F-1/A 1 d627523df1a.htm AMENDMENT NO.1 TO FORM F-1 AMENDMENT NO.1 TO FORM F-1
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As filed with the Securities and Exchange Commission on March 19, 2014

Registration No. 333-194191

 

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

AMENDMENT NO. 1 TO

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Tarena International, Inc.

(Exact name of Registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s name into English)

 

Cayman Islands   8200   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

Suite 10017, Building E,

Zhongkun Plaza, A18 Bei San Huan West Road,

Haidian District, Beijing 100098

People’s Republic of China

Tel: +86 10 6213-5687

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Law Debenture Corporate Services Inc.

400 Madison Avenue, Suite 4D

New York, New York 10017

+1 212 750-6474

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Z. Julie Gao, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

c/o 42/F, Edinburgh Tower, The Landmark

15 Queen’s Road Central

Hong Kong

+852 3740-4700

 

David Roberts, Esq.

Ke Geng, Esq.

O’Melveny & Myers LLP

Yin Tai Centre Office Tower, 37th Floor

No. 2 Jianguomenwai Ave., Beijing 100022

People’s Republic of China

+86 10 6563-4200

 

 

Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

  Amount of shares to
be registered(1)(2)
  Proposed maximum
offering price
per share
 

Proposed maximum
aggregate

offering price(1)(3)

 

Amount of

registration fee

Class A Ordinary Shares, par value $0.001 per share(2)(3)

  17,595,000   $10.00   $175,950,000   $22,662.36(4)

 

 

 

(1) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(a) under the Securities Act.
(2) American depositary shares issuable upon deposit of the Class A ordinary shares registered hereby have been registered under a separate registration statement on Form F-6 with the Securities and Exchange Commission on March 18, 2014 (Registration No.333-194662). Each American depositary share represents one Class A ordinary shares.
(3) Includes Class A ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public, and also includes 2,295,000 Class A ordinary shares that are issuable upon exercise of the underwriters’ option to purchase additional shares. These Class A ordinary shares are not being registered for the purpose of sales outside the United States.
(4) US$12,880.00 was previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We and the selling shareholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we and the selling shareholders are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (SUBJECT TO COMPLETION)

DATED MARCH 19, 2014

15,300,000 American Depositary Shares

 

LOGO

Tarena International, Inc.

 

Representing 15,300,000 Class A Ordinary Shares

Tarena International, Inc. is offering 11,500,000 American depositary shares, or ADSs, and the selling shareholders are offering 3,800,000 ADSs. Each ADS represents one Class A ordinary share, par value $0.001 per share. We will not receive any proceeds from the ADSs sold by the selling shareholders. This is our initial public offering, and no public market exists for our ADSs or our Class A ordinary shares. We anticipate the initial public offering price of our ADSs will be between $8.00 and $10.00 per ADS.

Upon the completion of this offering, we will have a dual class ordinary share structure. Our ordinary shares will be divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to ten votes per share. Holders of Class A and Class B ordinary shares will vote together as one class on all matters that require a shareholders’ vote. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstance. Upon the completion of this offering, our existing shareholders will own an aggregate of 33,857,389 Class B ordinary shares, which will represent 95.3% of the then total voting power of our outstanding shares, assuming the underwriters will not exercise their option to purchase additional ADSs.

We are an “emerging growth company” under applicable U.S. federal securities laws and are eligible for reduced public company reporting requirements.

We have applied for the listing of our ADSs on the NASDAQ Global Market under the symbol “TEDU.”

Investing in our ADSs involves risks. See “Risk Factors” beginning on page 15.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     Per ADS      Total  

Initial public offering price

   $                            $                        

Underwriting discount

   $                            $                        

Proceeds, before expenses, to us

   $                            $                        

Proceeds, before expenses, to the selling shareholders

   $                            $                        

The underwriters may also purchase up to an additional 2,295,000 ADSs from a selling shareholder at the initial public offering price, less underwriting discounts and commissions.

Delivery of the ADSs will be made on or about            , 2014.

 

 

 

Goldman Sachs (Asia) L.L.C.   Credit Suisse

Jefferies

Oppenheimer & Co.

The date of this prospectus is            , 2014.


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TABLE OF CONTENTS

 

     Page  

Business

     90   

PRC Regulation

     106   

Management

     120   

Principal and Selling Shareholders

     129   

Related Party Transactions

     132   

Description of Share Capital

     134   

Description of American Depositary Shares

     143   

Shares Eligible for Future Sale

     155   

Taxation

     157   

Underwriting (Conflict of Interest)

     164   

Legal Matters

     172   

Experts

     173   

Where You Can Find Additional Information

     174   

Index to Consolidated Financial Statements

     F-1   
 

 

 

You should rely only on the information contained in this prospectus or in any related free-writing prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, the ADSs only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is current only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the ADSs.

We have not taken any action to permit a public offering of the ADSs outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the ADSs and the distribution of the prospectus outside the United States.

 

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under “Risk Factors,” before deciding whether to buy our ADSs.

Our Business

We are a leading provider of professional education services in China. Our core strength is in IT professional education services, where we are the largest provider in China with a market share of 8.3% as measured by revenues in 2013 according to IDC, a third-party research firm. Since our inception in 2002, we have trained over 130,000 students, cooperated with more than 500 universities and colleges and placed students with approximately 35,000 corporate employers in a variety of industries. Our six-month post-course job placement rates for students enrolled in 2011 and 2012 have averaged over 90%. The average starting salary of our students enrolled in 2012 was 14.3% higher than the national average of college graduates in 2012, calculated based on data from IDC.

We have an innovative education platform combining live distance instruction, classroom-based tutoring and online learning modules. For each class, instructors deliver lectures from one classroom in Beijing to students in the same classroom as well as to students at our learning centers across China via simultaneous webcast. To facilitate a disciplined and focused learning environment, we staff each classroom at our learning centers with one or two on-site teaching assistants to tutor and supervise students. We complement the live instruction and tutoring with our proprietary learning management system, named the Tarena Teaching System, or TTS. TTS has five core functions, featuring course content, self-assessment exams, student and teaching staff interaction tools, student management tools and an online student community. Through this education platform, we provide job-oriented education with measurable outcomes, as demonstrated by our high job placement rates and students’ academic performance.

We currently offer courses in nine IT subjects and two non-IT subjects. Our courses provide students with practical education to prepare them for jobs in industries with significant growth potential and strong hiring demand. We believe we have successfully established “Tarena ( LOGO )” as a respected professional education brand known for high teaching quality and an excellent student placement track record. In 2013, we were recognized as the Outstanding Training Institute by China’s Ministry of Industry and Information Technology, or the MIIT.

With a strong commitment to career services, we have established an outstanding job placement record and a broad network of corporate employers. Our team of over 200 career counselors advise students through mandatory job skill seminars, one-on-one interview workshops and systematic career assessment and planning. We have over 100 employer cooperation representatives who liaise closely with employers, alumni, human resources websites and other employment recruiters to maximize job opportunities for our students. We have a track record of producing qualified, job-ready candidates for many corporate employers in China, including global Fortune 500 companies and leading technology companies. Our access to a large number of corporate employers is appealing to potential students, which in turn contributes to our student enrollment growth and further allows us to provide a larger pool of qualified candidates to employers.

Capitalizing on our innovative education platform, we have built a highly scalable business that we can expand and replicate rapidly with consistent quality. We deliver high quality lectures through a group of experienced and passionate instructors based in Beijing to a nationwide network of 92 directly operated learning

 

 

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centers in 33 cities in China as of December 31, 2013. Compared to traditional classroom-based teaching, which requires hiring and training of instructors for local sites, we are able to expand our geographic footprint and class sizes without impacting the quality of our course offerings because we are generally able to provide our students across China with equal access to the same group of instructors. For our most established Java course, our student-to-instructor ratio increased from 1,624-to-1 in 2011 to 3,276-to-1 in 2013, and the average net revenues per instructor for our Java course increased from approximately US$2.7 million in 2011 to approximately US$6.9 million in 2013.

We have experienced significant growth in recent years. Our student enrollments grew from 16,282 in 2011 to 46,458 in 2013, representing a compound annual growth rate, or CAGR, of 68.9%. Our net revenues increased from US$25.7 million in 2011 to US$92.8 million in 2013, representing a CAGR of 89.9%. A substantial portion of our total net revenues are generated from Java courses, which contributed 70.6%, 71.3% and 59.3% of our total net revenues in 2011, 2012 and 2013, respectively. Our net income increased from US$0.7 million in 2011 to US$14.0 million in 2013.

Tarena International, Inc. is a holding company with no material operations of its own. We conduct our operations primarily through our wholly-owned subsidiaries in China. We also control and consolidate a VIE, Beijing Tarena Jinqiao Technology Co., Ltd., or Beijing Tarena. Beijing Tarena holds an Internet content provider license, or ICP license, that is necessary for the operation of our website, www.it211.com.cn, which primarily conducts marketing activities for us. We are currently not eligible as a foreign-invested enterprise to hold an ICP license. If Beijing Tarena or its shareholders fail to perform their respective obligations under the contractual arrangements, we could be limited in our ability to enforce the contractual arrangements that give us effective control over Beijing Tarena. If we are unable to maintain effective control over Beijing Tarena, we would not be able to continue to use the ICP license to operate our www.it211.com.cn website.

Our Value Proposition to Students and Employers

Our services bridge the gap between students’ need for practical training and employers’ demand for trained professionals.

 

    Value proposition to students: For students, we provide practical training necessary to succeed in highly competitive professional job markets. Our job-oriented education offers students valuable practical skills that post-secondary institutions in China are less-equipped to provide. In addition, our personalized job placement services prepare students to perform well in the recruiting and interview processes.

 

    Value proposition to employers: For employers, we provide a large and stable pool of job-ready prospective employees and tailored recruitment services that meet their hiring needs in a cost-effective and time-efficient manner. We address their needs for skilled entry-level professionals by closely aligning our course offerings with the practical knowledge needed in the marketplace.

Our Industry

We define the professional education services market in China as non-degree granting, post-secondary education programs focused on professional career advancement. China’s professional education services market is rapidly growing as a result of favorable economic and demographic trends, an intensely competitive employment market, a significant demand and supply gap for qualified skilled professionals and governmental support. According to IDC, the market size of professional education services in China, which includes industries with high employment demand such as IT, computer graphics, online marketing, finance and accounting and management, grew from RMB48.8 billion (US$8.1 billion) in 2010 to RMB67.5 billion (US$11.1 billion) in 2013, representing a CAGR of 11.4% and is projected to grow to RMB89.0 billion (US$14.7 billion) in 2017, representing a CAGR of 7.2% from 2013 to 2017.

 

 

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In addition, the professional education services market in China is highly fragmented with no single company holding significant market share. We believe this fragmentation enables market players with high quality curricula and a track record of delivering strong educational outcomes to attract more students and grow market share.

Our Strengths

We believe the following competitive strengths are essential for our success and differentiate us from our competitors:

 

    highly innovative and effective education platform;

 

    scalable and efficient business model;

 

    respected brand known for high quality professional education;

 

    outstanding job placement record supported by our access to a broad network of corporate employers; and

 

    experienced management team with a proven track record.

Our Strategies

We are dedicated to improving careers and changing lives by delivering high quality professional education services. Our goal is to become the world’s leading and most innovative professional education services provider. We intend to achieve our goal by pursuing the following strategies:

 

    grow our student enrollments;

 

    expand our course offerings;

 

    continuously enhance the quality of our education services; and

 

    expand our corporate employer network.

Our Challenges

The successful execution of our strategies is subject to risks and uncertainties related to our business and industry, including those relating to:

 

    our ability to continue to attract students to enroll in our courses;

 

    our ability to continue to recruit, train and retain qualified instructors and teaching assistants;

 

    our ability to continually tailor our curriculum to market demand and enhance our courses to adequately and promptly respond to developments in the professional job market;

 

    our reliance on Java and C++ courses for a substantial portion of our net revenues, and a decrease in the popularity and usage of Java and/or C++ in the IT industry would have a material adverse effect on our business and results of operations;

 

    our ability to maintain or enhance our brand recognition;

 

    our ability to maintain our high job placement rate for our students;

 

    our ability to maintain our cooperative relationships with financing service providers for student loans;

 

 

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    our ability to control rental costs, obtain leases at desired locations at reasonable prices and protect our leasehold interests; and

 

    the possibility that certain of our learning centers may be deemed by PRC government authorities to be operating beyond their authorized business scope or without proper license or registration, and that we may be subject to fines, confiscation of gains derived from such learning centers and suspension of those certain learning centers as a result; 21.3% of our student enrollments in 2013 were from learning centers operating outside their authorized scope of business in their business licenses and 11.4% of our student enrollments in 2013 were from learning centers operated by schools outside their approved districts or without proper registration.

See “Risk Factors” and “Special Note Regarding Forward-Looking Statements” for a discussion of these and other risks and uncertainties associated with our business and investing in our ADSs.

Corporate History and Structure

We began our operations in Beijing in September 2002 through Beijing Tarena Technology Co., Ltd. In November 2012, we changed the name of Beijing Tarena Technology Co., Ltd. to Tarena Technologies Inc., or Tarena Tech. Tarena International, Inc. was incorporated in the Cayman Islands in October 2003 and became our ultimate holding company. We established Tarena Hong Kong Limited, or Tarena HK, as our wholly-owned subsidiary in October 2012. Tarena HK wholly owns Tarena Software Technology (Hangzhou) Co., Ltd., or Tarena Hangzhou, an entity that we established in January 2013.

