
engaged us to use our process-tailoring approach to design a
common, standards-based development process for use by its own
product development teams.
The backbone of GIP is our global delivery operations
infrastructure. This infrastructure combines enabling tools and
specialized teams that assist our project teams with important
enabling services such as workforce planning, knowledge
management, integrated process and program management and
operational reporting and analysis.
Two important aspects of our global delivery model are
innovation and continual improvement. A dedicated process group
provides three important functions: they continually monitor,
test and incorporate new approaches, techniques, tools and
frameworks into GIP; they advise project teams, particularly
during the process-tailoring phase; and they monitor and audit
projects to ensure compliance. New and innovative ideas and
approaches are broadly shared throughout the organization,
selectively incorporated into GIP and deployed through training.
Clients also contribute to innovation and improvement as their
ideas and experiences are incorporated into our body of
knowledge. We also seek regular informal and formal client
feedback. Our global leadership and executive team regularly
interacts with client leadership and each client is typically
given a formal feedback survey on a quarterly basis. Client
feedback is qualitatively and quantitatively analyzed and forms
an important component of our teams performance
assessments and our continual improvement plans.
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Sales and
marketing
Our global sales, marketing and business development teams seek
to develop strong relationships with managers and executives at
prospective and existing clients to establish long-term business
relationships that continue to grow in size and strategic value.
As of March 31, 2008, we had 76 sales, marketing and
business development professionals, including sales managers,
sales representatives, account managers, telemarketers, sales
support personnel and marketing professionals.
The sales cycle for our services often includes initiating
contact with a prospective client, understanding the prospective
clients business challenges and opportunities, performing
discovery or assessment activities, submitting proposals,
providing client case studies and references and developing
proofs-of-concept or solution prototypes. We organize our sales
teams by business unit with professionals who have specialized
industry knowledge. This industry focus enables our sales teams
to better understand the prospective clients business and
technology needs and to offer appropriate industry-focused
solutions.
Sales and sales support. Our sales and sales
support teams focus primarily on identifying, targeting and
building relationships with prospective clients. These teams are
supported in their efforts by industry specialists, technology
consultants and solution architects, who work together to design
client-specific solution proposals. Our sales and sales support
teams are based in offices throughout India, Sri Lanka, the
United Kingdom and the United States.
Account management. We assign experienced
account managers who build and regularly update detailed account
development plans for each of our clients. These managers are
responsible for developing strong working relationships across
the client organization, working day-to-day with the client and
our service delivery teams to understand and address the
clients needs. Our account managers work closely with our
clients to develop a detailed understanding of their business
objectives and technology environments. We use this knowledge to
identify and target additional consulting engagements and other
outsourcing opportunities.
Marketing. We maintain a marketing presence in
India, Sri Lanka, the United Kingdom and the United States.
Our marketing team seeks to build our brand awareness and
generate target lists and sales leads through industry events,
press releases, thought leadership publications, direct
marketing campaigns and referrals from clients, strategic
alliances and industry analysts. The marketing team maintains
frequent contact with industry analysts and experts to
understand market trends and dynamics.
Strategic alliances. We have strategic
alliances with software companies, some of which are also our
clients, to provide services to their customers. We believe
these alliances differentiate us from our competition. Our
extensive engineering, quality assurance and technology
implementation and support services to software companies enable
us to compete more effectively for the technology implementation
and support services required by their customers. In addition,
our strategic alliances with software companies allow us to
share sales leads, develop joint account plans and engage in
joint marketing activities.
Clients
and industry expertise
We market and provide our services primarily to companies in
North America and Europe. For additional discussion regarding
geographic information, see note 16 to our consolidated
financial statements included elsewhere in this Annual Report. A
majority of our revenue for the fiscal year ended March 31,
2008 was generated from Forbes Global 2000 firms or their
subsidiaries. We believe that our regular, direct interaction
with senior executives at these clients, the breadth of our
client relationships and our reputation within these clients as
a thought leader differentiates us from our competitors. The
strength of our relationships has resulted in significant
recurring revenue from existing clients. In the fiscal year
ended March 31, 2008, 73% of our revenue came from clients
who spent more than $5.0 million with us and 86% came from
clients who spent more than $2.0 million with us. Our
largest client, BT, accounted for 27% and 23% of our total
revenue in the fiscal years ended March 31, 2008 and 2007,
respectively.
We focus primarily on three industries: communications and
technology, BFSI and media and information. We build expertise
in these industries through our customer experience and industry
alliances, by hiring
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industry specialists and by training our business analysts and
other team members in industry-specific topics. Drawing on this
expertise, we strive to develop industry-specific perspectives
and services.
Communications and technology. For our
communications clients, we focus on customer service, sales and
billing functions and regulatory compliance and help them
improve service levels, shorten time-to-market and modernize
their IT environments. For our technology clients, which include
hardware manufacturers and software companies, we provide a wide
range of industry-specific service offerings, including product
management services; product architecture, engineering and
quality assurance services; and professional services to support
product implementation and integration. These clients often
employ cutting-edge technology and generally require strong
technical skills and a deep understanding of the software
product lifecycle.
Banking, financial services and insurance. We
provide services to clients in the retail, wholesale and
investment banking areas; financial transaction processors; and
insurance companies encompassing life,
property-and-casualty
and health insurance. For our BFSI clients, we have developed
industry-specific services for each of these sectors, such as an
account opening framework for banks, compliance services for
financial institutions and customer self-service solutions for
insurance companies. The need to rationalize and consolidate
legacy applications is pervasive across these industries and we
have tailored our platforming approach to address these
challenges.
Media and information. For our media and
information clients, we focus primarily on solutions involving
electronic publishing, online learning, content management,
information workflow and mobile content delivery as well as
personalization, search technology and digital rights
management. Many media and information providers are focused on
building common platforms that provide customized content from
multiple sources, customized and delivered to many consumers
using numerous delivery mechanisms. We believe our platforming
approach is ideally suited to these opportunities.
Competition
The IT services market in which we operate is highly
competitive, rapidly evolving and subject to shifting client
needs and expectations. This market includes a large number of
participants from a variety of market segments, including:
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offshore IT outsourcing firms, such as Cognizant Technology
Solutions Corporation, HCL Technologies Ltd., Infosys
Technologies Limited, Patni Computer Systems Limited, Satyam
Computer Services Limited, Tata Consultancy Services Limited,
Tech Mahindra Limited and Wipro Limited
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consulting and systems integration firms, such as Accenture
Ltd., BearingPoint, Inc., Cap Gemini S.A., Computer Sciences
Corporation, Deloitte Consulting LLP, Electronic Data Systems
Corporation, IBM Global Services Consulting and Sapient
Corporation
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We also occasionally compete with in-house IT departments,
smaller vertically-focused IT service providers and local IT
service providers based in the geographic areas where we
compete. We expect additional competition from offshore IT
outsourcing firms in emerging locations such as Eastern Europe,
Latin America and China, as well as offshore IT service
providers with facilities in less expensive geographies within
India.
We believe that the principal competitive factors in our
business include technical expertise and industry knowledge, a
breadth of service offerings to provide one-stop solutions to
clients, a well-developed recruiting, training and retention
model, responsiveness to clients business needs and
quality of services. We believe that we compete favorably with
respect to these factors. Many of our competitors, however, have
significantly greater financial, technical and marketing
resources and a greater number of IT professionals than we do.
We cannot assure you that we will continue to compete favorably
or that we will be successful in the face of increasing
competition.
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Human
resources
We seek to maintain a culture of innovation by aligning and
empowering our team members at all levels of our organization.
Our success depends upon our ability to attract, develop,
motivate and retain highly-skilled and multi-dimensional team
members. Our people management strategy is based on six key
components: recruiting, performance management, training and
development, employee engagement and communication, compensation
and retention. Although not currently a material component of
our people management strategy, we also retain subcontractors at
all of our locations on an as-needed basis for specific client
engagements.
Recruiting. Our global recruiting and hiring
process addresses our need for a large number of highly-skilled,
talented team members. In all of our recruiting and hiring
efforts, we employ a rigorous and efficient interview process.
We also employ technical and psychometric tests for our IT
professional recruiting efforts in India and Sri Lanka. These
tests evaluate basic technical skills, problem-solving
capabilities, attitude, leadership potential, desired career
path and compatibility with our team-oriented,
thought-leadership culture.
We recruit from leading technical schools in India and Sri Lanka
through dedicated campus hiring programs. We maintain a visible
position in these schools through a variety of specialized
programs, including IT curriculum development, classroom
teaching and award sponsorships. We also recruit and hire
laterally from leading IT service and software product companies
and use employee referrals as a significant part of our
recruitment process.
Performance management. We have a
sophisticated performance assessment process that evaluates team
members and enables us to tailor individual development
programs. Through this process, we assess performance levels,
along with each team members potential. We create and
manage development plans, adjust compensation and promote team
members based on these assessments.
Training and development. We devote
significant resources to train and integrate all new hires into
our global team. We conduct a training program for all lateral
hires that teaches them our culture and value system. We provide
a comprehensive training program for our campus hires that
combines classroom training with on-the-job learning and
mentoring. We also engage a leading
e-learning
company to provide world-class leadership development to our
managers. We strive to continually measure and improve the
effectiveness of our training and development programs based on
team member feedback.
Employee engagement and communication. We
believe open communication is essential to our team-oriented
culture. We maintain multiple communication forums, such as
regular company-wide updates from senior management,
complemented by team member sessions at the regional, local and
account levels, as well as regular town hall sessions to provide
team members a voice with management.
Compensation. We consistently benchmark our
compensation and benefits with relevant market data and make
adjustments based on market trends and individual performance.
Our compensation philosophy rewards performance by linking both
variable compensation and salary increases to performance.
Retention. To attract, retain and motivate our
team members, we seek to provide an environment that rewards
entrepreneurial initiative, thought leadership and performance.
During the twelve months ended March 31, 2008, we
experienced team member attrition at a rate of 21.3%, which
included involuntary attrition. We remain committed to improving
and sustaining our attrition levels in-line with our long-term
stated goals. We define attrition as the ratio of the number of
team members who have left us during a defined period to the
total number of team members that were on our payroll at the end
of the period. Our human resources team, working with our
business units, proactively manages team member attrition by
addressing many factors that improve retention, including:
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providing team members with opportunities to handle challenging
technical and organizational problems and learn our platforming
approach
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providing team members with clear career paths, rotation
opportunities across clients and domains and opportunities to
advance rapidly
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providing team members opportunities to interact with our
clients and help shape their IT strategy and solutioning
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creating a strong peer group work environment that pushes our
team members to succeed
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creating a climate where there is a free exchange of ideas
cutting across organizational hierarchy
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creating a family-oriented work environment that is fun and
engaging
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recognizing team performance through highly-visible team
recognition awards
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As of March 31, 2008, we had 4,265 team members worldwide.
We also retain outside contractors from time to time to
supplement our services on an as needed basis. None of our team
members are covered by a collective bargaining agreement or
represented by a labor union. We consider our relations with our
team members to be good.
Network
and infrastructure
Our global IT infrastructure is designed to provide
uninterrupted service to our clients. We use a secure,
high-performance communications network to enable our
clients systems to connect seamlessly to each of our
offshore global delivery centers. We provide flexibility for our
clients to operate their engagements from any of our offshore
global delivery centers by using mainstream network topologies,
including site-to-site Virtual Private Networks,
International Private Leased Circuits and MultiProtocol Label
Switching. We also provide videoconferencing, voice conferencing
and Voice over Internet Protocol capabilities to our global
delivery teams and clients to enable clear and uninterrupted
communication in our engagements, be it intra-company or with
our clients.
We monitor our network performance on a 24x7 basis to ensure
high levels of network availability and periodically upgrade our
network to enhance and optimize network efficiency across all
operating locations. We use leased telecommunication lines to
provide redundant data and voice communication with our
clients facilities and among all of our facilities in
Asia, the United States and the United Kingdom. We also maintain
multiple sites across our global delivery centers in India and
Sri Lanka as
back-up
centers to provide for continuity of infrastructure and
resources in the case of natural disasters or other events that
may cause a business interruption.
We have also implemented numerous security measures in our
network to protect our and our clients data, including
multiple layers of anti-virus solutions, network intrusion
detection, host intrusions detection and information monitoring.
We are ISO 27001 certified and believe that we meet all of our
clients stringent security requirements for ongoing
business with them.
Intellectual
property
We believe that our continued success depends in part on the
skills of our team members, the ability of our team members to
continue to innovate and our intellectual property rights. We
rely on a combination of copyright, trademark and design laws,
trade secrets, confidentiality procedures and contractual
provisions to protect our intellectual property rights and
proprietary methodologies. It is our policy to enter into
confidentiality agreements with our team members and consultants
and we generally control access to and distribution of our
proprietary information. These agreements generally provide that
any confidential or proprietary information developed by us or
on our behalf be kept confidential. We pursue the registration
of certain of our trademarks and service marks in the United
States and other countries. We have registered the mark
Virtusa in the United States, the European Community
and India and have filed for registration of Virtusa
in Sri Lanka. We also have a registered service mark in the
United States, Productization, which we use to
describe our methodology and approach to delivery services. We
have no issued patents.
Our business also involves the development of IT applications
and other technology deliverables for our clients. Our clients
usually own the intellectual property in the software
applications we develop for them. We generally implement
safeguards designed to protect our clients intellectual
property in accordance with their needs and specifications. Our
means of protecting our and our clients proprietary
rights, however, may not be
11
adequate. Despite our efforts, we may be unable to prevent or
deter infringement or other unauthorized use of our and our
clients intellectual property. Legal protections afford
only limited protection for intellectual property rights and the
laws of India and Sri Lanka do not protect intellectual property
rights to the same extent as those in the United States and the
United Kingdom. Time-consuming and expensive litigation may be
necessary in the future to enforce these intellectual property
rights.
In addition, we cannot assure you that our intellectual property
or the intellectual property that we develop for our clients
does not infringe the intellectual property rights of others, or
will not in the future. If we become liable to third parties for
infringing upon their intellectual property rights, we could be
required to pay substantial damage awards and be forced to
develop non-infringing technology, obtain licenses or cease
delivery of the applications that contain the infringing
technology.
Business
Segments and Geographic Information
We view our operations and manage our business as one operating
segment. For information regarding net revenue by geographic
regions for each of the last three fiscal years, see
note 16 to our consolidated financial statements for the
fiscal year ended March 31, 2008 contained in this Annual
Report.
For information regarding risks and dependencies associated with
foreign operations, see our risk factors listed in
Item 1A. Risk Factors contained in this
Annual Report.
Our
corporate and available information
We were originally incorporated in Massachusetts in November
1996 as Technology Providers, Inc. We reincorporated in Delaware
as eRunway, Inc. in May 2000 and subsequently changed our name
to Virtusa Corporation in April 2002. Our principal executive
offices are located at 2000 West Park Drive, Westborough,
Massachusetts 01581, and our telephone number at this location
is
(508) 389-7300.
Our website address is www.virtusa.com. We have included our
website address as an inactive textual reference only. The
information on, or that can be accessed through, our website is
not part of this Annual Report. Our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 are available free of charge through the investor relations
page of our internet website as soon as reasonably practicable
after we electronically file such material with, or furnish it
to, the Securities and Exchange Commission. In addition, we make
available our Code of Business Conduct and Ethics free of charge
through our website. We intend to disclose any amendments to, or
waivers from, our Code of Business Conduct and Ethics that are
required to be publicly disclosed pursuant to rules of the SEC
and the NASDAQ Stock Market by filing such amendment or waiver
with the SEC and posting it on our website.
No information on our Internet website is incorporated by
reference into this
Form 10-K
or any other public filing made by us with the SEC.
12
We operate in a rapidly changing environment that involves a
number of risks, some of which are beyond our control. This
discussion highlights some of the risks which may affect future
operating results. These are the risks and uncertainties we
believe are most important for you to consider. Our operating
results and financial condition have varied in the past and may
vary significantly in the future depending on a number of
factors. We cannot be certain that we will successfully address
these risks. If we are unable to address these risks, our
business may not grow, our stock price may suffer
and/or we
may be unable to stay in business. Additional risks and
uncertainties not presently known to us, which we currently deem
immaterial or which are similar to those faced by other
companies in our industry or business in general, may also
impair our business operations.
Except for the historical information in this Annual Report, the
matters contained in this report include forward-looking
statements that involve risks and uncertainties. The following
factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements
made in this report and presented elsewhere by management from
time to time. Such factors, among others, may have a material
adverse effect upon our business, results of operations and
financial condition. You should consider carefully the following
risk factors, together with all of the other information
included in this Annual Report. Each of these risk factors could
adversely affect our business, operating results and financial
condition, as well as adversely affect the value of an
investment in our common stock.
Risks
relating to our business
Our
revenue is highly dependent on a small number of clients and the
loss of any one of our major clients could significantly harm
our results of operations and financial condition.
We have historically earned and believe that over the next few
years we will continue to earn, a significant portion of our
revenue from a limited number of clients. For instance, we
generated approximately 54%, 49% and 43% of our revenue in our
fiscal years ended March 31, 2008, 2007 and 2006,
respectively, from our top five clients during those periods.
For the fiscal year ended March 31, 2008, BT, our largest
client, accounted for 27% of our revenue; no other client
accounted for 10% of our revenue in that fiscal year. During the
fiscal years ended March 31, 2008 and 2007, 96% and 97% of
our revenue, respectively came from clients to whom we had been
providing services for at least one year. The loss of any one of
our major clients could reduce our revenue or delay our
recognition of revenue, harm our reputation in the industry
and/or
reduce our ability to accurately predict cash flow. The loss of
any one of our major clients could also adversely affect our
gross profit and utilization as we seek to redeploy resources
previously dedicated to that client. Further, the loss of any
one of our major clients has required, and could in the future
require, us to initiate involuntary attrition. This could have a
material adverse effect on our attrition rate and make it more
difficult for us to attract and retain IT professionals in the
future. We may not be able to maintain our client relationships
and our clients may not renew their agreements with us, in which
case, our business, financial condition and results of
operations would be adversely affected. For instance, in March
2007 we entered into a five-year IT services agreement with BT,
which has been amended from time to time to reflect agreed upon
changes to terms and conditions, including rates and other
commercial terms, that is premised upon minimum aggregate
expenditures by BT of approximately $200 million over the
term of the agreement. However, there can be no assurance that
we will realize the full amount of those expenditures or that
the agreement will not be terminated or further amended prior to
the end of its term.
In addition, this client concentration may subject us to
perceived or actual leverage that our clients may have, given
their relative size and importance to us. If our clients seek to
negotiate their agreements on terms less favorable to us and we
accept such unfavorable terms, such unfavorable terms may have a
material adverse effect on our business, financial condition and
results of operations. Accordingly, unless and until we
diversify and expand our client base, our future success will
significantly depend upon the timing and volume of business from
our largest clients and the financial and operational success of
these clients. If we were to lose one of our major clients or
have a major client cancel substantial projects or otherwise
significantly
13
reduce its volume of business with us, our revenue and
profitability would be materially reduced and our business would
be seriously harmed.
We
depend on clients primarily located in the United States and the
United Kingdom, as well as clients concentrated in specific
industries, such as BFSI, and are therefore subject to risks
relating to developments affecting these clients and industries
that may cause them to reduce or postpone their IT
spending.
For the fiscal year ended March 31, 2008, we derived
substantially all of our revenue from clients located in the
United States and the United Kingdom, as well as clients
concentrated in certain industries. During the fiscal year ended
March 31, 2008, we generated 69% of our revenue in the
United States and 31% of our revenue in the United Kingdom. For
the same fiscal year, we derived substantially all of our
revenue from three industries: BFSI, communications and
technology, and media and information. In particular, the BFSI
industries have recently experienced substantial losses relating
to market conditions and economic downturn which have also
resulted in the consolidation of several large companies in the
BFSI industries. During our fiscal year ended March 31,
2008, we earned approximately 38% of our revenue from BFSI
clients and our revenue from this industry vertical grew by
approximately 43% from the prior fiscal year. Any significant
decrease in the growth of the BFSI industries, significant
consolidation in these industries or decrease in growth or
consolidation in other industry verticals on which we focus,
could reduce the demand for our services and negatively affect
our revenue and profitability. If economic conditions weaken,
particularly in the United States, the United Kingdom or
any of these industries in which we focus, our clients may
significantly reduce or postpone their IT spending. Reductions
in IT budgets, increased consolidation or decreased competition
in these geographic locations or industries could result in an
erosion of our client base and a reduction in our target market.
Any reductions in the IT spending of companies in any one of
these industries may reduce the demand for our services and
negatively affect our revenue and profitability.
A
significant or prolonged economic downturn in the IT services
industry, or industries in which we focus, may result in our
clients reducing or postponing spending on the services we
offer.
Our revenue is dependent on entering into large contracts for
our services with a limited number of clients each year. As we
are not the exclusive IT service provider for our clients, the
volume of work that we perform for any specific client is likely
to vary from year to year. There are a number of factors, other
than our performance, that could affect the size, frequency and
renewal rates of our client contracts. For instance, if economic
conditions weaken in the IT services industry or in any industry
in which we focus, our clients may reduce or postpone their IT
spending significantly which may, in turn, lower the demand for
our services and negatively affect our revenue and
profitability. As a way of dealing with a challenging economic
environment, clients may change their outsourcing strategy by
performing more work in-house or replacing their existing
software with packaged software supported by the licensor. The
loss of, or any significant decline in business from, one or
more of our major clients likely would lead to a significant
decline in our revenue and operating margins, particularly if we
are unable to make corresponding reductions in our expenses in
the event of any such loss or decline. Moreover, a significant
change in the liquidity or financial position of any of these
clients could have a material adverse effect on the
collectability of our accounts receivable, liquidity and future
operating results.
The IT
services market is highly competitive and our competitors may
have advantages that may allow them to compete more effectively
than we do to secure client contracts and attract skilled IT
professionals.
The IT services market in which we operate includes a large
number of participants and is highly competitive. Our primary
competitors include:
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offshore IT outsourcing firms
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consulting and systems integration firms
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We also occasionally compete with in-house IT departments,
smaller vertically-focused IT service providers and local IT
service providers based in the geographic areas where we
compete. We expect
14
additional competition from offshore IT outsourcing firms in
emerging locations such as Eastern Europe, Latin America and
China, as well as offshore IT service providers with facilities
in less expensive geographies within India.
The IT services industry in which we compete is experiencing
rapid changes in its competitive landscape. Some of the large
consulting firms and offshore IT service providers with which we
compete have significant resources and financial capabilities
combined with a greater number of IT professionals. Many of our
competitors are significantly larger and some have gained access
to public and private capital or have merged or consolidated
with better capitalized partners, which events have created and
may in the future create, larger and better capitalized
competitors. These competitors may have superior abilities to
compete for market share and for our existing and prospective
clients. Our competitors may be better able to use significant
economic incentives, such as lower billing rates or non-billable
resources, to secure contracts with our existing and prospective
clients. These competitors may also be better able to compete
for and retain skilled professionals by offering them more
attractive compensation or other incentives. These factors may
allow these competitors to have advantages over us to meet
client demands in an engagement for large numbers and varied
types of resources with specific experience or skill-sets that
we may not have readily available in the short- or long-term. We
cannot assure you that we can maintain or enhance our
competitive position against current and future competitors. Our
failure to compete effectively could have a material adverse
effect on our business, financial condition or results of
operations.
If we
cannot attract and retain highly-skilled IT professionals, our
ability to obtain, manage and staff new projects and continue to
expand existing projects may result in loss of revenue and an
inability to expand our business.
Our ability to execute and expand existing projects and obtain
new clients depends largely on our ability to hire, train and
retain highly-skilled IT professionals, particularly project
managers, IT engineers and other senior technical personnel. If
we cannot hire and retain such additional qualified personnel,
our ability to obtain, manage and staff new projects and to
expand, manage and staff existing projects, may be impaired. We
may then lose revenue and our ability to expand our business may
be harmed. There is intense worldwide competition for IT
professionals with the skills necessary to perform the services
we offer. We and the industry in which we operate generally
experience high employee attrition. Given our recent significant
growth and strong demand for IT professionals from our
competitors, we cannot assure you that we will be able to hire
or retain the number of technical personnel necessary to satisfy
our current and future client needs. We also may not be able to
hire and retain enough skilled and experienced IT professionals
to replace those who leave. Additionally, if we have to replace
personnel who have left our company, we will incur increased
costs not only in hiring replacements but also in training such
replacements until they can become productive and billable to
our clients. In addition, we may not be able to redeploy and
retrain our IT professionals in anticipation of continuing
changes in technology, evolving standards and changing client
preferences. Our inability to attract and retain IT
professionals could have a material adverse effect on our
business, operating results and financial condition.
Our
quarterly financial position, revenue, operating results and
profitability are difficult to predict and may vary from quarter
to quarter, which could cause our share price to decline
significantly.
Our quarterly revenue, operating results and profitability have
varied in the past and are likely to vary significantly from
quarter to quarter in the future. The factors that are likely to
cause these variations include:
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the number, timing, scope and contractual terms of IT projects
in which we are engaged
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delays in project commencement or staffing delays due to
immigration issues or assignment of appropriately skilled or
experienced personnel
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unanticipated contract or project terminations
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the accuracy of estimates of resources, time and fees required
to complete fixed-price projects and costs incurred in the
performance of each project
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changes in pricing in response to client demand and competitive
pressures
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the mix of onsite and offshore staffing
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the mix of leadership and senior technical resources to junior
engineering resources staffed on each project
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unexpected changes in the utilization rate of our IT
professionals
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general economic conditions
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seasonal trends, primarily our hiring cycle and the budget and
work cycles of our clients
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the ratio of fixed-price contracts to
time-and-materials
contracts in process
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employee wage levels and increases in compensation costs,
including timing of promotions and annual pay increases,
particularly in India and Sri Lanka
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the timing of collection of accounts receivable
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the continuing financial stability of our clients
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our ability to have the client reimburse us for travel and
living expenses, especially the airfare and related expenses of
our Indian and Sri Lankan offshore personnel traveling and
working onsite in the United States or the United Kingdom
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one-time, non-recurring projects
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As a result, our revenue and our operating results for a
particular period are difficult to predict and may decline in
comparison to corresponding prior periods regardless of the
strength of our business. Our future revenue is also difficult
to predict because we derive a substantial portion of our
revenue from fees for services generated from short-term
contracts that may be terminated or delayed by our clients
without penalty. In addition, a high percentage of our operating
expenses, particularly related to personnel and facilities, are
relatively fixed in advance of any particular quarter and are
based, in part, on our expectations as to future revenue. If we
are unable to predict the timing or amounts of future revenue
accurately, we may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall and
fail to meet our forecasts. Unexpected revenue shortfalls may
also decrease our gross margins and could cause significant
changes in our operating results from quarter to quarter. As a
result, and in addition to the factors listed above, any of the
following factors could have a significant and adverse impact on
our operating results, could result in a shortfall of revenue
and could result in losses to us:
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a clients decision not to pursue a new project or proceed
to succeeding stages of a current project
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the completion during a quarter of several major client projects
could require us to pay underutilized team members in subsequent
periods
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adverse business decisions of our clients regarding the use of
our services
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our inability to transition team members quickly from completed
projects to new engagements
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our inability to manage costs, including personnel,
infrastructure, facility and support services costs
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exchange rate fluctuations
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Due to the foregoing factors, it is possible that in some future
periods our revenue and operating results may not meet the
expectations of securities analysts or investors. If this
occurs, the trading price of our common stock could fall
substantially either suddenly or over time and our business,
financial condition and results of operations would be adversely
affected.
16
We are
investing substantial cash in new facilities and our
profitability could be reduced if our business does not grow
proportionately.
We have spent $7.7 million to date and currently plan to
spend approximately $23 million over the next two fiscal
years in connection with the construction and build-out of a
facility on our planned campus in Hyderabad, India. We also
intend to make increased investments to expand our existing
global delivery centers or procure additional capacity and
facilities in Chennai, India and Colombo, Sri Lanka. We may face
cost overruns and project delays in connection with these
facilities or other facilities we may construct or seek to lease
in the future. Such delays may also cause us to incur additional
leasing costs to extend the terms of existing facility leases or
to enter into new short-term leases if we cannot move into the
new facilities in a timely manner. Such expansion may also
significantly increase our fixed costs, including an increase in
depreciation expense. If we are unable to expand our business
and revenue proportionately, our profitability will be reduced.
The
international nature of our business exposes us to several
risks, such as significant currency fluctuations and unexpected
changes in the regulatory requirements of multiple
jurisdictions.
We have operations in India, Sri Lanka and the United Kingdom
and we serve clients across Europe, North America and Asia. For
the fiscal years ended March 31, 2008 , 2007 and 2006,
revenue generated outside of the United States accounted for
31%, 26% and 14% of total revenue, respectively. Our corporate
structure also spans multiple jurisdictions, with our parent
company incorporated in Delaware and operating subsidiaries
organized in India, Sri Lanka and the United Kingdom. As a
result, our international revenue and operations are exposed to
risks typically associated with conducting business
internationally, many of which are beyond our control. These
risks include:
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significant currency fluctuations between the U.S. dollar
and the U.K. pound sterling (in which our revenue is principally
denominated) and the Indian and Sri Lankan rupees (in which a
significant portion of our costs are denominated)
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legal uncertainty owing to the overlap of different legal
regimes and problems in asserting contractual or other rights
across international borders, including compliance with local
laws of which we may be unaware
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potentially adverse tax consequences, such as scrutiny of
transfer pricing arrangements and tax holidays by authorities in
the countries in which we operate, potential tariffs and other
trade barriers
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difficulties in staffing, managing and supporting operations in
multiple countries
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potential fluctuations in foreign economies
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unexpected changes in regulatory requirements
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government currency control and restrictions on repatriation of
earnings
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the burden and expense of complying with the laws and
regulations of various jurisdictions
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domestic and international economic or political changes,
hostilities, terrorist attacks and other acts of violence or war
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earthquakes, tsunamis and other natural disasters in regions
where we currently operate or may operate in the future
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Negative developments in any of these areas in one or more
countries could result in a reduction in demand for our
services, the cancellation or delay of client contracts,
business interruption, threats to our intellectual property,
difficulty in collecting receivables and a higher cost of doing
business, any of which could negatively affect our business,
financial condition or results of operations.