Prior to 2012, we conducted a substantial portion of our operations through our consolidated variable interest entities, or VIEs, and their subsidiaries and schools. On January 30, 2012, the new PRC Catalogue for the Guidance of Foreign Investment Industries (amended) became effective, which listed professional education service as an industry for which foreign investments are “encouraged” by the government. In light of such change of law, starting from the second half of 2012, we began to transfer the operations, including related assets and liabilities, of our consolidated VIEs to Tarena Tech and its subsidiaries and schools. As of December 31, 2013, all of our learning center operations of VIEs have been transferred to Tarena Tech and its subsidiaries and schools. We are in the process of winding down Shanghai Tarena Software Technology Co., Ltd., or Shanghai Tarena. We expect to continue to control and consolidate Beijing Tarena, which holds an ICP license that is necessary for the operation of our www.it211.com.cn website. For a detailed description of the risks associated with our corporate structure and the contractual arrangements we have entered into with our VIEs, see “Risk Factors—Risks Related to Our Corporate Structure.”

The table below sets forth the respective revenues contribution and assets of Tarena and our wholly-owned subsidiaries and our consolidated VIEs as of the dates and for the periods indicated:

 

     Net Revenues(1)      Total Assets(1)  
   For the year ended
December 31, 2012
     For the year ended
December 31, 2013
     As of December 31,
2013
 

Tarena and its wholly-owned subsidiaries

     67.7%         92.0%         96.8%   

Consolidated VIEs

     32.3%         8.0%         3.2%   
  

 

 

    

 

 

    

 

 

 

Total

     100%         100%         100%   
  

 

 

    

 

 

    

 

 

 

 

Note:
(1) The percentages exclude the inter-company transactions and balances between Tarena and wholly-owned subsidiaries and the consolidated VIEs.

 

 

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A list of our subsidiaries and VIEs is filed as exhibit 21.1 to the registration statement to which this prospectus is a part. The following diagram illustrates our current corporate structure:

 

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Notes:

(1) Mr. Shaoyun Han, our founder, chairman and chief executive officer, owns 70% of the equity interest in Beijing Tarena. Mr. Jianguang Li, our director, owns 30% of the equity interest in Beijing Tarena.
(2) Mr. Shaoyun Han and Mr. Jianguang Li own 49% and 51% of the equity interest in Shanghai Tarena, respectively.
(3) Shanghai Tarena is in the process of voluntary winding down.
(4) Tarena (Wuhan) Technology Co., Ltd., which is a wholly-owned subsidiary of Tarena Tech, wholly owns Wuhan Tarena Software Co., Ltd., which holds 100% of the sponsorship interest in Wuhan Tarena Professional Education School.
(5) Mr. Shaoyun Han is the principal of Shenyang Tarena Professional Education School, Jinan Tarena Professional Education School, Wuhan Tarena Professional Education School, Chongqing Jiulongpo Tarena Professional Education School and Nanjing Tarena Professional Education School; De Xun Wang is the principal of Guangzhou Tarena Professional Education School and Shenzhen Bao’an Tarena Professional Education School; Xuefeng Lu is the principal of Harbin Tarena Professional Education School; Qian Li is the principal of Qingdao Tarena Professional Education School; Ning Ding is the principal of Kunming Guandu Tarena Professional Education School; and Nini Tong is the principal of Zhuhai Tarena Professional Education School.

 

 

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Corporate Information

Our current principal executive offices are located at Suite 10017, Building E, Zhongkun Plaza, A18 Bei San Huan West Road, Haidian District, Beijing, 100098, PRC. Our telephone number at this address is +86 10 6213-5687. Pursuant to our agreement with the local government in Hangzhou, China, we placed certain of our management and administrative functions in our offices in Hangzhou. Our executive offices in Hangzhou are located at 1/F, Block A, Training Building, 65 Kejiyuan Road, Baiyang Jie Dao, Economic Development District, Hangzhou, 310000, PRC. Our telephone number at this address is +86 571 5602 9509. Our registered office in the Cayman Islands is located at the offices of Codan Trust Company (Cayman) Limited at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands. Our agent for service of process in the United States is Law Debenture Corporate Services Inc. Investors should contact us for any inquiries through the address and telephone number of our principal executive offices.

Our website is www.tarena.com.cn. The information contained on our website is not a part of this prospectus.

Implications of Being an Emerging Growth Company

As a company with less than US$1.0 billion in revenue for the last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

We will remain an emerging growth company until the earliest of (i) the last day of our fiscal year during which we have total annual gross revenues of at least US$1.0 billion; (ii) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (iii) the date on which we have, during the previous three year period, issued more than US$1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

 

 

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Conventions Which Apply to this Prospectus

Except where the context otherwise requires and for purposes of this prospectus only:

 

    “ADSs” refer to American depositary shares, representing our Class A ordinary shares; each ADS represents one Class A ordinary share;

 

    “China” or “PRC” refers to the People’s Republic of China, excluding, for the purpose of this prospectus only, Taiwan, Hong Kong and Macau;

 

    “IT” refers to information technology;

 

    “ordinary shares” refer to the Class A and Class B ordinary shares of Tarena, par value US$0.001 per share;

 

    “preferred shares” refer to Series A, Series B and Series C convertible and redeemable preferred shares of Tarena, par value US$0.001 per share;

 

    “RMB” or “Renminbi” refers to the legal currency of China;

 

    “variable interest entities,” or “VIEs,” refer to Beijing Tarena Jinqiao Technology Co., Ltd. and Shanghai Tarena Software Technology Co., Ltd., which are domestic PRC companies in which we do not have any equity interests but whose financial results have been consolidated into our consolidated financial statements in accordance with U.S. GAAP because we have effective financial control over, and Tarena International, Inc. being the primary beneficiary of, these companies; Shanghai Tarena Software Technology Co., Ltd. is in the process of voluntary winding down;

 

    “we,” “us,” “our company,” “our,” and “Tarena” refer to Tarena International, Inc., a Cayman Islands company, and, in the context of describing our operations and consolidated financial information, also include its subsidiaries, schools, VIEs, subsidiaries of VIEs and schools of VIEs.

We gather data on post-course job placement rates and average starting salary by conducting surveys of our graduates. Based on the survey responses, we calculate the six-month post-course job placement rates for a year by dividing the number of job-seeking students enrolled in such year who indicated that they had begun employment within six months of graduation by the total number of job-seeking students enrolled in such year. We calculate the average starting salary of our students for a year by averaging the starting salary reported by job-seeking students enrolled in such year who indicated that they had begun employment within six months of graduation.

We calculate the student-to-instructor ratio and the average net revenues per instructor for our Java courses for a period using the average number of instructors for such period, which is computed by adding the number of Java instructors at the beginning of such period and at the end of such period, and then dividing the sum by two.

We calculate the retention rate of our instructors in a year by dividing the number of instructors at the end of such year by the sum of the number of instructors at the beginning of such year and the number of newly hired instructors in such year.

This prospectus contains information and statistics relating to China’s economy and the industries in which we operate derived from various publications issued by market research companies and PRC governmental entities, which have not been independently verified by us, the underwriters or any of their respective affiliates or advisers. The information in such sources may not be consistent with other information compiled in or outside of China.

Certain operating data, economic and market data and regulatory information shown in Renminbi amounts in this prospectus are accompanied by translations into U.S. dollars solely for the convenience of the reader. Unless

 

 

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otherwise noted, all such translations from Renminbi to U.S. dollars in this prospectus were made at RMB6.0537 to US$1.0000, the noon buying rate for December 31, 2013 set forth in the H.10 statistical release of the Federal Reserve Board. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. The PRC government restricts the conversion of Renminbi into foreign currency and foreign currency into Renminbi for certain types of transactions. On March 7, 2014, the noon buying rate set forth in the H.10 statistical release of the Federal Reserve Board was RMB6.1258 to US$1.0000.

 

 

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The Offering

The following information assumes that the underwriters will not exercise their option to purchase additional ADSs in the offering, unless otherwise indicated.

 

Offering price

We currently estimate that the initial public offering price will be between US$8.00 and US$10.00 per ADS.

 

ADSs offered by us

11,500,000 ADSs.

 

ADSs offered by the selling shareholders

3,800,000 ADSs.

 

Concurrent Private Placement

Concurrently with, and subject to, the completion of this offering, New Oriental Education & Technology Group Inc., the largest provider of private educational services in China and a non-US entity, has agreed to purchase from us US$13.5 million of our Class A ordinary shares at a price per share equal to the initial public offering price adjusted to reflect the ADS-to-ordinary share ratio. Assuming an initial offering price of US$9.00 per ADS, the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus, New Oriental Education & Technology Group Inc. will purchase a total of 1,500,000 Class A ordinary shares from us. Our proposed issuance and sale of Class A ordinary shares to New Oriental Education & Technology Group Inc. is being made through a private placement pursuant to an exemption from registration with the U.S. Securities and Exchange Commission under Regulation S promulgated under the Securities Act. Under the subscription agreement executed on March 19, 2014, the completion of this offering is the only substantive closing condition precedent for this private placement, and if this offering is completed, this private placement will be completed at the same time as the completion of this offering. New Oriental Education & Technology Group Inc. has agreed with the underwriters not to, directly or indirectly, sell, transfer or dispose of any Class A ordinary shares acquired in the private placement for a period of 180 days after the date of this prospectus, subject to certain exceptions.

 

Ordinary shares outstanding immediately after this offering

We will adopt a dual class ordinary share structure immediately prior to the completion of this offering. Immediately upon the completion of this offering, 50,657,389 ordinary shares will be outstanding, comprised of (i) 16,800,000 Class A ordinary shares, par value US$0.001 per share (or 19,095,000 Class A ordinary shares if the underwriters exercise their option to purchase additional ADSs in full), including 1,500,000 Class A ordinary shares we will issue in the concurrent private placement, which number of shares has been calculated based on an initial offering price of US$9.00 per ADS, the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus, and (ii) 33,857,389 Class B ordinary shares, par value US$0.001 per share (or 31,562,389 Class B

 

 

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ordinary shares if the underwriters exercise their option to purchase additional ADSs in full). Class B ordinary shares outstanding immediately after the completion of this offering will represent 66.8% of our total outstanding shares and 95.3% of the then total voting power (or 62.3% of our total outstanding shares and 94.3% of the then total voting power if the underwriters exercise their option to purchase additional ADSs in full).

 

ADSs outstanding immediately after this offering

15,300,000 ADSs (or 17,595,000 ADSs if the underwriters exercise their option to purchase additional ADSs in full).

 

The ADSs

Each ADS represents one Class A ordinary share, par value US$0.001 per share.

 

  The depositary will hold the Class A ordinary shares underlying your ADSs. You will have rights as provided in the deposit agreement.

 

  If we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our Class A ordinary shares, after deducting its fees and expenses.

 

  You may turn in your ADSs to the depositary in exchange for Class A ordinary shares. The depositary will charge you fees for any exchange.

 

  We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended.

 

  To better understand the terms of the ADSs, you should carefully read the “Description of American Depositary Shares” section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.

 

Ordinary shares

We will issue 11,500,000 Class A ordinary shares represented by our ADSs in this offering.

 

  All of our existing ordinary shares will be redesignated as Class B ordinary shares and all of our outstanding preferred shares will be redesignated or automatically converted into Class B ordinary shares on a one-for-one basis immediately prior to the completion of this offering.

 

  All options, regardless of grant dates, will entitle holders to the equivalent number of Class A ordinary shares once the vesting and exercising conditions on such share-based compensation awards are met.

 

  Immediately upon the completion of this offering, we will have 33,857,389 Class B ordinary shares outstanding.

 

 

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  Holders of Class A ordinary shares will be entitled to one vote per share, while holders of Class B ordinary shares will be entitled to ten votes per share on all matters subject to shareholders’ vote.

 

  Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder to any person or entity which is not an affiliate of such holder, such Class B ordinary shares will be automatically and immediately converted into the equivalent number of Class A ordinary shares.

 

  See “Description of Share Capital.”

 

Option to purchase additional ADSs

IDG Technology Venture Investments, LP, one of the selling shareholders, has granted to the underwriters an option, which is exercisable within 30 days from the date of this prospectus, to purchase up to an additional 2,295,000 ADSs.

 

Use of proceeds

The primary purposes of this offering are to create a public market for our shares for the benefit of all shareholders, retain talented employees by providing them with equity incentives and obtain additional capital. We plan to use the net proceeds of this offering and the concurrent private placement primarily for general corporate purposes, which may include investing in course development, expanding our learning center network, sales and marketing activities, technology infrastructure, capital expenditures, improving facilities and other general and administrative matters. We may also use a portion of the net proceeds for investing in, or acquiring, complementary businesses, although we have not identified any near-term investment or acquisition targets.

 

  See “Use of Proceeds” for additional information.

 

  We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.

 

Lock-up

We, our directors and executive officers, our existing shareholders certain of our option holders and New Oriental Education & Technology Group Inc. have agreed with the underwriters, subject to certain exceptions, not to sell, transfer or dispose of, directly or indirectly, any of our ADSs or ordinary shares or securities convertible into or exercisable or exchangeable for our ADSs or ordinary shares for a period of 180 days after the date of this prospectus. See “Shares Eligible for Future Sale” and “Underwriting” for more information.

 

Proposed NASDAQ Global Market symbol

We have applied to have the ADSs listed on the NASDAQ Global Market under the symbol “TEDU.” Our ADSs and ordinary shares will not be listed on any other stock exchange or traded on any automated quotation system.

 

 

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Payment and settlement

The underwriters expect to deliver the ADSs against payment therefor through the facilities of the Depository Trust Company on             , 2014.

 

Depositary

Citibank, N.A.

 

Directed share program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 765,000 ADSs offered by this prospectus to our directors, officers, employees, business associates and related persons.

 

Conflicts of Interest

Goldman Sachs (Asia) L.L.C., one of the participating underwriters, and/or its affiliates beneficially own in excess of 10% of our issued and outstanding shares and as a result are deemed to be our “affiliate” and to have a “conflict of interest” with us within the meaning of the Financial Industry Regulatory Authority, Inc., or FINRA, Rule 5121, or Rule 5121. Therefore, this offering will be conducted in accordance with Rule 5121, which requires that Goldman Sachs (Asia) L.L.C. will not make sales to discretionary accounts without the prior written consent of the account holder and that a qualified independent underwriter, or QIU, as defined in Rule 5121, participate in the preparation of the registration statement of which this prospectus forms a part and perform its usual standard of due diligence with respect thereto. Credit Suisse Securities (USA) LLC is acting as QIU for this offering.

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of risks that you should carefully consider before investing in our ADSs.

The number of ordinary shares that will be outstanding immediately after this offering:

 

    assumes re-designation or conversion of all outstanding ordinary shares and Series A, B and C preferred shares into 37,657,389 Class B ordinary shares immediately upon the completion of this offering;

 

    includes 1,500,000 Class A ordinary shares we will issue and sell in a concurrent private placement to New Oriental Education & Technology Group Inc., assuming an initial public offering price of US$9.00 per ADS, the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus; and

 

    excludes 9,940,614 Class A ordinary shares issuable upon the exercise of options outstanding as of the date of this prospectus, at a weighted average exercise price of US$2.46 per share.

 

 

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Our Summary Consolidated Financial Data and Operating Data

The following summary consolidated statements of comprehensive income data (other than ADS data) for the years ended December 31, 2011, 2012 and 2013 and the summary consolidated balance sheet data as of December 31, 2012 and 2013 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. Our historical results for any period are not necessarily indicative of results to be expected for any future period. You should read the following summary financial information in conjunction with the consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

     For the Year Ended December 31,  
     2011     2012     2013  
     (in thousands of US$, except for share, per
share and per ADS data)
 

Summary Consolidated Statements of Comprehensive Income Data:

      

Net revenues

     25,741        56,820        92,834   

Cost of revenues(1)

     (8,714     (17,762     (29,068

Gross profit

     17,027        39,058        63,766   

Operating expenses(1):

      

Selling and marketing

     (7,676     (16,875     (30,252

General and administrative

     (7,832     (9,948     (16,224

Research and development

     (1,159     (1,792     (3,807

Operating income

     360        10,443        13,483   

Interest income

     275        1,165        1,541   

Income before income taxes

     840        11,771        16,318   

Income tax expense

     (139     (2,219     (2,271

Net income

     701        9,552        14,047   

Net loss attributable to ordinary shareholders

     (9,593     (16,993     (30,313

Weighted average number of ordinary shares used in per share calculations:

      

Basic

     12,518,419        10,851,287        10,930,412   

Diluted

     12,518,419        10,851,287        10,930,412   

Income (loss) per ordinary share

      

Basic

     (0.77     (1.57     (2.77

Diluted

     (0.77     (1.57     (2.77

Income (loss) per ADS(2)

      

Basic

     (0.77     (1.57     (2.77

Diluted

     (0.77     (1.57     (2.77

 

 

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Notes:

(1) Share-based compensation expenses were allocated in cost of revenues and operating expenses as follows:

 

     For the Year Ended
December 31,
 
     2011      2012      2013  
     (in thousands of US$)  

Cost of revenues

     —           —           17   

Selling and marketing expenses

     1         1         45   

General and administrative expenses

     59         125         654   

Research and development expenses

     3         3         48   

 

(2) Each ADS represents one Class A ordinary share.

 

     As of December 31,  
     2012     2013  
     (in thousands of
US$)
 

Summary Consolidated Balance Sheet Data:

    

Cash and cash equivalents

     16,197        26,139   

Accounts receivable, net of allowance for doubtful accounts

     16,984        15,417   

Property and equipment, net

     8,172        12,806   

Total assets

     46,870        73,673   

Deferred revenue

     9,656        15,487   

Total liabilities

     14,738        25,578   

Total mezzanine equity

     67,099        111,379   

Total shareholders’ deficit

     (34,967     (63,284

The following tables present our summary operating data as of the dates and for the periods indicated:

 

     For the Year Ended
December 31,
 
     2011      2012      2013  

Student enrollments(1)

     16,282         31,340         46,458   

 

Note:

(1) The number of student enrollments as presented does not include student enrollments at our two franchised learning centers in Taiyuan and Xi’an.

 

     As of December 31,  
     2011      2012      2013  

Learning centers(1)

     34         57         92   

 

Note:

(1) The number of learning centers as presented does not include our two franchised learning centers in Taiyuan and Xi’an.

 

 

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RISK FACTORS

An investment in our ADSs involves significant risks. You should carefully consider all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.

Risks Related to Our Business

If we are not able to continue to attract students to enroll in our courses, our business and prospects will be materially and adversely affected.

The success of our business depends primarily on the number of students enrolled in our courses. Therefore, our ability to continue to attract students to enroll in our courses is critical to the continued success and growth of our business. This in turn will depend on several factors, including our ability to develop new courses and enhance existing courses to respond to changes in market trends and student demands, expand our learning center network and geographic footprint, manage our growth while maintaining consistent and high education quality, broaden our relationships with corporate employers and market our courses effectively to a broader base of prospective students. Furthermore, our ability to attract students also depends on our ability to provide educational content that is perceived as more effective than the standard curricula of universities in China in terms of practical job-oriented training. If we are unable to continue to attract students to enroll in our courses, our net revenues may decline, which may have a material adverse effect on our business, financial condition and results of operations

We may not be able to continue to recruit, train and retain qualified instructors and teaching assistants, who are critical to the success of our business and effective delivery of our education services to students.

Our instructors and teaching assistants are critical to maintaining the quality of our educational services and our reputation. We seek to hire highly qualified instructors with rich industry experience and strong teaching skills. We recruit dedicated teaching assistants primarily from outstanding graduates of our courses. There is a limited pool of instructors and teaching assistants with these attributes and we must provide competitive compensation packages to attract and retain them. We must also provide ongoing training to our instructors and teaching assistants to ensure that they stay abreast of changes in curriculum, student demands, industry standards and other trends necessary to teach and tutor effectively. We have not experienced major difficulties in recruiting, training or retaining qualified instructors and teaching assistants in the past. However, we may not always be able to recruit, train and retain enough qualified instructors and teaching assistants in the future to keep pace with our growth and maintain consistent education quality. A shortage of qualified teaching staff, a decrease in the quality of our teaching staff’s classroom performance, whether actual or perceived, or a significant increase in compensation to retain qualified instructors and teaching assistants would have a material adverse effect on our business, financial condition and results of operations.

If we are not able to continually tailor our curriculum to market demand and enhance our courses to adequately and promptly respond to developments in the professional job market, our courses may become less attractive to students.

New trends in the global economy and rapid developments in the professional services industries may change the type of skills required for professionals in the marketplace. This requires us to continually develop, update and enhance our course materials to adapt to the needs of the professional job market in China. We may be unable to update our courses in a timely and cost-effective manner, or at all, to keep pace with changes in market requirements. Any inability to track and respond to these changes in a cost-effective and timely manner or to tailor our courses to the professional services markets in China would render our courses less attractive to

 

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students, which may materially and adversely affect our reputation and ability to continue to attract students and cause us to lose market share.

If we fail to develop and introduce new courses in anticipation of market demand in a timely and cost-effective manner, our competitive position and ability to generate revenues may be materially and adversely affected.

Since inception, our primary focus has been on providing IT professional education services. We have since expanded our course offerings to include non-IT training courses, including digital art and online sales and marketing. We intend to continue developing new courses in anticipation of market demand. The introduction of new courses is subject to risks and uncertainties. Unexpected technical, operational, logistical, regulatory or other problems could delay or prevent the introduction of one or more new courses. Moreover, we cannot assure you that any of these new courses will match the quality or popularity of those developed by our competitors, achieve widespread market acceptance or generate the desired level of income for our students.

Offering new courses requires us to make investments in content development, recruit and train additional qualified instructors and teaching assistants, increase marketing efforts and re-allocate resources away from other uses. We may have limited experience with the content of new courses and may need to modify our systems and strategies to incorporate new courses into our existing course offerings. In offering courses in new subject areas, we may face new risks and challenges that we are not familiar with. Furthermore, we may experience difficulties in recruiting or otherwise identifying qualified instructors to develop the content for these new courses. If we are unable to offer new courses in a timely and cost-effective manner, our results of operations and financial condition could be adversely affected.

We rely on Java and C++ courses for a substantial portion of our total net revenues, and a decrease in the popularity and usage of Java and/or C++ in the IT industry would have a material adverse effect on our business and results of operations.

A substantial portion of our total net revenues are generated from Java and C++ courses. In 2011, 2012 and 2013, our Java courses contributed 70.6%, 71.3% and 59.3% of our total net revenues, respectively. During the same periods, C++ courses contributed 12.4%, 12.5% and 12.0% of our total net revenues, respectively. The rapid growth of our business has been driven by the popularity and usage of Java and C++ in the IT industry, and we expect net revenues from these two courses to continue to represent a substantial portion of our total net revenues in the near future. We believe our reliance on Java and C++ courses is mainly attributable to the wide adoption of Java and C++ in the IT industry. However, whether Java or C++ as programming languages can maintain their popularity in the industry is beyond our control. Any factor that materially and adversely affects student enrollment in our Java or C++ courses, such as a decrease in the popularity and usage of Java or C++ in the IT industry, would have a material adverse effect on business and our results of operations.

Our business depends on the market recognition of our brand, and if we are unable to maintain or enhance our brand recognition, our business, financial condition and results of operations may be materially and adversely affected.

We believe that the market recognition of our “Tarena ( LOGO )” brand has significantly contributed to the success of our business and believe that maintaining and enhancing the reputation of this brand is critical to sustaining our competitive advantage. Our ability to maintain and enhance our brand recognition and reputation depends primarily on the perceived effectiveness and quality of our courses as well as the success of our marketing and promotion efforts. As we continue to grow and expand into new course areas, we may not be able to maintain the quality and consistency of our educational services as we did in the past. We have devoted significant resources to promoting our courses and brand in recent years, including Internet-based marketing and advertising, traditional media advertising and sponsoring industry trade seminars and software design

 

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competitions. However, our marketing and promotion efforts may not be successful or may negatively impact our brand recognition and reputation inadvertently. For example, if any governmental authority or competitor publicly alleges that any of our advertisements are misleading, our brand reputation may be adversely impacted. If we are unable to maintain and further enhance our brand recognition and reputation and increase awareness of our courses, or if we incur excessive marketing and promotion expenses, our results of operations may be materially and adversely affected. If we are unable to sustain our brand image, we may not be able to maintain premium tuition fees over our competitors, which may further exacerbate the extent of any adverse effect on our results of operations. Furthermore, any negative publicity relating to our company or our courses and services, regardless of its veracity, could harm our brand image and in turn materially and adversely affect our business and operating results.

We may not be able to maintain our high job placement rate for students, which could harm our ability to attract student enrollments.

Our student job placement rate depends on a wide range of external and internal factors. External factors include the macroeconomic conditions, the performance of the professional services sector in China and the recruiting demand of corporate employers. Internal factors include our education quality, the efforts of our career services personnel, our ability to provide adequate staffing to achieve desired results and our relationships with corporate employers. A number of such external and internal factors are outside of our control. Our historical job placement rates have been high, with our six-month post-course job placement rates for students enrolled in 2011 and 2012 have averaged over 90%. However, we cannot assure you that we will be able to maintain our current level of job placement rate for our students in the future. Any decrease in our job placement rate could harm our ability to recruit students, which may materially and adversely affect our business, financial condition and results of operations.

Our business, financial condition and results of operations may be adversely affected by a downturn in the global or Chinese economy.

Because our student enrollment may depend on our students’ and potential students’ levels of disposable income, perceived job prospects and willingness to spend, as well as the level of hiring demand of professional services positions our business and prospects may be affected by economic conditions in China or globally. The global financial markets experienced significant disruptions in 2008 and the United States, Europe and other economies went into recession. The recovery from the lows of 2008 and 2009 was uneven and is continuously facing new challenges, including the escalation of the European sovereign debt crisis since 2011 and the slowdown of the Chinese economy in 2012. Economic conditions in China, including the performance of the IT and other professional services industries, are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. A decline in the economic prospects of IT and other professionals could alter current or prospective students’ spending priorities and the recruiting demand from professional service industries. We cannot assure you that professional education spending in general or with respect to our course offerings in particular will increase, or not decrease, from current levels. Therefore, a slowdown in China’s economy or the global economy may lead to a reduction in demand for professional education services, which could materially and adversely affect our financial condition and results of operations.

If we fail to successfully execute our growth strategies, our business and prospects may be materially and adversely affected.

Our growth strategies include growing our student enrollments for existing courses, expanding our course offerings, further enhancing the quality of our education services and expanding our corporate employer network. We may not succeed in executing our growth strategies due to a number of factors, including, without limitation, the following:

 

    we may fail to market our courses in new markets or promote new courses in existing markets effectively;

 

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    we may not be able to replicate our successful business model in other geographic markets or in new course subject areas;

 

    we may fail to identify new cities with sufficient growth potential to expand our network;

 

    we may not be able to recruit and retain learning center managers, teaching assistants and other key personnel;

 

    our analysis for selecting suitable new locations may not be accurate and the demand for our services at such new locations may not materialize or increase as rapidly as we expect;

 

    we may fail to obtain the requisite licenses and permits necessary to open learning centers at our desired locations from local authorities;

 

    we may not be able to continue to update our existing courses or offer new courses to adapt to changing market demand and technological advances; and

 

    we may fail to achieve the benefits we expect from our expansion.

If we fail to execute our growth strategies successfully, we may not be able to maintain our growth rate and our business and prospects may be materially and adversely affected as a result.

We may not be able to manage our business expansion effectively, which could harm our financial condition and results of operations.

We have expanded rapidly and we plan to continue to expand our operations in different geographic areas as we address the growth in our customer base and market opportunities. We increased the number of our learning centers from 34 as of December 31, 2011 to 92 as of December 31, 2013. This expansion has resulted, and will continue to result, in substantial demands on our management, personnel and operational, technological and other resources. To manage the expected growth of our operations, we will be required to expand our existing operational, administrative and technological systems and our financial systems, procedures and controls and to expand training and management of our growing employee base. In addition, the geographic dispersion of our operations requires significant management resources. We cannot assure you that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations, or that we will be able to effectively and efficiently manage the growth of our operations or recruit and retain qualified personnel to support our expansion. Any failure to effectively and efficiently manage our expansion may materially and adversely affect our ability to capitalize on new business opportunities, which in turn may have a material adverse effect on our financial condition and results of operations.