17
Currency
exchange rate fluctuations may negatively affect our operating
results.
The exchange rates among the Indian and Sri Lankan rupees and
the U.S. dollar and the U.K. pound sterling have changed
substantially in recent years and may fluctuate substantially in
the future. We expect that a majority of our revenue will
continue to be generated in the U.S. dollar and U.K. pound
sterling for the foreseeable future and that a significant
portion of our expenses, including personnel costs, as well as
capital and operating expenditures, will continue to be
denominated in Indian and Sri Lankan rupees. Accordingly, any
material appreciation of the Indian rupee or the Sri Lankan
rupee against the U.S. dollar or U.K. pound sterling could
have a material adverse effect on our cost of services, gross
margin and net income, which may in turn have a negative impact
on our business, operating results and financial condition.
Although we have adopted an eight quarter hedging program to
minimize the effect of the Indian rupee movement on our
financial condition, the hedging program may be inadequate and
could cause the Company to forego benefits associated with any
significant depreciation of the Indian rupee which would
otherwise have had a beneficial impact on our earnings and
margins, and create a competitive disadvantage compared to
companies exposed to the Indian rupee but who do not hedge. The
appreciation of the Indian rupee against the U.S. dollar
and U.K. pound sterling since March 31, 2007 has had a
negative impact on our earnings and margins, and any continued
appreciation is likely to have a negative impact on future
earnings and margins.
The
loss of key members of our senior management team may prevent us
from executing our business strategy.
Our future success depends to a significant extent on the
continued service and performance of key members of our senior
management team. Our growth and success depends to a significant
extent on our ability to retain Kris Canekeratne, our chief
executive officer, who is a founder of our company and has led
the growth, operation, culture and strategic direction of our
business since its inception. The loss of his services or the
services of other key members of our senior management could
seriously harm our ability to execute our business strategy.
Although we have entered into agreements with our executive
officers providing for severance and change in control benefits
to them, our executive officers or other key employees could
terminate their employment with us at any time. We also may have
to incur significant costs in identifying, hiring, training and
retaining replacements for key employees. The loss of any member
of our senior management team might significantly delay or
prevent the achievement of our business or development
objectives and could materially harm our business. We do not
maintain key man life insurance on any of our team members other
than Kris Canekeratne.
We may
lose revenue if our clients terminate or delay their contracts
with us.
Our clients typically retain us on a non-exclusive,
engagement-by-engagement
basis, rather than under exclusive long-term contracts. Many of
our contracts for services have terms of less than
12 months and permit our clients to terminate our
engagement on prior written notice of 90 days or less for
convenience, and without termination-related penalties. Further,
many large client projects typically involve multiple
independently defined stages, and clients may choose not to
retain us for additional stages of a project or cancel or delay
their start dates. These terminations, cancellations or delays
could result from factors unrelated to our work product or the
progress of the project, including:
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client financial difficulties
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a change in a clients strategic priorities, resulting in a
reduced level of IT spending
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a clients demand for price reductions
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a change in a clients outsourcing strategy that shifts
work to in-house IT departments or to our competitors
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replacement by our client of existing software to packaged
software supported by licensors
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If our contracts were terminated early or materially delayed,
our business and operating results could be materially harmed
and the value of our common stock could be impaired. Unexpected
terminations,
18
cancellation or delays in our client engagements could also
result in increased operating expenses as we transition our team
members to other engagements.
We
invest in auction rate securities that are subject to market
risk and the recent problems in the financial markets could
adversely affect the value and liquidity of our
assets.
As of March 31, 2008, our long-term investments included
$8.0 million of auction rate securities. In addition, all
of our auction rate securities, including those subject to the
prior failures, are currently rated AAA or Aaa, the highest
rating available by a credit rating agency. A substantial
majority of the underlying assets of these auction rate
securities are student loans which are backed by the federal
government under the Federal Family Education Loan Program.
Prior to March 31, 2008, all auctions on our auction rate
securities had failed and the securities have become illiquid.
An auction failure means that the parties wishing to sell
securities could not carry out the transaction. There is no
assurance that these auctions on auction rate securities will
succeed in the future. As a result, our ability to liquidate our
investments in the near term may be limited, and our ability to
fully recover the carrying value of our investments may be
limited or non-existent. If losses become other than temporary
in the future, we will be required to record an impairment
charge in our consolidated statements of income. Any such loses
or impairment charge could have a material adverse affect on our
results of operations and financial condition.
We may
face damage to our professional reputation if our services do
not meet our clients expectations.
Many of our projects involve technology applications or systems
that are critical to the operations of our clients
businesses and handle very large volumes of transactions. If we
fail to perform our services correctly, we may be unable to
deliver applications or systems to our clients with the promised
functionality or within the promised time frame, or to satisfy
the required service levels for support and maintenance. If a
client is not satisfied with our services or products, including
those of subcontractors we employ, our business may suffer.
Moreover, if we fail to meet our contractual obligations, our
clients may terminate their contracts and we could face legal
liabilities and increased costs, including warranty claims
against us. Any failure in a clients project could result
in a claim for substantial damages, non-payment of outstanding
invoices, loss of future business with such client and increased
costs due to non-billable time of our resources dedicated to
address any performance or client satisfaction issues,
regardless of our responsibility for such failure.
We may
not be able to continue to maintain or increase our
profitability and our recent growth rates may not be indicative
of our future growth.
We have been consistently profitable only since the quarter
ended December 31, 2005. We may not succeed in maintaining
our profitability and could incur losses in future periods. If
we experience declines in demand or declines in pricing for our
services, or if wages in India or Sri Lanka increase at a faster
rate than in the United States and the United Kingdom, we will
be faced with continued growing costs for our IT professionals,
including wage increases. We also expect to continue to make
investments in infrastructure, facilities, sales and marketing
and other resources as we expand our operations, thus incurring
additional costs. If our revenue does not increase to offset
these increases in costs or operating expenses, our operating
results would be negatively affected. In fact, in future
quarters we may not have any revenue growth and our revenue and
net income could decline. You should not consider our historic
revenue and net income growth rates as indicative of future
growth rates. Accordingly, we cannot assure you that we will be
able to maintain or increase our profitability in the future.
Restrictions
on immigration may affect our ability to compete for and provide
services to clients in the United States or the United Kingdom,
which could result in lost revenue and delays in client
engagements and otherwise adversely affect our ability to meet
our growth and revenue projections.
The vast majority of our team members are Indian and Sri Lankan
nationals. The ability of our IT professionals to work in the
United States, the United Kingdom and other countries depends on
the ability to obtain the necessary visas and entry permits. In
recent years, the United States has increased the level of
scrutiny in granting H-1B, L-1 and ordinary business visas. In
response to terrorist attacks and global unrest,
19
U.S. and U.K. immigration authorities, as well as other
countries, have not only increased the level of scrutiny in
granting visas, but have also introduced new security
procedures, which include extensive background checks, personal
interviews and the use of biometrics, as conditions to granting
visas and work permits. A number of European countries are
considering changes in immigration policies as well. The
inability of key project personnel to obtain necessary visas or
work permits could delay or prevent our fulfillment of client
projects, which could hamper our growth and cause our revenue to
decline. These restrictions and additional procedures may delay,
or even prevent, the issuance of a visa or work permit to our IT
professionals and affect our ability to staff projects in a
timely manner. Any delays in staffing a project can result in
project postponement, delays or cancellation, which could result
in lost revenue and decreased profitability and have a material
adverse effect on our business, revenue, profitability and
utilization rates.
Immigration laws in countries in which we seek to obtain visas
or work permits may require us to meet certain other legal
requirements as conditions to obtaining or maintaining entry
visas. These immigration laws are subject to legislative change
and varying standards of application and enforcement due to
political forces, economic conditions or other events, including
terrorist attacks. We cannot predict the political or economic
events that could affect immigration laws, or any restrictive
impact those events could have on obtaining or monitoring entry
visas for our personnel. Our reliance on work visas and work
permits for a significant number of our IT professionals makes
us particularly vulnerable to such changes and variations,
particularly in the United States and the United Kingdom,
because these immigration and legislative changes affect our
ability to staff projects with IT professionals who are not
citizens of the country where the onsite work is to be
performed. We may not be able to obtain a sufficient number of
visas for our IT professionals or may encounter delays or
additional costs in obtaining or maintaining such visas. To the
extent we experience delays due to such immigration
restrictions, we may encounter client dissatisfaction, project
and staffing delays in new and existing engagements, project
cancellations, higher project costs and loss of revenue,
resulting in decreases in profits and a material adverse effect
on our business, results of operations, financial condition and
cash flows.
Our
management has limited experience managing a public company, and
regulatory compliance may divert its attention from the
day-to-day management of our business.
The individuals who constitute our management team have limited
experience managing a publicly traded company and limited
experience complying with the increasingly complex laws
pertaining to public companies. We have hired, and may need to
hire a number of, additional team members with public accounting
and disclosure experience in order to meet our ongoing
obligations as a public company. Our management team and other
personnel will need to devote a substantial amount of time to
these new compliance initiatives. In particular, these new
obligations will require substantial attention from our senior
management and divert its attention away from the day-to-day
management of our business, which could materially and adversely
affect our business operations.
The Sarbanes-Oxley Act of 2002 requires, among other things,
that we maintain effective internal control over financial
reporting and disclosure controls and procedures. In particular,
we must perform system and process evaluation and testing of our
internal control over financial reporting to allow management
and our independent registered public accounting firm to report
on the effectiveness of our internal control over financial
reporting, as required by Section 404 of the Sarbanes-Oxley
Act. Our testing, or the subsequent testing by our independent
registered public accounting firm, may reveal deficiencies in
our internal control over financial reporting that are deemed to
be material weaknesses. To comply with Section 404, we will
incur substantial accounting expense and expend significant
management time. Compared to many newly-public companies, the
scale of our organization and our significant foreign operations
may make it more difficult to comply with Section 404 in a
timely manner. We may not be able to successfully complete the
procedures and certification and attestation requirements of
Section 404 by the time we will be required to do so. If we
are not able to comply with the requirements of Section 404
in a timely manner, or if we or our independent registered
public accounting firm identifies deficiencies in our internal
control over financial reporting that are deemed to be material
weaknesses, we could be subject to sanctions or investigations
by the NASDAQ Stock Market, the Securities and Exchange
Commission or other regulatory authorities, which would require
20
additional financial and management resources. In addition,
because effective internal controls are necessary for us to
produce reliable financial reports and prevent fraud, our
failure to satisfy the requirements of Section 404 could
harm investor confidence in the reliability of our financial
statements, which could harm our business and the trading price
of our common stock.
We may
be required to spend substantial time and expense before we can
recognize revenue, if any, from a client contract.
The period between our initial contact with a potential client
and the execution of a client contract for our services is
lengthy, and can extend over one or more fiscal quarters. To
sell our services successfully and obtain an executed client
contract, we generally have to educate our potential clients
about the use and benefits of our services, which can require
significant time, expense and capital without the ability to
realize revenue, if any. If our sales cycle unexpectedly
lengthens for one or more large projects, it would negatively
affect the timing of our revenue, and hinder our revenue growth.
Furthermore, a delay in our ability to obtain a signed agreement
or other persuasive evidence of an arrangement or to complete
certain contract requirements in a particular quarter, could
reduce our revenue in that quarter. These delays or failures can
cause our gross margin and profitability to fluctuate
significantly from quarter to quarter. Overall, any significant
failure to generate revenue or delays in recognizing revenue
after incurring costs related to our sales or services process
could have a material adverse effect on our business, financial
condition and results of operations.
We may
not be able to recognize revenue in the period in which our
services are performed, which may cause our margins to
fluctuate.
Our services are performed under both
time-and-material
and fixed-price arrangements. All revenue is recognized pursuant
to applicable accounting standards. These standards require us
to recognize revenue once evidence of an arrangement has been
obtained, services are delivered, fees are fixed or determinable
and collectability is reasonably assured. If we perform our
services prior to the time when we are able to recognize the
associated revenue, our margins may fluctuate significantly from
quarter to quarter.
Additionally, payment of our fees on fixed-price contracts are
based on our ability to provide deliverables on certain dates or
meet certain defined milestones. Our failure to produce the
deliverables or meet the project milestones in accordance with
agreed upon specifications or timelines, or otherwise meet a
clients expectations, may result in our having to record
the cost related to the performance of services in the period
that services were rendered, but delay the timing of revenue
recognition to a future period in which the milestone is met.
Our
inability to manage to a desired onsite-to-offshore service
delivery mix may negatively affect our gross margins and costs
and our ability to offer competitive pricing.
We may not succeed in maintaining or increasing our
profitability and could incur losses in future periods if we are
not able to manage to a desired onsite-to-offshore service
delivery mix. To the extent that our engagements involve an
increasing number of consulting, production support, software
package implementation or other services typically requiring a
higher percentage of onsite resources, we may not be able to
manage to our desired service delivery mix. Additionally, other
factors like client constraint or preferences or our inability
to manage engagements effectively with limited resources onsite
may result in a higher percentage of onsite resources than our
desired service delivery mix. Accordingly, we cannot assure you
that we will be able to manage to our desired onsite-to-offshore
service delivery mix. If we are unable to manage to our targeted
service delivery mix, our gross margins may decline and our
profitability may be reduced. Additionally, our costs will
increase and we may not be able to offer competitive pricing to
our clients.
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Our
profitability is dependent on our billing and utilization rates,
which may be negatively affected by various
factors.
Our profit margin is largely a function of the rates we are able
to charge for our services and the utilization rate of our IT
professionals. The rates we are able to charge for our services
are affected by a number of factors, including:
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our clients perception of our ability to add value through
our services
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the introduction of new services or products by us or our
competitors
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the pricing policies of our competitors
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general economic conditions
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A number of factors affect our utilization rate, including:
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our ability to transition team members quickly from completed or
terminated projects to new engagements
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our ability to maintain continuity of existing resources on
existing projects
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our ability to obtain visas for offshore personnel to commence
projects at a client site for new or existing engagements
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the amount of time spent by our team members on non-billable
training activities
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our ability to maintain resources who are appropriately skilled
for specific projects
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our ability to forecast demand for our services and thereby
maintain an appropriate number of team members
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our ability to manage team member attrition
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seasonal trends, primarily our hiring cycle, holidays and
vacations
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the number of campus hires
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If we are not able to maintain the rates we charge for our
services or maintain an appropriate utilization rate for our IT
professionals, our revenue will decline, our costs will increase
and we will not be able to sustain our profit margin, any of
which will have a material adverse effect on our profitability.
If we
fail to manage our rapid growth effectively, we may not be able
to obtain, develop or implement new systems, infrastructure,
procedures and controls that are required to support our
operations, maintain cost controls, market our services and
manage our relationships with our clients.
We have experienced rapid growth in recent periods. From
March 31, 2005 to March 31, 2008, the number of our
team members increased from 2,251 to 4,265. We expect that we
will continue to grow and our anticipated growth could place a
significant strain on our ability to:
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recruit, hire, train, motivate and retain highly-skilled IT
services and management personnel
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adequately and timely staff personnel at client locations in the
United States and Europe due to increasing immigration and
related visa restrictions and intense competition to hire and
retain these skilled IT professionals
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adhere to our global delivery process and execution standards
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maintain and manage costs to correspond with timeliness of
revenue recognition
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develop and improve our internal administrative infrastructure,
including our financial, operational and communication systems,
processes and controls
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provide sufficient operational facilities and offshore global
delivery centers to accommodate and satisfy the capacity needs
of our growing workforce on reasonable commercial terms, or at
all, whether by leasing, buying or building suitable real estate
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preserve our corporate culture, values and entrepreneurial
environment
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maintain high levels of client satisfaction
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To manage this anticipated future growth effectively, we must
continue to maintain and may need to enhance, our IT
infrastructure, financial and accounting systems and controls
and manage expanded operations in several locations. We also
must attract, integrate, train and retain qualified personnel,
especially in the areas of accounting, internal audit and
financial disclosure. Further, we will need to manage our
relationships with various clients, vendors and other third
parties. We may not be able to develop and implement, on a
timely basis, if at all, the systems, infrastructure procedures
and controls required to support our operations. Additionally
some factors, like changes in immigration laws or visa
processing restrictions that limit our ability to engage
offshore resources at client locations in the United States or
the United Kingdom, are outside of our control. Our future
operating results will also depend on our ability to develop and
maintain a successful sales organization despite our rapid
growth. If we are unable to manage our growth, our operating
results could fluctuate from quarter to quarter and our
financial condition could be materially adversely affected.
Unexpected
costs or delays could make our contracts
unprofitable.
When making proposals for engagements, we estimate the costs and
timing for completion of the projects. These estimates reflect
our best judgment regarding the efficiencies of our
methodologies, staffing of resources, complexities of the
engagement and costs. The profitability of our engagements, and
in particular our fixed-price contracts, are adversely affected
by increased or unexpected costs or unanticipated delays in
connection with the performance of these engagements, including
delays caused by factors outside our control, which could make
these contracts less profitable or unprofitable. The occurrence
of any of these costs or delays could result in an unprofitable
engagement or litigation.
We may
face liability if we inappropriately disclose confidential
client information.
In the course of providing services to our clients, we may have
access to confidential client information. We are bound by
certain agreements to use and disclose this information in a
manner consistent with the privacy standards under regulations
applicable to our clients. Although these privacy standards may
not apply directly to us, if any person, including a team member
of ours, misappropriates client confidential information, or if
client confidential information is inappropriately disclosed due
to a breach of our computer systems, system failures or
otherwise, we may have substantial liabilities to our clients or
our clients customers. In addition, in the event of any
breach or alleged breach of our confidentiality agreements with
our clients, these clients may terminate their engagements with
us or sue us for breach of contract, resulting in the associated
loss of revenue and increased costs. We may also be subject to
civil or criminal liability if we are deemed to have violated
applicable regulations. We cannot assure you that we will
adequately address the risks created by the regulations to which
we may be contractually obligated to abide.
Our
failure to anticipate rapid changes in technology may negatively
affect demand for our services in the marketplace.
Our success will depend, in part, on our ability to develop and
implement business and technology solutions that anticipate
rapid and continuing changes in technology, industry standards
and client preferences. We may not be successful in anticipating
or responding to these developments on a timely basis, which may
negatively affect demand for our solutions in the marketplace.
Also, if our competitors respond faster than we do to changes in
technology, industry standards and client preferences, we may
lose business and our services may become less competitive or
obsolete. Any one or a combination of these circumstances could
have a material adverse effect on our ability to obtain and
successfully complete client engagements.
23
Interruptions
or delays in service from our third-party providers could impair
our global delivery model, which could result in client
dissatisfaction and a reduction of our revenue.
We depend upon third parties to provide a high speed network of
active voice and data communications 24 hours per day and
various satellite and optical links between our global delivery
centers and our clients. Consequently, the occurrence of a
natural disaster or other unanticipated problems with the
equipment or at the facilities of these third-party providers
could result in unanticipated interruptions in the delivery of
our services. For example, we may not be able to maintain active
voice and data communications between our global delivery
centers and our clients sites at all times due to
disruptions in these networks, system failures or virus attacks.
Any significant loss in our ability to communicate or any
impediments to any IT professionals ability to provide
services to our clients could result in a disruption to our
business, which could hinder our performance or our ability to
complete client projects in a timely manner. This, in turn,
could lead to substantial liability to our clients, client
dissatisfaction, loss of revenue and a material adverse effect
on our business, our operating results and financial condition.
We cannot assure you that our business interruption insurance
will adequately compensate our clients or us for losses that may
occur. Even if covered by insurance, any failure or breach of
security of our systems could damage our reputation and cause us
to lose clients.
Our
ability to raise capital in the future may be limited and our
failure to raise capital when needed could prevent us from
growing.
We anticipate that our current cash and cash equivalents and
short-term investments, together with cash generated from
operations, will be sufficient to meet our current needs for
general corporate purposes for the foreseeable future. We may
also need additional financing to execute our current or future
business strategies, including to:
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add additional global delivery centers
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procure additional capacity and facilities
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hire additional personnel
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enhance our operating infrastructure
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acquire businesses or technologies
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otherwise respond to competitive pressures
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If we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of our
stockholders could be significantly diluted and these newly
issued securities may have rights, preferences or privileges
senior to those of existing stockholders. If we incur additional
debt financing, a substantial portion of our operating cash flow
may be dedicated to the payment of principal and interest on
such indebtedness, thus limiting funds available for our
business activities. Any such debt financing could require us to
comply with restrictive financial and operating covenants, which
could have a material adverse impact on our business, results of
operations or financial condition. We cannot assure you that
additional financing will be available on terms favorable to us,
or at all. If adequate funds are not available or are not
available on acceptable terms, when we desire them, our ability
to fund our operations and growth, take advantage of
unanticipated opportunities or otherwise respond to competitive
pressures may be significantly limited.
Potential
future acquisitions, strategic investments, partnerships or
alliances could be difficult to identify and integrate, divert
the attention of key management personnel, disrupt our business,
dilute stockholder value and adversely affect our financial
results.
We may acquire or make strategic investments in complementary
businesses, technologies or services or enter into strategic
partnerships or alliances with third parties to enhance our
business. If we do identify
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suitable candidates, we may not be able to complete transactions
on terms commercially acceptable to us, if at all. These types
of transactions involve numerous risks, including:
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difficulties in integrating operations, technologies, accounting
and personnel
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difficulties in supporting and transitioning clients of our
acquired companies or strategic partners
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diversion of financial and management resources from existing
operations
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risks of entering new markets
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potential loss of key team members
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inability to generate sufficient revenue to offset transaction
costs
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We may finance future transactions through debt financing or the
issuance of our equity securities or a combination of the
foregoing. Acquisitions financed with the issuance of our equity
securities could be dilutive, which could affect the market
price of our stock. Acquisitions financed with debt could
require us to dedicate a substantial portion of our cash flow to
principal and interest payments and could subject us to
restrictive covenants. Acquisitions also frequently result in
the recording of goodwill and other intangible assets that are
subject to potential impairments in the future that could harm
our financial results. It is possible that we may not identify
suitable acquisition, strategic investment or partnership or
alliance candidates. Our inability to identify suitable
acquisition targets, strategic investments, partners or
alliances, or our inability to complete such transactions, may
negatively affect our competitiveness and growth prospects.
Moreover, if we fail to properly evaluate acquisitions,
alliances or investments, we may not achieve the anticipated
benefits of any such transaction and we may incur costs in
excess of what we anticipate.
Some
of our client contracts contain restrictions or penalty
provisions that, if triggered, could result in lower future
revenue and decrease our profitability.
We have entered in the past, and may in the future enter, into
contracts that contain restrictions or penalty provisions that,
if triggered, may adversely affect our operating results. For
instance, some of our client contracts provide that, during the
term of the contract and for a certain period thereafter ranging
from six to 12 months, we may not use the same personnel to
provide similar services to any of the clients
competitors. This restriction may hamper our ability to compete
for and provide services to clients in the same industry. In
addition, some contracts contain provisions that would require
us to pay penalties to our clients if we do not meet pre-agreed
service level requirements. If any of the foregoing were to
occur, our future revenue and profitability under these
contracts could be materially harmed.
Negative
public perception in the United States and the United Kingdom
regarding offshore IT service providers and proposed legislation
may adversely affect demand for our services.
We have based our growth strategy on certain assumptions
regarding our industry, services and future demand in the market
for such services. However, the trend to outsource IT services
may not continue and could reverse. Offshore outsourcing is a
politically sensitive topic in the United States and the
United Kingdom. For example, many organizations and public
figures in the United States and the United Kingdom have
publicly expressed concern about a perceived association between
offshore outsourcing providers and the loss of jobs in their
home countries. In addition, there has been recent publicity
about the negative experience of certain companies that use
offshore outsourcing, particularly in India. Current or
prospective clients may elect to perform such services
themselves or may be discouraged from transferring these
services from onshore to offshore providers to avoid negative
perceptions that may be associated with using an offshore
provider. Any slowdown or reversal of existing industry trends
towards offshore outsourcing would seriously harm our ability to
compete effectively with competitors that operate out of
facilities located in the United States or the
United Kingdom.
Legislation in the United States or the United Kingdom may be
enacted that is intended to discourage or restrict outsourcing.
In the United States, a variety of federal and state legislation
has been proposed that, if enacted, could restrict or discourage
U.S. companies from outsourcing their services to companies
outside the
25
United States. For example, legislation has been proposed that
would require offshore providers to identify where they are
located. In addition, it is possible that legislation could be
adopted that would restrict U.S. private sector companies
that have federal or state government contracts from outsourcing
their services to offshore service providers. We do not
currently have any contracts with U.S. federal or state
government entities. However, there can be no assurance that
these restrictions will not extend to or be adopted by private
companies, including our clients. Recent legislation introduced
in the United Kingdom would restrict or discourage companies
from outsourcing their services, including IT services. Any
changes to existing laws or the enactment of new legislation
restricting offshore outsourcing in the United States or the
United Kingdom may adversely affect our ability to do business
in the United States or in the United Kingdom, particularly if
these changes are widespread, and could have a material adverse
effect on our business, results of operations, financial
condition and cash flows.
Our
results of operations and business may be adversely affected by
an investigation currently being conducted by the Wage and Hour
Division of the U.S. Department of Labor.
There are strict labor regulations associated with the H-1B visa
classification. Larger employers of the
H-1B visa
program are often subject to investigations by the Wage and Hour
Division of the U.S. Department of Labor. The Department of
Labor commenced an investigation to determine if we have
complied with the elements of the Labor Condition Application(s)
(ETA Form 9035) to hire certain H-1B non-immigrant
workers. We believe the Department of Labor is primarily focused
on whether our team members with H-1B renewals were paid at the
appropriate pay level. However, the investigation has recently
been commenced and is in its early stages. We do not currently
know when this investigation will be concluded. An adverse
finding by the U.S. Department of Labor may result in
back-pay liability, substantial fines,
and/or a ban
on future use of the H-1B program and other immigration
benefits, which could materially harm our business and results
of operations.
Our
services may infringe on the intellectual property rights of
others, which may subject us to legal liability, harm our
reputation, prevent us from offering some services to our
clients or distract management.
We cannot be sure that our services or the deliverables that we
develop and create for our clients do not infringe the
intellectual property rights of third parties and infringement
claims may be asserted against us or our clients. These claims
may harm our reputation, distract management, cost us money and
prevent us from offering some services to our clients.
Historically, we have generally agreed to indemnify our clients
for all expenses and liabilities resulting from infringement of
intellectual property rights of third parties based on the
services and deliverables that we have performed and provided to
our clients. In some instances, the amount of these indemnities
may be greater than the revenue we receive from the client. In
addition, as a result of intellectual property litigation, we
may be required to stop selling, incorporating or using products
that use or incorporate the infringed intellectual property. We
may be required to obtain a license or pay a royalty to make,
sell or use the relevant technology from the owner of the
infringed intellectual property. Such licenses or royalties may
not be available on commercially reasonable terms, or at all. We
may also be required to redesign our services or change our
methodologies so as not to use the infringed intellectual
property, which may not be technically or commercially feasible
and may cause us to expend significant resources. Subject to
certain limitations, under our indemnification obligations to
our clients, we may also have to provide refunds to our clients
to the extent that we must require them to cease using an
infringing deliverable if we are unable to provide a work around
or acquire a license to permit use of the infringing deliverable
that we had provided to them as part of a service engagement. If
we are obligated to make any such refunds or dedicate time to
provide alternatives or acquire a license to the infringing
intellectual property, our business and financial condition
could be materially adversely affected.
26
Any
claims or litigation involving intellectual property, whether we
ultimately win or lose, could be extremely time-consuming,
costly and injure our reputation.
As the number of patents, copyrights and other intellectual
property rights in our industry increases, we believe that
companies in our industry will face more frequent infringement
claims. Defending against these claims, even if the claims have
no merit, may not be covered by or could exceed the protection
offered by our insurance and could divert managements
attention and resources from operating our company.
Risks
related to our Indian and Sri Lankan operations
Political
instability or changes in the government in India could result
in the change of several policies relating to foreign direct
investment and repatriation of capital and dividends. Further,
changes in the economic policies could adversely affect economic
conditions in India generally and our business in
particular.
We have three subsidiaries in India and a significant portion of
our business, fixed assets and human resources are located in
India. As a result, our business is affected by foreign exchange
rates and controls, interest rates, local regulations, changes
in government policy, taxation, social and civil unrest and
other political, economic or other developments in or affecting
India.
Since 1991, successive Indian governments have pursued policies
of economic liberalization, including significantly relaxing
restrictions on foreign direct investment into India with
repatriation benefits. Nevertheless, the roles of the Indian
central and state governments in the Indian economy as
producers, consumers and regulators have remained significant.
The rate of economic liberalization could change and specific
laws and policies affecting software companies, foreign
investment, currency exchange and other matters affecting
investment in our securities could change as well. A significant
change in Indias economic liberalization and deregulation
policies could adversely affect business and economic conditions
in India generally and our business in particular, if new
restrictions on the private sector are introduced or if existing
restrictions are increased.
Changes
in the policies of the government of Sri Lanka or political
instability could delay the further liberalization of the Sri
Lankan economy and adversely affect economic conditions in Sri
Lanka, which could adversely affect our business.
Our subsidiary in Sri Lanka has been approved as an export
computer software developer by the Board of Investment in Sri
Lanka, which is a statutory body organized to facilitate foreign
investment into Sri Lanka and grant concessions and benefits to
entities with which it has entered into agreements. Pursuant to
our agreement with the Board of Investment, our subsidiary is
entitled to exemptions from taxation on income for a period of
12 years expiring on March 31, 2019. Our subsidiary is
also exempt from exchange control regulations which will enable
our subsidiary to repatriate dividends abroad. Nevertheless,
government policies relating to taxation other than on income
would have an impact on the subsidiary, and the political,
economic or social factors in Sri Lanka may affect these
policies. Historically, past incumbent governments have followed
policies of economic liberalization. However, we cannot assure
you that the current government or future governments will
continue these liberal policies.
Regional
conflicts or terrorist attacks and other acts of violence or war
in India, Sri Lanka, the United States or other regions
could adversely affect financial markets, resulting in loss of
client confidence and our ability to serve our clients which, in
turn, could adversely affect our business, results of operations
and financial condition.