The growth of our business is in part dependent on our continuing access to a broad network of corporate employers.

We have placed students with approximately 35,000 corporate employers since our inception. We derive both direct benefits, such as increased enrollment driven by employer-specific customized courses, and indirect benefits, such as higher student job placement rate and strengthening of the Tarena brand, from our access to these corporate employers. We believe our access to a large number of corporate employers in a wide range of industries is one of our core competitive strengths. If our access to these corporate employers were to become constrained or limited, or the benefits we derive from these access were to be diminished, whether by our own actions or actions of our competitors, our growth prospects and our business would be harmed.

Our success depends on the continuing efforts of our senior management team and other key personnel and our business may be adversely affected if we lose their services.

Our future success depends heavily upon the continuing services of our senior management team. If any member of our senior management team leaves us and we fail to effectively manage a transition to new

 

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personnel, or if we fail to attract and retain experienced and passionate instructors, regional managers and other key personnel on acceptable terms, our business, financial conditions and results of operations could be adversely affected. We will need to continue to hire additional personnel, especially qualified instructors and regional managers, as our business grows. A shortage in the supply of personnel with requisite skills or our failure to attract and retain high quality executives or key personnel could impede our ability to increase revenues from our existing courses, to launch new course offerings and to expand our operations and would have an adverse effect on our business and financial results.

Mr. Shaoyun Han, our founder, chairman and chief executive officer, has played an important role in the growth and development of our business since its inception. To date, we have relied heavily on Mr. Han’s expertise in, and familiarity with, our business operations, his leadership, and his reputation in the professional education services industry. If Mr. Han is unable or unwilling to continue in his present positions, we may not be able to easily replace him and may incur additional expenses to identify and train his successor. We do not maintain key man insurance on Mr. Han.

The operations of certain of our learning centers are, or may be deemed by relevant PRC government authorities to be, beyond their authorized business scope or without proper license or registration. If the relevant PRC government authorities take actions against such learning centers, our business and operations could be materially and adversely affected.

The principal regulations governing private education in China consist of the Education Law of the PRC, the Law for Promoting Private Education and the Implementation Rules for the Law for Promoting Private Education. Under these PRC laws and regulations and related administrative requirements, to provide professional education services, a company may, in the capacity of a school sponsor, establish a private school which obtains a school permit from the human resources and social security authorities under the Law for Promoting Private Education, and such school can then establish and operate learning centers within the approved districts to provide professional education services, provided that learning centers located outside the registered address of the private schools shall be registered with original approving authorities. Alternatively, a company may obtain approval from the competent industry and commerce administration authorities to include the relevant professional education services in the authorized scope of business as specified in the business licenses of such company. A company with “professional education services” or an equivalent statement included in its approved scope of business can operate learning centers by itself or through its registered branches.

However, many local government authorities have different views on the relevant rules and regulations and have adopted different practices in granting school permits to private schools or issuing business licenses to companies that provide professional education services. Although some cities, such as Beijing, Shanghai and Hangzhou, allow companies to include “professional education services” in their business scope, the industry and commerce administration authorities in certain other areas have adopted regional policies of not allowing “professional education services” or similar statement to be included in the business scope of any company. In addition, when we applied for school permits or registrations of learning centers, the local human resources and social security authorities in some cities in China have either informed us that no school permits will be issued to new private schools in their jurisdictions or that they do not permit new learning centers established by private schools to be registered. These regional policies and practices have created significant obstacles for us to comply with all applicable rules and regulations for all of our local operations.

We use both ways discussed above to establish learning centers. As of December 31, 2013, we operated a total of 92 learning centers, of which 29 were operated by schools and 63 were operated by our subsidiaries. Among the learning centers currently operated by our subsidiaries, 24 are operated by our subsidiaries or their registered branches that have neither professional education services nor education information-related consultation as an authorized scope of business in their licenses as of the date of this prospectus, and these learning centers in the aggregate accounted for 21.3% of our student enrollments in 2013. We were not able to include professional education services in these companies’ authorized business scope mainly because the

 

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industry and commerce administration authorities in the relevant areas have a general local policy prohibiting the inclusion of “professional education services” in the business scope of any company. In addition, eight learning centers are operated by our subsidiaries that only have “education information-related consultation” rather than “professional education services” in their respective authorized scopes of business as of the date of this prospectus, and these learning centers in the aggregate accounted for 6.4% of our student enrollments in 2013. The difference between “educational services” and “education information-related consultation” is not very clear under applicable PRC laws and regulations, and it is possible that the relevant PRC government authorities may determine that operating learning centers in the way as currently conducted by our relevant subsidiaries is beyond the scope of “education information-related consultation.” For these learning centers, we have been communicating, and will continue to communicate, with the competent industry and commerce administration authorities to expand the authorized business scope of the relevant subsidiaries to include “professional education services” or similar statement. For regions where it becomes apparent that we will not be able to expand the authorized business scope of the relevant subsidiaries, we will also explore the possibility of obtaining approval from the competent authorities to set up private schools to take over the operations of the relevant subsidiaries. If the relevant PRC government authorities discover or determine that our subsidiaries operate beyond their authorized business scope, they may order the relevant subsidiaries to complete the registration for change of business scope within a given period, failing which each company is subject to a one-time fine of RMB10,000 (US$1,652) to RMB100,000 (US$16,519), or may be ordered to cease its operation. We have been fined once for RMB50,000 (US$8,259) for conducting business outside the authorized business scope since 2011.

For our learning centers operated by schools, we are also required to obtain and maintain various licenses and permits and make filings for each learning center with the competent human resources and social security authorities and civil affairs authorities. As of the date of this prospectus, three of our learning centers are operated by schools outside their approved districts without obtaining relevant licenses and permits, and 14 of our learning centers are operated by schools outside their registered address without being registered with the original approving authorities, which may subject us to fines of RMB10,000 (US$1,652) to RMB50,000 (US$8,259), confiscation of the gains derived from the noncompliant operations or the suspension of the noncompliant learning centers. These 17 learning centers in the aggregate accounted for 11.4% of our total student enrollments in 2013. We were unable to obtain the requisite permits or make the required filings in some districts because the local authorities discontinued granting permits or accepting filings for administrative reasons for a period of time. Although we have not been subject to any material fines or other penalties in relation to any non-compliance of licensing requirements in the past with respect to our learning centers operated by schools, if we fail to cure any non-compliance in a timely manner, we may be subject to fines, confiscation of the gains derived from our noncompliant operations or the suspension of our noncompliant learning centers, which may materially and adversely affect our business and results of operation.

We may lose market share and our profitability may be materially and adversely affected, if we fail to compete effectively with our present and future competitors or to adjust effectively to changing market conditions and trends.

The professional education services market in China is fragmented, rapidly evolving and highly competitive. We face competition in our offered courses and in many of the geographic markets in which we operate. As the IT professional education market in China matures, there is increased demand for highly specialized IT labor, and we may face competition from IT professional education providers that offer specialized training programs targeting certain niche job markets in the IT industry. In the future, we may also face competition from new entrants into the Chinese IT professional education market. As we expand beyond IT education into other fields of professional education, we also face competition for student enrollment from existing large online and offline providers of professional education services, as well as smaller regional professional education services providers in China.

Some of our competitors may be able to devote more resources than we can to the development, promotion and provision of their education services and respond more quickly than we can to changes in student needs,

 

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market trends or new technologies. In addition, some of our competitors may be able to respond faster to changes in student preferences in some of our geographic markets and engage in price-cutting strategies. We cannot assure you that we will be able to compete successfully against current or future competitors. If we are unable to maintain our competitive position or otherwise respond to competitive pressure effectively, we may be forced to reduce our tuition fees and lose our market share, which will adversely impact our profitability.

Our business and financial results may be materially and adversely affected if we are unable to maintain our cooperative relationships with financing service providers for student loans.

A significant portion of our students rely on loans provided or arranged by Bank of Beijing Consumer Finance Company, or BOB CFC, and CreditEase Business Consulting (Beijing) Co., Ltd., or CreditEase, to pay our tuition fees. Historically, a significant portion of our students also relied on loans arranged by Chuanbang Business Consulting (Beijing) Co., Ltd., or Chuanbang, to pay our tuition fees. Chuanbang is owned by Mr. Shaoyun Han, our chief executive officer. We have entered into a cooperative agreement with BOB CFC pursuant to which BOB CFC provides loans to our students for the payment of our tuition fees. We have also entered into agreements with CreditEase and Chuanbang, whereby they assisted our students in obtaining loans to pay for our tuition fees. In 2013, 56.9% of our students took out loans provided or arranged by these three financing service providers to pay for our tuition fees. Chuanbang ceased offering financing services to our students enrolled since January 1, 2014.

Our cooperative agreement with BOB CFC, our most important source of student loans, will expire on August 1, 2014, and we may not be able to renew the agreement on commercially reasonable terms or at all. Moreover, BOB CFC and CreditEase have full discretion in deciding whether or not to extend or arrange for loans to a particular student. Furthermore, macroeconomic conditions in China may force the financing service providers to decrease or eliminate the amount of credit available for our students, making it difficult for our prospective students to afford our education. In addition, if the default rates on the loans provided or arranged by these two financing service providers were to increase, they may raise the interest rates on the student loans, making such financing options less attractive to our students. Although person-to-person lending is generally protected as private loans between individuals under PRC law and has flourished in recent years in China, there are uncertainties as to the licensing requirements and the nature of business provided by those intermediaries, such as CreditEase, in facilitating the person-to-person lending. If one or more new PRC laws and/or regulations are passed in the future prohibiting person-to-person lending facilitated by, or imposing significant licensing requirements on, intermediaries such as CreditEase, we cannot assure you that CreditEase will be able to obtain relevant licenses and continue facilitating person-to-person lending in the future. If CreditEase ceases to facilitate person-to-person lending to our students in the future, if our cooperative relationships with the financing service providers are damaged or lost, or if the financing service providers significantly increase their interest rates, our business and financial results would be adversely affected.

If we fail to protect our intellectual property rights, we may lose our competitive advantage and our brand and operations may suffer.

We consider our copyrights, trademarks, trade names and domain names invaluable to our ability to continue to develop and enhance our brand recognition. Unauthorized use of our copyrights, trademarks, trade names and domain names may damage our reputation and brand. Our major brand names and logos are registered trademarks in China. Our proprietary curricula and course materials, together with our TTS, are protected by copyrights. However, preventing copyright, trademark and trade name infringement or misuse could be difficult, costly and time-consuming, particularly in China. The measures we take to protect our copyrights, trademarks and other intellectual property rights are currently based upon a combination of trademark and copyright laws in China and may not be adequate to prevent unauthorized uses. Furthermore, application of laws governing intellectual property rights in China is uncertain and evolving, and could involve substantial uncertainties to us. There had been several incidents in the past where third parties used our “Tarena ( LOGO )” brand without our authorization, and we had to resort to litigation to protect our intellectual property rights. These proceedings were

 

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all resolved in our favor and our brand and business were not materially harmed. However, if we are unable to adequately protect our trademarks, copyrights and other intellectual property rights in the future, we may lose our competitive advantage, our brand name may be harmed and our business may suffer materially. Furthermore, our management’s attention may be diverted by violations of our intellectual property rights, and we may be required to enter into costly litigation to protect our proprietary rights against any infringement or violation.

We may be subject to intellectual property rights claims or other claims which could result in substantial costs and diversion of our financial and management resources away from our business.

We cannot assure you that our course materials, other educational contents or other intellectual properties developed or used by us do not or will not infringe upon patents, valid copyrights or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others. In addition, some of our employees were previously employed at other companies, including our current and potential competitors. To the extent these employees are involved in content development at our company similar to content development in which they have been involved at their former employers, we may become subject to claims that such employees or we may have used or disclosed trade secrets or other proprietary information of the former employers of our employees. In addition, our competitors may file lawsuits against us. Although we are not aware of any pending or threatened claims, if any such claim arises in the future, litigation or other dispute resolution proceedings may be necessary to retain our ability to offer our current and future course materials or other content, which could result in substantial costs and diversion of our financial and management resources. Furthermore, if we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property rights, incur additional costs to license or develop alternative intellectual property rights and be forced to pay fines and damages, any of which may materially and adversely affect our business.

We recruit a significant portion of our students directly from our network of cooperative universities and colleges. If we lose these relationships, or the benefits we derive from these relationships diminish, our growth and our business may be harmed.

We have established various kinds of cooperative relationships with over 500 universities and colleges in China. We enroll a significant percentage of our students directly from these universities and colleges through jointly offered majors, on-campus learning sites and university recruiting promotional events. We recruited approximately 22.9% of our students in 2013 from these universities and colleges. If our relationships with any of these universities and colleges were to be damaged or lost, or the benefits we derive from these relationships were to be diminished, whether by our own actions, actions of one or more governmental entities or actions of our competitors, our growth and our business may be harmed.

Failure to control rental costs, obtain leases at desired locations at reasonable prices or protect our leasehold interests could materially and adversely affect our business.

All of our offices and learning centers are located on leased premises. At the end of each lease term we must negotiate an extension of the lease. If we are not able to negotiate an extension on terms acceptable to us, we will be forced to move to a different location, or the rent may increase significantly. This could disrupt our operations and adversely affect our profitability. All of our leases are subject to renewal at market prices, which could result in a substantial rent increase each renewal period. We compete with many other businesses for sites in certain highly desirable locations. As a result, we may not be able to obtain new leases at desirable locations or renew our existing leases on acceptable terms or at all, which could adversely affect our business. In addition, we have not been able to receive from our lessors copies of title certificates or proof of authorization to lease the properties to us for leased properties of approximately 35,300 square meters, which consisted of approximately 33% of our total leased property as of December 31, 2013. We cannot assure you that title to these properties we currently lease will not be challenged. Furthermore, several of our leased properties are owned by universities or the military or built on allocated land in China. Such properties may not be legally leased to us under PRC law.