The Asian region has from time to time experienced instances of
civil unrest and hostilities among neighboring countries,
including between India and Pakistan. Since May 1999, military
confrontations between India and Pakistan have occurred in
Kashmir. Also, there have been military hostilities and civil
unrest in Iraq. Terrorist attacks, such as the ones that
occurred in New York and Washington, D.C., on
September 11, 2001, New Delhi on December 13, 2001,
Bali on October 12, 2002, civil or political unrest in Sri
Lanka and other acts of violence or war, including those
involving India, Sri Lanka, the United States, the United
Kingdom or
27
other countries, may adversely affect U.S., U.K. and worldwide
financial markets. Prospective clients may wish to visit several
of our facilities, including our global delivery centers in
India and Sri Lanka, prior to reaching a decision on vendor
selection. Terrorist threats, attacks and international
conflicts could make travel more difficult and cause potential
clients to delay, postpone or cancel decisions to use our
services. In addition, such attacks may have an adverse impact
on our ability to operate effectively and interrupt lines of
communication and restrict our offshore resources from traveling
onsite to client locations, effectively curtailing our ability
to deliver our services to our clients. These obstacles may
increase our expenses and negatively affect our operating
results. In addition, military activity, terrorist attacks,
political tensions between India and Pakistan and conflicts
within Sri Lanka could create a greater perception that the
acquisition of services from companies with significant Indian
or Sri Lankan operations involves a higher degree of risk that
could adversely affect client confidence in India or Sri Lanka
as a software development center, each of which would have a
material adverse effect on our business.
Our
net income may decrease if the governments of the United
Kingdom, the United States, India or Sri Lanka adjust the
amount of our taxable income by challenging our transfer pricing
policies.
Our subsidiaries conduct intercompany transactions among
themselves and with the U.S. parent company on an
arms-length basis in accordance with U.S. and local
country transfer pricing regulations. The jurisdictions in which
we pay income taxes could challenge our determination of
arms-length profit and issue tax assessments. Although the
United States has income tax treaties with all countries in
which we have operations, which mitigates the risk of double
taxation, the costs to appeal any such tax assessment and
potential interest and penalties could decrease our earnings and
cash flows.
The Indian taxing authorities issued an assessment order with
respect to their examination of the tax return for the fiscal
year ended March 31, 2004 of our Indian subsidiary, Virtusa
(India) Private Ltd., or Virtusa India. At issue were several
matters, the most significant of which was the re-determination
of the arms-length profit which should be recorded by
Virtusa India on the intercompany transactions with its
affiliates. We are contesting the assessment and have filed
appeals with both the appropriate Indian tax authorities and the
U.S. Competent Authority. As of March 31, 2008, we
recorded a $0.5 million reserve related to this matter.
Our
net income may decrease if the governments of India or Sri Lanka
reduce or withdraw tax benefits and other incentives provided to
us or levy new taxes.
Virtusa India is an export-oriented company under the Indian
Income Tax Act of 1961 and is entitled to claim tax exemption
for each Software Technology Park, or STP, which it operates.
Virtusa India currently operates two STPs, in Chennai and in
Hyderabad. Substantially all of the earnings of both STPs
qualify as tax-exempt export profits. These holidays will be
completely phased out by March 2010, and at that time any
profits would be fully taxable at the Indian statutory rate,
which is currently 34%. Although we believe we have complied
with and are eligible for the STP holiday, the government of
India may deem us ineligible for the STP holiday or make
adjustments to the profit level resulting in an overall increase
in our effective tax rate. In anticipation of the phase-out of
the STP holidays, we intend to locate at least a portion of our
Indian operations in areas designated as a Special Economic
Zone, or SEZ, under the SEZ Act of 2005. In particular, we are
building a campus on a 6.3 acre parcel of land in
Hyderabad, India that has been designated as a SEZ. In addition,
we have leased space and intend to operate on a SEZ designated
location in Chennai, India. Although our profits from the SEZ
operations would be eligible for certain income tax exemptions
for a period up to 15 years, there is no guarantee that we
will secure SEZ status for any other location in India.
Additionally, the government of India may deem us ineligible for
a SEZ holiday or make adjustments to the transfer pricing profit
levels resulting in an overall increase in our effective tax
rate.
In addition, our Sri Lankan subsidiary, Virtusa Private Ltd., or
Virtusa SL, was approved as an export computer software
developer by the Sri Lanka Board of Investment in 1998 and has
negotiated multiple extensions of the original holiday period in
exchange for further capital investments in Sri Lanka
facilities. The most recent
12-year
agreement, which is set to expire on March 31, 2019,
requires that we meet certain
28
new job creation and investment criteria. Any inability to meet
the agreed upon timetable for new job creation and investment
would jeopardize the new holiday arrangement.
Newly-enacted
legislation in India could harm our results of operations and
ability to attract, hire and retain qualified
personnel.
In May 2007, the Parliament of India enacted the Finance Act,
2007, which, among other things, imposes a fringe benefit tax at
the applicable Indian tax rate (currently 34%) on certain stock
compensation and equity awards paid or issued to team members of
our Indian subsidiaries. Specifically, the fringe benefit tax,
which is payable upon the exercise of such equity awards, is
based on the difference between the exercise price of the equity
award and the fair market value of the equity award upon
vesting. Because our potential tax liability is dependent on the
fair market value of our common stock at the time of vesting of
such equity awards, which could span over the next several
years, and whether the equity awards are ultimately exercised,
it is difficult to accurately forecast and could represent a
significant liability and expense to us. We have decided to
reduce the impact of this tax obligation on us, such as passing
the cost of the fringe benefit tax on to our team members from
our Indian subsidiaries. However, such alternatives do not
eliminate the negative impact of the tax liability on our
statements of income and result in significant non-cash
compensation expense, which impacts our gross margin, operating
profit margin and net income and creates volatility in our
income from operations from period to period. This transfer of
cost could significantly decrease the desirability of these
equity awards to these team members, which could harm our
ability to attract, hire and retain qualified personnel.
Wage
pressures and increases in government mandated benefits in India
and Sri Lanka may reduce our profit margins.
Wage costs in India and Sri Lanka have historically been
significantly lower than wage costs in the United States and
Europe for comparably-skilled professionals. However, wages in
India and Sri Lanka are increasing, which will result in
increased costs for IT professionals, particularly project
managers and other mid-level professionals. We may need to
increase the levels of our team member compensation more rapidly
than in the past to remain competitive without the ability to
make corresponding increases to our billing rates. Compensation
increases may reduce our profit margins, make us less
competitive in pricing potential projects against those
companies with lower cost resources and otherwise harm our
business, operating results and financial condition.
In addition, we contribute to benefit funds covering our
employees in India and Sri Lanka as mandated by the Indian and
Sri Lankan governments. Benefits are based on the team member
years of service and compensation. If the governments of India
and/or Sri
Lanka were to legislate increases to the benefits required under
these plans or mandate additional benefits, our profitability
and cash flows would be reduced.
Our
facilities are at risk of damage by earthquakes, tsunamis and
other natural disasters.
In December 2004, Sri Lanka and India were struck by multiple
tsunamis that devastated certain areas of both countries. Our
Indian and Sri Lankan facilities are located in regions that are
susceptible to tsunamis and other natural disasters, which may
increase the risk of disruption of information systems and
telephone service for sustained periods. Damage or destruction
that interrupts our ability to deliver our services could damage
our relationships with our clients and may cause us to incur
substantial additional expense to repair or replace damaged
equipment or facilities. Our insurance coverage may not be
sufficient to cover all such expenses. Furthermore, we may be
unable to secure such insurance coverage or to secure such
insurance coverage at premiums acceptable to us in the future.
Prolonged disruption of our services as a result of natural
disasters may cause our clients to terminate their contracts
with us and may result in project delays, project cancellations
and loss of substantial revenue to us. Prolonged disruptions may
also harm our team members or cause them to relocate, which
could have a material adverse effect on our business.
29
The
laws of India and Sri Lanka do not protect intellectual property
rights to the same extent as those of the United States and we
may be unsuccessful in protecting our intellectual property
rights. Unauthorized use of our intellectual property rights may
result in loss of clients and increased
competition.
Our success depends, in part, upon our ability to protect our
proprietary methodologies, trade secrets and other intellectual
property. We rely upon a combination of trade secrets,
confidentiality policies, non-disclosure agreements, other
contractual arrangements and copyright and trademark laws to
protect our intellectual property rights. However, existing laws
of India and Sri Lanka do not provide protection of intellectual
property rights to the same extent as provided in the United
States. The steps we take to protect our intellectual property
may not be adequate to prevent or deter infringement or other
unauthorized use of our intellectual property. Thus, we may not
be able to detect unauthorized use or take appropriate and
timely steps to enforce our intellectual property rights. Our
competitors may be able to imitate or duplicate our services or
methodologies. The unauthorized use or duplication of our
intellectual property could disrupt our ongoing business,
distract our management and team members, reduce our revenue and
increase our costs and expenses. We may need to litigate to
enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others. Any such
litigation could be extremely time-consuming and costly and
could materially adversely impact our business.
Risks
related to our common stock
Provisions
in our charter documents and under Delaware law may prevent or
delay a change of control of us and could also limit the market
price of our common stock.
Certain provisions of Delaware law and of our certificate of
incorporation and by-laws could have the effect of making it
more difficult for a third party to acquire, or of discouraging
a third party from attempting to acquire, control of us, even if
such a change in control would be beneficial to our stockholders
or result in a premium for your shares of our common stock.
These provisions may also prevent or frustrate attempts by our
stockholders to replace or remove our management. These
provisions include:
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a classified board of directors
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limitations on the removal of directors
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advance notice requirements for stockholder proposals and
nominations
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the inability of stockholders to act by written consent or to
call special meetings
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the ability of our board of directors to make, alter or repeal
our by-laws
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The affirmative vote of the holders of at least 75% of our
shares of capital stock entitled to vote is necessary to amend
or repeal the above provisions that are contained in our
certificate of incorporation. In addition, our board of
directors has the ability to designate the terms of and issue
new series of preferred stock without stockholder approval.
Also, absent approval of our board of directors, our by-laws may
only be amended or repealed by the affirmative vote of the
holders of at least 75% of our shares of capital stock entitled
to vote.
In addition, we are subject to the provisions of
Section 203 of the Delaware General Corporation Law, which
limits business combination transactions with stockholders of
15% or more of our outstanding voting stock that our board of
directors has not approved. These provisions and other similar
provisions make it more difficult for stockholders or potential
acquirers to acquire us without negotiation. These provisions
may apply even if some stockholders may consider the transaction
beneficial to them.
These provisions could limit the price that investors are
willing to pay in the future for shares of our common stock.
These provisions might also discourage a potential acquisition
proposal or tender offer, even if the acquisition proposal or
tender offer is at a premium over the then current market price
for our common stock.
30
Because
our common stock price is likely to continue to be volatile, the
market price of our common stock could drop
unexpectedly.
Our stock price has been and may continue to be volatile, and
the market price of our common stock could drop unexpectedly.
Some of the factors that may cause the market price of our
common stock to fluctuate include:
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actual or anticipated variations in our quarterly operating
results or the quarterly financial results of companies
perceived to be similar to us
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announcements of technological innovations or new services by us
or our competitors
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changes in estimates of our financial results or recommendations
by market analysts
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announcements by us or our competitors of significant projects,
contracts, acquisitions, strategic alliances or joint ventures
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changes in our capital structure, such as future issuances of
securities or the incurrence of additional debt
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regulatory developments in the United States, the United
Kingdom, Sri Lanka, India or other countries in which we operate
or have clients
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litigation involving our company, our general industry or both
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additions or departures of key team members
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investors general perception of us
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changes in general economic, industry and market conditions
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changes in the market valuations of other IT service providers
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Many of these factors are beyond our control. In addition, the
stock markets, especially the NASDAQ Global Market, have
experienced significant price and volume fluctuations that have
affected the market prices of equity securities of many
technology companies. These fluctuations have often been
unrelated or disproportionate to operating performance. If any
of the foregoing occurs, it could cause our stock price to fall
and may expose us to securities class action litigation. Any
securities class action litigation could result in substantial
costs and the diversion of managements attention and
resources.
Our
existing stockholders and management control a substantial
interest in us and thus may influence certain actions requiring
stockholder vote.
Our executive officers, directors and stockholders affiliated
with our directors will beneficially own, in the aggregate,
shares representing approximately 48% of our outstanding capital
stock. Although we are not aware of any voting arrangements that
are in place among these stockholders, if these stockholders
were to choose to act together, as a result of their stock
ownership, they would be able to control all matters submitted
to our stockholders for approval, including the election of
directors and approval of any merger, consolidation or sale of
all or substantially all of our assets. This concentration of
voting power could delay or prevent an acquisition of our
company on terms that other stockholders may desire.
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Item 1B.
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Unresolved
Staff Comments.
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None.
Our principal executive offices are located in Westborough,
Massachusetts, where we lease approximately 30,000 square
feet. We also have sales and business development offices
located in Reading and London in the United Kingdom.
31
We have global delivery centers located in Hyderabad and
Chennai, India and Colombo, Sri Lanka. We lease space at four
facilities in Hyderabad, India, totaling approximately
168,500 square feet, and at two facilities in Chennai,
India, totaling approximately 120,700 square feet. In
Colombo, Sri Lanka, we lease space at four facilities totaling
approximately 152,600 square feet. Our leases vary in
duration and term, have varying renewable terms and have
expiration dates extending from 2008 to 2012. In addition, in
March 2007, we entered into a
99-year
lease, as amended in August 2007, with an option for an
additional 99 years for approximately 6.3 acres of
land in Hyderabad, India, where we are presently building a
campus. We have begun construction of Phase I of the campus
which, when completed, will total approximately
340,000 square feet.
We believe that our existing and planned facilities are adequate
to support our existing operations and that, as needed, we will
be able to obtain suitable additional facilities on commercially
reasonable terms.
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Item 3.
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Legal
Proceedings
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We are involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of our
management, the outcome of such claims and legal actions, if
decided adversely, is not currently expected to have a material
adverse effect on our operating results, cash flows or
consolidated financial position.
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Item 4.
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Submission
of Matter to a Vote of Security Holders
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None.
PART II
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Item 5.
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Market
for Our Common Equity, Related Stockholder Matters and Purchases
of Equity Securities.
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Our common stock commenced trading on the NASDAQ Global Market
on August 3, 2007 under the symbol VRTU. The
following table sets forth, for the periods indicated, the high
and low sale prices for our common stock for our fiscal year
ended March 31, 2008 since our initial public offering as
reported on the NASDAQ Global Market.
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High
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Low
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Fiscal 2008:
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Second quarter*
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$
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15.99
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$
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11.04
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Third quarter
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$
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19.97
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$
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12.57
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Fourth quarter
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$
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17.07
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$
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8.55
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* |
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Our common stock began trading on August 3, 2007. |
As of June 2, 2008, there were approximately
23,058,539 shares of our common stock outstanding held by
approximately 62 stockholders of record and the last
reported sale price of our common stock on the NASDAQ Global
Market on June 2, 2008 was $10.15 per share.
Dividend
Policy
We have never declared or paid any cash dividends on our capital
stock. We currently expect to retain future earnings, if any, to
finance the growth and development of our business and we do not
anticipate paying any cash dividends in the foreseeable future.
32
Equity
Compensation Plan Information
Equity
Compensation Plan Information
The following table provides information as of March 31,
2008 with respect to the shares of our common stock that may be
issued under our existing equity compensation plans.
We have three equity compensation plans, each of which has been
approved by our stockholders: (1) Amended and Restated 2000
Stock Option Plan, which we refer to as the 2000 Plan;
(2) the 2005 Stock Appreciation Rights Plan, which we refer
to as the SAR Plan; and (3) the 2007 Stock Option and
Incentive Plan, which we refer to as the 2007 Plan. For
additional information on our equity compensation plans, please
see note 9 to the consolidated financial statements.
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Number of Securities
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to be Issued Upon
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Weighted Average
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Vesting
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Exercise Price of
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Number of Securities
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of Awards or
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Awards or
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Available for Future
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Exercise of
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Outstanding
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Issuance Under Equity
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Plan Category
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Outstanding Options
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Options
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Compensation Plans
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Equity compensation plans that have been approved by security
holders stock options(1)
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2,551,757
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(2)
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$
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5.64
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476,390
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(2)
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Equity compensation plans that have been approved by security
holders stock appreciation rights(3)
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151,274
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4.12
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(2)
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Equity compensation plans not approved by security holders(4)
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869,055
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2.74
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Total
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3,572,086
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476,390
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(1) |
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Consists of the 2000 Plan and the 2007 Plan |
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(2) |
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In the event that any option under the 2000 Plan or any stock
appreciation right under the SAR Plan terminates without being
exercised, the number of shares underlying such option or stock
appreciation right becomes available for grant under the 2007
Plan. No further awards are authorized to be granted under the
2000 Plan or the SAR Plan. |
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(3) |
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Consists of the SAR Plan. |
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(4) |
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Consists of 869,055 shares issuable upon exercise of
options granted to Mr. Danford Smith, our President and
Chief Operating Officer, and Mr. Martin Trust, a board
member. |
Issuer
Purchases of Equity Securities
(a) On August 8, 2007, we completed our initial public
offering (the IPO) of 4,400,000 shares of
common stock at a public offering price of $14.00 per share
which we offered for sale pursuant to a registration statement
on
Form S-1
as amended (File
No. 333-141952).
Such registration statement was declared effective by the SEC on
August 2, 2007. The managing underwriters in the offering
were J.P. Morgan Securities Inc., Bear, Stearns & Co.
Inc., Cowen and Company, LLC and William Blair
& Company, LLC. Net proceeds of the IPO were
approximately $52.8 million, after deducting underwriting
discounts and commissions of approximately $4.3 million and
offering fees and expenses of approximately $4.5 million,
which includes legal, accounting and printing costs and various
other fees associated with registration and listing of our
common stock. We expect to use a portion of the net proceeds
from our IPO to fund the construction and build-out of a new
facility on our planned campus in Hyderabad, India, of which we
have spent approximately $7.2 million in our fiscal year
ended March 31, 2008 and plan to spend approximately
$23.3 million during our fiscal years ending 2009 and 2010.
The balance of the net proceeds will be used for working capital
and other general corporate purposes, including to finance the
expansion of our global delivery centers in Chennai, India and
Colombo, Sri Lanka, the hiring of additional personnel, sales
and marketing activities, capital expenditures, the costs of
operating as a public company and possible strategic alliances
or acquisitions.
33
(b) On April 9, 2008, we issued an aggregate of
6,285 shares of our common stock upon the exercise of a
warrant issued to Silicon Valley Bank on April 9, 2001,
giving effect to a net and automatic exercise provision in the
warrant. The 6,285 shares were issued based on the exercise
price of $5.48 per share (or an aggregate consideration of
$85,224) and a fair market value per share of $9.19 (or an
aggregate fair market value of $142,987), based on the closing
price of our common stock on the NASDAQ Global Market on
April 9, 2008. We issued the 6,285 shares of our
common stock under Section 4(2) of the Securities Act
(and/or Regulation D promulgated thereunder).
(c) During the fiscal quarter ended March 31, 2008,
there were no repurchases made by us or on our behalf, or by any
affiliated purchasers, of shares of our common stock.
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Item 6.
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Selected
Financial Data
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The selected historical financial data set forth below as of
March 31, 2008 and 2007 and for the fiscal years ended
March 31, 2008, 2007 and 2006 are derived from our
financial statements, which have been audited by KPMG LLP, our
independent registered public accounting firm, and which are
included elsewhere in this Annual Report on
Form 10-K.
The selected historical financial data as of March 31,
2006, 2005 and 2004 and for the fiscal years ended
March 31, 2005 and 2004 are derived from our financial
statements which are not included elsewhere in this Annual
Report.
The following selected consolidated financial data should be
read in conjunction with our consolidated financial statements,
the related notes and Managements Discussion and
Analysis of Financial Condition and Results of Operations
included elsewhere in this Annual Report on
Form 10-K.
The historical results are not necessarily indicative of the
results to be expected for any future period.
Consolidated
statement of operations data
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|
Fiscal Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
Revenue
|
|
$
|
165,198
|
|
|
$
|
124,660
|
|
|
$
|
76,935
|
|
|
$
|
60,484
|
|
|
$
|
42,822
|
|
Costs of revenue
|
|
|
92,847
|
|
|
|
68,031
|
|
|
|
43,417
|
|
|
|
31,813
|
|
|
|
22,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
72,351
|
|
|
|
56,629
|
|
|
|
33,518
|
|
|
|
28,671
|
|
|
|
20,174
|
|
Operating expenses
|
|
|
52,972
|
|
|
|
42,478
|
|
|
|
32,925
|
|
|
|
27,838
|
|
|
|
20,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
19,379
|
|
|
|
14,151
|
|
|
|
593
|
|
|
|
833
|
|
|
|
(135
|
)
|
Other income
|
|
|
3,249
|
|
|
|
1,209
|
|
|
|
1,564
|
|
|
|
376
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit)
|
|
|
22,628
|
|
|
|
15,360
|
|
|
|
2,157
|
|
|
|
1,209
|
|
|
|
(62
|
)
|
Income tax expense (benefit)
|
|
|
4,857
|
|
|
|
(3,630
|
)
|
|
|
176
|
|
|
|
99
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
17,771
|
|
|
$
|
18,990
|
|
|
$
|
1,981
|
|
|
$
|
1,110
|
|
|
$
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.83
|
|
|
$
|
1.09
|
|
|
$
|
0.12
|
|
|
$
|
0.07
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.76
|
|
|
$
|
1.03
|
|
|
$
|
0.11
|
|
|
$
|
0.06
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,368,470
|
|
|
|
6,005,619
|
|
|
|
5,613,623
|
|
|
|
5,448,048
|
|
|
|
5,561,278
|
|
Diluted
|
|
|
23,282,663
|
|
|
|
18,351,161
|
|
|
|
17,361,219
|
|
|
|
17,116,473
|
|
|
|
|
|
Note: The net income per share calculations
for the fiscal years ended March 31, 2007, 2006 and 2005
give effect to the automatic conversion of the redeemable
convertible preferred stock into 11,425,786 shares of
common stock upon the closing of the IPO on August 8, 2007.
The decrease in net income and earnings per
34
share in the fiscal year ended March 31, 2008 from the
fiscal year ended March 31, 2007 is due to our one-time
income tax benefit of $5.0 million in fiscal year 2007
caused by the release of our deferred tax asset valuation
allowance. Fiscal year 2004 did not give effect to the
conversion of the redeemable convertible preferred stock, which
would have been anti-dilutive.
Consolidated
balance sheet data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
41,047
|
|
|
$
|
45,079
|
|
|
$
|
30,237
|
|
|
$
|
28,406
|
|
|
$
|
30,361
|
|
Working capital
|
|
|
108,808
|
|
|
|
65,765
|
|
|
|
41,696
|
|
|
|
35,436
|
|
|
|
33,043
|
|
Total assets
|
|
|
180,770
|
|
|
|
99,319
|
|
|
|
58,719
|
|
|
|
50,085
|
|
|
|
47,141
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
60,862
|
|
|
|
60,814
|
|
|
|
60,758
|
|
|
|
60,701
|
|
Total stockholders equity (deficit)
|
|
|
155,834
|
|
|
|
19,259
|
|
|
|
(13,610
|
)
|
|
|
(17,899
|
)
|
|
|
(20,992
|
)
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Business
overview
We are a global information technology services company. We use
an offshore delivery model to provide a broad range of IT
services, including IT consulting, technology implementation and
application outsourcing. Using our enhanced global delivery
model, innovative platforming approach and industry expertise,
we provide cost-effective services that enable our clients to
use IT to enhance business performance, accelerate
time-to-market,
increase productivity and improve customer service.
Headquartered in Massachusetts, we have offices in the United
States and the United Kingdom and global delivery centers in
Hyderabad and Chennai, India and Colombo, Sri Lanka. We have
experienced compounded annual revenue growth of 46% over the
five-year period ended March 31, 2008. At March 31,
2008, we had 4,265 employees, or team members, and for the
fiscal year ended March 31, 2008, we had revenue of
$165.2 million and income from operations of
$19.4 million.
In our fiscal year ended March 31, 2008, our revenue
increased 33% to $165.2 million compared to
$124.7 million in our fiscal year ended March 31,
2007. Net income decreased by $1.2 million to
$17.8 million in our fiscal year ended March 31, 2008,
as compared to $19.0 million in our fiscal year ended
March 31, 2007. The
year-over-year
decrease in net income of $1.2 million is primarily due to
a one-time income tax benefit of $5.0 million in the prior
year caused by the release of our deferred tax asset valuation
allowance.
The key drivers of our revenue growth in our fiscal year ended
March 31, 2008 were as follows:
|
|
|
|
|
greater penetration of the European market, where we experienced
revenue growth of 60% in our fiscal year ended March 31,
2008 as compared to our fiscal year ended March 31, 2007
|
|
|
|
strong performance of our BFSI industry vertical, which had
fiscal year-over-year growth of 43%, our communication and
technology industry vertical which had fiscal year-over-year
revenue growth of approximately 34%, and our media and
information industry vertical which had fiscal year over year
growth of approximately 13%
|
|
|
|
increased penetration at existing clients
|
|
|
|
continued expansion of the market for global delivery of IT
services
|
High repeat business and client concentration is common in our
industry. During our fiscal year ended March 31, 2008, 96%
of our revenue was derived from clients who had been using our
services for more than one year. Accordingly, our global account
management and service delivery teams focus on expanding client
relationships and converting new engagements to long-term
relationships to generate repeat revenue and expand revenue
streams from existing clients. We also have a dedicated business
development team focused on generating engagements with new
clients to continue to expand our client base, and over time,
reduce client concentration.
35
Our European revenue increased to $51.1 million, or 31% of
total revenue, from $31.9 million, or 26% of total revenue
for the fiscal years ended March 31, 2008 and
March 31, 2007, respectively. Other revenue diversification
strategies include revenue by industry and revenue by service
offering. Our revenue from application outsourcing services has
represented a substantial majority of our total revenue.
However, IT consulting services and technology implementation
services have increased as a percentage of our total revenue in
recent years.
We perform our services under both
time-and-materials
and fixed-price contracts. Revenue from fixed-price contracts
was 21%, 14%, and 5% of total revenue for the fiscal years ended
March 31, 2008, 2007 and 2006, respectively. The increased
revenue earned from fixed-price contracts reflects our
clients preferences.
As an IT services company, our revenue growth has been, and will
continue to be, highly dependent on our ability to attract,
develop, motivate and retain skilled IT professionals. We
closely monitor our overall attrition rates and patterns to
ensure our people management strategy aligns with our growth
objectives. For the last twelve months ended March 31,
2008, our attrition rate was 21.3%. We remain committed to
improving our attrition levels. There is intense competition for
IT professionals with the skills necessary to provide the type
of services we offer. If our attrition rate increases and is
sustained at higher levels, our growth may slow and our cost of
attracting and retaining IT professionals could increase.
In our fiscal year ended March 31, 2008, we experienced
pressure on our cost structure due to the appreciation of the
Indian rupee versus the U.S. dollar. This is in addition to
the continuing wage inflation, primarily in India and Sri Lanka,
that we have experienced over the last several years. In
response to these pressures, in our fiscal year ended
March 31, 2008, we initiated a hedging strategy using
forward contracts designed to hedge fluctuation in the Indian
rupee against the U.S. dollar and U.K. pound sterling.
There is no assurance that these hedging programs will be
effective.
We have been profitable for the past ten consecutive quarters.
We continually monitor and manage a number of operating metrics
to ensure quality and reduce volatility in our earnings,
including:
|
|
|
|
|
Days sales outstanding, or DSO, is a measure of the
number of days our accounts receivable are outstanding based
upon the last 90 days of revenue activity, which indicates
the timeliness of our cash collection from clients and our
overall credit terms to our clients. DSO was 78 days and
79 days for our fiscal years ended March 31, 2008 and
2007, respectively. Higher DSO reduces our cash balance because
the
revenue-to-cash
conversion process takes longer.
|
|
|
|
Realized billing rates are the rates we charge our
clients for our services, which reflect the value our clients
place on our services, market competition and the geographic
location in which we perform our services. Our realized billing
rates have increased in our fiscal years ended March 31,
2007 and 2006, respectively, and have remained unchanged for our
fiscal year ended March 31, 2008. Any increase in realized
billing rates is a result of our ability to successfully
preserve or increase our billing rates with existing
and/or new
clients.
|
|
|
|
Average cost per IT professional is the sum of team
member salaries, including variable compensation, and fringe
benefits divided by the average number of IT professionals
during the period. We experienced increases in our average cost
per IT professional of 7.0% from our fiscal year ended
March 31, 2007 to our fiscal year ended March 31,
2008, primarily driven by the year-over-year appreciation of the
Indian rupee against the U.S. dollar, and of 1.9% from our
fiscal year ended March 31, 2006 to our fiscal year ended
March 31, 2007. These increases are primarily driven by
wage inflation and increased fringe benefit costs in India and
Sri Lanka, as well as increased foreign currency fluctuations
which we expect will continue to increase for the foreseeable
future.
|
|
|
|
Utilization rate is the percentage of time billable IT
professionals are deployed on client engagements, which
indicates the efficiency of our billable IT resources. Our
utilization rate is defined as number of billable hours divided
by the total number of available hours of our IT professionals
in a given period of time, excluding trainees. We track our
utilization rates to measure revenue potential and gross profit
margins. Managements targeted range for utilization is
between 70% and 75%. Generally, gross margin moves directionally
with utilization rate. Utilization is affected by the rate of
quarterly sequential
|
36
|
|
|
|
|
revenue growth. In higher growth periods, utilization tends to
rise as more resources are deployed to meet rising demand. In
addition, the seasonal graduation patterns introduce a higher
number of graduates from universities who join us, which may
temporarily lower our utilization rate during the period as
these new graduates become deployable. When we anticipate
periods of high growth, we hire in advance of current demand,
which may temporarily lower our utilization rate. In order to
facilitate growth and maintain client satisfaction, we seek to
maintain a sustainable level of utilization.
|
|
|
|
|
|
Attrition rate is the ratio of terminated team members
during the latest twelve months to the total number of team
members at the end of such period, which measures team member
turnover. Increased attrition rates result in increased hiring,
training and boarding costs and productivity losses, which may
affect our revenue, gross margin and operating profit margin.
Our attrition rate was 21.3% and 16.1% for our fiscal years
ended March 31, 2008 and 2007, respectively. The increase
in attrition from our fiscal year ended March 31, 2007 to
our fiscal year ended March 31, 2008 is primarily related
to the strong demand for IT professionals in India and Sri Lanka.
|
|
|
|
Operating expense efficiency is a measure of operating
expenses as a percentage of revenue. If we continue to
successfully grow our revenue, we anticipate that operating
expenses will decrease as a percentage of revenue as such
expenses are absorbed across a larger revenue base. In the near
term, however, any operating expense efficiency that we realize
may be offset by higher costs of operating as a public company,
as well as the negative impact on our operating margins
resulting from the appreciation of the Indian rupee against the
U.S. dollar. We continually try to increase operating
efficiencies and to lower operating expenses as a percentage of
revenue.
|
|
|
|
Effective tax rate is our worldwide tax expense as a
percentage of our consolidated net income before tax, which
measures the impact of income taxes worldwide on our operations
and net income. We monitor and assess our effective tax rate to
evaluate whether our tax structure is competitive as compared to
our industry. Our effective tax rate was 21.5% for the fiscal
year ended March 31, 2008 as compared to an income tax
(benefit) rate of (23.6%) for the fiscal year ended
March 31, 2007. The significant change in the rate for our
fiscal year ended March 31, 2008 was due to the recognition
of the one-time benefit related to the release of a
$5.0 million deferred tax asset valuation allowance in the
fiscal year ended March 31, 2007. We anticipate that our
effective tax rate will increase in our fiscal years ending
after March 31, 2010 as our India STPI tax holiday expires.
|
|
|
|
Onsite-to-offshore
mix is the measurement of hours billed by resources located
offshore to hours billed onsite by our team members over a
defined period. We strive to manage both fixed-price contracts
and
time-and-materials
engagements to a highly-efficient 20/80, or better,
onsite-to-offshore
service delivery team mix.
|
Sources
of revenue
We generate revenue by providing IT services to our clients
located primarily in the United States and the United Kingdom.
We have historically earned and believe that over the next few
years we will continue to earn, a significant portion of our
revenue from a limited number of clients. For the fiscal year
ended March 31, 2008, our five largest and ten largest
clients accounted for 54% and 76% of our revenue, respectively.
Our largest client, BT, accounted for 27% of our revenue for the
same period. Although no other client accounted for 10% or more
of our revenue during our fiscal year ended March 31, 2008,
the loss of any one of our major clients could reduce our
revenue or delay our recognition of revenue, harm our reputation
in the industry
and/or
reduce our ability to accurately predict cash flow. During the
fiscal year ended March 31, 2008, 69% of our revenue was
generated in the United States and 31% in the United Kingdom. We
provide IT services on either a
time-and-materials
or a fixed-price basis. For the fiscal year ended March 31,
2008, the percentage of revenue from
time-and-materials
and fixed-price contracts was 79% and 21%, respectively.
Revenue from services provided on a
time-and-materials
basis is derived from the number of billable hours in a period
multiplied by the rates at which we bill our clients. Revenue
from services provided on a fixed-price basis is recognized as
efforts are expended pursuant to the
percentage-of-completion
method.
37
Revenue also includes reimbursements of travel and
out-of-pocket
expenses with equivalent amounts of expense recorded in costs of
revenue.
Most of our client contracts, including those that are on a
fixed-price basis, can be terminated by our clients with or
without cause on 30 to 90 days prior written notice.
All fees for services provided by us through the date of
cancellation are generally due and payable under the contract
terms.
We have found there is a wide range in unit pricing from one
client to another and from one engagement to another, driven by
business need, delivery timeframes, complexity of the
engagement, operating differences (such as onsite/offshore
ratio), competitive environment and engagement size (or volume).
As a pricing strategy to encourage clients to increase the
volume of services that we provide to them, we may, on occasion,
offer volume discounts. We manage our business carefully to
protect our account margins and our overall profit margins. We
have not experienced significant pressure from clients to reduce
rates beyond what we consider to be our normal negotiation
process. We find that our clients generally purchase on the
basis of total value, rather than minimum cost, considering all
of the factors listed above.
While we are subject to the effects of overall market pricing
pressure, we believe that there is a fairly broad range of
pricing offered by different competitors for each service we
provide. We believe that no one competitor, or set of
competitors, sets pricing in our industry. As a result, we do
not see strong pricing pressure from competitors in our
industry. We find that our unit pricing, as a result of our
global delivery model, is generally competitive with other firms
who operate with a predominately offshore operating model.
The proportion of work performed at our offshore facilities and
at onsite client locations varies from
period-to-period.
Effort, in terms of the percentage of hours billed to clients by
onsite resources, was 17% of total hours billed in each of the
fiscal years ended March 31, 2008 and 2007, while the
revenue from onsite and offshore resources accounted for 46% and
54% and 47% and 53%, during the fiscal years ended
March 31, 2008 and 2007, respectively. We charge higher
rates and incur higher compensation and other expenses for work
performed at client locations in the United States and the
United Kingdom than for work performed at our global delivery
centers in India and Sri Lanka. Services performed at client
locations or at our offices in the United States or the United
Kingdom generate higher revenue per-capita at lower gross
margins than similar services performed at our global delivery
centers in India and Sri Lanka. We manage to a 20/80, or better,
onsite-to-offshore
service delivery mix and intend to manage to an efficient
onsite-to-offshore
service delivery ratio for the foreseeable future.
Costs of
revenue and gross profit
Costs of revenue consist principally of payroll and related
fringe benefits, reimbursable and non-reimbursable costs,
immigration-related expenses, fees for subcontractors working on
client engagements and share-based compensation expense for IT
professionals including account management personnel.
Wage costs in India and Sri Lanka have historically been
significantly lower than wage costs in the United States and
Europe for comparably-skilled IT professionals. However, wages
in India and Sri Lanka are increasing, which will result in
increased costs for IT professionals, particularly project
managers and other mid-level professionals. We may need to
increase the levels of our team member compensation more rapidly
than in the past to remain competitive without the ability to
make corresponding increases to our billing rates. Compensation
increases may reduce our profit margins, make us less
competitive in pricing potential projects against those
companies with lower cost resources and otherwise harm our
business, operating results and financial condition. We deploy a
campus hiring philosophy and encourage internal promotions to
minimize the effects of wage inflation pressure and recruiting
costs. Additionally, any material appreciation in the Indian or
Sri Lankan rupee against the U.S. dollar or U.K. pound
sterling could have a material adverse impact on our cost of
services. Although we have adopted an eight quarter hedging
program to minimize the effect of the Indian rupee movement on
our financial condition, the hedging program may be inadequate
and could cause the Company to forego benefits associated with
any significant depreciation of the Indian rupee which would
otherwise have had a beneficial impact on our earnings and
margins, and create a competitive disadvantage compared to
companies exposed to the Indian rupee but who do not hedge.
38
Our revenue and gross profit are also affected by our ability to
efficiently manage and utilize our IT professionals, as well as
fluctuations in foreign currency exchange rates. We define
utilization rate as the total number of days billed in a given
period divided by the total available days of our IT
professionals during that same period, excluding trainees. We
manage employee utilization by continually monitoring project
requirements and timetables to efficiently staff our projects
and meet our clients needs. The number of IT professionals
assigned to a project will vary according to the size,
complexity, duration and demands of the project. An
unanticipated termination of a significant project could cause
us to experience a higher than expected number of unassigned IT
professionals, thereby lowering our utilization rate, but such
hedging program may be ineffective.
Operating
expenses
Operating expenses consist primarily of payroll and related
fringe benefits, commissions, share-based compensation and
non-reimbursable costs, as well as promotion, communications,
management, finance, administrative, occupancy, marketing and
depreciation and amortization expenses. In the fiscal years
ended March 31, 2008, 2007 and 2006, we invested in all
aspects of our business, including sales, marketing, IT
infrastructure, human resources programs and financial
operations. Additionally, any material appreciation in the
Indian or Sri Lankan rupee against the U.S. dollar or U.K.
pound sterling could have a material adverse impact on our cost
of operating expenses. We have adopted an eight quarter hedging
program to mitigate the effect of the Indian rupee on our cost
of operating expenses.
Other
income (expense)
Other income (expense) includes interest income, interest
expense, investment gains and losses and foreign currency
transaction gains and losses. We generate interest income by
investing in money market instruments, short-term investments
and long-term investments. The functional currencies of our
subsidiaries are their local currencies. Foreign currency gains
and losses are generated primarily by fluctuations of the Indian
rupee, Sri Lankan rupee and U.K. pound sterling against the
U.S. dollar on intercompany transactions. We place our cash
in liquid investments at highly-rated financial institutions. We
believe that our credit policies reflect normal industry terms
and business risk.
Income
tax expense (benefit)
Our net income is subject to income tax in those countries in
which we perform services and have operations, including India,
Sri Lanka, the United Kingdom and the United States. In previous
years, we accumulated net operating loss carry-forwards which
were used to offset U.S. taxable income into fiscal 2008.
We have benefited from long-term income tax holiday arrangements
in both India and Sri Lanka that are offered to certain
export-oriented IT services firms. As a result of these net
operating losses and tax holiday arrangements, our worldwide
profit has been subject to a relatively low effective tax rate
as compared to the statutory rates in the countries in which we
operate. The effect of the income tax holidays increased our net
income in the fiscal years ended March 31, 2008 and 2007 by
$3.9 million and $2.4 million, respectively.
Our effective tax rates were 21.5% and (23.6%) for the fiscal
years ended March 31, 2008 and 2007, respectively. During
the fiscal year ended March 31, 2007, we determined that it
was more likely than not that our deferred tax assets would be
realized based upon our positive cumulative operating results
and our assessment of our expected future results. As a result,
we released our valuation allowance and recognized a discrete
income tax benefit of $5.0 million in our statement of
income for the fiscal year ended March 31, 2007. Our
effective tax rate in future periods will be affected by the
geographic distribution of our earnings, as well as the
availability of tax holidays in India and Sri Lanka.
Application
of critical accounting estimates and risks
Our consolidated financial statements have been prepared in
accordance with United States generally accepted accounting
principles, or GAAP. Preparation of these financial statements
requires us to make estimates and assumptions that affect the
reported amount of revenue and expenses, assets and liabilities
and
39
the disclosure of contingent assets and liabilities. We consider
an accounting estimate to be critical to the preparation of our
financial statements when both of the following are present:
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|
|
|
|
the estimate is complex in nature or requires a high degree of
judgment; and
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|
|
the use of different estimates and assumptions could have a
material impact on the consolidated financial statements.
|
We have discussed the development and selection of our critical
accounting estimates and related disclosures with the audit
committee of our board of directors. Those estimates critical to
the preparation of our consolidated financial statements are
listed below.
Revenue
recognition
Our revenue is derived from a variety of IT consulting,
technology implementation and application outsourcing services.
Our services are performed under both
time-and-material
and fixed-price arrangements. All revenue is recognized pursuant
to GAAP. Revenue is recognized as work is performed and amounts
are earned in accordance with the SEC Staff Accounting Bulletin,
or SAB, No. 101, Revenue Recognition in Financial
Statements, as amended by SAB No. 104, Revenue
Recognition. We consider amounts to be earned once evidence
of an arrangement has been obtained, services are delivered,
fees are fixed or determinable and collectability is reasonably
assured. For contracts with fees billed on a
time-and-materials
basis, we generally recognize revenue as the service is
performed.
Fixed-price engagements are accounted for under the
percentage-of-completion
method in accordance with the American Institute of Certified
Public Accountants Statement of Position, or SOP,
81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. Under the
percentage-of-completion
method, we estimate the
percentage-of-completion
by comparing the actual number of work days performed to date to
the estimated total number of days required to complete each
engagement. The use of the
percentage-of-completion
method requires significant judgment relative to estimating
total contract revenue and costs to completion, including
assumptions and estimates relative to the length of time to
complete the project, the nature and complexity of the work to
be performed and anticipated changes in other engagement-related
costs. Estimates of total contract revenue and costs to
completion are continually monitored during the term of the
contract and are subject to revision as the contract progresses.
Unforeseen circumstances may arise during an engagement
requiring us to revise our original estimates and may cause the
estimated profitability to decrease. When revisions in estimated
contract revenue and efforts are determined, such adjustments
are recorded in the period in which they are first identified.
Income
taxes
The calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations in
multiple jurisdictions. We record liabilities for estimated tax
obligations in the United States and other tax jurisdictions.
Determining the consolidated provision for income tax expense,
tax reserves, deferred tax assets and liabilities and related
valuation allowance, if any, involves judgment. We calculate and
provide for income taxes in each of the jurisdictions in which
we operate, including India, Sri Lanka, the United States and
the United Kingdom, and this can involve complex issues which
require an extended period of time to resolve. In the year of
any such resolution, additional adjustments may need to be
recorded that result in increases or decreases to income. Our
overall effective tax rate fluctuates due to a variety of
factors, including arms-length prices for our intercompany
transactions, changes in the geographic mix or estimated level
of annual pretax income, as well as newly enacted tax
legislation in each of the jurisdictions in which we operate.
Applicable transfer pricing regulations require that
transactions between and among our subsidiaries be conducted at
an arms-length price. On an ongoing basis we estimate
appropriate arms-length prices and use such estimates for
our intercompany transactions.
At each financial statement date we evaluate whether a valuation
allowance is needed to reduce our deferred tax assets to the
amount that is more likely than not to be realized. This
evaluation considers the
40
weight of all available evidence, including both future taxable
income and ongoing prudent and feasible tax planning strategies.
In the event that we determine that we will not be able to
realize a recognized deferred tax asset in the future, an
adjustment to the valuation allowance would be made resulting in
a decrease in income in the period such determination was made.
Likewise, should we determine that we will be able to realize
all or part of an unrecognized deferred tax asset in the future,
an adjustment to the valuation allowance would be made resulting
in an increase to income (or equity in the case of excess stock
option tax benefits).
We have benefited from long-term income tax holiday arrangements
in both India and Sri Lanka. Our Indian subsidiary is an
export-oriented company that is entitled to claim a tax
exemption for a period of ten years for each Software Technology
Park, or STP, it operates. All of our STP holidays will be
completely phased out by March 2010 and, at that time, any
profits could be fully taxable at the Indian statutory rate,
which is currently 34%. Although we believe we have complied
with, and are eligible for, the STP holidays, it is possible
that upon examination the government of India may deem us
ineligible for the STP holidays or make adjustments to the
profit level. In anticipation of the phase-out of the STP
holidays, we intend to locate at least a portion of our Indian
operations in areas designated as Special Economic Zones, or
SEZs, to secure additional tax exemptions for a period of ten
years, which could extend to 15 years if we meet certain
reinvestment requirements. Our Sri Lankan subsidiary has been
granted an income tax holiday by the Sri Lanka Board of
Investment which expires on March 31, 2019. The tax holiday
is contingent upon a certain level of job creation by us during
a given timetable. Any inability to meet the agreed upon level
or timetable for new job creation would jeopardize this holiday
arrangement. Primarily as a result of these tax holiday
arrangements, our worldwide profit has been subject to a
relatively low effective tax rate, and the loss of any of these
arrangements would increase our overall effective tax rate.
It is our intent to reinvest all accumulated earnings from India
and Sri Lanka back into their respective operations to fund
growth. As a component of this strategy, pursuant to Accounting
Principles Board Opinion No. 23, Accounting for Income
Taxes-Special Areas, we do not accrue incremental
U.S. taxes on Indian, Sri Lanka, or U.K. earnings as these
earnings are considered to be permanently or indefinitely
reinvested outside of the United States. If such earnings were
to be repatriated in the future or are no longer deemed to be
indefinitely reinvested, we will accrue the applicable amount of
taxes associated with such earnings, which would increase our
overall effective tax rate.
Share-based
compensation
Under the fair value recognition provisions of Statement of
Financial Accounting Standard (SFAS) No. 123R,
Share-Based Payment, share-based compensation cost is
measured at the grant date based on the value of the award and
is recognized over the vesting period. Determining the fair
value of the share-based awards at the grant date requires
judgment, including estimating the expected term over which
stock options will be outstanding before they are exercised, the
expected volatility of our stock, the number of share-based
awards that are expected to be forfeited and due to a recent tax
law change in India, the expected exercise proceeds for
share-based awards subject to the Indian fringe benefit tax. If
actual results differ significantly from our estimates,
share-based compensation expense and our results of operations
could be materially impacted.
Effective April 1, 2007, a new fringe benefit tax was
introduced in India that obligates us to pay, upon the exercise
or distribution of shares under a stock-based compensation
award, a non-income related tax on the appreciation of the award
from date of grant to the date of total vesting. We intend to
collect the cash amount of the fringe benefit tax from our team
members. However under GAAP, the stock-based Indian fringe
benefit tax expense is required to be recorded as an operating
expense and the related cash recovery of such tax from our team
members is required to be recorded to stockholders equity
as proceeds from a stock-based compensation award. Our future
operating results may experience volatility as a result of the
timing of exercise or distribution of shares related to
stock-based compensation awards to our team members who worked
or are working in India. The amount of stock-based Indian fringe
benefit tax expense recorded during our fiscal year ended
March 31, 2008 was immaterial.
41
We established a stock appreciation rights plan, or SAR Plan,
during the fiscal year ended March 31, 2006. Prior to our
IPO in August 2007, under the terms of the SAR Plan, all stock
appreciation rights, or SARs, were settled in cash and the
compensation cost and future liability for these SARs were
determined using the fair value at the grant date and
remeasuring the fair value of the vested SARs at the close of
each reporting period. After our IPO, we are obligated under the
SAR Plan to settle all SARs in shares of our common stock.
Therefore, the SARs are now equity classified and are no longer
remeasured. The liability measured as of our IPO date was
$1.4 million and this amount has been reclassified as a
component of additional paid in capital subsequent to our IPO.
Results
of operations
Fiscal
year ended March 31, 2008 compared to fiscal year ended
March 31, 2007
The following table presents an overview of our results of
operations for the fiscal years ended March 31, 2008 and
2007:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
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|
|
|
|
|
|
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|
2008
|
|
|
2007
|
|
|
$ Change
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|
|
% Change
|
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|
|
(Dollars in thousands)
|
|
|
Revenue
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|
$
|
165,198
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|
|
$
|
124,660
|
|
|
$
|
40,538
|
|
|
|
32.5
|
%
|
Costs of revenue
|
|
|
92,847
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|
|
|
68,031
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|
|
|
24,816
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|
|
|
36.5
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
72,351
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|
|
|
56,629
|
|
|
|
15,722
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|
|
|
27.8
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|
Operating expenses
|
|
|
52,972
|
|
|
|
42,478
|
|
|
|
10,494
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|
|
|
24.7
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
19,379
|
|
|
|
14,151
|
|
|
|
5,228
|
|
|
|
36.9
|
|
Other income
|
|
|
3,249
|
|
|
|
1,209
|
|
|
|
2,040
|
|
|
|
168.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense (benefit)
|
|
|
22,628
|
|
|
|
15,360
|
|
|
|
7,268
|
|
|
|
47.3
|
|
Income tax expense (benefit)
|
|
|
4,857
|
|
|
|
(3,630
|
)
|
|
|
8,487
|
|
|
|
(233.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,771
|
|
|
$
|
18,990
|
|
|
$
|
(1,219
|
)
|
|
|
(6.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Revenue increased by 32.5%, or $40.5 million, from
$124.7 million during the fiscal year ended March 31,
2007 to $165.2 million in the fiscal year ended
March 31, 2008. This increase is primarily attributed to
greater demand for our IT services delivered through our global
model. Revenue from clients existing as of March 31, 2007
increased in the fiscal year ended March 31, 2008 by
$34.3 million and revenue from new clients added since
March 31, 2007 was $6.2 million or 3.8% of total
revenue for the fiscal year ended March 31, 2008. In
addition, revenue from European clients in the fiscal year ended
March 31, 2008 increased by $19.2 million, or 60%, as
compared to the fiscal year ended March 31, 2007. Revenue
from North American clients increased by $21.1 million, or
23%, as compared to the fiscal year ended March 31, 2007.
We had 56 active clients as of March 31, 2008 as compared
to 41 active clients as of March 31, 2007. In addition, we
experienced strong demand across all of our industry verticals
for an increasingly broad range of services, with our BFSI and
communications and technology industry verticals experiencing
fiscal
year-over-year
revenue growth of 43% and 34%, respectively.
Costs
of revenue
Costs of revenue increased from $68.0 million in the fiscal
year ended March 31, 2007 to $92.8 million in the
fiscal year ended March 31, 2008, an increase of
$24.8 million, or 36.5%. A significant portion of the
increase was attributable to an increase in the number of our IT
professionals to support revenue growth, from 3,312 as of
March 31, 2007 to 4,036 as of March 31, 2008,
resulting in additional compensation and benefits costs of
$22.1 million. The net effects of a weaker U.S. dollar
against the Indian rupee during the fiscal year ended
March 31, 2008, as compared to the fiscal year ended
March 31, 2007, also increased our costs of revenue by
approximately $3.7 million which were partially offset by
$0.2 million gain recorded on foreign
42
currency forward contracts as part of our hedging program. These
increases were partially offset by a decrease in share-based
compensation expense of $0.6 million and a decrease in
subcontractors costs of $0.7 million in the fiscal year
ended March 31, 2008 as compared to the fiscal year ended
March 31, 2007.
Gross
profit
Our gross profit increased by $15.7 million or 27.8%, to
$72.4 million for the fiscal year ended March 31, 2008
as compared to $56.6 million in the fiscal year ended
March 31, 2007, primarily driven by higher utilization
rates. As a percentage of revenue, gross margin was 43.8% and
45.4% in the fiscal years ended March 31, 2008 and 2007,
respectively.
Operating
expenses
Operating expenses increased from $42.5 million in the
fiscal year ended March 31, 2007 to $53.0 million in
the fiscal year ended March 31, 2008, an increase of
$10.5 million, or 24.7%. The increase in our operating
expenses in absolute dollars is due to the increase of
$3.4 million in compensation and benefit costs and
$0.7 million in share-based compensation expense associated
with our non-IT professionals and an additional
$3.9 million in infrastructure expenses to accommodate the
increase in the number of IT professionals in Asia. In addition,
operating expenses during the fiscal year ended March 31,
2008 increased by $0.6 million from the fiscal year ended
March 31, 2007 with respect to the incremental non-payroll
costs associated with being a public company. The net effects of
a weaker U.S. dollar against the Indian rupee during the
fiscal year ended March 31, 2008, as compared to the fiscal
year ended March 31, 2007, also increased our operating
expenses by approximately $1.9 million. These increases
were partially offset by the $0.1 million gain recorded on
foreign currency forward contracts as part of our hedging
program. As a percentage of revenue, our operating expenses
decreased from 34.1% in the fiscal year ended March 31,
2007 to 32.1% in the fiscal year ended March 31, 2008.
Income
from operations
Income from operations increased from $14.2 million in the
fiscal year ended March 31, 2007 to $19.4 million in
the fiscal year ended March 31, 2008, an increase of
$5.2 million or 36.9%. This increase in income from
operations resulted from higher overall gross profit and lower
operating expenses as a percentage of revenue. As a percentage
of revenue, income from operations increased marginally from
11.4% in the fiscal year ended March 31, 2007 to 11.7% in
the fiscal year ended March 31, 2008, primarily due to our
lower operating expenses as a percentage of revenue, offset by a
lower gross margin.
Other
income
Other income increased from $1.2 million in the fiscal year
ended March 31, 2007 to $3.2 million in the fiscal
year ended March 31, 2008. The increase is primarily
attributed to an increase in interest income of
$2.7 million, from $1.2 million in the fiscal year
ended March 31, 2007 to $3.9 million in the fiscal
year ended March 31, 2008, partially offset by the increase
in foreign currency transaction losses of $0.8 million,
primarily due to the effects of a weaker U.S. dollar
against the Indian rupee and our hedging program. The increase
in interest income is due to an increase in average cash and
cash equivalents and our investment balances during the fiscal
year ended March 31, 2008 as a result of our IPO, when
compared to the fiscal year ended March 31, 2007.
Income
tax expense (benefit)
We had an income tax (benefit) of ($3.6) million in the
fiscal year ended March 31, 2007 compared to an income tax
expense of $4.9 million in the fiscal year ended
March 31, 2008. Our effective tax rate was an income tax
(benefit) rate of (23.6%) for the fiscal year ended
March 31, 2007, which is largely due to the recognition of
a discrete income tax benefit of approximately $5.0 million
due to the release of our deferred tax asset valuation allowance
in our statement of income during the fiscal year ended
March 31, 2007, as compared to an effective tax rate of
21.5% for the fiscal year ended March 31, 2008.
43
Net
income
Net income decreased from $19.0 million in the fiscal year
ended March 31, 2007 to $17.8 million in the fiscal
year ended March 31, 2008. This decrease was driven
primarily by the recognition of a discrete income tax benefit
due to the release of our deferred tax asset valuation allowance
during the fiscal year ended March 31, 2007, which offset
an increase in income from operations and other income during
the fiscal year ended March 31, 2008.
Fiscal
year ended March 31, 2007 compared to fiscal year ended
March 31, 2006
The following table presents an overview of our results of
operations for the fiscal years ended March 31, 2007 and
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Revenue
|
|
$
|
124,660
|
|
|
$
|
76,935
|
|
|
$
|
47,725
|
|
|
|
62.0
|
%
|
Costs of revenue
|
|
|
68,031
|
|
|
|
43,417
|
|
|
|
24,614
|
|
|
|
56.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
56,629
|
|
|
|
33,518
|
|
|
|
23,111
|
|
|
|
69.0
|
|
Operating expenses
|
|
|
42,478
|
|
|
|
32,925
|
|
|
|
9,553
|
|
|
|
29.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
14,151
|
|
|
|
593
|
|
|
|
13,558
|
|
|
|
2,286.3
|
|
Other income
|
|
|
1,209
|
|
|
|
1,564
|
|
|
|
(355
|
)
|
|
|
(22.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense (benefit)
|
|
|
15,360
|
|
|
|
2,157
|
|
|
|
13,203
|
|
|
|
612.1
|
|
Income tax expense (benefit)
|
|
|
(3,630
|
)
|
|
|
176
|
|
|
|
(3,806
|
)
|
|
|
(2,162.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,990
|
|
|
$
|
1,981
|
|
|
$
|
17,009
|
|
|
|
858.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Revenue increased by 62.0%, or $47.7 million, from
$76.9 million during the fiscal year ended
March 31, 2006 to $124.7 million in the fiscal
year ended March 31, 2007. This increase is primarily
attributed to greater demand for our IT services delivered
through our global model. Revenue from clients existing as of
March 31, 2006 increased in the fiscal year ended
March 31, 2007 by $43.9 million and revenue from new
clients added since March 31, 2006 was $3.8 million or
3.0% of total revenue for the fiscal year ended March 31,
2007. In addition, revenue from European clients for the fiscal
year ended March 31, 2007 increased by $21.3 million
as compared to the fiscal year ended March 31, 2006.
Revenue from North American clients for the fiscal year ended
March 31, 2007 increased by $26.3 million as
compared to the fiscal year ended March 31, 2006. We had
41 active clients as of March 31, 2007 as compared to
46 active clients as of March 31, 2006.
Costs
of revenue
Costs of revenue increased from $43.4 million in the fiscal
year ended March 31, 2006 to $68.0 million in the
fiscal year ended March 31, 2007, an increase of
$24.6 million, or 56.7%. A significant portion of the
increase was attributable to an increase in the number of IT
professionals to support revenue growth, from 2,113 as of
March 31, 2006 to 3,312 as of March 31, 2007,
resulting in additional compensation and benefits costs of
$21.5 million. We also experienced increases in
subcontractor costs working on client engagements of
$2.5 million and share-based compensation expense of
$0.7 million in the fiscal year ended March 31, 2007
as compared to the fiscal year ended March 31, 2006. The
net effects of a stronger U.S. dollar against the Indian
rupee during the fiscal year ended March 31, 2007 as
compared the fiscal year ended March 31, 2006, decreased
our costs of revenue by approximately $0.3 million,
partially offset by the impact of our hedged positions of
$0.2 million.
44
Gross
profit
Our gross profit increased from $33.5 million in the fiscal
year ended March 31, 2006 to $56.6 million in the
fiscal year ended March 31, 2007, an increase of
$23.1 million, or 69.0%. As a percentage of revenue, gross
margin was 45.4% and 43.6% in the fiscal years ended
March 31, 2007 and 2006, respectively.
Operating
expenses
Operating expenses increased from $32.9 million in the
fiscal year ended March 31, 2006 to $42.5 million in
the fiscal year ended March 31, 2007, an increase of
$9.6 million, or 29.0%. The increase in our operating
expenses in absolute dollars is due to the growth in our
headcount in non-IT professionals resulting in an increase of
$2.8 million in compensation and benefit costs,
$0.4 million in share-based compensation expense and an
additional $2.6 million in infrastructure expenses to
accommodate the increase in the number of IT professionals in
Asia. In addition, we incurred an additional $3.7 million
in professional services and travel expenses to establish a
financial shared-services center in India to provide back-office
transactional support to our Indian, U.K. and U.S. finance
organizations and to formalize our internal control framework in
anticipation of meeting the standards set forth by the
Sarbanes-Oxley Act of 2002 during the fiscal year ended
March 31, 2007 as compared to the fiscal year ended
March 31, 2006.
In the fiscal years ended March 31, 2007 and 2006, we
invested in sales, marketing, IT infrastructure, human resource
programs and financial operations. Our investments in our
infrastructure, principally in staff and systems, provided us
with higher economies of scale and supported our revenue growth.
As a result, our operating expenses, as a percentage of revenue,
decreased from 42.8% in the fiscal year ended March 31,
2006 to 34.1% in the fiscal year ended March 31, 2007.
Income
from operations
Income from operations increased from $0.6 million in the
fiscal year ended March 31, 2006 to $14.2 million in
the fiscal year ended March 31, 2007, an increase of
$13.6 million. This increase in income from operations
resulted from higher overall gross profit and lower operating
expenses as a percentage of revenue. As a percentage of revenue,
income from operations increased from 0.8% in the fiscal year
ended March 31, 2006 to 11.4% in the fiscal year ended
March 31, 2007.