 

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Our leasehold interest in these properties may be challenged by relevant PRC governmental authorities to be invalid, and we may be forced to move out of such premises. In addition, we have not registered most of our lease agreements with relevant PRC governmental authorities as required by PRC law, and although failure to do so does not in itself invalidate the leases, we may not be able to defend these leases against bona fide third parties. As of the date of this prospectus, we are not aware of any actions, claims or investigations being contemplated by governmental authorities against us or our lessors with respect to the defects in our leased real properties or any challenges by third parties to our use of these properties. However, if any of our leases are terminated as a result of challenges by third parties or governmental authorities for lack of title certificates or proof of authorization to lease, we may not be able to protect our leasehold interest and may be forced to relocate the affected learning centers and incur additional expenses relating to such relocation. If we fail to find suitable replacement sites in a timely manner or on terms acceptable to us, our business and results of operations could be materially and adversely affected.

Capacity constraints of our learning centers could cause us to lose students to our competitors.

Our learning centers are limited in size and number of classrooms. We may not be able to admit all students who would like to enroll in our courses due to the capacity constraints of our learning centers. If we fail to expand our physical capacity as quickly as the demand for our classroom-based services grows, we could lose potential students to our competitors, which could adversely affect our results of operations and business prospects.

Geographic concentration of our learning centers may unfavorably impact our operations.

We derive a substantial portion of our net revenues from our learning centers in Beijing. Revenue derived from the learning centers in Beijing accounted for 28.8%, 30.6% and 36.1% of our net revenues in 2011, 2012 and 2013, respectively. As a result of this geographic concentration, our results of operations are significantly affected by economic conditions in Beijing. Furthermore, any natural disaster or health epidemics affecting the Beijing region could significantly impact our operations. We expect that we will continue to derive a substantial portion of our net revenues from Beijing in the near future. Deterioration in economic conditions and the professional services industries in this market could decrease the demand for our courses, which in turn could negatively impact our operations and business prospects.

Our historical financial and operating results, growth rates and profitability may not be indicative of future performance.

Although we commenced operations in 2002, our significant business growth and expansion began in 2009. Our business and our prospects must be evaluated in light of the risks and uncertainties encountered by companies at a comparable stage of development. In addition, the professional education services market in China is still at an early stage of development, which makes it difficult to evaluate our business and future prospects. Furthermore, our results of operations may vary from period to period in response to a variety of other factors, including general economic conditions and regulations, government actions pertaining to the professional education services sector in China, changes in spending on professional education services, our ability to control cost of revenues and operating expenses, and non-recurring charges incurred in connection with acquisitions or other extraordinary transactions or under unexpected circumstances. Due to the above factors, some of which are beyond our control, our historical financial and operating results, growth rates and profitability may not be indicative of our future performance and you should not rely on our past results or our historic growth rates as indicators of our future performance.

Our ability to broadcast our lectures live and to offer online learning modules on TTS depends upon the performance and reliability of our systems and the Internet infrastructure and telecommunications networks in China.

We deliver live broadcasts of our lectures via dedicated networks provided by China Telecom or China Unicom to terminals located in selected learning centers with high student enrollment and via public Internet

 

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infrastructure to other learning centers. Any unscheduled service interruption of the Internet infrastructure and telecommunications networks in China could cause us to be unable to deliver these live broadcasts, forcing us to resort to using pre-recorded lectures in the event of such service interruptions. Our inability to broadcast live lectures during service interruptions may damage the quality of our education and student experience, which may hurt our reputation and negatively impact our financial condition and results of operations. Furthermore, our gross profit and net income could be adversely affected if the prices that we pay for telecommunications and Internet services rise significantly.

Our ability to offer online learning modules also depends on the performance and reliability of the Internet infrastructure in China. Disruptions to the Internet infrastructure of China may deny our students access to the learning functionalities on our TTS, which may hinder students from effectively learning our education contents. Furthermore, increases in the traffic on TTS could also strain the capacity of our existing computer systems, which could lead to slower response times or system failures. This would cause a disruption or suspension in our course offerings, which would hurt our brand and reputation and negatively affect our revenue growth. We may need to incur additional costs to improve our systems in order to accommodate increased demand if we anticipate that our systems cannot handle higher traffic volume in the future.

Our transition to a new CRM system may materially and adversely affect our operations

We are in the process of switching our customer relationship management, or CRM, system. The new CRM system is developed in-house and is intended to improve functionality and information flow. As with any major new software system, there are inherent risks in the design, construction, implementation and operation of our new CRM system. These risks include the potential failures to properly design the system, to efficiently construct and implement the system and to effectively operate the system. While we believe that our new CRM system will provide the anticipated IT and customer service enhancements we expect, no assurances can be given in this regard. The failure to properly and efficiently complete and operate the new CRM system could disrupt our operations and adversely affect our financial results.

Accidents or injuries suffered by our students or other people on our premises may adversely affect our reputation, subject us to liability and cause us to incur substantial costs.

We do not carry any liability insurance for our students at our learning centers. In the event of accidents, injuries or other harm to students or other people on our premises, including those caused by or otherwise arising from the actions of our employees on our premises, our facilities may be perceived to be unsafe, which may discourage prospective students from attending our classes. We could also face claims alleging that we were negligent or provided inadequate supervision to our employees and therefore should be held jointly liable for harm caused by them or are otherwise liable for injuries suffered by our students or other people on our premises. A liability claim, even of unsuccessful, against us or any of our employees could adversely affect our reputation, enrollment and revenues, causing us to incur substantial expenses and divert the time and attention of our management.

If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately report our results of operations or prevent fraud or fail to meet our reporting obligations, and investor confidence and the market price of our ADSs may be materially and adversely affected.

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in connection with the audit of our consolidated financial statements as of December 31, 2012 and 2013 and for the three years ended December 31, 2013, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting as of December 31, 2013, as defined in the standards established by the Public Company Accounting Oversight Board of the United States, or PCAOB. The material weakness

 

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identified related to the lack of sufficient personnel with adequate knowledge and experience in accounting for income taxes under U.S. GAAP. Following the identification of the material weakness, we have taken measures and plan to continue to take measures to remedy the material weakness. For details of these remedies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control over Financial Reporting.” However, the implementation of these measures may not fully address the material weakness in our internal control over financial reporting, and we cannot conclude that they have been fully remedied. Our failure to correct the material weakness or our failure to discover and address any other material weakness or deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our ADSs, may be materially and adversely affected. Moreover, ineffective internal control over financial reporting significantly hinders our ability to prevent fraud.

Furthermore, it is possible that, had our independent registered public accounting firm conducted an audit of our internal control over financial reporting, such firm might have identified additional material weaknesses and deficiencies. Upon the completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will require that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the year ending December 31, 2015. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.

Our historical outstanding accounts receivable have been relatively high. Inability to collect our accounts receivable on a timely basis, if at all, could materially and adversely affect our financial condition, liquidity and results of operations.

Understanding the difficulty for recent college graduates to afford the high tuition fees of our courses, we offered students the installment payment option beginning in 2006, which led to our high historical outstanding accounts receivable. We have gradually reduced the installment payment option starting from 2013. As of December 31, 2012 and 2013, our outstanding accounts receivable, net of allowance for doubtful accounts, were

 

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US$17.0 million and US$15.4 million, respectively. Although we conduct financial evaluations of our students, we do not require collateral or other security from our students. Adverse changes in the macroeconomic environmental and the earnings capacity of our students could negatively impact our ability to collect our accounts receivable. Our inability to collect our accounts receivable on a timely basis, if at all, could materially and adversely affect our financial condition, liquidity and results of operations.

We have limited insurance coverage for our operations in China.

Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies do in more developed economies. We have determined that the risks of disruption or liability from our business, the loss or damage to our fixed assets, including our equipment and office furniture, the cost of insuring for these risks, and the difficulties associated with acquiring such insurance on commercially reasonable terms render it commercially impractical for us to have such insurance. As a result, we do not have any liability, business interruption, litigation or property insurance coverage for our operations in China. Any uninsured occurrence of personal injury, loss or damage to fixed assets, or litigation or business disruption may result in the incurrence of substantial costs and the diversion of resources, which could have an adverse effect on our operating results.

Our business is subject to seasonal fluctuations, which may cause our operating results to fluctuate from quarter to quarter. This may result in volatility in and adversely affect the price of our ADSs.

We have experienced, and expect to continue to experience, seasonal fluctuations in our net revenues and results of operations, primarily due to seasonal changes in student enrollment. Historically, our courses tend to have the largest student enrollment, cash collection and net revenues in the third and fourth quarters. We generally generate less tuition fees in the first quarter of each year due to the Chinese New Year holiday. For example, we expect our net revenues in the quarter ended March 31, 2014 to be lower than that in the quarter ended December 31, 2013 primarily due to the Chinese New Year holiday consistent with prior years. Our quarterly cost of revenue, selling and marketing expenses, general and administrative expenses and research and development expenses have generally been increasing in absolute amounts during the period from January 1, 2012 to December 31, 2013 as we expanded our network of learning centers, increased the number of our personnel and enhanced our marketing efforts. We expect quarterly fluctuations in our net revenues and results of operations to continue. These fluctuations could result in volatility and adversely affect the price of our ADSs. As our net revenues grow, these seasonal fluctuations may become more pronounced.

Higher labor costs and inflation in China may adversely affect our business and our profitability.

Labor costs in China have risen in recent years as a result of social development and increasing inflation in China. According to the National Bureau of Statistics of China, the consumer price index in China increased by 5.4%, 2.6% and 2.6% in 2011, 2012 and 2013, respectively. We currently employ over 3,000 employees in China. The increases in labor cost may erode our profitability and materially harm our business, financial condition and results of operations. In addition, PRC government have promulgated some new laws and regulations to enhance labor protection in recent years, such as the Labor Contract Law and the Social Insurance Law, which are also expected to cause our labor costs to increase. As the interpretation and implementation of these new laws and regulations are still evolving, our employment practice may not be at all times be deemed in compliance with the new laws and regulations. If we are subject to severe penalties or incur significant liabilities in connection with labor disputes or investigation, our business and profitability may be adversely affected.

We have granted share options and may grant share options and other share-based awards in the future, which may materially reduce our net income.

We adopted a share incentive plan in 2008, or the 2008 Plan, that permits granting of share options and other share-based awards to our key employees, directors and consultants. Under the 2008 Plan, the maximum

 

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aggregate number of ordinary shares that may be issued pursuant to all awards under our share plan is 8,184,990 shares. In February 2014, we adopted a 2014 share incentive plan, or the 2014 Plan. Pursuant to the 2014 Plan, we may issue options, restricted shares and restricted share units to our qualified employees, directors and consultants on a regular basis. The maximum aggregate number of shares which may be issued pursuant to all awards under the 2014 Plan, or the Award Pool, is 1,833,696, provided that the shares reserved in the Award Pool shall be increased on the first day of each calendar year, commencing with January 1, 2015, if the unissued shares reserved in the Award Pool on such day account for less than 2% of the total number of shares issued and outstanding on a fully-diluted basis on December 31 of the immediately preceding calendar year, as a result of which increase the shares unissued and reserved in the Award Pool immediately after each such increase shall equal 2% of the total number of shares issued and outstanding on a fully-diluted basis on December 31 of the immediately preceding calendar year. As a result of grants and potential future grants under the 2008 Plan and the 2014 Plan, we have incurred and will continue to incur share-based compensation expenses. As of December 31, 2013, the unrecognized compensation cost related to unvested options that are not contingent upon our IPO amounted to US$4.0 million, which will be recognized over a weighted average period of approximately 3.71 years. Expenses associated with share-based compensation awards granted under our share plan may materially reduce our future net income. However, if we limit the size of grants under our share plan to minimize share-based compensation expenses, we may not be able to attract or retain key personnel.

Any natural catastrophes, severe weather conditions, health epidemics and other extraordinary events could severely disrupt our business operations.

The occurrence of natural catastrophes such as earthquakes, floods, typhoons, tsunamis or any acts of terrorism may result in significant property damages as well as loss of revenues due to interruptions in our business operations. Health epidemics such as outbreaks of avian influenza, severe acute respiratory syndrome (SARS) or the influenza A (H1N1), and severe weather conditions such as snow storm and hazardous air pollution, as well as the government measures adopted in response to these events, could require the temporary closure of our learning centers.

Furthermore, our ability to broadcast live lectures and provide our education services through TTS depends on the continuing operation of our technology system, which is vulnerable to damage or interruption from natural catastrophes and other extraordinary events. Our disaster recovery planning cannot account for every conceivable possibility. Any damage to or failure of our technology system could result in interruptions in our services, and our brand could be damaged if students believe our systems are unreliable. Such disruptions could severely interfere with our business operations and adversely affect our results of operations.

Risks Related to Our Corporate Structure

If the PRC government finds that the agreements that establish the structure for holding our ICP license do not comply with applicable PRC laws and regulations, we could be subject to severe penalties.

Prior to 2012, we conducted a substantial portion of our operations through our consolidated VIEs and their subsidiaries and schools. On January 30, 2012, the new PRC Catalogue for the Guidance of Foreign Investment Industries (amended) became effective, which listed professional education service as an industry for which foreign investments are “encouraged” by the government. In light of such change of law, starting from the second half of 2012, we began to transfer the operations, including related assets and liabilities, of our consolidated VIEs to Tarena Tech and its subsidiaries and schools. As of December 31, 2013, all of our learning center operations of VIEs have been transferred to Tarena Tech and its subsidiaries and schools. We are in the process of winding down Shanghai Tarena. Pursuant to the Provisions on Administration of Foreign Invested Telecommunications Enterprises promulgated by the PRC State Council on December 11, 2001 and amended on September 10, 2008, the ultimate foreign equity ownership in a value-added telecommunications services provider may not exceed 50%. Moreover, for a foreign investor to acquire any equity interest in a value-added telecommunication business in China, it must satisfy a number of stringent performance and operational experience requirements, including demonstrating good track records and experience in operating value-added telecommunication business

 

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overseas. Foreign investors that meet these requirements must obtain approvals from the MIIT and the Ministry of Commerce or their authorized local counterparts, which retain considerable discretion in granting approvals. Pursuant to publicly available information, the PRC government has issued telecommunications business operating licenses to only a limited number of foreign invested companies, all of which are sino-foreign joint ventures engaging in the value-added telecommunication business. Due to the foreign ownership restriction on Internet content and other value-added telecommunication services, we operate our www.it211.com.cn website through our VIE, Beijing Tarena. Beijing Tarena holds our ICP license for www.it211.com.cn. Beijing Tarena is 70% owned by Mr. Shaoyun Han, our chief executive officer, and 30% owned by Mr. Jianguang Li, our director. Mr. Han and Mr. Li are both PRC citizens. We entered into a series of contractual arrangements with Beijing Tarena and its shareholders, which enable us to:

 

    exercise effective financial control over Beijing Tarena;

 

    receive substantially all of the economic benefits and bear the obligation to absorb substantially all of the losses of Beijing Tarena; and

 

    have an exclusive option to purchase all or part of the equity interests in Beijing Tarena when and to the extent permitted by PRC law.

Because of these contractual arrangements, we are the primary beneficiary of Beijing Tarena and consolidate its financial results in our consolidated financial statements in accordance with U.S. GAAP. For a detailed discussion of these contractual arrangements, see “Corporate History and Structure.”

Han Kun Law Offices, our PRC legal counsel, is of the opinion that (i) the ownership structure of Beijing Tarena and Tarena Tech, both currently and immediately after giving effect to this offering, will not result in any violation of PRC laws or regulations currently in effect; and (ii) the contractual arrangements among Tarena Tech, Beijing Tarena and its shareholders governed by PRC law both currently and immediately after giving effect to this offering are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect. There are, however, substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations concerning foreign investment in the PRC, and their application to and effect on the legality, binding effect and enforceability of the contractual arrangements. In particular, we cannot rule out the possibility that PRC regulatory authorities, courts or arbitral tribunals may in the future adopt a different or contrary interpretation or take a view that is inconsistent with the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to VIEs will be adopted or if adopted, what they would provide. In or around September 2011, various media sources reported that the China Securities Regulatory Commission, or the CSRC, had prepared a report proposing regulating the use of VIE structures, such as ours, in industries subject to foreign investment restrictions in China and overseas listings by China-based companies. However, it is unclear whether the CSRC officially issued or submitted such a report to a higher level government authority or what such report provides, or whether any new PRC laws or regulations relating to the VIE structures will be adopted or if adopted, what they would provide.

If we or Beijing Tarena is found to be in violation of any existing or future PRC laws or regulations, or such arrangement is determined as illegal and invalid by the PRC court, arbitral tribunal or regulatory authorities, or fail to obtain, maintain or renew any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures, including:

 

    revoking the business and operating licenses of our PRC subsidiaries and Beijing Tarena;

 

    discontinuing or restricting the conduct of any transactions between our PRC subsidiaries and Beijing Tarena;

 

    imposing fines, confiscating the income from Beijing Tarena, or imposing other requirements with which we or Beijing Tarena may not be able to comply;

 

    requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with Beijing Tarena and deregistering the equity pledges of Beijing Tarena; or

 

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    restricting or prohibiting our use of the proceeds of this offering to finance our business and operations in China.

Our website www.it211.com.cn features sample lecture videos and class materials covering our current course subjects, as well as a few experimental subjects. We provide prospective students with complimentary prepaid cards to purchase sample content on our www.it211.com.cn website. Currently, although www.it211.com.cn does not generate any meaningful revenues for us, it is important for our marketing efforts. Therefore, the imposition of any of these penalties could result in a material and adverse effect on our ability to conduct our marketing and promotional activities through www.it211.com.cn.

If the relevant PRC authorities determine that we can no longer own and operate certain of our learning centers through our PRC subsidiaries, we may need to restructure the ownership and operation of these learning centers (including possibly transferring these learning centers to our consolidated VIEs), our business may be disrupted and we may be exposed to increased risks associated with the contractual arrangements relating to our consolidated VIEs.

Prior to 2012, we operated a substantial portion of our learning centers through our consolidated VIEs and their subsidiaries and schools. After the PRC Catalogue for the Guidance of Foreign Investment Industries (amended) became effective on January 30, 2012, foreign investment in professional education services is now “encouraged” in China and there is no limitation with respect to maximum percentage of foreign ownership in a company conducting business in this area.

In light of such change of law, starting from the second half of 2012, we began to transfer the operations, including related assets and liabilities, of our consolidated VIEs to our wholly-owned subsidiary, Tarena Tech, and its subsidiaries and schools. As of December 31, 2013, all of our learning center operations of VIEs have been transferred to Tarena Tech and its subsidiaries and schools. As of December 31, 2013, we operated 29 of our learning centers through private schools owned by subsidiaries of Tarena Tech. These 29 learning centers in the aggregate accounted for 30.4% of our total student enrollments in 2013.

However, there are still uncertainties under current PRC laws as to whether a wholly foreign owned enterprise (such as Tarena Tech) is allowed to indirectly invest in and own private schools through its PRC subsidiaries. On the one hand, the PRC Catalogue for the Guidance of Foreign Investment Industries (Amended) encourages and permit 100% foreign ownership of professional training business in China and the Law for Promoting Private Education does not expressly prohibit a subsidiary of a foreign-invested enterprise from investing in private schools. On the other hand, according to the Law for Promoting Private Education, Chinese-foreign cooperation in operating schools is specifically governed by the Regulations on Operating Chinese-foreign Schools and its implementing rules, which requires specific approvals from those governmental authorities in charge of either human resources and social security or education and requires any foreign party to such Chinese-foreign cooperation in operating schools to be an educational institution with relevant experience in providing educational services outside of China. In addition, the Regulations on Operating Chinese-foreign Schools prohibits foreign institutions or individuals from independently establishing schools which provide educational services mainly for Chinese citizens in China. In practice, different local authorities have different views and administrative policies on whether foreign institutions or individuals are permitted to use their direct or indirect wholly-owned subsidiary incorporated in China to establish a school under the Law for Promoting Private Education without violating the Regulations on Operating Chinese-foreign Schools. 11 private schools sponsored by our wholly-owned subsidiaries in China have obtained private school operating permits, and based on the results of oral inquiries with the relevant governmental authorities of human resources and social security or education, we believe that the relevant government authorities have not challenged and are unlikely to challenge the ownership structure of our schools. However, if the relevant PRC government authorities determine in the future that we can no longer own and operate our schools and their related learning centers through our PRC subsidiaries, which are considered ineligible to act as sponsors of private schools, we may need to transfer these schools and the related learning centers to our consolidated VIEs, which may severely disrupt our business

 

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and expose us to increased risks associated with the contractual arrangements relating to our consolidated VIEs. See “—Risks Related to Our Corporate Structure.” If we fail to restructure the ownership and operation of these schools or otherwise accommodate requests from the relevant PRC human resources and social security or education regulatory authorities in a timely manner or to their satisfaction, we may be subject to fines, the suspension or ceasing of our operations or other penalties, which may materially and adversely affect our business and results of operations.

Any failure by Beijing Tarena or its shareholders to perform their obligations under our contractual arrangements with them would have an adverse effect on our business.

If Beijing Tarena or its shareholders fail to perform their obligations under their contractual arrangements with us, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective. For example, if the shareholders of Beijing Tarena were to refuse to transfer their equity interest in Beijing Tarena to us or our designee if we exercise the exclusive option agreements pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.

All the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Under PRC law, if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective financial control over Beijing Tarena, and our ability to conduct our business may be negatively affected.

If we had direct ownership of Beijing Tarena, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of Beijing Tarena, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. However, under the current contractual arrangements, we rely on the performance by Beijing Tarena and its shareholders of their obligations under the contracts to exercise control over Beijing Tarena. Therefore, our contractual arrangements with Beijing Tarena may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.

The shareholders of Beijing Tarena may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

We have designated individuals who are PRC nationals to be the shareholders of Beijing Tarena. The equity interests of Beijing Tarena are held by Mr. Shaoyun Han and Mr. Jianguang Li. The interests of these individuals as the shareholders of Beijing Tarena may differ from the interests of our company as a whole. These shareholders may breach, or cause Beijing Tarena to breach, or refuse to renew, the existing contractual arrangements we have with them and Beijing Tarena, which would have a material and adverse effect on our ability to effectively control Beijing Tarena. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.

Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except that we could exercise our purchase option under the purchase option agreement with these shareholders to request him to transfer all of his equity ownership in Beijing Tarena to a PRC entity or individual designated by us. We rely on Mr. Shaoyun Han and Mr. Jianguang Li, who are both our

 

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directors and who owe a fiduciary duty to our company, to comply with the terms and conditions of the contractual arrangements. Such fiduciary duty requires directors to act in good faith and in the best interests of the company and not to use their positions for personal gains. If we cannot resolve any conflict of interest or dispute between us and the shareholders of Beijing Tarena, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

Our contractual arrangements with our consolidated VIEs may be subject to scrutiny by the PRC tax authorities, and a finding that we owe additional taxes could substantially reduce our consolidated net income and the value of your investment.

Under PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among Tarena Tech and our consolidated VIEs did not represent an arm’s-length price and adjust our consolidated VIEs’ income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction, for PRC tax purposes, of expense deductions recorded by our consolidated VIEs, which could in turn increase their tax liabilities without reducing our tax liabilities. In addition, the PRC tax authorities may impose late payment fees and other penalties to our consolidated VIEs for under-paid taxes. Our consolidated net income may be materially and adversely affected if our tax liabilities increase or if we are found to be subject to late payment fees or other penalties.

If Beijing Tarena becomes the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy its assets, which could materially and adversely affect our business.

Due to foreign ownership restrictions in the online value-added telecommunications business, we hold our ICP license through contractual arrangements with Beijing Tarena as well as its shareholders. As part of these arrangements, Beijing Tarena holds assets that are important to the operation of our business, including the ICP license and the domain name for our www.it211.com.cn website.

We do not have priority pledges and liens against Beijing Tarena’s assets. As a contractual and property right matter, this lack of priority pledges and liens has remote risks. If Beijing Tarena undergoes an involuntary liquidation proceeding, third-party creditors may claim rights to some or all of its assets and we may not have priority against such third-party creditors on Beijing Tarena’s assets. If Beijing Tarena liquidates, we may take part in the liquidation procedures as a general creditor under the PRC Enterprise Bankruptcy Law and recover any outstanding liabilities owed by Beijing Tarena to Tarena Tech under the applicable service agreements. To ameliorate the risks of an involuntary liquidation proceeding initiated by a third-party creditor, we closely monitor the operations and finances of Beijing Tarena through carefully designed budgetary and internal controls to ensure that Beijing Tarena is well capitalized and is highly unlikely to trigger any third party monetary claims in excess of its assets and cash resources. Furthermore, Tarena Tech has the ability, if necessary, to provide financial support to Beijing Tarena to prevent such an involuntary liquidation.

If the shareholders of Beijing Tarena were to attempt to voluntarily dissolve or liquidate Beijing Tarena without obtaining our prior consent, we could effectively prevent such unauthorized voluntary liquidation by exercising our right to request Beijing Tarena’s shareholders to transfer all of their equity ownership interest to a PRC entity or individual designated by us in accordance with the exclusive option agreements with the shareholders of Beijing Tarena. In the event that the shareholders of Beijing Tarena initiates a voluntary liquidation proceeding without our authorization or attempts to distribute the retained earnings or assets of Beijing Tarena without our prior consent, we may need to resort to legal proceedings to enforce the terms of the contractual agreements. Any such legal proceeding may be costly and may divert our management’s time and attention away from the operation of our business, and the outcome of such legal proceeding would be uncertain. The uncertainties in legal proceedings to enforce the terms of the contractual agreements are mainly caused by

 

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PRC laws that prohibit domestic companies holding ICP licenses from assisting foreign investors in conducting value-added telecommunications business in China. Under the MIIT Circular issued by the MIIT in July 2006, a domestic company that holds an ICP license is prohibited from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors that conduct value-added telecommunications business illegally in China.

If the custodians or authorized users of our controlling non-tangible assets, including chops and seals, fail to fulfill their responsibilities, or misappropriate or misuse these assets, our business and operations could be materially and adversely affected.

In China, legal documents for corporate transactions, including agreements and contracts such as the leases and sales contracts that our business relies on, are typically executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant local branch of the State Administration for Industry and Commerce, or the SAIC. We generally execute legal documents by affixing chops or seals, rather than having the designated legal representatives sign the documents.

We have three major types of chops—corporate chops, contract chops and finance chops. We use corporate chops generally for documents to be submitted to government agencies, such as applications for changing business scope, directors or company name, and for legal letters. We use contract chops for executing leases and commercial contracts. We use finance chops generally for making and collecting payments, including but not limited to issuing invoices. Use of corporate chops and contract chops must be approved by our legal department and administrative department, and use of finance chops must be approved by our finance department. The chops of our subsidiaries and our consolidated VIEs are generally held by the relevant entities so that documents can be executed locally. Although we usually utilize chops to execute contracts, the registered legal representatives of our PRC subsidiaries and our consolidated VIEs have the apparent authority to enter into contracts on behalf of such entities without chops, unless such contracts set forth otherwise. All designated legal representatives of our PRC subsidiaries and our consolidated VIEs have signed employment agreements with us under which they agree to abide by duties they owe to us.