Other
income
Other income decreased from $1.6 million in the fiscal year
ended March 31, 2006 to $1.2 million in the fiscal
year ended March 31, 2007. The decrease is attributed to
the absence of one-time investment gains of $0.9 million,
partially offset by an increase in interest income by
$0.4 million in the fiscal year ended March 31, 2007
as compared to the fiscal year ended March 31, 2006. The
increase in interest income is due to an increase in average
cash and equivalents during the fiscal year ended March 31,
2007 when compared to the fiscal year ended March 31, 2006.
Income
tax expense (benefit)
We had income tax expense of $0.2 million in the fiscal
year ended March 31, 2006 compared to an income tax
(benefit) of ($3.6) million in the fiscal year ended
March 31, 2007. This decrease in income tax expense is
largely related to the recognition of a discrete income tax
benefit of $5.0 million due to the release of our deferred
tax asset valuation allowance in our statement of income during
the fiscal year ended March 31, 2007. This was partially
offset by the provision of $1.4 million in income taxes in
the fiscal year ended March 31, 2007. Also reflected in the
provision are higher U.S. federal and state income taxes
due to higher U.S. profit levels. Our effective tax rate
was 8.1% for the fiscal year ended March 31, 2006 as
compared to an income tax (benefit) rate of (23.6%) for the
fiscal year ended March 31, 2007.
45
Net
income
Net income increased from $2.0 million in the fiscal year
ended March 31, 2006 to $19.0 million in the fiscal
year ended March 31, 2007. This increase was driven by the
increase in revenue, offset by comparatively smaller increases
in costs of revenue and operating expenses and the recognition
of a discrete income tax benefit of $5.0 million due to the
release of our deferred tax asset valuation allowance.
Liquidity
and capital resources
We completed an IPO of our common stock on August 8, 2007.
In connection with our IPO, we issued and sold
4,400,000 shares of common stock at a public offering price
of $14.00 per share. We received net proceeds of
$52.8 million after deducting underwriting discounts and
commissions of $4.3 million and offering costs of
$4.5 million.
We have financed our operations from sales of shares of equity
securities, including preferred and common stock and from cash
from operations. We have not borrowed against our existing or
preceding credit facilities.
As of March 31, 2008, we had cash and cash equivalents and
short-term investments of $81.9 million, of which
$6.7 million was held outside the United States. There were
foreign currency derivative contracts with a notional amount of
$73.1 million outstanding as at March 31, 2008. We
have a $3.0 million revolving line of credit with a bank.
This facility provides a $1.5 million sub-limit for letters
of credit. The revolving line of credit also includes a foreign
exchange line of credit requiring 15% of foreign exchange
contracts to be supported by our borrowing base. Advances under
our credit facility accrue interest at an annual rate equal to
the prime rate minus 0.25%. Our credit facility is secured by
certain U.S. assets in favor of the bank and contains
financial and reporting covenants and limitations. We are
currently in compliance with all covenants contained in our
credit facility and believe that our credit facility provides
sufficient flexibility so that we will remain in compliance with
its terms. As of March 31, 2008, we have no amounts
outstanding under this credit facility. Our credit facility
expires on September 30, 2008.
The funds held at locations outside of the United States are for
future operating expenses and expansion of our business, and we
have no intention of repatriating those funds. We are not,
however, restricted in repatriating those funds back to the
United States, if necessary. If we decide to remit funds from
India to the United States in the form of dividends, they would
be subject to Indian dividend distribution tax, which is
currently at a rate of approximately 17%, as well as
U.S. corporate income tax on the dividends.
On January 31, 2008, we purchased, from two banking
institutions, multiple foreign currency forward contracts
designed to hedge fluctuation in the Indian rupee against the
U.S. dollar and U.K. pound sterling. The contracts have an
aggregate notional amount of approximately 2.9 billion
Indian rupees (approximately $73.4 million) and will settle
on a monthly basis over a 21 month period ending
December 31, 2009. We have the obligation to settle these
contracts based upon the Reserve Bank of India published Indian
rupee exchange rates. The approximate weighted average Indian
rupee rate associated with these contracts is 39.56.
As of March 31, 2008, our long-term investments included
$8.0 million of auction-rate securities. All of these
auction rate securities are AAA or Aaa rated by one or more of
the major credit rating agencies. Furthermore, 85% of these
auction rate securities are issued by state agencies which issue
student loans, of which approximately 97% are guaranteed by the
U.S. government under the Federal Family Education Loan
Program (FFELP). The remaining 15% of these auction rate
securities consists of investments in municipal bonds and
preferred shares in a closed end mutual fund. As of
March 31, 2008, we experienced failed auctions with respect
to all of our auction rate securities, resulting in our
inability to sell these securities. However, this does not
represent a default by the issuer of the auction rate security.
Upon an auction failure, the interest rate does not reset at a
market rate but instead resets based on a formula contained in
the security, which is generally higher than the current market
rate. We have assessed each failed auction and believe that none
of the underlying issuers of auction rate securities are
presently at risk for default. At March 31, 2008, we
recorded, as a component of accumulated other comprehensive
income, a temporary impairment charge of $0.4 million, or
$0.3 million, net of tax, related to our auction rate
securities.
46
We believe we will be able to recover our investment in
auction-rate municipal debt securities due to: (i) the
strength of the underlying collateral, substantially backed by
FFELP, (ii) credit rating of the securities held by us and
(iii) recent news that certain municipal issuers of
auction-rate securities with failed auctions have announced
plans to call such securities. All of the auction-rate municipal
debt securities held by us are callable by the issuer at par
value. If future auctions continue to fail, we believe the
issuers of the auction-rate securities held by us will begin to
call these securities to avoid paying the higher penalty
interest rates associated with failed auctions. However, it
could take until the final maturity of the underlying security
(up to 37 years) to realize our investments recorded
value. Based on our expected operating cash flows, and our other
sources of cash, we do not anticipate the potential lack of
liquidity on these investments will affect our ability to
execute current and planned operations and needs for the
foreseeable future.
We believe that our available cash and cash equivalents,
short-term investments and cash flows expected to be generated
from operations will be adequate to satisfy our current and
planned operations for the foreseeable future. Our ability to
expand and grow our business in accordance with current plans
and to meet our long-term capital requirements will depend on
many factors, including the rate, if any, at which our cash flow
increases, our continued intent not to repatriate earnings from
India and Sri Lanka and the availability of public and private
debt and equity financing. To the extent we decide to pursue one
or more significant strategic acquisitions, we may incur debt or
sell additional equity to finance those acquisitions.
Anticipated
capital expenditures
We are constructing a facility as part of a planned campus on a
6.3 acre site in Hyderabad, India. We expect to construct
and build out this facility, which will be approximately
340,000 square feet, over the next two fiscal years at a
total estimated cost of $31.0 million, of which we
anticipate spending approximately $15.0 million during the
fiscal year ending March 31, 2009. Through March 31,
2008, we have spent $7.7 million toward the completion of
this facility with approximately $7.2 million spent during
the fiscal year ended March 31, 2008. Other capital
expenditures during the fiscal year ended March 31, 2008
were approximately $5.3 million. We expect other capital
expenditures in the normal course of business during the fiscal
year ended March 31, 2009 to be approximately
$6.0 million, primarily for leasehold improvements, capital
equipment and purchased software.
Cash
flows
The following table summarizes our cash flows for the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
13,440
|
|
|
$
|
11,120
|
|
|
$
|
1,892
|
|
Net cash used for investing activities
|
|
|
(73,147
|
)
|
|
|
(6,364
|
)
|
|
|
(865
|
)
|
Net cash provided by financing activities
|
|
|
55,434
|
|
|
|
9,843
|
|
|
|
659
|
|
Effect of exchange rate on cash
|
|
|
241
|
|
|
|
243
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(4,032
|
)
|
|
|
14,842
|
|
|
|
1,831
|
|
Cash and cash equivalents, beginning of fiscal year
|
|
|
45,079
|
|
|
|
30,237
|
|
|
|
28,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of fiscal year
|
|
$
|
41,047
|
|
|
$
|
45,079
|
|
|
$
|
30,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
Net cash provided by operating activities was $13.4 million
during the fiscal year ended March 31, 2008 as compared to
$11.1 million during the fiscal year ended March 31,
2007. This increase was attributable to a decrease in our trade
accounts receivable by $6.1 million as a result of our
increased collection efforts, a decrease in deferred income
taxes of $5.4 million, an increase in accrued compensation
and benefits of $1.1 million and an increase in
depreciation and amortization of $0.7 million during the
fiscal year ended March 31, 2008 as compared to the fiscal
year ended March 31, 2007. These sources of cash were
partially offset by decreases in net income of
$1.2 million, an increase in prepaid and other current
assets of $3.3 million,
47
an increase in other long-term assets of $3.8 million and a
decrease in accounts payable of $2.8 million during the
fiscal year ended March 31, 2008 as compared to the fiscal
year ended March 31, 2007.
Net cash provided by operating activities was $11.1 million
during the fiscal year ended March 31, 2007 as compared to
$1.9 million during the fiscal year ended March 31,
2006. This increase was attributable to our increase in net
income of $17.0 million, an increase in accounts payable of
$2.0 million, an increase in share-based compensation
expense of $1.1 million and a $0.9 million reduction
on the one-time gain on the sale of an equity investment during
the fiscal year ended March 31, 2007 as compared to the
fiscal year ended March 31, 2006. These increases were
partially offset by an increase in trade receivables by
$6.1 million, an increase in deferred income taxes due to
the release of our valuation allowance of $5.0 million and
a decrease in deferred revenue by $0.7 million.
Net
cash used for investing activities
Net cash used for investing activities was $73.1 million
during the fiscal year ended March 31, 2008 as compared to
$6.4 million during the fiscal year ended March 31,
2007. The increase was due to investments of cash and IPO
proceeds into short-term investments of $79.8 million and
long-term investments of $23.9 million, partially offset by
proceeds from sale or maturity of short-term investments of
$40.9 million and long-term investments of
$4.7 million. Additionally, we invested $12.5 million
in facilities and equipment including $7.2 million on our
Hyderabad campus during the fiscal year ended March 31,
2008, as compared to total capital expenditures of
$6.0 million during the fiscal year ended March 31,
2007. There was also an increase in restricted cash of
$1.8 million in the fiscal year ended March 31, 2008
as compared to the fiscal year ended March 31, 2007.
Further, we received proceeds from the sale of equity
investments of $0.5 million in the fiscal year ended
March 31, 2007, with no such transaction in the fiscal year
ended March 31 2008.
Net cash used for investing activities was $6.4 million
during the fiscal year ended March 31, 2007 as compared to
$0.9 million during the fiscal year ended March 31,
2006. We invested $6.0 million on facilities and equipment
during the fiscal year ended March 31, 2007, as compared to
total capital expenditures of $1.4 million during the
fiscal year ended March 31, 2006. In our fiscal year ended
March 31. 2006, we contained our facilities and equipment
spending and made an effort to redeploy existing equipment due
to lower utilization at our global delivery centers in India and
Sri Lanka, particularly during the first half of the fiscal year
ended March 31, 2006. There was also an increase in
restricted cash of $0.9 million in the fiscal year ended
March 31, 2007 as compared to the fiscal year ended
March 31, 2006.
Net
cash provided by financing activities
Net cash provided by financing activities was $55.4 million
during the fiscal year ended March 31, 2008, as compared to
$9.8 million during the fiscal year ended March 31,
2007. The increase was due to the gross proceeds from our IPO of
$61.6 million during the fiscal year ended March 31,
2008 as compared to proceeds from the sale of common stock of
$11.0 million, net of expenses, during the fiscal year
ended March 31, 2007. In addition, we received proceeds of
$0.4 million from stock option exercises during the fiscal
year ended March 31, 2008 as compared to proceeds of
$0.5 million from other stock sales and stock option
exercises during the fiscal year ended March 31, 2007. We
also recognized tax benefits of $0.4 million on stock
option exercises during the fiscal year ended March 31,
2008. This increase was partially offset by the
$7.0 million of cash used to fund our IPO during the fiscal
year ended March 31, 2008 as compared to $1.8 million
during the fiscal year ended March 31, 2007.
Net cash provided by financing activities was $9.8 million
during the fiscal year ended March 31, 2007, as compared to
$0.7 million during the fiscal year ended March 31,
2006. The increase was due to the proceeds of
$11.0 million, net of expenses, on the sale of common stock
to a wholly-owned subsidiary of BT. In addition, we received
proceeds of $0.5 million from other stock sales and stock
option exercises during the fiscal year ended March 31,
2007 as compared to $0.9 million during the fiscal year
ended March 31, 2006. In the fiscal year ended
March 31, 2007, we incurred $1.8 million of costs to
fund our IPO.
48
Contractual
obligations
We have no long-term debt and have various contractual
obligations and commercial commitments. The following table sets
forth our future contractual obligations and commercial
commitments as of March 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5+ Years
|
|
|
|
(In thousands)
|
|
|
Operating lease obligations(1)
|
|
$
|
14,014
|
|
|
$
|
4,425
|
|
|
$
|
7,458
|
|
|
$
|
2,131
|
|
|
$
|
|
|
Defined benefit plan(2)
|
|
|
3,837
|
|
|
|
113
|
|
|
|
434
|
|
|
|
710
|
|
|
|
2,580
|
|
Capital Commitments(3)
|
|
|
11,022
|
|
|
|
11,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,873
|
|
|
$
|
15,560
|
|
|
$
|
7,892
|
|
|
$
|
2,841
|
|
|
$
|
2,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our obligations under our operating leases consist of future
payments related to our real estate leases. |
|
(2) |
|
We accrue and contribute to benefit funds covering our employees
in India and Sri Lanka. The amounts in the table represent the
expected benefits to be paid out over the next ten years. We are
not able to quantify expected benefit payments beyond ten years
with any certainty. |
|
(3) |
|
Relates to construction of our campus in Hyderabad, India, net
of advances. |
Off-balance
sheet arrangements
We do not have any investments in special purpose entities or
undisclosed borrowings or debt. We had cash-secured letters of
credit totaling approximately $0.6 million at
March 31, 2008.
We have entered into foreign currency derivative contracts with
the objective of limiting our exposure to changes in the Indian
rupee as described below in Qualitative and Quantitative
Disclosures about Market Risk.
During the quarter ended March 31, 2008, we adopted an
expanded foreign currency hedging program to further mitigate
the risks of volatility in the Indian rupee against the
U.S. dollar and U.K. pound sterling, although such hedging
program may not be effective. The expanded program contemplates
a partially hedged position for a rolling eight quarter period.
Other than these foreign currency derivative contracts, we have
not entered into off-balance sheet transactions, arrangements or
other relationships with unconsolidated entities or other
persons that are likely to affect liquidity or the availability
of or requirements for capital resources.
Recent
accounting pronouncements
In June 2006, the FASB issued Financial Interpretation
No. 48, Accounting for Uncertainty in Income Taxes-and
interpretation of SFAS No. 109 (FIN 48),
which clarifies the accounting for uncertainty in income taxes
by prescribing a minimum recognition threshold for a tax
position taken or expected to be taken in a tax return that is
required to be met before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition. On April 1,
2007, we adopted FIN 48. The cumulative effect of adopting
FIN 48 of $0.1 million was recorded as a reduction of
beginning retained earnings.
In March 2008, the FASB issued Statement No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133.
(SFAS No. 161). SFAS No. 161 requires
enhanced disclosures about an entitys derivative
instruments and hedging activities with a view toward improving
the transparency of financial reporting, and is effective for
financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application
encouraged. SFAS No. 161 encourages, but does not
require, comparative disclosures for earlier periods at initial
adoption. We are currently evaluating the impact of adopting
SFAS No. 161 on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research
Bulletin No. 51 (SFAS No. 160).
SFAS No. 160
49
establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent
and to the noncontrolling interest, changes in a parents
ownership interest, and the valuation of retained noncontrolling
equity investments when a subsidiary is deconsolidated.
SFAS No. 160 also establishes disclosure requirements
that clearly identify and distinguish between the interests of
the parent and the interests of the noncontrolling owners.
SFAS No. 160 is effective for us beginning
April 1, 2009. We are currently evaluating the potential
impact that SFAS No. 160 will have on our consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of FASB Statement
No. 115 (SFAS No. 159), which is effective
for our financial statements beginning April 1, 2008.
SFAS No. 159 permits entities to measure eligible
financial assets, financial liabilities and firm commitments at
fair value, on an
instrument-by-instrument
basis, that are otherwise not permitted to be accounted for at
fair value under other GAAP. The fair value measurement election
is irrevocable and subsequent changes in fair value must be
recorded in earnings. We are currently evaluating the potential
impact that SFAS No. 159 will have on our consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about
fair value measurements. SFAS No. 157 does not require
any new fair value measurements, but provides guidance on how to
measure fair value by providing a fair value hierarchy used to
classify the source of the information. SFAS No. 157
is effective for fiscal years beginning after November 15,
2007. However, on February 12, 2008, the FASB issued
FSP 157-2
(the FSP) which delays the effective date of
SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a
recurring basis (at least annually). The FSP partially defers
the effective date of SFAS No. 157 to fiscal years
beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope of the FSP.
We are currently evaluating the potential impact that
SFAS No. 157 and the FSP will have on our consolidated
financial statements.
|
|
Item 7A.
|
Quantitative
and qualitative disclosures about market risk
|
Foreign
currency exchange rate risk
We are exposed to foreign currency exchange rate risk in the
ordinary course of business. We have historically entered into,
and in the future we may enter into, foreign currency derivative
contracts to minimize the impact of foreign currency
fluctuations on both foreign currency denominated assets and
forecasted expenses. The purpose of this foreign exchange policy
is to protect us from the risk that the recognition of and
eventual cash flows related to Indian rupee denominated expenses
might be affected by changes in exchange rates. Certain of these
contracts meet the criteria for hedge accounting as cash flow
hedges under SFAS 133, Accounting for Derivative
Instruments and Hedging Activities.
We evaluate our foreign exchange policy on an ongoing basis to
assess our ability to address foreign exchange exposures on our
balance sheet and operating cash flows from the U.K. pound
sterling, Indian rupee, and the Sri Lankan rupee.
During the fiscal year ended March 31, 2008, we adopted a
foreign currency hedging program to mitigate the risks of
volatility in the Indian rupee against the U.S. dollar and
U.K. pound sterling. The U.S. dollar equivalent market
value of the outstanding foreign currency derivative contracts
as of March 31, 2008 was $71.6 million. There were no
outstanding foreign currency derivative contracts as of
March 31, 2007.
Assuming the amount of expenditures by our Indian operations
were consistent with fiscal 2008 and the timing of the funding
of these operations were to remain consistent during our fiscal
year ending March 31, 2009, a constant increase or decrease
in the exchange rate between the Indian rupee and the
U.S. dollar during the fiscal 2009 of 10% would impact our
net income by $5.1 million excluding the effect of foreign
currency derivative contracts which would offset 85% of the
impact.
50
Interest
rate risk
We do not believe we are exposed to material direct risks
associated with changes in interest rates other than with our
cash and cash equivalents, short-term investments and long-term
investments. As of March 31, 2008, we had
$99.1 million in cash and cash equivalents, short-term
investments and long-term investments, the interest income from
which is affected by changes in short-term interest rates. Our
investment securities primarily consist of auction rate
securities, commercial paper and corporate debts. All of our
investments in debt securities are classified as
available-for-sale and are recorded at fair value.
Our available-for-sale investments are sensitive to
changes in interest rates. Interest rate changes would result in
a change in the net fair value of these financial instruments
due to the difference between the market interest rate and the
market interest rate at the date of purchase of the financial
instrument. A 10% decrease in market interest rates at
March 31, 2008 would impact the net fair value of such
interest-sensitive financial instruments by $0.3 million.
We had no debt outstanding as of March 31, 2008.
Concentration
of credit risk
Financial instruments which potentially expose us to
concentrations of credit risk primarily consist of cash and cash
equivalents, short-term investments and long-term investments,
accounts receivable and unbilled accounts receivable. We place
our temporary cash in liquid investments at highly-rated
financial institutions. We believe that our credit policies
reflect normal industry terms and business risk. We do not
anticipate non-performance by the counterparties and,
accordingly, do not require collateral. Credit losses and
write-offs of accounts receivable balances have historically not
been material to our financial statements and have not exceeded
our expectations.
As of March 31, 2008, our long-term investments included
$8.0 million of auction-rate securities. All of these
auction rate securities are AAA or Aaa rated by one or more of
the major credit rating agencies. Furthermore, 85% of these
auction rate securities are issued by state agencies which issue
student loans, of which approximately 97% are guaranteed by the
U.S. government under the FFELP. The remaining 15% of these
auction rate securities consists of investments in municipal
bonds and preferred shares in a closed end mutual fund. As of
March 31, 2008, we had experienced failed auctions with
respect to our auction rate securities, resulting our inability
to sell these securities. As a result, our ability to liquidate
and fully recover the carrying value of our investments in the
near term may be impacted. We believe that our available cash
and cash equivalents, short term investments and cash flows
expected to be generated from operations will be adequate to
satisfy our current and planned operations for the foreseeable
future.
51
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Virtusa
Corporation and Subsidiaries
Index to
Consolidated Financial Statements
52
Report of
Independent Registered Public Accounting Firm
Board of
Directors and Shareholders
Virtusa Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
Virtusa Corporation and Subsidiaries (the Company) as of
March 31, 2008 and 2007, and the related consolidated
statements of income, changes in stockholders equity
(deficit) and cash flows for each of the years in the three-year
period ended March 31, 2008. These consolidated financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated 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, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Virtusa Corporation and Subsidiaries as of
March 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the
three-year period ended March 31, 2008, in conformity with
U.S. generally accepted accounting principles.
As discussed in note 2 to the consolidated financial
statements, the Company changed its method of accounting for
share-based payments effective April 1, 2005.
Boston, Massachusetts
May 29, 2008
53
Virtusa
Corporation and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
41,047
|
|
|
$
|
45,079
|
|
Short-term investments
|
|
|
40,816
|
|
|
|
|
|
Accounts receivable, net of allowance of $653 and $420 at
March 31, 2008 and 2007, respectively
|
|
|
34,716
|
|
|
|
28,588
|
|
Unbilled accounts receivable
|
|
|
4,233
|
|
|
|
2,422
|
|
Prepaid expenses
|
|
|
4,025
|
|
|
|
1,862
|
|
Deferred income taxes
|
|
|
901
|
|
|
|
3,094
|
|
Other current assets
|
|
|
6,349
|
|
|
|
3,681
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
132,087
|
|
|
|
84,726
|
|
Property and equipment, net
|
|
|
16,833
|
|
|
|
7,541
|
|
Long-term investments
|
|
|
17,091
|
|
|
|
41
|
|
Restricted cash
|
|
|
4,361
|
|
|
|
1,588
|
|
Deferred income taxes
|
|
|
4,429
|
|
|
|
1,946
|
|
Other long-term assets
|
|
|
5,969
|
|
|
|
3,477
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
180,770
|
|
|
$
|
99,319
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,726
|
|
|
$
|
4,414
|
|
Accrued employee compensation and benefits
|
|
|
10,424
|
|
|
|
6,999
|
|
Accrued expenses other
|
|
|
8,375
|
|
|
|
4,338
|
|
Deferred revenue
|
|
|
351
|
|
|
|
877
|
|
Income taxes payable
|
|
|
403
|
|
|
|
1,163
|
|
Accrued liabilities stock appreciation rights
|
|
|
|
|
|
|
1,170
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
23,279
|
|
|
|
18,961
|
|
Long-term liabilities
|
|
|
1,657
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
24,936
|
|
|
|
19,198
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock, at accreted redemption
value:
|
|
|
|
|
|
|
|
|
Series A redeemable convertible preferred stock,
$0.01 par value. Authorized, issued and outstanding zero
and 4,043,582 shares at liquidation preference at
March 31, 2008 and 2007, respectively
|
|
|
|
|
|
|
13,500
|
|
Series B redeemable convertible preferred stock,
$0.01 par value. Authorized zero and 8,749,900 shares
at March 31, 2008 and 2007, respectively; issued and
outstanding zero and 8,647,043 shares at liquidation
preference at March 31, 2008 and 2007, respectively
|
|
|
|
|
|
|
15,132
|
|
Series C redeemable convertible preferred stock,
$0.01 par value. Authorized, issued and outstanding zero
and 12,807,624 shares at liquidation preference at
March 31, 2008 and 2007, respectively
|
|
|
|
|
|
|
12,230
|
|
Series D redeemable convertible preferred stock,
$0.01 par value. Authorized, issued and outstanding zero
and 7,458,494 shares at liquidation preference at
March 31, 2008 and 2007, respectively
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
Total redeemable convertible preferred stock
|
|
|
|
|
|
|
60,862
|
|
|
|
|
|
|
|
|
|
|
Commitments and guarantees
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Undesignated preferred stock, $0.01 par value; Authorized
5,000,000 and 29,016,038 shares at March 31, 2008 and
2007, respectively; issued zero shares at March 31, 2008
and 2007
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; Authorized 120,000,000 and
80,000,000 shares at March 31, 2008 and 2007,
respectively; issued 23,427,976 and 7,420,646 shares at
March 31, 2008 and 2007, respectively; outstanding
23,008,411 and 7,001,081 shares at March 31, 2008 and
2007, respectively
|
|
|
234
|
|
|
|
74
|
|
Treasury stock, 419,565 common shares, at cost
|
|
|
(442
|
)
|
|
|
(442
|
)
|
Additional paid-in capital
|
|
|
137,774
|
|
|
|
19,205
|
|
Accumulated earnings
|
|
|
18,428
|
|
|
|
752
|
|
Accumulated other comprehensive loss
|
|
|
(160
|
)
|
|
|
(330
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
155,834
|
|
|
|
19,259
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable convertible preferred stock and
stockholders equity
|
|
$
|
180,770
|
|
|
$
|
99,319
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
54
Virtusa
Corporation and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenue
|
|
$
|
165,198
|
|
|
$
|
124,660
|
|
|
$
|
76,935
|
|
Costs of revenue
|
|
|
92,847
|
|
|
|
68,031
|
|
|
|
43,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
72,351
|
|
|
|
56,629
|
|
|
|
33,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
52,972
|
|
|
|
42,478
|
|
|
|
32,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
19,379
|
|
|
|
14,151
|
|
|
|
593
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
3,917
|
|
|
|
1,246
|
|
|
|
800
|
|
Gain on sale of investments
|
|
|
|
|
|
|
|
|
|
|
927
|
|
Foreign currency transaction gains (losses)
|
|
|
(732
|
)
|
|
|
125
|
|
|
|
(193
|
)
|
Other, net
|
|
|
64
|
|
|
|
(162
|
)
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
3,249
|
|
|
|
1,209
|
|
|
|
1,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense (benefit)
|
|
|
22,628
|
|
|
|
15,360
|
|
|
|
2,157
|
|
Income tax expense (benefit)
|
|
|
4,857
|
|
|
|
(3,630
|
)
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,771
|
|
|
$
|
18,990
|
|
|
$
|
1,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.83
|
|
|
$
|
1.09
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.76
|
|
|
$
|
1.03
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
55
Virtusa
Corporation and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable
|
|
|
|
|
|
Accumulated
|
|
|
Total
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
from
|
|
|
Accumulated
|
|
|
Other
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
Employee
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
Equity
|
|
|
Income
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Stockholders
|
|
|
(Deficit)
|
|
|
Loss
|
|
|
(Deficit)
|
|
|
(Loss)
|
|
|
|
(In thousands, except share amounts)
|
|
|
Balance at March 31, 2005
|
|
|
5,984,117
|
|
|
$
|
60
|
|
|
|
(419,565
|
)
|
|
$
|
(442
|
)
|
|
$
|
3,273
|
|
|
$
|
(71
|
)
|
|
$
|
(49
|
)
|
|
$
|
(20,219
|
)
|
|
$
|
(451
|
)
|
|
$
|
(17,899
|
)
|
|
$
|
1,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest on notes receivable from employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
Accretion of preferred stock issuance cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56
|
)
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
266,030
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
766
|
|
|
|
|
|
Proceeds from the exercise of stock options
|
|
|
80,917
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,516
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,587
|
|
|
|
|
|
Cumulative translation adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(96
|
)
|
|
|
(96
|
)
|
|
|
(96
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,981
|
|
|
|
|
|
|
|
1,981
|
|
|
|
1,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2006
|
|
|
6,331,064
|
|
|
$
|
63
|
|
|
|
(419,565
|
)
|
|
$
|
(442
|
)
|
|
$
|
5,605
|
|
|
$
|
|
|
|
$
|
(51
|
)
|
|
$
|
(18,238
|
)
|
|
$
|
(547
|
)
|
|
$
|
(13,610
|
)
|
|
$
|
1,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest on notes receivable from employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
Repayment of principal and accrued interest on notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
Accretion of preferred stock issuance cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48
|
)
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
1,006,669
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
11,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,420
|
|
|
|
|
|
Proceeds from the exercise of stock options
|
|
|
82,913
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,962
|
|
|
|
|
|
Adjustment to initially apply SFAS No. 158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(136
|
)
|
|
|
(136
|
)
|
|
|
|
|
Cumulative translation adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353
|
|
|
|
353
|
|
|
|
353
|
|
Reclassification of warrants from equity to liabilities pursuant
to adoption of FSP
150-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(151
|
)
|
|
|
|
|
Reclassification of warrants from liabilities to equity pursuant
to warrant amendment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,990
|
|
|
|
|
|
|
|
18,990
|
|
|
|
18,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007
|
|
|
7,420,646
|
|
|
$
|
74
|
|
|
|
(419,565
|
)
|
|
$
|
(442
|
)
|
|
$
|
19,205
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
752
|
|
|
$
|
(330
|
)
|
|
$
|
19,259
|
|
|
$
|
19,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options
|
|
|
181,544
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
442
|
|
|
|
|
|
Reclass of SARs from liability to equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,382
|
|
|
|
|
|
Deferred offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,811
|
)
|
|
|
|
|
Proceeds from initial public offering
|
|
|
4,400,000
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
61,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,600
|
|
|
|
|
|
Conversion of preferred stock to common stock
|
|
|
11,425,786
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
60,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,862
|
|
|
|
|
|
Share based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,817
|
|
|
|
|
|
Unrealized gain (loss) on available-for-sale securities,
net of taxes $107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(196
|
)
|
|
|
(196
|
)
|
|
|
(196
|
)
|
Unrealized gain (loss) on effective cash flow hedges, net of
taxes $567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(931
|
)
|
|
|
(931
|
)
|
|
|
(931
|
)
|
Pension benefit adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(167
|
)
|
|
|
(167
|
)
|
|
|
(167
|
)
|
Adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95
|
)
|
|
|
|
|
|
|
(95
|
)
|
|
|
|
|
Tax benefit related to stock plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437
|
|
|
|
|
|
Cumulative translation adjustment, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,464
|
|
|
|
1,464
|
|
|
|
1,464
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,771
|
|
|
|
|
|
|
|
17,771
|
|
|
|
17,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
|
23,427,976
|
|
|
$
|
234
|
|
|
|
(419,565
|
)
|
|
$
|
(442
|
)
|
|
$
|
137,774
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
18,428
|
|
|
$
|
(160
|
)
|
|
$
|
155,834
|
|
|
$
|
17,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
56
Virtusa
Corporation and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,771
|
|
|
$
|
18,990
|
|
|
$
|
1,981
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,923
|
|
|
|
3,272
|
|
|
|
3,051
|
|
Share-based compensation expense
|
|
|
3,041
|
|
|
|
2,911
|
|
|
|
1,792
|
|
Gain on sale of equity investment
|
|
|
|
|
|
|
|
|
|
|
(927
|
)
|
Loss (gain) on disposal of property and equipment and investments
|
|
|
(144
|
)
|
|
|
7
|
|
|
|
245
|
|
Mark to market for liability classified warrants
|
|
|
|
|
|
|
148
|
|
|
|
|
|
Deferred income taxes, net
|
|
|
402
|
|
|
|
(5,040
|
)
|
|
|
|
|
Net changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(6,834
|
)
|
|
|
(12,887
|
)
|
|
|
(6,757
|
)
|
Prepaid expenses and other current assets
|
|
|
(4,960
|
)
|
|
|
(1,625
|
)
|
|
|
(1,593
|
)
|
Other long-term assets
|
|
|
(3,875
|
)
|
|
|
(10
|
)
|
|
|
(297
|
)
|
Accounts payable
|
|
|
(1,011
|
)
|
|
|
1,836
|
|
|
|
(136
|
)
|
Accrued employee compensation and benefits
|
|
|
3,052
|
|
|
|
1,981
|
|
|
|
1,846
|
|
Accrued expenses other
|
|
|
2,032
|
|
|
|
941
|
|
|
|
1,560
|
|
Deferred revenue
|
|
|
(540
|
)
|
|
|
9
|
|
|
|
748
|
|
Income taxes payable
|
|
|
416
|
|
|
|
644
|
|
|
|
207
|
|
Excess tax benefits from stock option exercises
|
|
|
(437
|
)
|
|
|
(36
|
)
|
|
|
|
|
Other long-term liabilities
|
|
|
604
|
|
|
|
(21
|
)
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
13,440
|
|
|
|
11,120
|
|
|
|
1,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used for investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of equity investment
|
|
|
|
|
|
|
466
|
|
|
|
461
|
|
Proceeds from sale of property and equipment
|
|
|
172
|
|
|
|
35
|
|
|
|
103
|
|
Purchase of short-term investments
|
|
|
(79,773
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sale or maturity of short-term investments
|
|
|
40,943
|
|
|
|
|
|
|
|
|
|
Purchase of long-term investments
|
|
|
(23,929
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sale or maturity of long-term investments
|
|
|
4,656
|
|
|
|
|
|
|
|
|
|
Increase in restricted cash
|
|
|
(2,690
|
)
|
|
|
(872
|
)
|
|
|
|
|
Purchase of property and equipment
|
|
|
(12,526
|
)
|
|
|
(5,993
|
)
|
|
|
(1,429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(73,147
|
)
|
|
|
(6,364
|
)
|
|
|
(865
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of common stock options
|
|
|
442
|
|
|
|
129
|
|
|
|
109
|
|
Proceeds from sale of common stock
|
|
|
61,600
|
|
|
|
11,420
|
|
|
|
766
|
|
Principal payments on capital lease obligation
|
|
|
(7
|
)
|
|
|
(22
|
)
|
|
|
(216
|
)
|
Repayments of notes receivable
|
|
|
|
|
|
|
53
|
|
|
|
|
|
Deferred stock offering costs
|
|
|
(7,038
|
)
|
|
|
(1,773
|
)
|
|
|
|
|
Excess tax benefits from stock option exercises
|
|
|
437
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
55,434
|
|
|
|
9,843
|
|
|
|
659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
241
|
|
|
|
243
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(4,032
|
)
|
|
|
14,842
|
|
|
|
1,831
|
|
Cash and cash equivalents, beginning of year
|
|
|
45,079
|
|
|
|
30,237
|
|
|
|
28,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
41,047
|
|
|
$
|
45,079
|
|
|
$
|
30,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
3
|
|
|
$
|
13
|
|
|
$
|
28
|
|
Cash receipts from interest
|
|
$
|
3,275
|
|
|
$
|
1,233
|
|
|
$
|
807
|
|
Cash paid for income tax
|
|
$
|
4,219
|
|
|
$
|
722
|
|
|
$
|
65
|
|
See accompanying notes to consolidated financial statements
57
Virtusa
Corporation and Subsidiaries
(thousands,
except share and per share amounts)
|
|
(1)
|
Nature of
the Business
|
Virtusa Corporation (the Company or Virtusa) is a global
information technology services company. The Company uses an
offshore delivery model to provide a broad range of information
technology, or IT services, including IT consulting, technology
implementation and application outsourcing. Using its enhanced
global delivery model, innovative platforming approach and
industry expertise, the Company provides cost-effective services
that enable its clients to accelerate time to market, improve
service and enhance productivity. Headquartered in
Massachusetts, Virtusa has offices in the United States and the
United Kingdom, and global delivery centers in Hyderabad and
Chennai, India and Colombo, Sri Lanka.