In order to maintain the physical security of our chops, we generally store them in secured locations accessible only to the department heads of the legal, administrative or finance departments. Our designated legal representatives generally do not have access to the chops. Although we monitor our employees, including the designated legal representatives of our PRC subsidiaries and our consolidated VIEs, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our employees or designated legal representatives could abuse their authority, for example, by binding the relevant subsidiary or consolidated VIEs with contracts against our interests, as we would be obligated to honor these contracts if the other contracting party acts in good faith in reliance on the apparent authority of our chops or signatures of our legal representatives. If any designated legal representative obtains control of the chop in an effort to obtain control over the relevant entity, we would need to have a shareholder or board resolution to designate a new legal representative and to take legal action to seek the return of the chop, apply for a new chop with the relevant authorities, or otherwise seek legal remedies for the legal representative’s misconduct. If any of the designated legal representatives obtains and misuses or misappropriates our chops and seals or other controlling intangible assets for whatever reason, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve while distracting management from our operations.

Risks Related to Doing Business in China

Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us.

The PRC legal system is based on written statutes. Unlike common law systems, it is a system in which legal cases have limited value as precedents. In the late 1970s, the PRC government began to promulgate a

 

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comprehensive system of laws and regulations governing economic matters. The overall effect of legislation over the past three decades has significantly increased the protections afforded to various forms of foreign or private-sector investment in China. Our PRC subsidiaries and our consolidated VIEs are subject to various PRC laws and regulations generally applicable to companies in China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties.

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) some of which may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, and any failure to respond to changes in the regulatory environment in China could materially and adversely affect our business and impede our ability to continue our operations.

Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.

All of our business operations are conducted in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.

China’s economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over the PRC economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

While China’s economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy, and may slow down in the future. Some of the government measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. Any stimulus measures designed to boost the Chinese economy may contribute to higher inflation, which could adversely affect our results of operations and financial condition.

We may be subject to significant limitations on our ability to operate private schools, or otherwise be materially and adversely affected by changes in PRC laws governing private education providers.

Under the Law for Promoting Private Education and the Implementation Rules for The Law for Promoting Private Education, a private school may elect to be a school that does not require reasonable returns or a school that requires reasonable returns. At the end of each fiscal year, every private school is required to allocate a certain amount to its development fund for the construction or maintenance of the school or procurement or upgrade of educational equipment. In the case of a private school that requires reasonable returns, this amount shall be no less than 25% of annual net income of the school, while in the case of a private school that does not

 

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require reasonable returns, this amount shall be equivalent to no less than 25% of the annual increase in the net assets of the school, if any. A private school that requires reasonable returns must publicly disclose such election and additional information required under the regulations. A private school shall consider factors such as the school’s tuition, ratio of the funds used for education-related activities to the course fees collected, admission standards and educational quality when determining the percentage of the school’s net income that would be distributed to the investors as reasonable returns. However, none of the current PRC laws and regulations provides a formula or guidelines for determining “reasonable returns.” In addition, none of the current PRC laws and regulations sets forth clear requirements or restrictions on a private school’s ability to operate its education business based on such school’s status as a school that requires reasonable returns or a school that does not require reasonable returns.

As of the date of this prospectus, we had two schools registered as schools requiring reasonable returns, while all other schools are registered as schools not requiring reasonable returns. Unlike typical schools which grant diplomas to students upon graduation, we provide professional education and do not grant any diploma to our students. However, the current PRC laws and regulations governing private education may be amended or replaced by new laws and regulations that (i) impose significant limitations on the ability of our schools to operate their business, charge course fees or make payments to related parties for services, (ii) specify the formula for calculating “reasonable returns,” or (iii) change the tax treatment policies applicable to private schools. We cannot predict the timing and effects of any such amendments or new laws and regulations. Changes in PRC laws and regulations governing private education could materially and adversely affect our business prospects and results of operations. For example, if the PRC government imposes additional restrictions on private schools’ ability to operate their business or restricts private schools from making payments to related parties for services, our ability to receive service fees from our schools may be limited.

Under the PRC Enterprise Income Tax Law, we may be classified as a PRC “resident enterprise” for PRC enterprise income tax purposes. Such classification would likely result in unfavorable tax consequences to us and our non-PRC shareholders and have a material adverse effect on our results of operations and the value of your investment.

Under the PRC Enterprise Income Tax Law, or the EIT Law, that became effective on January 1, 2008, an enterprise established outside the PRC with “de facto management bodies” within the PRC is considered a PRC “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. Under the Implementation Rules to the EIT Law, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and properties of an enterprise. In addition, a circular, known as Circular 82, issued in April 2009, as amended in January 2014, by the State Administration of Taxation, or the SAT, specifies that certain offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise groups will be classified as PRC resident enterprises if the following are located or resident in the PRC: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights. Circular 82 also clarified that dividends and other income paid by such “resident enterprises” will be considered to be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by shareholders that are non-PRC resident enterprises. Further to Circular 82, the SAT issued a bulletin, known as Bulletin 45, which took effect on September 1, 2011, to provide more guidance on the implementation of Circular 82 and clarify the reporting and filing obligations of such “Chinese-controlled offshore-incorporated resident enterprises.” Bulletin 45 provides procedures and administrative details for the determination of PRC resident enterprise status and administration on post-determination matters. Although both Circular 82 and Bulletin 45 only apply to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign individuals like us, the determining criteria set forth in Circular 82 and Bulletin 45 may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident enterprise

 

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status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, PRC enterprise groups or by PRC or foreign individuals.

We do not believe that Tarena International, Inc. meets all of the conditions above, and thus we do not believe that Tarena International, Inc. is a PRC resident enterprise, despite the fact that all of the members of our management team as well as the management team of our offshore holding company are located in China. However, if the PRC tax authorities determine that Tarena International, Inc. is a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we will be subject to the uniform 25% enterprise income tax on our world-wide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. Second, although dividends paid by one PRC tax resident to another PRC tax resident should qualify as “tax-exempt income” under the EIT Law, we cannot assure you that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax on dividends, and the PRC tax authorities have not yet issued guidance with respect to the processing of outbound remittances to entities that are not controlled by any PRC enterprise or enterprise group and treated as resident enterprises for PRC enterprise income tax purposes.

Finally, dividends we pay to our non-PRC enterprise shareholders and gains derived by our non-PRC shareholders from the sale of our shares may be become subject to a 10% PRC withholding tax. In addition, future guidance may extend the withholding tax to dividends we pay to our non-PRC individual shareholders and gains derived by such shareholders from transferring our shares. In addition to the uncertainty in how the new “resident enterprise” classification could apply, it is also possible that the rules may change in the future, possibly with retroactive effect. If PRC income tax were imposed on gains realized through the transfer of our ADSs or ordinary shares or on dividends paid to our non-resident investors, the value of the investment in our ADSs or ordinary shares may be materially and adversely affected. Furthermore, our ADS holders whose jurisdictions of residence have tax treaties or arrangements with China may not qualify for benefits under such tax treaties or arrangements.

We face uncertainty regarding the PRC tax reporting obligations and consequences for certain indirect transfers of our operating company’s equity interests. Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.

In connection with the EIT Law, the Ministry of Finance and the SAT jointly issued a Circular 59 in April 2009, and the SAT issued a Circular 698 in December 2009. Both Circular 59 and Circular 698 became effective retroactively on January 1, 2008.

According to Circular 698, where a non-resident enterprise transfers the equity interests of a PRC “resident enterprise” indirectly by disposition of the equity interests of an overseas holding company, or an Indirect Transfer, and the overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5% or (ii) does not impose tax on foreign income of its residents, the non-resident enterprise, being the transferor, must report to the relevant tax authority of the PRC “resident enterprise” this Indirect Transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC withholding tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests in a PRC “resident enterprise” to its related parties at a price lower than the fair market value, the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction. In addition, the PRC “resident enterprise” is supposed to provide necessary assistance to support the enforcement of Circular 698.

On March 28, 2011, the SAT released Bulletin [2011] No. 24, or Bulletin 24, to clarify several issues related to Circular 698. Bulletin 24 became effective on April 1, 2011. According to SAT Bulletin 24, the term

 

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“effective tax” refers to the effective tax on the gain derived from disposition of the equity interests of an overseas holding company; and the term “does not impose income tax” refers to the cases where the gain derived from disposition of the equity interests of an overseas holding company is not subject to income tax in the country or region where the overseas holding company is a resident.

There is little guidance and practical experience as to the application of Circular 698. For example, while the term “Indirect Transfer” is not clearly defined, it is understood that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with China. In addition, there are no formal declarations with regard to how to determine whether a foreign investor has adopted an abusive arrangement in order to reduce, avoid or defer PRC tax. Moreover, although Circular 698 contains an exemption for transfers of publicly traded stock in a PRC resident enterprise, it remains unclear whether we will be deemed a PRC resident enterprise and whether such exemption will be applicable to the transfer of our shares or ADSs. If any of the previous investments by non-resident investors in our company were determined by the tax authorities to lack reasonable commercial purpose, it is possible that the PRC tax authorities would pursue our offshore shareholders to conduct a filing regarding our offshore restructuring transactions where non-resident investors were involved and would request our PRC subsidiaries to assist in providing such disclosures. In addition, if our offshore subsidiary is deemed to lack substance, it could be disregarded by the PRC tax authorities. As a result, we and our non-resident investors may become at risk of being taxed under Circular 698 and may be required to expend valuable resources to comply with Circular 698 or to establish that we should not be taxed under Circular 698, which may have a material adverse effect on our financial condition and results of operations or the non-resident investors’ investments in us.

By promulgating and implementing these circulars, the PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of equity interests in a PRC resident enterprise by a non-resident enterprise. The PRC tax authorities have the discretion under Circular 59 and Circular 698 to make adjustments to the taxable capital gains based on the difference between the fair value of the equity interests transferred and the cost of investment. Although we currently have no confirmed plans to pursue any acquisitions in China or elsewhere in the world, we may pursue acquisitions in the future that may involve complex corporate structures. If we are considered a non-resident enterprise under the EIT Law and if the PRC tax authorities make adjustments under Circular 59 or Circular 698, our income tax costs associated with such potential acquisitions will be increased, which may have an adverse effect on our financial condition and results of operations.

We face risks and uncertainties with respect to the licensing requirement for Internet audio-video programs.

In December 2007, the State Administration of Press Publication Radio Film and Television, or the SAPPRFT, and the MIIT issued the Administrative Measures Regarding Internet Audio-Video Program Services, or the Internet Audio-Video Program Measures, which became effective on January 31, 2008. Among other things, the Internet Audio-Video Program Measures stipulate that no entities or individuals may provide Internet audio-video program services without a “License for Disseminating Audio-Video Programs through Information Network” issued by the SAPPRFT or its local bureaus or completing the relevant registration with the SAPPRFT or its local bureaus, and only entities wholly owned or controlled by the PRC government may engage in the production, editing, integration or consolidation, and transmission to the public through the Internet, of audio-video programs, or the provision of audio-video program uploading and transmission services. In February 2008, the SAPPRFT and MIIT jointly held a press conference in response to inquiries related to the Internet Audio-Video Program Measures, during which the SAPPRFT and MIIT officials indicated that providers of audio-video program services established prior to the promulgation date of the Internet Audio-Video Program Measures that do not have any regulatory non-compliance records can re-register with the relevant government authorities to continue their current business operations. After the conference, the two authorities published a press release that confirmed the above guidelines. There are still significant uncertainties relating to the interpretation and implementation of the Internet Audio-Video Program Measures, in particular, the scope of “Internet Audio-Video Programs.”

 

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Furthermore, on April 1, 2010, the SAPPRFT promulgated the Test Implementation of the Tentative Categories of Internet Audio-Visual Program Services, or the Categories, which clarified the scope of Internet audio-video programs services. According to the Categories, there are four categories of Internet audio-visual program services which are further divided into seventeen sub-categories. The third sub-category to the second category covers the making and editing of certain specialized audio-video programs concerning, among other things, educational content, and broadcasting such content to the general public online.

We transmit our audio-video educational programs through our TTS system only to enrolled course participants, not to the general public. The limited scope of our audience distinguishes us from general online audio-video broadcasting companies, such as companies operating user-generated content websites. In addition, we do not provide audio-video program uploading and transmission services. As a result, we believe that we are not subject to the Internet Audio-Video Program Measures. However, there is no further official or publicly available interpretation of these definitions, especially the scope of “Internet audio-video program service.” If the governmental authorities determine that our provision of lecture videos on TTS falls within the Internet Audio-Video Program Measures, we may not be able to obtain the License for Disseminating Audio-Video Programs through Information Network. If this occurs, we may become subject to significant penalties, fines, legal sanctions or an order to suspend our use of audio-video content, all of which could have a material adverse effect on our business, financial condition, results of operations and prospectus.

PRC regulations establish complex approval procedures for some acquisitions of PRC companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China. The transfers of our learning centers from our consolidated VIEs to our wholly-owned subsidiaries in China may be subject to such approval procedures, in which case we may need to restructure the ownership and operation of the affected learning centers, and as a result we may be exposed to increased risks associated with the contractual arrangements relating to our consolidated VIEs.