The Company completed an initial public offering, or IPO, of its
common stock on August 8, 2007. In connection with the
Companys IPO, the Company issued and sold
4,400,000 shares of common stock at a public offering price
of $14.00 per share. The Company received net proceeds of
$52,789 after deducting underwriting discounts and commissions
of $4,312 and offering costs of $4,499. Upon the closing of the
IPO, all shares of redeemable convertible preferred stock
automatically converted into 11,425,786 shares of the
Companys common stock.
|
|
(2)
|
Summary
of Significant Accounting Policies
|
|
|
(a)
|
Principles
of Consolidation
|
The consolidated financial statements reflect the accounts of
the Company and its subsidiaries, Virtusa (India) Private
Limited, organized and located in India, Virtusa (Private)
Limited, organized and located in Sri Lanka, Virtusa UK
Limited, organized and located in the United Kingdom, Virtusa
Securities Corporation, a Massachusetts securities corporation
located in the United States, Virtusa International, B.V.,
organized and located in the Netherlands, Virtusa Consulting
Services, Pvt. Ltd., organized and located in India, and Virtusa
Software Services, Pvt. Ltd., organized and located in India.
All intercompany transactions and balances have been eliminated
in consolidation.
The preparation of financial statements in accordance with
generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities,
including the recoverability of tangible assets, disclosure of
contingent assets and liabilities as of the date of the
financial statements, and the reported amounts of revenue and
expenses during the reported period. Management reevaluates
these estimates on an ongoing basis. The most significant
estimates relate to the recognition of revenue and profits based
on the percentage of completion method of accounting for
fixed-price contracts, share-based compensation, income taxes
and related deferred tax assets and liabilities. Management
bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the
circumstances. The actual amounts may vary from the estimates
used in the preparation of the accompanying consolidated
financial statements.
|
|
(c)
|
Foreign
Currency Translation
|
The functional currencies of the Companys
non-U.S. subsidiaries
are the local currency. India, Sri Lanka and the United
Kingdoms operating and capital expenditures are
denominated in their local currency which is the currency most
compatible with their expected economic results. India and Sri
Lanka local expenditures form the underlying basis for
intercompany transactions which are subsequently conducted in
both U.S. dollars and U.K. pounds sterling. U.K. client
sales contracts are conducted in U.K. pounds sterling.
All transactions and account balances are denominated in the
local currency. The Company translates the value of these
non-U.S. subsidiaries local currency denominated
assets and liabilities into U.S. dollars at the
58
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
rates in effect at the balance sheet date. Resulting translation
adjustments are recorded in stockholders equity as a
component of accumulated other comprehensive income (loss). The
local currency denominated statement of income amounts are
translated into U.S. dollars using the average exchange
rates in effect during the period. Realized foreign currency
transaction gains and losses are included in the consolidated
statements of income. The Companys
non-U.S. subsidiaries
do not operate in highly inflationary countries.
|
|
(d)
|
Derivative
Instruments and Hedging Activities
|
The Company enters into forward foreign exchange contracts to
mitigate the risk of changes in foreign exchange rates on
intercompany transactions and forecasted transactions
denominated in foreign currencies. The Company designates
derivative contracts as cash flow hedges if it satisfies the
criteria for hedge accounting under SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities. Changes in fair values of derivatives designated
as cash flow hedges are deferred and recorded as a component of
accumulated other comprehensive income until the hedged
transactions occur and are then recognized in the consolidated
statements of income. Changes in fair value of derivatives not
designated as hedging instruments and the ineffective portion of
derivatives designated as cash flow hedges are recognized
immediately in the consolidated statements of income.
With respect to derivatives designated as hedges, the Company
formally documents all relationships between hedging instruments
and hedged items, as well as its risk management objectives and
strategy for undertaking various hedge transactions. The Company
also formally assesses, both at the inception of the hedge and
on an ongoing basis, whether each derivative is highly effective
in offsetting changes in fair values or cash flows of the hedged
item. If the Company determines that a derivative or a portion
thereof is not highly effective as a hedge, or if a derivative
ceases to be a highly effective hedge, the Company will
prospectively discontinue hedge accounting with respect to that
derivative.
|
|
(e)
|
Cash
and Cash Equivalents and Restricted Cash
|
The Company considers all highly liquid investments with a
remaining maturity of three months or less from the date of
purchase to be cash equivalents. At March 31, 2008, cash
equivalents consisted of money market instruments,
U.S. Treasury bills and certificates of deposit.
The Company leases its Westborough, Massachusetts facility. The
lease is secured by a credit facility, which, in turn is secured
by a pledge of restricted cash. As of March 31, 2008 and
2007, cash of $490 was restricted in support of the Westborough,
Massachusetts lease. The Company also has restricted cash in
India totaling $1,242 and $935 at March 31, 2008 and 2007,
respectively, which includes restricted deposits with banks to
secure the import of computer and other equipment of $242 and
$72 at March 31, 2008 and 2007, respectively, deposits
under lien of $299 and $219 respectively, against bank
guarantees issued by a bank in favor of government agencies
associated with the construction of its facility in India, and
deposits under lien of $701 and $644 respectively against a bank
guarantee related to a transfer pricing tax appeal with the
government of India at March 31, 2008 and 2007. At
March 31, 2008 and 2007, the Company had restricted cash in
Sri Lanka of $129 and $163, respectively, for a bank guarantee
relating to refunds of value-added tax from the Sri Lankan
government. Additionally at March 31, 2008, the Company had
restricted cash related to its hedging program of $2,500.
|
|
(f)
|
Investment
Securities
|
The Company classifies all debt securities with readily
determinable market values as available for sale in
accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. These
securities are classified as short-term investments and
long-term investments on the consolidated balance sheet and are
carried at fair market value. Any unrealized gains and losses on
these securities are reported as other comprehensive income
(loss), net of tax, as a separate component of
stockholders equity unless the decline in
59
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
value is deemed to be other-than-temporary, in which case,
investments are written down to fair value and the loss is
charged to the consolidated statement of income. Short-term
investments are those with original maturities of more than
three months and less than one year at the date of purchase and
less than one year from the date of the balance sheet. Long-term
investments are those with maturities of more than one year from
the date of the balance sheet.
At March 31, 2008 and 2007, the Company held long-term
investments in equity instruments of companies, which the
Company accounts for under the cost method, as its ownership is
less than 20% and the Company does not have the ability to
exercise significant influence over the operations of these
companies. In prior years, because evidence indicated that it
would be highly unlikely that the Company would be able to sell
or otherwise recover the cost basis of certain investments, the
Company had reduced the carrying value of certain investments to
zero to reflect the value of the investments.
During the fiscal year ended March 31, 2006, the Company
recognized a gain of $696 from earn out payments on
the sale of an investment. The Company also recognized a gain of
$231 on the sale of a second investment during the fiscal year
ended March 31, 2006 which had a carrying value of zero.
|
|
(g)
|
Fair
Value of Financial Instruments
|
At March 31, 2008 and 2007, the carrying amounts of the
Companys financial instruments, which included cash and
cash equivalents, accounts receivable, unbilled accounts
receivable, restricted cash, accounts payable, accrued employee
compensation and benefits and other accrued expenses,
approximate their fair values due to their short-term nature.
Based on borrowing rates currently available to the Company for
leases with similar terms, the carrying value of capital lease
obligations approximated fair value at March 31, 2008 and
2007.
|
|
(h)
|
Concentration
of Credit Risk and Significant Customers
|
Financial instruments which potentially expose the Company to
concentrations of credit risk are primarily comprised of cash
and cash equivalents, investments, accounts receivable and
unbilled accounts receivable. The Company places its cash in
highly rated financial institutions. The Company adheres to a
formal investment policy with the primary objective of
preservation of principal, which contains credit rating minimums
and diversification requirements. Management believes its credit
policies reflect normal industry terms and business risk. The
Company does not anticipate non-performance by the
counterparties and, accordingly, does not require collateral.
At March 31, 2008 and 2007, one client accounted for 36%
and 28%, respectively, of gross accounts receivable. During the
fiscal years ended March 31, 2008 and 2007, one client
accounted for 27% and 23%, respectively, of the Companys
revenue.
|
|
(i)
|
Property
and Equipment
|
Property and equipment are recorded at cost and depreciated over
their estimated useful lives using the straight-line method.
Property and equipment held under capital leases, which involve
a transfer of ownership, are amortized over the estimated useful
life of the asset. Other property and equipment held under
capital leases and leasehold improvements are amortized over the
shorter of their lease term or the estimated useful life of the
related asset. Upon retirement or sale, the cost of assets
disposed of and the related accumulated depreciation are removed
from the accounts and any resulting gain or loss is credited or
charged to income. Repair and maintenance costs are expensed as
incurred.
60
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The Companys long-lived assets include property and
equipment. The Company evaluates the recoverability of its
long-lived assets whenever events or changes in circumstances
indicate that the carrying amounts of the long-lived assets may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amounts of an asset
to future undiscounted net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying value of the assets exceed the fair value of the
assets and the resulting losses are included in the statement of
income.
|
|
(k)
|
Internally-Developed
Software
|
Statement of Position (SOP)
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, requires certain research and
development costs associated with the application development
stage to be capitalized for internal use software. At
March 31, 2008 and 2007, capitalized software development
costs pursuant to
SOP 98-1
were approximately $825 and $870, respectively. These costs were
recorded in property and equipment. Capitalized internal use
software development costs are amortized over their estimated
useful life, generally three years, using the straight line
method, beginning with the date that an asset is ready for its
intended use. For the fiscal years ended March 31, 2008,
2007 and 2006, amortization of capitalized software development
costs amounted to approximately $326, $230 and $138,
respectively.
Income taxes are accounted for under the provisions of
SFAS No. 109, Accounting for Income Taxes,
using the asset and liability method whereby deferred tax assets
and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be
recovered or settled.
At December 31, 2006, the Company determined that it was
more likely than not that its deferred tax assets would be
realized based upon its positive cumulative operating results
and its assessment of its expected future results. As a result,
the Company released its valuation allowance and recognized a
discrete income tax benefit of $5,040 in its consolidated
statement of income for the fiscal year ended March 31,
2007. On an ongoing basis, the Company evaluates whether a
valuation allowance is needed to reduce its deferred tax assets
to the amount that is more likely than not to be realized based
on the weight of all the negative and positive evidence.
Effective April 1, 2007, the Company adopted Financial
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes-an interpretation of SFAS No. 109
(FIN 48). In addition, the calculation of the
Companys tax liabilities involves dealing with
uncertainties in the application of complex tax regulations in
multiple jurisdictions. The Company records liabilities for
estimated tax obligations in the United States and other tax
jurisdictions (see note 10).
The Company derives its revenue from a variety of IT consulting,
technology implementation and application outsourcing services.
Contracts for these services have different terms and conditions
based on the scope, deliverables, and complexity of the
engagement which require management to make judgments and
estimates in determining the overall cost to the customer. Fees
for these contracts may be in the form of
time-and-materials
or fixed price arrangements and volume discounts are recorded as
a reduction of revenue over the contractual period as services
are performed.
61
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Revenue on
time-and-material
contracts is recognized as the services are performed and
amounts are earned in accordance with the Securities and
Exchange Commission (SEC) Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial
Statements, as amended by SAB No. 104, Revenue
Recognition. The Company considers amounts to be earned once
evidence of an arrangement has been obtained, services are
delivered, fees are fixed or determinable, and collectibility is
reasonably assured. For contracts with fees based on
time-and-materials,
the Company recognizes revenue over the period of performance.
Revenue from fixed price contracts is accounted for under the
percentage-of-completion method in accordance with the American
Institute of Certified Public Accountants Statement of Position
81-1
(SOP 81-1),
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. Under the
percentage-of-completion method, management estimates the
percentage of completion based upon efforts incurred as a
percentage of the total estimated efforts for the specified
engagement. When total cost estimates exceed revenue, the
Company accrues for the estimated losses immediately. The use of
the percentage-of-completion method requires significant
judgment relative to estimating total contract revenue and
efforts, including assumptions relative to the length of time to
complete the project, the nature and complexity of the work to
be performed, and anticipated changes in other
engagement-related costs. Estimates of total contract revenue
and efforts are continuously monitored during the term of the
contract and are subject to revision as the contract progresses.
When revisions in estimated contract revenue and efforts are
determined, such adjustments are recorded in the period in which
they are first identified.
Revenue includes reimbursements of travel and out-of-pocket
expenses with equivalent amounts of expense recorded in costs of
revenue of $4,303, $3,312 and $1,724 for the fiscal years ended
March 31, 2008, 2007 and 2006, respectively.
|
|
(n)
|
Costs
of Revenue and Operating Expenses
|
Costs of revenue consist principally of salaries, employee
benefits and stock compensation expense, reimbursable and
non-reimbursable travel costs, subcontractor fees, and
immigration related expenses for IT professionals. Selling and
marketing expenses are charged to income as incurred. Selling
and marketing expenses are those expenses associated with
promoting and selling the Companys services and include
such items as sales and marketing personnel salaries, stock
compensation expense and related fringe benefits, commissions,
travel, and the cost of advertising and other promotional
activities. Advertising and promotional expenses incurred were
approximately $172, $207 and $455 for the fiscal years ended
March 31, 2008, 2007 and 2006, respectively.
General and administrative expenses include other operating
items such as officers and administrative personnel
salaries, stock compensation expense and related fringe
benefits, legal and audit expenses, public company related
expenses, insurance, provision for doubtful accounts,
depreciation and operating lease expenses.
|
|
(o)
|
Share-Based
Compensation
|
Effective April 1, 2005, the Company adopted the provisions
of SFAS No. 123(R), Share Based Payment,
(SFAS 123R) using the modified prospective method.
Accordingly, the statements of income for the fiscal years ended
March 31, 2008, 2007 and 2006 include compensation costs
related to newly granted share-based awards calculated in
accordance with SFAS 123R, as well as for those issued in
prior years calculated in accordance with SFAS 123 that
vest after the adoption date. The compensation cost is
determined by estimating the fair value at the grant date of the
Companys common stock using the Black-Scholes option
pricing model, and expensing the total compensation cost on a
straight line basis (net of estimated forfeitures) over the
requisite employee service period. Due to the fringe benefit tax
in India, the Company estimated the fair value at grant date
using the lattice model for stock options granted to employees
based in India, during the fiscal year ended March 31,
2008. The total SFAS 123R compensation expense for the
fiscal years ended
62
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
March 31, 2008, 2007 and 2006 was $3,041, $2,911 and
$1,792, respectively, with $661, $1,216 and $537, respectively,
of this amount included in the costs of revenue, and $2,380,
$1,695 and $1,255, respectively, included in selling, general
and administrative expenses.
The fair value of each stock option is estimated on the date of
grant using the respective option pricing valuation model with
the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Fair
|
|
|
|
|
|
|
|
|
|
Value Options Pricing
|
|
Year Ended March 31,
|
|
Model Assumptions
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Risk-free interest rate
|
|
|
4.02
|
%
|
|
|
4.63
|
%
|
|
|
4.24
|
%
|
Expected term (in years)
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.44
|
|
Anticipated common stock volatility
|
|
|
43.8
|
%
|
|
|
50.06
|
%
|
|
|
60.10
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
The risk-free interest rate assumptions are based on the
interpolation of various U.S. Treasury bill rates in effect
during the month in which stock option awards are granted. The
Companys volatility assumption is based on the historical
volatility rates of the common stock of its publicly held peers
over periods commensurate with the expected term of each grant.
The expected term of employee share-based awards represents the
weighted average period of time that awards are expected to
remain outstanding. The determination of the expected term of
share-based awards assumes that employees behavior is a
function of the awards vested, contractual lives, and the extent
to which the award is in the money. Accordingly, the Company has
elected to use the SAB No. 107 Share-Based
Payments (as amended by
SAB 110) simplified method of determining
the expected term or life of its share-based awards. The SEC
permits the use of this method by newly-public companies that
have relatively little plan history or peer-company, industry,
or other empirical data available to determine the expected
period or term over which its awards will be held before
exercise.
As of March 31, 2008, there was $2,611 of total
unrecognized compensation cost related to nonvested stock
options granted under the Companys Amended and Restated
2000 Option Plan and the Companys 2007 Stock Option and
Incentive Plan (see note 9 for a more complete description
of these plans). That cost is expected to be recognized over a
remaining weighted average period of 2.38 years.
In addition to the stock options described above, the Company
established the 2005 Stock Appreciation Rights Plan, a stock
appreciation rights (SARs) compensation plan during the fiscal
year ended March 31, 2006 (see note 9 for a more
complete description of this plan). Prior to the Companys
IPO, SARs were required to be settled in cash under the terms of
the plan. Thus, the Company determined the compensation cost and
the future liability for these SARs by establishing the fair
value of the SARs at the date of grant and remeasuring the fair
value of the vested SARs at the close of each reporting period.
Subsequent to the Companys IPO, the Company is required,
under the terms of the plan to settle, and has settled, all
exercised SARs in shares of the Companys common stock.
Therefore, the SARs are now equity classified and are no longer
remeasured. The liability measured as of the IPO date was $1,382
and this amount has been reclassified as a component of
additional paid in capital during the fiscal year ended
March 31, 2008. During the fiscal years ended
March 31, 2008, 2007 and 2006, the Company recognized
compensation expense in the amount of $455, $984 and $206,
respectively, with $391, $883 and $185 of this amount included
in costs of revenue, and $64, $101 and $21 in selling, general
and administrative expenses.
|
|
(p)
|
Allowance
for Doubtful Accounts
|
The Company maintains an allowance for doubtful accounts for
estimated losses resulting from the inability of clients to make
required payments. The allowance for doubtful accounts is
determined by
63
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
evaluating the relative credit worthiness of each client,
historical collections experience and other information,
including the aging of the receivables.
|
|
(q)
|
Unbilled
Accounts Receivable
|
Unbilled accounts receivable represent revenue on contracts to
be billed, in subsequent periods, as per the terms of the
related contracts.
|
|
(r)
|
Recent
Accounting Pronouncements
|
In June 2006, the FASB issued FIN 48 which clarifies the
accounting for uncertainty in income taxes by prescribing a
minimum recognition threshold for a tax position taken or
expected to be taken in a tax return that is required to be met
before being recognized in the financial statements. FIN 48
also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. On April 1, 2007, the
Company adopted FIN 48. The cumulative effect of adopting
FIN 48 of $95 was recorded as a reduction of beginning
retained earnings.
In March 2008, the FASB issued Statement No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133.
(SFAS No. 161). SFAS No. 161
requires enhanced disclosures about an entitys derivative
instruments and hedging activities with a view toward improving
the transparency of financial reporting, and is effective for
financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application
encouraged. SFAS No. 161 encourages, but does not
require, comparative disclosures for earlier periods at initial
adoption. The Company is currently evaluating the impact of
adopting SFAS No. 161 on its consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research
Bulletin No. 51 (SFAS No. 160).
SFAS No. 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by
parties other than the parent, the amount of consolidated net
income attributable to the parent and to the noncontrolling
interest, changes in a parents ownership interest, and the
valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS No. 160 also
establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160
is effective for the Company beginning April 1, 2009. The
Company is currently evaluating the potential impact that
SFAS No. 160 will have on its consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of FASB Statement
No. 115 (SFAS No. 159), which is effective
for financial statements beginning April 1, 2008.
SFAS No. 159 permits entities to measure eligible
financial assets, financial liabilities and firm commitments at
fair value, on an
instrument-by-instrument
basis, that are otherwise not permitted to be accounted for at
fair value under other generally accepted accounting principles.
The fair value measurement election is irrevocable and
subsequent changes in fair value must be recorded in earnings.
The Company is currently evaluating the potential impact that
SFAS No. 159 will have on its consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about
fair value measurements. SFAS No. 157 does not require
any new fair value measurements, but provides guidance on how to
measure fair value by providing a fair value hierarchy used to
classify the source of the information. SFAS No. 157
is effective for fiscal years beginning after November 15,
2007. However, on February 12, 2008, the FASB issued FSP
SFAS No. 157-2
(the FSP) which delays the effective date of
SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a
recurring basis (at least annually). The FSP partially
64
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
defers the effective date of SFAS No. 157 to fiscal
years beginning after November 15, 2008, and interim
periods within those fiscal years for items within the scope of
the FSP. The Company is currently evaluating the potential
impact that SFAS No. 157 and the FSP will have on its
consolidated financial statements.
Certain prior-year amounts have been reclassified to conform to
the fiscal year ended March 31, 2008 presentation.
Prior to the Companys IPO, the Company calculated net
income per share in accordance with SFAS No. 128,
Earnings per Share (SFAS No. 128) and EITF
Issue
No. 03-6,
Participating Securities and the Two
Class Method under FASB Statement 128 (EITF
No. 03-6).
EITF
No. 03-6
clarifies the use of the two-class method for the
computation of earnings per share by companies with
participating securities or multiple classes of common stock.
The Companys series A, B, C and D redeemable
convertible preferred stock were participating securities due to
their participation rights related to cash dividends declared by
the Company. When determining basic earnings per share under
EITF
No. 03-6,
undistributed earnings for a period are allocated to a
participating security based on the contractual participation
rights of the security to share in those earnings as if all of
the earnings for the period had been distributed. Net losses are
not allocated to preferred stockholders.
Basic net income per share for the fiscal years ended
March 31, 2007 and 2006 has been calculated using the two
class method. Basic net income per share is computed by dividing
the net income available to common stockholders by the weighted
average common shares outstanding. The net income available to
common stockholders is calculated by deducting dividends
allocable to the Companys redeemable convertible preferred
stock from net income. There have been no dividends to common or
redeemable convertible preferred stock for any of the periods
presented. Diluted net income per share is computed giving
effect to all potentially dilutive common stock, including
options and all convertible securities to the extent they are
dilutive.
Subsequent to the IPO, for the fiscal year ended March 31,
2008, basic net income per share is computed by dividing net
income by the weighted average number of shares of common stock
outstanding for the period, and diluted earnings per share is
computed by including common stock equivalents outstanding for
the period in the denominator. Common stock equivalents include
shares issuable upon the exercise of outstanding stock options,
SARs and warrants, net of shares assumed to have been purchased
with the proceeds, using the
65
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
treasury stock method. The following table sets forth the
computation of basic and diluted net income per share for the
periods set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Numerators:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,771
|
|
|
$
|
18,990
|
|
|
$
|
1,981
|
|
Net income allocated to participating redeemable convertible
preferred stockholders
|
|
|
|
|
|
|
12,447
|
|
|
|
1,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
17,771
|
|
|
$
|
6,543
|
|
|
$
|
653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominators:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
21,368,470
|
|
|
|
6,005,619
|
|
|
|
5,613,623
|
|
Dilutive effect of employee stock options and warrants
|
|
|
1,828,021
|
|
|
|
919,756
|
|
|
|
321,810
|
|
Dilutive effect of stock appreciation rights
|
|
|
86,172
|
|
|
|
|
|
|
|
|
|
Dilutive effect of redeemable convertible preferred shares
|
|
|
|
|
|
|
11,425,786
|
|
|
|
11,425,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares-Diluted
|
|
|
23,282,663
|
|
|
|
18,351,161
|
|
|
|
17,361,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share-Basic
|
|
$
|
0.83
|
|
|
$
|
1.09
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share-Diluted
|
|
$
|
0.76
|
|
|
$
|
1.03
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the fiscal years ended March 31, 2008, 2007, and
2006, options to purchase 257,386, 691,151 and
1,826,595 shares of common stock, respectively, were
excluded from the calculations of diluted earnings per share as
their effect would have been anti-dilutive.
|
|
(4)
|
Investment
Securities
|
At March 31, 2008, all of the Companys investment
securities were classified as available-for-sale and were
carried on its balance sheet at their fair market value. Fair
market value was determined based upon quoted market prices for
the applicable security.
The following is a summary of investment securities as of
March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
14,969
|
|
|
$
|
1
|
|
|
$
|
(14
|
)
|
|
$
|
14,956
|
|
Corporate bonds
|
|
|
16,621
|
|
|
|
88
|
|
|
|
(41
|
)
|
|
|
16,668
|
|
Auction Rate Securities
|
|
|
8,350
|
|
|
|
|
|
|
|
(385
|
)
|
|
|
7,965
|
|
Treasury Coupons
|
|
|
8,579
|
|
|
|
12
|
|
|
|
(8
|
)
|
|
|
8,583
|
|
Medium and Short-term notes
|
|
|
4,885
|
|
|
|
11
|
|
|
|
(9
|
)
|
|
|
4,887
|
|
Euro dollar bonds
|
|
|
2,806
|
|
|
|
32
|
|
|
|
|
|
|
|
2,838
|
|
Municipal bonds
|
|
|
1,200
|
|
|
|
8
|
|
|
|
|
|
|
|
1,208
|
|
Certificates of deposit
|
|
|
800
|
|
|
|
2
|
|
|
|
|
|
|
|
802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,210
|
|
|
$
|
154
|
|
|
$
|
(457
|
)
|
|
$
|
57,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
At March 31, 2007, the Company had investments in Sri Lanka
treasury notes and bills of $41 which were carried at cost and
were redeemed during the Companys fiscal year ended
March 31, 2008.
The Company evaluates investments with unrealized losses to
determine if the losses are other than temporary. The Company
has determined that the gross unrealized losses at
March 31, 2008 are temporary. In making this determination,
the Company considered the financial condition and near-term
prospects of the issuers, the magnitude of the losses compared
to the investments cost, the length of time the investments have
been in an unrealized loss position and the Companys
ability to hold the investments to maturity.
The following table shows the gross unrealized losses and fair
value of the Companys investment securities with
unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment
category and length of time that individual securities have been
in a continuous unrealized loss position as of March 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
7,929
|
|
|
$
|
(14
|
)
|
Corporate bonds
|
|
|
4,910
|
|
|
|
(41
|
)
|
Auction Rate Securities
|
|
|
7,965
|
|
|
|
(385
|
)
|
Treasury Coupons
|
|
|
5,070
|
|
|
|
(8
|
)
|
Medium and Short-term notes
|
|
|
1,967
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,841
|
|
|
$
|
(457
|
)
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities by contractual maturity were as
follows:
|
|
|
|
|
|
|
March 31, 2008
|
|
|
Due in one year or less
|
|
$
|
40,816
|
|
Due after 1 year through 5 years
|
|
|
9,126
|
|
Due after 5 years
|
|
|
7,965
|
|
|
|
|
|
|
Total
|
|
$
|
57,907
|
|
|
|
|
|
|
The Companys investments in auction rate securities
generally have contractual maturities in excess of one year;
however, they are structured to provide liquidity to the Company
every ninety days or less when interest rates are reset through
a Dutch auction process. As of March 31, 2008,
the Company held $7,965 of auction rate securities whose
underlying assets are generally student loans which are
substantially backed by the Federal government. During the
period February 6, 2008 to March 31, 2008 auctions
failed for all of the auction rate securities held by the
Company at March 31, 2008, at which time, the Company
reclassified these auction rate securities from short-term
investments to long-term investments. There has not been a
deterioration of the underlying credit quality of the auction
rate securities, and the Company has the intent and ability to
hold the securities until there is a recovery in the market
value, if necessary. As of March 31, 2008, the Company
recorded as a component of other comprehensive income (loss) an
unrealized loss of $385, or $250 net of tax, related to its
auction rate securities.
During the year ended March 31, 2008, the Company recorded
net gains on investments of $64 on sales of marketable
securities.
67
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
(5)
|
Property
and Equipment
|
Property and equipment and their estimated useful lives in years
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
Useful Life
|
|
March 31,
|
|
|
|
(Years)
|
|
2008
|
|
|
2007
|
|
|
Computer equipment
|
|
3
|
|
$
|
17,043
|
|
|
$
|
14,664
|
|
Furniture and fixtures
|
|
7
|
|
|
1,768
|
|
|
|
2,005
|
|
Vehicles
|
|
4
|
|
|
229
|
|
|
|
299
|
|
Software
|
|
3
|
|
|
3,689
|
|
|
|
2,835
|
|
Leasehold improvements
|
|
Lesser of
Estimated
Useful Life or
Lease Term
|
|
|
3,476
|
|
|
|
2,220
|
|
Capital
work-in-progress
|
|
|
|
|
9,559
|
|
|
|
1,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,764
|
|
|
|
23,062
|
|
Less Accumulated depreciation and amortization
|
|
|
|
|
18,931
|
|
|
|
15,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,833
|
|
|
$
|
7,541
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the fiscal years ended
March 31, 2008, 2007 and 2006 was $3,923, $3,272 and
$3,051, respectively. Capital
work-in-progress
represents advances paid towards the acquisition of property and
equipment and the cost of property and equipment not put to use
before the balance sheet date.
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Accrued taxes
|
|
$
|
2,564
|
|
|
$
|
1,841
|
|
Accrued professional fees
|
|
|
1,317
|
|
|
|
1,043
|
|
Derivative instruments-current
|
|
|
1,530
|
|
|
|
|
|
Accrued miscellaneous
|
|
|
2,964
|
|
|
|
1,454
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,375
|
|
|
$
|
4,338
|
|
|
|
|
|
|
|
|
|
|
The Company has a $3,000 revolving line of credit with a bank
with a $1,500 sub-limit for letters of credit as of
March 31, 2008. The revolving line of credit also includes
a foreign exchange line of credit requiring 15% of foreign
exchange contracts to be supported by the Companys
borrowing base. Advances under this credit facility accrue
interest at an annual rate equal to the prime rate minus 0.25%.
The credit facility is secured by the grant of a security
interest in all of the Companys U.S. assets in favor
of the bank and contains financial and reporting covenants and
limitations. The Company is currently in compliance with all
covenants contained in its credit facility and believes that the
credit facility provides sufficient flexibility so that it will
remain in compliance with its terms. The credit facility expires
on September 30, 2008. The Company had no amounts
outstanding under this credit facility as of March 31, 2008.
68
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
(8)
|
Redeemable
Convertible Preferred Stock, Preferred Stock, and Common
Stock
|
The Company completed an IPO of its common stock on
August 8, 2007. In connection with its IPO, the Company
issued and sold 4,400,000 shares of common stock at a
public offering price of $14.00 per share. Upon the closing of
the Companys IPO, the Companys series A, B, C,
and D redeemable convertible preferred stock automatically
converted into common stock.
The Companys redeemable convertible preferred stock
consisted of the following as of March 31, 2008 and 2007,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
Series C
|
|
|
Series D
|
|
|
Total
|
|
|
Balance at March 31, 2007
|
|
$
|
13,500
|
|
|
$
|
15,132
|
|
|
$
|
12,230
|
|
|
$
|
20,000
|
|
|
$
|
60,862
|
|
Conversion to Common Stock at IPO
|
|
|
(13,500
|
)
|
|
|
(15,132
|
)
|
|
|
(12,230
|
)
|
|
|
(20,000
|
)
|
|
|
(60,862
|
)
|
Balance at March 31, 2008
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
In addition, the Company in its certificate of incorporation has
authorized and reserved a total of 120,000,000 shares of
$0.01 par value, common stock and 5,000,000 shares of
$0.01 par value, undesignated preferred stock. None of the
undesignated shares of preferred stock have been issued as of
March 31, 2008.
Each share of common stock is entitled to one vote. The holders
of common stock are also entitled to receive dividends whenever
funds are legally available and when declared by the board of
directors, subject to the prior rights of holders of all classes
of stock outstanding.
On March 29, 2007, the Company issued and sold
918,807 shares of common stock at $12.27 per share for
gross proceeds of approximately $11,273 to a wholly-owned
subsidiary of British Telecommunications plc (BT), one of the
Companys clients. The per share price was equal to the
estimated fair value of the common stock at the date of sale as
determined by the Companys board of directors. The sale
represented 4.99% of the Companys then outstanding common
stock at the date of the sale.
In August 2006, the Company issued and sold 87,866 shares
of its common stock to a newly-appointed member of the board of
directors at $4.19 per share.
Each of the per-share prices listed above was equal to the
estimated fair value of the common stock at the date of sale as
determined by the Companys board of directors.
|
|
(9)
|
Stock
Options and Appreciation Rights
|
The Companys Amended and Restated 2000 Stock Option Plan
(the 2000 Plan), was adopted in the fiscal year ended
March 31, 2001 under which shares were reserved for
issuance to the Companys employees, directors, and
consultants. The 2000 Plan was amended over the years to reduce
the number of shares reserved for issuance to a total of
3,281,149 as of March 31, 2008. Options granted under the
2000 Plan may be incentive stock options, nonqualified stock
options or restricted stock. Incentive stock options may only be
granted to employees. Options granted have a term of ten years
and generally vest over four years. The Company settles employee
stock option exercises with newly issued shares. The
compensation committee of the board of directors determines the
term of awards on an individual case basis. The exercise price
of incentive stock options shall be no less than 100% of the
fair market value per share of the Companys common stock
on the grant date. If an individual owns stock representing more
than 10% of the outstanding shares, the price of each share
shall be at least 110% of fair market value.
In July 2005, the Company adopted the Virtusa Corporation 2005
Stock Appreciation Rights Plan (the SAR Plan). Under the SAR
Plan, the Company may grant up to 479,233 SARs to employees and
consultants of Virtusa and its foreign subsidiaries, and settled
the SARs in cash or common stock, as set forth in the SAR Plan.
In connection with the adoption of the SAR Plan, the Company
reduced the number of shares reserved for issuance under the
2000 Plan by 479,233 to 3,281,149, canceled options previously
granted under the 2000
69
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Plan to certain
non-U.S. employees,
and issued SARs in replacement of the cancelled options that had
the identical exercise price, exercise period after termination
and vesting period as the canceled options. Prior to the
Companys IPO, the SARs could only be settled in cash.
After the Companys IPO, the cash settlement feature of the
SARs ceased and exercises may only be settled in shares of the
Companys common stock.
The Companys board of directors and its stockholders
approved the Companys 2007 Stock Option and Incentive Plan
(the 2007 Plan), in May 2007. The 2007 Plan permits the Company
to make grants of incentive stock options, non-qualified stock
options, SARs, deferred stock awards, restricted stock awards,
unrestricted stock awards, and dividend equivalent rights. The
Company reserved 830,670 shares of its common stock for the
issuance of awards under the 2007 Plan. The 2007 Plan provides
that the number of shares reserved and available for issuance
under the plan will be automatically increased each
April 1, beginning in 2008, by 2.9% of the outstanding
number of shares of common stock on the immediately preceding
March 31 or such lower number of shares of common stock as
determined by the board of directors. This number is subject to
adjustment in the event of a stock split, stock dividend or
other change in the Companys capitalization. Generally,
shares that are forfeited or canceled from awards under the 2007
Plan also will be available for future awards. In addition,
available shares under the 2000 Plan and the SAR Plan, including
as a result of the forfeiture, expiration, cancellation,
termination or net issuances of awards, are automatically made
available for issuance under the 2007 Plan. In May 2007, the
Companys board of directors determined that no further
grants would be made under the 2000 Plan or the SAR Plan.
The following table summarizes stock option activity under the
2000 Plan and the 2007 Plan for the fiscal years ended
March 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Options to Purchase
|
|
|
Weighted Average
|
|
|
|
Common Shares
|
|
|
Exercise Price
|
|
|
Outstanding at March 31, 2005
|
|
|
2,138,862
|
|
|
$
|
3.49
|
|
Granted
|
|
|
440,217
|
|
|
|
2.84
|
|
Exercised
|
|
|
(80,908
|
)
|
|
|
1.34
|
|
Canceled and replaced with SARs
|
|
|
(207,460
|
)
|
|
|
4.00
|
|
Forfeited
|
|
|
(340,696
|
)
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006
|
|
|
1,950,015
|
|
|
|
3.29
|
|
Granted
|
|
|
610,032
|
|
|
|
5.46
|
|
Exercised
|
|
|
(82,899
|
)
|
|
|
1.55
|
|
Forfeited
|
|
|
(134,746
|
)
|
|
|
5.05
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007
|
|
|
2,342,402
|
|
|
|
3.82
|
|
Granted
|
|
|
464,524
|
|
|
|
13.88
|
|
Exercised
|
|
|
(166,979
|
)
|
|
|
2.86
|
|
Forfeited
|
|
|
(88,190
|
)
|
|
|
5.93
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008
|
|
|
2,551,757
|
|
|
|
5.64
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes options exercisable and available
for future grant under the 2000 Plan and 2007 Plan at
March 31, 2008:
|
|
|
|
|
|
|
March 31,
|
|
|
2008
|
|
Options exercisable
|
|
|
1,458,250
|
|
Options available for future grant
|
|
|
476,390
|
|
70
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The aggregate intrinsic value and weighted average remaining
contractual life of stock options outstanding at March 31,
2008 was approximately $12,423 and 6.70 years,
respectively. The aggregate intrinsic value, weighted average
remaining contractual life and weighted average exercise price
of stock options exercisable at March 31, 2008 were $9,335,
5.52 years and $3.40, respectively. The aggregate intrinsic
value of options vested and expected to vest during the fiscal
year ended March 31, 2008 was $11,195. The aggregate
intrinsic value of options exercised during the fiscal years
ended March 31, 2008, 2007 and 2006 was $1,536, $381 and
$56, respectively. The weighted average fair value of options
granted during the fiscal year ended March 31, 2008, 2007
and 2006 was $13.88, $2.99 and $1.72, respectively. During the
fiscal year ended March 31, 2008, the Company realized $437
of income tax benefit from the exercise of stock options.
The tables below summarize information about the SAR Plan
activity for the fiscal years ended March 31, 2008, 2007
and 2006 as follows:
|
|
|
|
|
|
|
|
|
|
|
SAR Plan Activity
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
SARs
|
|
|
Price
|
|
|
Outstanding at March 31, 2005
|
|
|
|
|
|
$
|
|
|
SARs issued in replacement of canceled options
|
|
|
207,453
|
|
|
|
4.01
|
|
Granted
|
|
|
11,677
|
|
|
|
2.72
|
|
Exercised
|
|
|
(3,463
|
)
|
|
|
1.57
|
|
Forfeited or expired
|
|
|
(31,797
|
)
|
|
|
4.76
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006
|
|
|
183,870
|
|
|
|
3.85
|
|
Granted
|
|
|
51,360
|
|
|
|
4.73
|
|
Exercised
|
|
|
(5,223
|
)
|
|
|
2.13
|
|
Forfeited or expired
|
|
|
(33,766
|
)
|
|
|
4.48
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007
|
|
|
196,241
|
|
|
|
4.04
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(22,466
|
)
|
|
|
2.68
|
|
Forfeited or expired
|
|
|
(22,501
|
)
|
|
|
4.58
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008
|
|
|
151,274
|
|
|
|
4.12
|
|
|
|
|
|
|
|
|
|
|
SARs exercisable and available for future grant at
March 31, 2008:
|
|
|
|
|
|
|
March 31, 2008
|
|
SARs exercisable
|
|
|
86,836
|
|
SARs available for future grant
|
|
|
|
|
The aggregate intrinsic value and weighted average remaining
contractual life of outstanding SARs were approximately $854 and
6.09 years at March 31, 2008. The aggregate intrinsic
value and weighted average remaining contractual life of the
exercisable SARs at March 31, 2008 were approximately $551
and 4.98 years, respectively. The aggregate intrinsic value
of SARs exercised during the fiscal years ended March 31,
2008 and 2007 was $293 and $28, respectively.
The weighted average fair value of SARs granted during the
fiscal years ended March 31, 2007 was $2.72. There were no
SARs granted during the fiscal year ended March 31, 2008.
During the fiscal years ended March 31, 2007 and 2006, the
Company granted nonqualified options of 6,388 shares and
6,389 shares, respectively, of common stock to a
non-employee at exercise prices of $7.39
71
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
and $2.88 per share, respectively, with immediate vesting and a
two-year vesting period, respectively. The value of all of the
options was determined using the Black-Scholes model with the
following assumptions: no dividend yield, 50% to 80% volatility,
risk-free interest rates of 4.16% to 4.86%, and expected terms
of five to 10 years. During the fiscal years ended
March 31, 2008, 2007 and 2006, compensation expense related
to
non-employee
options was not material.
During the fiscal year ended March 31, 2005, the Company
granted options to purchase an aggregate of 869,055 of common
stock outside of the 2000 Plan at an exercise price of $6.89 per
share. Of the total grants, an option to purchase
798,722 shares was issued to an executive officer and an
option to purchase 70,333 shares was issued to a director of the
Company. On the first anniversary of the employment date of the
executive officer, the executive officers option vests as
to 25% of the shares, and the remainder vests in equal quarterly
installments over the following three years. The directors
option vests in equal quarterly installments over three years.
During the fiscal year ended March 31, 2006, the executive
officers option agreement was amended to reduce the
exercise price from $6.89 to $2.38. The compensation related to
these options, including the effect of the modification, is
included in the accounting associated with the adoption of
SFAS 123R (see note 2(o)).
The income (loss) before income tax expense (benefit) shown
below is based on the geographic location to which such income
is attributed for each of the fiscal years ended March 31,
2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
United States
|
|
$
|
7,878
|
|
|
$
|
6,811
|
|
|
$
|
(1,744
|
)
|
Foreign
|
|
|
14,750
|
|
|
|
8,549
|
|
|
|
3,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,628
|
|
|
$
|
15,360
|
|
|
$
|
2,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision (benefit) for income taxes for each of the fiscal
years ended March 31, 2008, 2007 and 2006 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,538
|
|
|
$
|
262
|
|
|
$
|
97
|
|
State
|
|
|
863
|
|
|
|
430
|
|
|
|
24
|
|
Foreign
|
|
|
2,065
|
|
|
|
717
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
$
|
4,466
|
|
|
$
|
1,409
|
|
|
$
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,587
|
|
|
$
|
3,195
|
|
|
$
|
(74
|
)
|
State
|
|
|
(81
|
)
|
|
|
540
|
|
|
|
|
|
Foreign
|
|
|
(1,115
|
)
|
|
|
5
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision
|
|
$
|
391
|
|
|
$
|
3,740
|
|
|
$
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
|
|
|
|
(8,779
|
)
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
$
|
4,857
|
|
|
$
|
(3,630
|
)
|
|
$
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The items which gave rise to differences between the income
taxes in the statements of income and the income taxes computed
at the U.S. statutory rate are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Statutory tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
U.S. state and local taxes, net of U.S federal income tax effects
|
|
|
2.1
|
|
|
|
3.1
|
|
|
|
(0.9
|
)
|
Benefit from foreign subsidiaries tax holidays
|
|
|
(17.7
|
)
|
|
|
(13.8
|
)
|
|
|
(54.4
|
)
|
Change in valuation allowance
|
|
|
|
|
|
|
(56.8
|
)
|
|
|
4.5
|
|
Permanent items
|
|
|
3.6
|
|
|
|
4.3
|
|
|
|
26.5
|
|
Other adjustments
|
|
|
(0.5
|
)
|
|
|
5.6
|
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
21.5
|
%
|
|
|
(23.6
|
)%
|
|
|
8.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys Sri Lanka subsidiary has entered into an
agreement with the Sri Lanka Board of Investment whereby export
business income of the subsidiary is exempt from Sri Lanka
income tax through March 31, 2019. Additionally, the
Companys India subsidiary operates two Software Technology
Parks (STPs) which qualify as Export Oriented Units and are
exempt from India tax on business income through March 31,
2010. The effect of the income tax holidays was to increase both
net income and diluted net income per share in the fiscal years
ended March 31, 2008, 2007 and 2006 by $3,949, $2,443 and
$1,173, respectively, and by $0.17, $0.13 and $0.07,
respectively.
Deferred tax assets (liabilities) as of March 31, 2008 and
2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Net operating loss carryforwards
|
|
$
|
|
|
|
$
|
2,360
|
|
Deferred revenue
|
|
|
133
|
|
|
|
|
|
Bad debt reserve
|
|
|
232
|
|
|
|
118
|
|
Depreciation
|
|
|
181
|
|
|
|
179
|
|
Tax credit carryforwards
|
|
|
1,035
|
|
|
|
254
|
|
Accrued expenses and reserves
|
|
|
1,033
|
|
|
|
1,004
|
|
Compensation expense
|
|
|
2,043
|
|
|
|
1,099
|
|
Other
|
|
|
673
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
5,330
|
|
|
$
|
5,040
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006, the Company determined that it was
more likely than not that all of its deferred tax assets would
be realized based upon its positive cumulative operating results
and its assessment of its expected future results. As a result,
the Company released the deferred tax asset valuation allowance
and recognized a discrete income tax benefit of $5,040 in the
consolidated statement of income for the fiscal year ended
March 31, 2007. At March 31, 2008, the Company has an
Indian tax credit carryforward of $1,035, which is available to
reduce future Indian income tax liabilities, and which expires
in 2015.
The Company intends to reinvest certain of its foreign earnings
indefinitely. Accordingly, no U.S. income taxes have been
provided for approximately $32,529 of unremitted earnings of
international subsidiaries as of March 31, 2008. The amount
of taxes attributable to the permanently reinvested
undistributed earnings is not practically determinable.
The Indian taxing authorities issued an assessment order with
respect to their examination of the tax return for the fiscal
year ended March 31, 2004 of the Companys Indian
subsidiary, Virtusa (India) Private Ltd., or Virtusa India.
At issue were several matters, the most significant of which was
the
73
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
redetermination of the arms-length profit which should be
recorded by Virtusa India on the intercompany transactions with
its affiliates. The Company is contesting the assessment and has
filed appeals with both the appropriate Indian tax authorities
and the U.S. Competent Authority. As of March 31,
2008, the Company accrued $487 related to this matter. The
Indian taxing authorities have also indicated their intent to
issue a similar assessment for the fiscal year ended
March 31, 2005.
The Company adopted the provisions of FIN 48, on
April 1, 2007. FIN 48 clarifies the accounting for
uncertainty in income taxes by prescribing a minimum recognition
threshold for a tax position taken or expected to be take in a
tax return that is required to be met before being recognized in
the financial statements. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. The cumulative effect of adopting FIN 48 of $95
was recorded as a reduction to opening retained earnings and an
increase to long-term liabilities. The total amount of
unrecognized tax benefits of $756 and $1,260 as of March 31,
2008 and April 1, 2007, respectively, would reduce income
tax expense and the effective income tax rate, if recognized.
The following summarizes the activity related to the gross
unrecognized tax benefits from April 1, 2007 through
March 31, 2008:
|
|
|
|
|
Balance as of April 1, 2007
|
|
$
|
1,260
|
|
Foreign currency translation related to prior year tax positions
|
|
|
43
|
|
Increases related to prior year tax positions
|
|
|
51
|
|
Decreases related to prior year tax positions
|
|
|
(598
|
)
|
|
|
|
|
|
Balance as of March 31, 2008
|
|
$
|
756
|
|
|
|
|
|
|
The Company continues to classify accrued interest and penalties
related to unrecognized tax benefits in income tax expense. The
total accrued for interest and penalties relating to certain tax
matters in India at March 31, 2008 and April 1, 2007
was $214 and $152, respectively. The total accrued interest and
penalties relating to certain tax matters in the United States
at March 31, 2008 and April 1, 2007 was $60 and $49,
respectively. At March 31, 2008, the Company had $7 accrued
for interest and penalties relating to certain tax matters in
the United Kingdom.
There has been a $598 decrease in unrecognized tax benefits
related to prior year U.S. tax positions. During the fiscal
year ended March 31, 2008, the Company reduced its
liability for unrecognized tax benefits by $598 upon a change in
estimate relating to certain unused net operating loss
carryforwards in the United States. No significant changes in
the unrecognized tax benefit balance are expected in the next
twelve months.
Currently, the Company is under income tax examination in India.
The Company does not believe that the outcome of any examination
will have a material effect on its consolidated financial
statements. The Companys major taxing jurisdictions
include the United States, United Kingdom, India, and Sri Lanka.
With few exceptions, the Company remains subject to examination
for all fiscal years ended after March 31, 2001.
The Companys Indian subsidiary, Virtusa (India) Private
Limited, is an export-oriented company under the Indian Income
Tax Act of 1961 and is entitled to claim tax exemption for each
Software Technology Park, or STP, which Virtusa India operates.
Virtusa India currently operates two STPs, in Chennai and in
Hyderabad. Substantially all of the earnings of both STPs
qualify as tax-exempt export profits. These holidays will be
completely phased out by March 2010, and at that time any
profits would be fully taxable at the Indian statutory rate,
which is currently 34.0%. In anticipation of the phase-out of
the STP holidays, the Company intends to locate at least a
portion of its Indian operations in areas designated as a
Special Economic Zone, or SEZ, under the SEZ Act of 2005. In
particular, the Company is building a campus on a 6.3 acre
parcel of land in Hyderabad, India that has been designated as
an SEZ. In addition, the Company has leased space and intends to
operate on an SEZ designated location in Chennai, India. The
Companys profits from the SEZ operations would be eligible
for certain income tax exemptions for a period of up to
15 years.
74
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
In addition, the Companys Sri Lankan subsidiary, Virtusa
Private Ltd., or Virtusa SL, was approved as an export computer
software developer by the Sri Lanka Board of Investment in 1998
and has negotiated multiple extensions of the original holiday
period in exchange for further capital investments in Sri Lanka
facilities. The most recent
12-year
agreement, which is set to expire on March 31, 2019,
requires that the Company meet certain new job creation and
investment criteria.
|
|
(11)
|
Post-retirement
Benefits
|
The Company has noncontributory defined benefit plans (the
Benefit Plans) covering its employees in India and Sri Lanka as
mandated by the Indian and Sri Lankan governments. Benefits are
based on the employees years of service and compensation.
The Company uses March 31 as a measurement date for its plans.
Cost
of pension plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Components of net periodic pension expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets
|
|
$
|
(36
|
)
|
|
$
|
|
|
|
$
|
|
|
Service costs for benefits earned
|
|
|
232
|
|
|
|
125
|
|
|
|
107
|
|
Interest cost on projected benefit obligation
|
|
|
61
|
|
|
|
30
|
|
|
|
21
|
|
Amortization of the unrecognized transition obligation
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
Recognized net actuarial loss
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension expense
|
|
$
|
269
|
|
|
$
|
155
|
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial
assumptions
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Discount rate
|
|
8.0%-15.0%
|
|
9.0%
|
|
9.0%
|
Compensation increases (annual)
|
|
6.5%-12.0%
|
|
6.5%-8.0%
|
|
5.0%-8.0%
|
Expected return on assets
|
|
8.0%-8.5%
|
|
|
|
|
Discount rate is based upon high quality fixed income
investments in India and Sri Lanka. The discount rates at
March 31, 2008 were used to measure the year-end benefit
obligations and the earnings effects for the subsequent year.
To determine the expected long-term rate of return on pension
plan assets, the Company considers the current and expected
asset allocations, as well as historical and expected returns on
various categories of plan assets. The Company amortizes
unrecognized actuarial gains or losses over a period no longer
than the average future service of employees.
The Companys benefit obligations are described in the
following tables. Accumulated and projected benefit obligations
(ABO and PBO, respectively) represent the obligations of a
pension plan for past service as
75
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
of the measurement date. ABO is the present value of benefits
earned to date with benefits computed based on current
compensation levels. PBO is ABO increased to reflect expected
future compensation.
Accumulated
benefit obligation and projected benefit
obligation
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Accumulated benefit obligation
|
|
$
|
628
|
|
|
$
|
386
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation:
|
|
|
|
|
|
|
|
|
Balance at April 1,
|
|
$
|
575
|
|
|
$
|
370
|
|
Service cost
|
|
|
232
|
|
|
|
125
|
|
Interest cost
|
|
|
61
|
|
|
|
30
|
|
Actuarial loss
|
|
|
167
|
|
|
|
109
|
|
Benefits paid
|
|
|
(95
|
)
|
|
|
(57
|
)
|
Exchange rate adjustments
|
|
|
33
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
Balance at March 31,
|
|
$
|
973
|
|
|
$
|
575
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets
|
|
|
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
Balance at April 1,
|
|
$
|
|
|
Employer contributions
|
|
|
953
|
|
Actual gain on plan assets
|
|
|
35
|
|
Benefits paid
|
|
|
(26
|
)
|
Exchange rate adjustments
|
|
|
14
|
|
|
|
|
|
|
Balance at March 31,
|
|
$
|
976
|
|
|
|
|
|
|
Plan
asset allocation
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
|
Target
|
|
|
Actual
|
|
|
|
Allocation
|
|
|
Allocation
|
|
|
Government securities
|
|
|
70-80
|
%
|
|
|
75
|
%
|
Corporate Debt
|
|
|
10-20
|
%
|
|
|
15
|
%
|
Other
|
|
|
1-10
|
%
|
|
|
10
|
%
|
The Companys plan assets are being managed by the
respective insurance companies in India and Sri Lanka.
76
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Pension
liability
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
PBO
|
|
$
|
973
|
|
|
$
|
575
|
|
Fair value of plan assets
|
|
|
976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status recognized
|
|
$
|
(3
|
)
|
|
$
|
575
|
|
Amount recorded in stockholders equity
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
303
|
|
|
$
|
136
|
|
|
|
|
|
|
|
|
|
|
The amount in accumulated other comprehensive income (loss) that
is expected to be recognized as a component of net periodic
benefit cost over the fiscal year ending March 31, 2009 is
$28. The Company expects to contribute $361 to its gratuity
plans during the fiscal year ending March 31, 2009.
Estimated
future benefits payments
|
|
|
|
|
Fiscal year ending March 31:
|
|
|
|
|
2009
|
|
$
|
113
|
|
2010
|
|
|
187
|
|
2011
|
|
|
247
|
|
2012
|
|
|
296
|
|
2013
|
|
|
414
|
|
2014-2018
|
|
|
2,580
|
|
The Company sponsors a defined contribution savings plan under
Section 401(k) of the Internal Revenue Code (the 401(k)
Plan). The 401(k) Plan covers substantially all employees in the
United States who meet minimum age and service requirements and
allows participants to contribute a portion of their annual
compensation on a pretax basis. Company contributions to the
401(k) Plan may be made at the discretion of the board of
directors. During the years ended March 31, 2008, 2007 and
2006, the Company did not contribute to the 401(k) Plan.
|
|
(13)
|
Related
Party Transactions
|
In December 2000, in connection with the hiring of an executive
officer, the Company issued an interest-free loan of 2,935 Sri
Lankan rupees, or approximately $29, due and payable when the
fair market value of the Companys common stock reaches $20
per share following its IPO. The loan balance was repaid in full
during March 2007.
During the fiscal years ended March 31, 2008, 2007 and
2006, the Company purchased approximately $387, $1,048, and
$942, respectively, in services from Lotus Travel Services. The
managing director of Lotus Travel Services is a relative of
an executive officer of the Company.
During the fiscal years ended March 31, 2008, 2007 and
2006, the Company made capital and operating lease payments for
equipment of approximately $0, $230 and $291, respectively, to
Alliance Finance Company. Relatives of an executive officer of
the Company are directors of Alliance Finance Company.
|
|
(14)
|
Commitments,
Contingencies and Guarantees
|
The Company leases office space under operating leases, which
expire at various dates through the year 2013. Certain leases
contain renewal provisions and generally require the Company to
pay utilities, insurance, taxes, and other operating expenses.
77
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Future minimum lease payments under non-cancelable operating
leases at March 31, 2008 are:
|
|
|
|
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Fiscal year ending March 31:
|
|
|
|
|
2009
|
|
$
|
4,425
|
|
2010
|
|
|
4,344
|
|
2011
|
|
|
3,114
|
|
2012
|
|
|
1,591
|
|
2013
|
|
|
540
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,014
|
|
|
|
|
|
|
The operating lease commitment for the fiscal year ending
March 31, 2009 is net of $103 of sublease income. Total
rental expense was approximately $5,957, $3,417 and $2,598 for
the fiscal years ended March 31, 2008, 2007 and 2006,
respectively.
The Company is constructing a facility as part of a planned
campus on a 6.3 acre site in Hyderabad, India which
includes planned construction of approximately
340,000 square feet, over the next three fiscal years at a
total estimated cost of $31,000, of which $7,698 was spent as of
March 31, 2008. As of March 31, 2008, the Company had
outstanding fixed capital commitments of $11,022, net of
advances related to this facility construction.
The Company has deposits under lien of $238 against a bank
guarantee issued by a bank in favor of Andhra Pradesh Industrial
Infrastructure Corporation Limited which would be forfeited if
the Company fails to meet certain hiring criteria with
established timelines at its Hyderabad facility.
The Company indemnifies its officers and directors for certain
events or occurrences under charter and indemnification
agreements while the officer or director is, or was serving, at
its request in a defined capacity. The term of the
indemnification period is for the officers or
directors lifetime. The maximum potential amount of future
payments the Company could be required to make under these
indemnification obligations is unlimited. The costs incurred to
defend lawsuits or settle claims related to these
indemnification obligations have not been material. As a result,
the Company believes that its estimated exposure on these
obligations is minimal. Accordingly, the Company had no
liabilities recorded for these obligations as of March 31,
2008.
The Company is insured against any actual or alleged act, error,
omission, neglect, misstatement or misleading statement or
breach of duty by any current or former officer, director or
employee while rendering information technology services. The
Company believes that its financial exposure from such actual or
alleged actions, should they arise, is minimal and no liability
was recorded at March 31, 2008.
The Company is not a party to any pending litigation or other
legal proceedings that are likely to have a material adverse
affect on its financial statements.
|
|
(15)
|
Derivative
Financial Instruments and Trading Activities
|
The Company enters into foreign currency derivative contracts to
mitigate the risk of changes in foreign exchange rates on
intercompany transactions and forecasted transactions
denominated in foreign currencies, particularly between the
Indian rupee and the U.S. dollar and the U.K. pound
sterling. The notional principal amounts of these foreign
currency derivative contracts as of March 31, 2008 and 2007
were $73,101 and $0, respectively. During the fiscal year ended
March 31, 2008, the Company entered into foreign currency
derivative contracts which met the criteria for hedge accounting
as cash flow hedges pursuant to SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities.
Changes in the fair values of these hedges are deferred and
recorded as a component of accumulated other comprehensive
income (loss) until the hedged transactions occur and are then
recognized in the consolidated statements of income in the same
line item as the hedged item, whether it be to cost of sales or
78
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
operating expenses. During the fiscal year ended March 31,
2007, changes in the fair value of the portion of derivatives
not designated as cash flow hedges were recognized in costs of
revenue in the consolidated statements of income.
In connection with the cash flow hedges, the Company has
recorded an unrealized loss of $931, net of tax as a component
of accumulated other comprehensive income (loss) within
stockholders equity as of March 31, 2008.
Foreign currency (gains) losses on settlement of cash flow
hedges were ($272), $202 and $133 during the fiscal years ended
March 31, 2008, 2007 and 2006, respectively.
|
|
(16)
|
Business
Segment Information
|
The Companys Chief Operating Decision Maker (CODM) reviews
discrete financial information for the Companys operations
in the following operating segments: (i) the communications
content and technology operating segment, which includes
communications and technology and media and information; and
(ii) the banking financial services and insurance operating
segment. The CODM reviews historical forecast, summary and
detailed revenue and margin information to monitor the operating
performance and assess overall profitability of the Company.
Discrete financial information is not available or reviewed by
the CODM for any of the industries contained within these
operating segments. The Company aggregates the two operating
segments into a single reportable segment, information
technology services.
Geographic
information:
Total revenue is attributed to geographic areas based on
location of the client. Geographic information is summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Customer revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
113,447
|
|
|
$
|
92,356
|
|
|
$
|
66,020
|
|
Europe
|
|
|
51,125
|
|
|
|
31,887
|
|
|
|
10,627
|
|
Other
|
|
|
626
|
|
|
|
417
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenue
|
|
$
|
165,198
|
|
|
$
|
124,660
|
|
|
$
|
76,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Long-lived assets, net of accumulated depreciation:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,843
|
|
|
$
|
1,371
|
|
India
|
|
|
11,758
|
|
|
|
3,848
|
|
Sri Lanka
|
|
|
3,194
|
|
|
|
2,281
|
|
United Kingdom
|
|
|
38
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
Consolidated long-lived assets, net
|
|
$
|
16,833
|
|
|
$
|
7,541
|
|
|
|
|
|
|
|
|
|
|
79
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
(17)
|
Quarterly
Results of Operations (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
Revenue
|
|
$
|
45,040
|
|
|
$
|
42,455
|
|
|
$
|
40,257
|
|
|
$
|
37,446
|
|
|
$
|
35,272
|
|
|
$
|
33,673
|
|
|
$
|
30,090
|
|
|
$
|
25,625
|
|
Costs of revenue
|
|
|
24,904
|
|
|
|
23,307
|
|
|
|
23,038
|
|
|
|
21,598
|
|
|
|
19,402
|
|
|
|
18,360
|
|
|
|
16,231
|
|
|
|
14,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
20,136
|
|
|
|
19,148
|
|
|
|
17,219
|
|
|
|
15,848
|
|
|
|
15,870
|
|
|
|
15,313
|
|
|
|
13,859
|
|
|
|
11,587
|
|
Operating expenses
|
|
|
14,521
|
|
|
|
13,281
|
|
|
|
12,510
|
|
|
|
12,660
|
|
|
|
11,788
|
|
|
|
11,244
|
|
|
|
10,173
|
|
|
|
9,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
5,615
|
|
|
|
5,867
|
|
|
|
4,709
|
|
|
|
3,188
|
|
|
|
4,082
|
|
|
|
4,069
|
|
|
|
3,686
|
|
|
|
2,314
|
|
Other income
|
|
|
1,163
|
|
|
|
1,096
|
|
|
|
801
|
|
|
|
189
|
|
|
|
3
|
|
|
|
288
|
|
|
|
237
|
|
|
|
681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense (benefit)
|
|
|
6,778
|
|
|
|
6,963
|
|
|
|
5,510
|
|
|
|
3,377
|
|
|
|
4,085
|
|
|
|
4,357
|
|
|
|
3,923
|
|
|
|
2,995
|
|
Income tax expense (benefit)
|
|
|
1,519
|
|
|
|
1,706
|
|
|
|
943
|
|
|
|
689
|
|
|
|
450
|
|
|
|
(4,317
|
)
|
|
|
130
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,259
|
|
|
$
|
5,257
|
|
|
$
|
4,567
|
|
|
$
|
2,688
|
|
|
$
|
3,635
|
|
|
$
|
8,674
|
|
|
$
|
3,793
|
|
|
$
|
2,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share Basic
|
|
$
|
0.23
|
|
|
$
|
0.23
|
|
|
$
|
0.21
|
|
|
$
|
0.15
|
|
|
$
|
0.21
|
|
|
$
|
0.50
|
|
|
$
|
0.22
|
|
|
$
|
0.17
|
|
Net income per share Diluted
|
|
|
0.21
|
|
|
|
0.21
|
|
|
|
0.20
|
|
|
|
0.13
|
|
|
|
0.19
|
|
|
|
0.47
|
|
|
|
0.21
|
|
|
|
0.16
|
|
On April 3, 2008, the Company purchased multiple foreign
currency forward contracts designed to hedge fluctuation in the
Indian rupee against the U.S. dollar and U.K. pound
sterling. The contracts, which meet the criteria for hedge
accounting as cash flow hedges pursuant to
SFAS No. 133, have an aggregate notional amount of
approximately 682 million Indian rupees (approximately
$16,900) and will expire on a monthly basis over a
24-month
period ending on March 31, 2010. The Company has the
obligation to settle these contracts based upon the Reserve Bank
of India published Indian rupee exchange rates. The weighted
average Indian rupee rate associated with these contracts is
approximately 40.32.
80
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures.
|
|
|
(1)
|
Evaluation
of Disclosure Controls and Procedures
|
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
reports filed under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within
the time periods specified in the SECs rules and forms,
and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
desired control objectives, as ours are designed to do, and
management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls
and procedures.
As of March 31, 2008, we carried out an evaluation, under
the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended. Based
upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures are effective at that reasonable assurance level in
(i) enabling us to record, process, summarize and report
information required to be included in our periodic SEC filings
within the required time period and (ii) ensuring that
information required to be disclosed in the reports that we file
or submit under the Securities 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.
|
|
(2)
|
Report of
Management on Internal Control over Financial
Reporting
|
This Annual Report does not include a report of
managements assessment regarding internal control over
financial reporting or an attestation report of the
Companys registered public accounting firm, KPMG LLP,
regarding our internal control over financial reporting due to a
transition period established by the rules of the SEC for newly
public companies.
|
|
(3)
|
Changes
in Internal Controls Over Financial Reporting
|
There have been no changes in our internal control over
financial reporting that occurred during the last fiscal quarter
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
|
|
Item 9B.
|
Other
Information.
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required under this item is incorporated herein
by reference to the Companys definitive proxy statement
pursuant to Regulation 14A, which proxy statement is
expected to be filed with the Securities and Exchange Commission
not later than 120 days after the close of the
Companys fiscal year ended March 31, 2008.
81
Virtusa
Corporation and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Item 11.
|
Executive
Compensation
|
The information required under this item is incorporated herein
by reference to the Companys definitive proxy statement
pursuant to Regulation 14A, which proxy statement is
expected to be filed with the Securities and Exchange Commission
not later than 120 days after the close of the
Companys fiscal year ended March 31, 2008.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required under this item is incorporated herein
by reference to the Companys definitive proxy statement
pursuant to Regulation 14A, which proxy statement is
expected to be filed with the Securities and Exchange Commission
not later than 120 days after the close of the
Companys fiscal year ended March 31, 2008.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required under this item is incorporated herein
by reference to the Companys definitive proxy statement
pursuant to Regulation 14A, which proxy statement is
expected to be filed with the Securities and Exchange Commission
not later than 120 days after the close of the
Companys fiscal year ended March 31, 2008.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required under this item is incorporated herein
by reference to the Companys definitive proxy statement
pursuant to Regulation 14A, which proxy statement is
expected to be filed with the Securities and Exchange Commission
not later than 120 days after the close of the
Companys fiscal year ended March 31, 2008.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
The following are filed as part of this Annual Report on
Form 10-K:
The following consolidated financial statements are included in
Item 8:
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
53
|
|
Consolidated Balance Sheets at March 31, 2008 and
March 31, 2007
|
|
|
54
|
|
Consolidated Statements of Income for the Years ended
March 31, 2008, 2007 and 2006
|
|
|
55
|
|
Consolidated Statements of Stockholders Equity (Deficit)
for the Years ended March 31, 2008, 2007 and 2006
|
|
|
56
|
|
Consolidated Statements of Cash Flows for the Years ended
March 31, 2008, 2007 and 2006
|
|
|
57
|
|
Notes to Consolidated Financial Statements
|
|
|
58
|
|
|
|
2.
|
Financial
Statement Schedules
|
The financial statement schedule entitled Schedule
II Valuation and Qualifying Accounts is filed
as part of this Annual Report on
Form 10-K
under this Item 15.
All other schedules have been omitted since the required
information is not present, or not present in amounts sufficient
to require submission of the schedule, or because the
information required is included in the Consolidated Financial
Statements or the Notes thereto.
82
Report of
Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
Virtusa Corporation and Subsidiaries:
Under date of May 29, 2008, we reported on the consolidated
balance sheets of Virtusa Corporation and Subsidiaries (the
Company) as of March 31, 2008 and 2007, and the related
consolidated statements of income, changes in stockholders
equity (deficit) and cash flows for each of the years in the
three-year period ended March 31, 2008, which are contained
in the March 31, 2008 annual report on
Form 10-K.
In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated
financial statement schedule of Valuation and Qualifying
Accounts in this
Form 10-K.
This financial statement schedule is the responsibility of the
Companys management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in note 2 to the consolidated financial
statements, the Company changed its method of accounting for
share-based payments effective April 1, 2005.
Boston, Massachusetts
May 29, 2008
83
Virtusa
Corporation and Subsidiaries
Schedule II Valuation and Qualifying
Accounts
For the years ended March 31, 2008, 2007, and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
Deductions/
|
|
|
End of
|
|
Description
|
|
of Period
|
|
|
Expenses
|
|
|
Other
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Accounts receivable allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended March 31, 2006
|
|
$
|
89
|
|
|
$
|
326
|
|
|
$
|
|
|
|
$
|
415
|
|
Year ended March 31, 2007
|
|
$
|
415
|
|
|
$
|
202
|
|
|
$
|
(197
|
)
|
|
$
|
420
|
|
Year ended March 31, 2008
|
|
$
|
420
|
|
|
$
|
440
|
|
|
$
|
(207
|
)
|
|
$
|
653
|
|
84
The following exhibits are filed as part of and incorporated by
reference into this Annual Report:
|
|
|
|
|
Exhibit No.
|
|
Exhibit Title
|
|
|
3
|
.1
|
|
Amended and Restated By-laws of the Registrant (previously filed
as Exhibit 3.1 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
3
|
.2
|
|
Form of Seventh Amended and Restated Certificate of
Incorporation of the Registrant (previously filed as
Exhibit 3.3 to the Registrants Registration Statement
on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
4
|
.1
|
|
Specimen certificate evidence shares of the Registrants
common stock (previously filed as Exhibit 4.1 to the
Registrants Registration Statement on
Form S-1,
as amended
(Registration No. 333-141952)
and incorporated herein by reference).
|
|
4
|
.2
|
|
Fourth Amended and Restated Registration Rights Agreement by and
among the Registrant and the Investors named therein, dated as
of March 29, 2007 (previously filed as Exhibit 4.2 to
the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.1
|
|
Warrant by and between the Registrant and Silicon Valley Bank,
dated as of February 27, 2002, as amended (previously filed
as Exhibit 10.2 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.2
|
|
Lease Agreement by and between the Registrant and W9/TIB Real
Estate Limited Partnership, dated June 2000, as amended by a
First Amendment thereto, dated as of November 2000, and a Second
Amendment and Extension of Lease thereto, dated as of
December 30, 2003 (previously filed as Exhibit 10.3 to
the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.3+
|
|
Amended and Restated 2000 Stock Option Plan and forms of
agreements thereunder (previously filed as Exhibit 10.4 to
the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.4+
|
|
2005 Stock Appreciation Rights Plan and form of agreements
thereunder (previously filed as Exhibit 10.5 to the
Registrants Registration Statement on
Form S-1,
as amended
(Registration No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.5
|
|
Material Service Provider Agreement by and between the
Registrant and JPMorgan Chase Bank, N.A., dated as of
December 6, 2004, as amended (previously filed as
Exhibit 10.6 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.6+
|
|
Form of Indemnification Agreement between the Registrant and
each of its directors (previously filed as Exhibit 10.7 to
the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.7*
|
|
Provision of IT Services for BT Contract by and between the
Registrant and British Telecommunications plc, dated as of
March 29, 2007, as amended by Amendment Number 1 to
Contract, dated as of February 1, 2008, as amended by
Amendment Number 2 to Contract, dated as of March 27, 2008,
as amended by Amendment No. 3 to Contract, dated as of
March 31, 2008, as amended by Amendment No. 4 to
Contract dated as of March 31, 2008.
|
|
10
|
.8*
|
|
Amended and Restated Credit Agreement between Registrant and
Citizens Bank of Massachusetts, dated as of September 29,
2006, including Amended and Restated Revolving Credit Note,
Amended and Restated Security Agreement and Negative Pledge
Agreement, each dated as of September 29, 2006, as amended
by the First Amendment to Amended and Restated Credit Agreement,
dated as of September 30, 2007, as amended by the Second
Amendment to Amended and Restated Credit Agreement, dated as of
December 31, 2007, as amended by the Third Amendment to
Amended and Restated Credit Agreement, dated as of
February 7, 2008, as amended by the Fourth Amendment to
Amended and Restated Credit Agreement, dated as of
March 31, 2008.
|
85
|
|
|
|
|
Exhibit No.
|
|
Exhibit Title
|
|
|
10
|
.9+
|
|
Executive Agreement between the Registrant and Kris Canekeratne,
dated as of April 5, 2007 (previously filed as
Exhibit 10.10 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.10+
|
|
Executive Agreement between the Registrant and Danford F. Smith,
dated as of April 5, 2007 (previously filed as
Exhibit 10.11 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.11+
|
|
Executive Agreement between the Registrant and Thomas R. Holler,
dated as of April 5, 2007 (previously filed as
Exhibit 10.12 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.12+
|
|
Executive Agreement between the Registrant and Roger Keith
Modder, dated as of April 5, 2007 (previously filed as
Exhibit 10.13 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.13+
|
|
Executive Agreement between the Registrant and T.N. Hari, dated
as of April 5, 2007 (previously filed as Exhibit 10.14
to the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.14
|
|
Co-Developer Agreement and Lease Deed between the Registrant and
APIICL, a state government agency in India, dated as of March
2007 (previously filed as Exhibit 10.15 to the
Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.15*+
|
|
2007 Stock Option and Incentive Plan, including Form of
Incentive Stock Option Agreement, Form of Non-Qualified Stock
Option Agreement for Company Employees, Form of Non-Qualified
Stock Option Agreement for Non-Employee Directors and Form of
Employee Restricted Stock Award Agreement.
|
|
10
|
.16
|
|
Fifth Amended and Restated Stockholders Agreement by and among
the Registrant and the Stockholders named therein, dated as of
March 29, 2007 (previously filed as Exhibit 10.17 to
the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.17
|
|
Agreement for Civil and Structural Works, including the General
Conditions of the Contract by and between Virtusa (India)
Private Limited and Shapoorji Pallionji & Company
Limited, dated as of July 2, 2007 (previously filed as
Exhibit 10.18 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.18+
|
|
2007 Executive Variable Incentive Cash Compensation Program
(previously filed as Exhibit 10.19 to the Registrants
Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.19+
|
|
Non-Employee Director Compensation Policy (previously filed as
Exhibit 10.20 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.20+
|
|
Virtusa Corporation Variable Cash Compensation Plan (previously
filed as Exhibit 10.1 to the Registrants Quarterly
Report on
Form 10-Q,
filed September 7, 2008, and incorporated herein by
reference).
|
|
10
|
.21
|
|
LEASE DEED by and between Andhra Pradesh Industrial
Infrastructure Corporation Limited and Virtusa (India) Private
Limited dated as of August 22, 2007 previously filed as
Exhibit 10.1 to the Registrants Quarterly Report on
Form 10-Q,
filed September 7, 2008, and incorporated herein by
reference).
|
|
10
|
.22*
|
|
Indenture of Lease by and between Orion Development PVT. Ltd.
and Virtusa (Private) Limited dated as of May 17, 2007
|
|
21
|
.1*
|
|
Subsidiaries of Registrant
|
|
23
|
.1*
|
|
Consent of KPMG LLP
|
|
24
|
.1
|
|
Power of Attorney (included on signature page)
|
|
31
|
.1*
|
|
Certification of principal executive officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
86
|
|
|
|
|
Exhibit No.
|
|
Exhibit Title
|
|
|
31
|
.2*
|
|
Certification of principal accounting and financial officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1**
|
|
Certification of principal executive officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. 1350
|
|
32
|
.2**
|
|
Certification of principal accounting and financial officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. 1350
|
|
|
|
+ |
|
Indicates a management contract or compensation plan, contract
or arrangement. |
|
|
|
Confidential treatment has been requested for certain provisions
of this Exhibit. |
|
* |
|
Filed herewith. |
|
** |
|
Furnished herewith. This certification shall not be deemed filed
for any purpose, nor shall it be deemed to be incorporated by
reference into any filing under the Securities Act of 1933,
amended or the Exchange Act of 1934, as amended. |
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 3rd day of June,
2008.
Virtusa Corporation
Kris Canekeratne
Chairman and Chief Executive Officer (Principal
Executive Officer)
Date: June 3, 2008
POWER OF
ATTORNEY AND SIGNATURES
We the undersigned officers and directors of Virtusa
Corporation, hereby severally constitute and appoint Kris
Canekeratne and Thomas R. Holler, and each of them singly, our
true and lawful attorneys, with full power to them and each of
them singly, to sign for us and in our names in the capacities
indicated below, any amendments to this Annual Report on
Form 10-K,
and generally to do all things in our names and on our behalf in
such capacities to enable Virtusa Corporation to comply with the
provisions of the Securities Act of 1934, as amended, and all
the requirements of the Securities Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities indicated on the 3rd day of June, 2008.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
|
|
|
|
/s/ Kris
Canekeratne
Kris
Canekeratne
|
|
Chairman and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ Danford
F. Smith
Danford
F. Smith
|
|
President, Chief Operating Officer and Director
|
|
|
|
|
|
|
|
/s/ Thomas
R. Holler
Thomas
R. Holler
|
|
Executive Vice President of Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/ Andrew
P. Goldfarb
Andrew
P. Goldfarb
|
|
Director
|
|
|
|
|
|
|
|
/s/ Robert
E. Davoli
Robert
E. Davoli
|
|
Director
|
|
|
|
|
|
|
|
/s/ Izhar
Armony
Izhar
Armony
|
|
Director
|
|
|
88
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
|
|
|
|
|
|
/s/ Ronald
T. Maheu
Ronald
T. Maheu
|
|
Director
|
|
|
|
|
|
|
|
/s/ Martin
Trust
Martin
Trust
|
|
Director
|
|
|
|
|
|
|
|
/s/ Rowland
Moriarty
Rowland
Moriarty
|
|
Director
|
|
|
89
Exhibit Index
|
|
|
|
|
Exhibit No.
|
|
Exhibit Title
|
|
|
3
|
.1
|
|
Amended and Restated By-laws of the Registrant (previously filed
as Exhibit 3.1 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
3
|
.2
|
|
Form of Seventh Amended and Restated Certificate of
Incorporation of the Registrant (previously filed as
Exhibit 3.3 to the Registrants Registration Statement
on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
4
|
.1
|
|
Specimen certificate evidence shares of the Registrants
common stock (previously filed as Exhibit 4.1 to the
Registrants Registration Statement on
Form S-1,
as amended
(Registration No. 333-141952)
and incorporated herein by reference).
|
|
4
|
.2
|
|
Fourth Amended and Restated Registration Rights Agreement by and
among the Registrant and the Investors named therein, dated as
of March 29, 2007 (previously filed as Exhibit 4.2 to
the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.1
|
|
Warrant by and between the Registrant and Silicon Valley Bank,
dated as of February 27, 2002, as amended (previously filed
as Exhibit 10.2 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.2
|
|
Lease Agreement by and between the Registrant and W9/TIB Real
Estate Limited Partnership, dated June 2000, as amended by a
First Amendment thereto, dated as of November 2000, and a Second
Amendment and Extension of Lease thereto, dated as of
December 30, 2003 (previously filed as Exhibit 10.3 to
the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.3+
|
|
Amended and Restated 2000 Stock Option Plan and forms of
agreements thereunder (previously filed as Exhibit 10.4 to
the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.4+
|
|
2005 Stock Appreciation Rights Plan and form of agreements
thereunder (previously filed as Exhibit 10.5 to the
Registrants Registration Statement on
Form S-1,
as amended
(Registration No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.5
|
|
Material Service Provider Agreement by and between the
Registrant and JPMorgan Chase Bank, N.A., dated as of
December 6, 2004, as amended (previously filed as
Exhibit 10.6 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.6+
|
|
Form of Indemnification Agreement between the Registrant and
each of its directors (previously filed as Exhibit 10.7 to
the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.7*
|
|
Provision of IT Services for BT Contract by and between the
Registrant and British Telecommunications plc, dated as of
March 29, 2007, as amended by Amendment Number 1 to
Contract, dated as of February 1, 2008, as amended by
Amendment Number 2 to Contract, dated as of March 27, 2008,
as amended by Amendment No. 3 to Contract, dated as of
March 31, 2008, as amended by Amendment No. 4 to
Contract dated as of March 31, 2008.
|
|
10
|
.8*
|
|
Amended and Restated Credit Agreement between Registrant and
Citizens Bank of Massachusetts, dated as of September 29,
2006, including Amended and Restated Revolving Credit Note,
Amended and Restated Security Agreement and Negative Pledge
Agreement, each dated as of September 29, 2006, as amended
by the First Amendment to Amended and Restated Credit Agreement,
dated as of September 30, 2007, as amended by the Second
Amendment to Amended and Restated Credit Agreement, dated as of
December 31, 2007, as amended by the Third Amendment to
Amended and Restated Credit Agreement, dated as of
February 7, 2008, as amended by the Fourth Amendment to
Amended and Restated Credit Agreement, dated as of
March 31, 2008.
|
|
10
|
.9+
|
|
Executive Agreement between the Registrant and Kris Canekeratne,
dated as of April 5, 2007 (previously filed as
Exhibit 10.10 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
90
|
|
|
|
|
Exhibit No.
|
|
Exhibit Title
|
|
|
10
|
.10+
|
|
Executive Agreement between the Registrant and Danford F. Smith,
dated as of April 5, 2007 (previously filed as
Exhibit 10.11 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.11+
|
|
Executive Agreement between the Registrant and Thomas R. Holler,
dated as of April 5, 2007 (previously filed as
Exhibit 10.12 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.12+
|
|
Executive Agreement between the Registrant and Roger Keith
Modder, dated as of April 5, 2007 (previously filed as
Exhibit 10.13 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.13+
|
|
Executive Agreement between the Registrant and T.N. Hari, dated
as of April 5, 2007 (previously filed as Exhibit 10.14
to the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.14
|
|
Co-Developer Agreement and Lease Deed between the Registrant and
APIICL, a state government agency in India, dated as of March
2007 (previously filed as Exhibit 10.15 to the
Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.15*+
|
|
2007 Stock Option and Incentive Plan, including Form of
Incentive Stock Option Agreement, Form of Non-Qualified Stock
Option Agreement for Company Employees, Form of Non-Qualified
Stock Option Agreement for Non-Employee Directors and Form of
Employee Restricted Stock Award Agreement.
|
|
10
|
.16
|
|
Fifth Amended and Restated Stockholders Agreement by and among
the Registrant and the Stockholders named therein, dated as of
March 29, 2007 (previously filed as Exhibit 10.17 to
the Registrants Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.17
|
|
Agreement for Civil and Structural Works, including the General
Conditions of the Contract by and between Virtusa (India)
Private Limited and Shapoorji Pallionji & Company
Limited, dated as of July 2, 2007 (previously filed as
Exhibit 10.18 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.18+
|
|
2007 Executive Variable Incentive Cash Compensation Program
(previously filed as Exhibit 10.19 to the Registrants
Registration Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.19+
|
|
Non-Employee Director Compensation Policy (previously filed as
Exhibit 10.20 to the Registrants Registration
Statement on
Form S-1,
as amended (Registration
No. 333-141952)
and incorporated herein by reference).
|
|
10
|
.20+
|
|
Virtusa Corporation Variable Cash Compensation Plan (previously
filed as Exhibit 10.1 to the Registrants Quarterly
Report on
Form 10-Q,
filed September 7, 2008, and incorporated herein by
reference).
|
|
10
|
.21
|
|
LEASE DEED by and between Andhra Pradesh Industrial
Infrastructure Corporation Limited and Virtusa (India) Private
Limited dated as of August 22, 2007 previously filed as
Exhibit 10.1 to the Registrants Quarterly Report on
Form 10-Q,
filed September 7, 2008, and incorporated herein by
reference)
|
|
10
|
.22*
|
|
Indenture of Lease by and between Orion Development PVT. Ltd.
and Virtusa (Private) Limited dated as of May 17, 2007
|
|
21
|
.1*
|
|
Subsidiaries of Registrant
|
|
23
|
.1*
|
|
Consent of KPMG LLP
|
|
24
|
.1
|
|
Power of Attorney (included on signature page)
|
|
31
|
.1*
|
|
Certification of principal executive officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2*
|
|
Certification of principal accounting and financial officer
pursuant to Section 302 of the
Sarbanes-Oxley
Act of 2002
|
91
|
|
|
|
|
Exhibit No.
|
|
Exhibit Title
|
|
|
32
|
.1**
|
|
Certification of principal executive officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. 1350
|
|
32
|
.2**
|
|
Certification of principal accounting and financial officer
pursuant to Section 906 of the
Sarbanes-Oxley
Act of 2002, 18 U.S.C. 1350
|
|
|
|
+ |
|
Indicates a management contract or compensation plan, contract
or arrangement. |
|
|
|
Confidential treatment has been requested for certain provisions
of this Exhibit. |
|
* |
|
Filed herewith. |
|
** |
|
Furnished herewith. This certification shall not be deemed filed
for any purpose, nor shall it be deemed to be incorporated by
reference into any filing under the Securities Act of 1933,
amended or the Exchange Act of 1934, as amended. |
92