Six PRC regulatory agencies promulgated regulations effective in September 2006 that are commonly referred to as the M&A Rules. The M&A Rules, as amended, establish procedures and requirements that could make some acquisitions of PRC companies by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce, or the MOFCOM, be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. In addition, national security review rules issued by the PRC governmental authorities in 2011 require acquisitions by foreign investors of domestic companies engaged in military-related or certain other industries that are crucial to national security to be subject to prior security review. Moreover, the Anti-Monopoly Law requires that the MOFCOM shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. We may expand our business in part by acquiring complementary businesses. Complying with the requirements of the M&A Rules, security review rules and other PRC regulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

In addition, in accordance with the M&A Rules, approval of the MOFCOM is required for acquisitions of PRC domestic enterprises by foreign companies that are established or controlled by PRC domestic companies, enterprises or individuals related to the target PRC domestic enterprises, or “Related Party Acquisitions,” and the parties are not allowed to evade such requirements through investment by foreign investment enterprises in China or other ways. Although M&A Rules have become effective since September 2006, we are not aware of any precedent of approval by the MOFCOM of any Related Party Acquisition conducted by PRC domestic individuals. Starting from the second half of 2012, we began to transfer our operations, including related assets and liabilities, of our consolidated VIEs to our wholly-owned subsidiary, Tarena Tech, and its subsidiaries and schools, either through transferring the companies that operate learning centers or that sponsor the schools, or through changing the schools’ sponsors. As of December 31, 2013, all of our learning center operations of VIEs have been transferred to Tarena Tech and its subsidiaries and schools. As Mr. Shaoyun Han is a shareholder of

 

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both Tarena and our consolidated VIEs, even though the transfers of the companies, which currently operate 24 of our learning centers themselves or through schools they established, from our consolidated VIEs to our wholly-owned subsidiaries in China are not “acquisitions by foreign investors of PRC domestic enterprises” under the M&A Rules, and Tarena Tech, our wholly foreign invested enterprise in PRC, was converted into a wholly foreign invested enterprise before the effective date of M&A Rules, the requirement for an approval from the MOFCOM may still be required for such transfers because of the above anti-evasion clause. Furthermore, it is unclear whether our transfers of the schools currently operating 11 learning centers, which are not enterprises, from subsidiaries of our consolidated VIEs to our wholly-owned subsidiaries, could be regarded as Related Party Transactions under the M&A Rules. If the MOFCOM determines that our previous transfers of learning centers from our consolidated VIEs to our wholly-owned subsidiaries are Related Party Transactions under the M&A Rules and we fail to obtain the MOFCOM’s approvals on such transfers, the effectiveness of such transfers may be challenged and we may be need to transfer these companies and schools, including the related learning centers, back to our consolidated VIEs. Under such circumstances, our business may be disrupted and we may be exposed to increased risks associated with the contractual arrangements relating to our consolidated VIEs. See “—Risks Related to Our Corporate Structure.”

PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, limit our ability to inject capital into our PRC subsidiaries, or otherwise expose us to liability and penalties under PRC law.

The PRC State Administration of Foreign Exchange, or the SAFE, promulgated in October 2005 a SAFE Circular 75 that requires PRC citizens or residents to register with the SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas equity financing involving a roundtrip investment whereby the offshore entity acquires or controls onshore assets or equity interests held by the PRC citizens or residents. In addition, such PRC citizens or residents must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to increases or decreases in investment amount, transfers or exchanges of shares, mergers or divisions, long-term equity or debt investments, external guarantees, or other material events that do not involve roundtrip investments. The term “control” under SAFE Circular 75 is broadly defined as the operation rights, beneficiary rights or decision-making rights acquired by the PRC residents in the offshore special purpose vehicles, or SPVs, or PRC companies by such means as acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other arrangements. Subsequent regulations further clarified that PRC subsidiaries of an offshore company governed by the SAFE regulations are required to coordinate and supervise the filing of SAFE registrations in a timely manner by the offshore holding company’s shareholders and beneficial owners who are PRC citizens or residents. If these shareholders or beneficial owners fail to comply, the PRC subsidiaries are required to report to the local SAFE branches. See “PRC Regulation—Regulations on Foreign Exchange Registration of Overseas Investment by PRC Residents.” If our shareholders or beneficial owners who are PRC citizens or residents do not complete their registration with the local SAFE branches, our PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to comply with the various SAFE registration requirements described above could result in liabilities for our PRC subsidiaries under PRC laws for evasion of applicable foreign exchange restrictions, including (i) the requirement by SAFE to return the foreign exchange remitted overseas within a period specified by SAFE, with a fine of up to 30% of the total amount of foreign exchange remitted overseas and deemed to have been evasive and (ii) in circumstances involving serious violations, a fine of no less than 30% of and up to the total amount of remitted foreign exchange deemed evasive. Furthermore, the persons-in-charge and other persons at our PRC subsidiaries who are held directly liable for the violations may be subject to criminal sanctions.

These foreign exchange regulations provide that PRC residents include both PRC citizens, meaning any individual who holds a PRC passport or resident identification card, and individuals who are non-PRC citizens but primarily reside in the PRC due to their economic ties to the PRC. We have requested all of our current shareholders and/or beneficial owners to disclose whether they or their shareholders or beneficial owners fall within the ambit of

 

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SAFE Circular 75 and its guidance and will urge relevant shareholders and beneficial owners, upon learning they are PRC residents, to make the necessary applications, filings and amendments as required under SAFE Circular 75 and other related rules. To our knowledge, all of our shareholders who are PRC citizens and hold interest in us, have registered with the local SAFE branch as required under SAFE Circular 75 and are in the process of amending certain applicable registrations with the local SAFE pursuant to SAFE Circular 75. We would expect these shareholders to also amend their registrations after the completion of this offering as required by PRC law. However, we cannot assure you that they can successfully amend their foreign exchange registrations with the local SAFE branch in full compliance with applicable laws after this offering. In addition, we may not be informed of the identities of all the PRC residents holding direct or indirect interest in our company, and we cannot provide any assurances that these PRC residents will comply with our request to make or obtain any applicable registrations or comply with other requirements required by SAFE Circular 75 or other related rules. A failure by any of our current or future shareholders or beneficial owners who are PRC residents to comply with the SAFE regulations may subject us to fines or other legal sanctions, restrict our cross-border investment activities, limit our PRC subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.

Furthermore, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We cannot predict how these regulations will affect our business operations or future strategy. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, either we or the owners of such company, as the case may be, may not be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

Failure to comply with PRC regulations regarding the registration requirements for employee share ownership plans or share option plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, or the Stock Option Rules. Under the Stock Option Rules and other relevant rules and regulations, PRC residents who participate in stock incentive plan in an overseas publicly-listed company are required to register with SAFE or its local branches and complete certain other procedures. Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of the overseas publicly-listed company or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of its participants. The participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or the overseas entrusted institution or other material changes. See “PRC Regulation—Regulation on Employee Stock Option Plans.” We and our PRC employees who have been granted share options and restricted shares will be subject to these regulations upon the completion of this offering. Failure of our PRC share option holders or restricted shareholders to complete their SAFE registrations may subject these PRC residents to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries, limited our PRC subsidiaries’ ability to distribute dividends to us, or otherwise materially and adversely affect our business.

PRC regulation of direct investment and loans by offshore holding companies to PRC entities and governmental control of currency conversion may delay or limit us from using the proceeds of this offering to make additional capital contributions or loans to our PRC subsidiaries.

Any capital contributions or loans that we, as an offshore entity, make to our PRC subsidiaries, including from the proceeds of this offering, are subject to PRC regulations. Under PRC laws and regulations, we are

 

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permitted to utilize the proceeds from this offering to fund our existing PRC subsidiaries only through loans or capital contributions or to establish new PRC subsidiaries, subject to applicable government registration and approval requirements. None of our loans to a PRC subsidiary can exceed the difference between its total amount of investment and its registered capital approved under relevant PRC laws, and the loans must be registered with the local branch of SAFE. Our capital contributions to our PRC subsidiaries or establishment of new PRC subsidiaries must be approved by the MOFCOM or its local counterpart. We cannot assure you that we will be able to complete the necessary registration or obtain the necessary approval on a timely basis, or at all. If we fail to complete the necessary registration or obtain the necessary approval, our ability to make loans or equity contributions to our PRC subsidiaries may be negatively affected, which could adversely affect our PRC subsidiaries’ liquidity and their ability to fund their working capital and expansion projects and meet their obligations and commitments.

In August 2008, the SAFE promulgated a SAFE Circular 142 regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into Renminbi by restricting how the converted Renminbi may be used. SAFE Circular 142 provides that the Renminbi capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government authority and unless otherwise provided by law, such Renminbi capital may not be used for equity investments in the PRC. The business scopes of Tarena Tech include research and development of computer software, hardware, internet technology and products and telecommunications technology, transfer of proprietary technologies, information technology consulting, technical services, computer technology training, sales of self-developed products and franchise business operations. The business scopes of Tarena Hangzhou include technology development, technology consulting, technical services, computer software and hardware, network technology, telecommunication technology, services, non-certification computer technology training for adults (excluding business subject to pre-approvals), wholesale and retail of computer software and hardware and telecommunication equipments (excluding equipments subject to national controls and other special controls). Tarena Tech and Tarena Hangzhou may only use Renminbi converted from foreign exchange capital contribution for activities within their respective approved business scopes. In addition, the use of such Renminbi capital may not be altered without SAFE approval, and such Renminbi capital may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used. Violations of SAFE Circular 142 could result in severe monetary or other penalties. If we convert the net proceeds we receive from this offering into Renminbi pursuant to SAFE Circular 142, our use of Renminbi funds for general corporate purposes will be within the business scope of our PRC subsidiaries. However, we may not be able to use such Renminbi funds to make equity investments in the PRC through our PRC subsidiaries.

Furthermore, the SAFE promulgated in November 2010 a SAFE Circular 59, which requires the relevant government authorities to closely examine the authenticity of settlement of net proceeds from offshore offerings and the net proceeds to be settled in the manner described in the offering documents. The SAFE also promulgated a SAFE Circular 45 in November 2011, which, among other things, restricts a foreign-invested enterprise from using RMB converted from its registered capital to provide entrusted loans or repay loans between non-financial enterprises. SAFE Circular 142, SAFE Circular 59 and SAFE Circular 45 may significantly limit our ability to use Renminbi converted from the net proceeds of this offering to fund establishment of new PRC subsidiaries by Tarena Tech to invest in or acquire any other PRC companies, or to establish new PRC consolidated affiliated entities.

Our PRC subsidiaries are subject to restrictions on paying dividends or making other payments to us, which may restrict our ability to satisfy our liquidity requirements.

We are a holding company incorporated in the Cayman Islands. We may need dividends and other distributions on equity from our PRC subsidiaries to satisfy our liquidity requirements. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiaries are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until the

 

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total amount set aside reaches 50% of their respective registered capital. Our PRC subsidiaries may also allocate a portion of its after-tax profits based on PRC accounting standards to employee welfare and bonus funds at their discretion. These reserves are not distributable as cash dividends. Furthermore, if our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any limitation on the ability of our subsidiaries to distribute dividends to us or may restrict our ability to satisfy our liquidity requirements.

In addition, the EIT Law, and its implementation rules provide that withholding tax rate of up to 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises are incorporated.

We may not be able to obtain certain treaty benefits on dividends paid to us by our PRC subsidiary through our Hong Kong subsidiary.

Under the EIT Law, dividends generated from retained earnings after January 1, 2008 from a PRC company and distributed to a foreign parent company are subject to a withholding tax rate of 10% unless the foreign parent’s jurisdiction of incorporation has a tax treaty with China that provides for a preferential withholding arrangement. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income, or the Hong Kong Tax Treaty, which became effective on December 8, 2006, a company incorporated in Hong Kong, such as Tarena HK, will be subject to withholding income tax at a rate of 5% on dividends it receives from its PRC subsidiary if it holds a 25% or more interest in that particular PRC subsidiary, or 10% if it holds less than a 25% interest in that subsidiary. However, the SAT promulgated a tax notice on October 27, 2009, or Circular 601, which provides that tax treaty benefits will be denied to “conduit” or shell companies without business substance, and a beneficial ownership analysis will be used based on a “substance-over-the-form” principle to determine whether or not to grant tax treaty benefits. On June 29, 2012, the SAT further issued the Announcement of the SAT regarding Recognition of “Beneficial Owner” under Tax Treaties, or Announcement 30, which provides that a comprehensive analysis should be made when determining the beneficial owner status based on various factors supported by various types of documents including the articles of association, financial statements, records of cash movements, board meeting minutes, board resolutions, staffing and materials, relevant expenditures, functions and risk assumption as well as relevant contracts and other information. As a result, although our PRC subsidiary, Tarena Hangzhou, is currently wholly owned by our Hong Kong subsidiary Tarena HK, we cannot assure you that we would be entitled to the tax treaty benefits and enjoy the favorable 5% rate applicable under the Hong Kong Tax Treaty on dividends. If Tarena HK cannot be recognized as the beneficial owner of the dividends to be paid by Tarena Hangzhou to us, such dividends will be subject to a normal withholding tax of 10% as provided by the EIT Law.

Discontinuation or revocation of any of the preferential tax treatments and government subsidies or imposition of any additional taxes and surcharges could adversely affect our financial condition and results of operations.

Our PRC subsidiaries are incorporated in the PRC and governed by applicable PRC tax laws and regulations. The EIT Law and its Implementing Rules, both became effective on January 1, 2008, have adopted a uniform statutory enterprise income tax rate of 25% to all enterprises in China including foreign-invested enterprises. The EIT Law and its Implementation Rules also permit qualified “high and new technology enterprises,” or HNTEs, to enjoy a preferential enterprise income tax rate of 15% upon filing with relevant tax authorities. The qualification as a HNTE generally has a valid term of three years and the renewal of such qualification is subject to review by the relevant authorities in China. Tarena Tech obtained its HNTE certificate in 2009 and renewed its HNTE certificate in 2012 with a valid period of three years. Therefore, Tarena Tech is eligible to enjoy a preferential tax rate of 15% until the end of 2014, as long as it maintains the HNTE qualification and duly conducts filing procedures with relevant tax authority regarding the tax incentive. If

 

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Tarena Tech fails to maintain its HNTE qualification or renew its qualification when its current term expires, its applicable enterprise income tax rate may increase to 25%, which could have an adverse effect on our financial condition and results of operations.

In addition, one of our PRC subsidiaries, Tarena Hangzhou, has received financial subsidies from PRC local government authority. Preferential tax treatments and financial subsidies are subject to review and may be adjusted or revoked at any time in the future. The discontinuation of any preferential tax treatments or financial subsidies or imposition of any additional taxes could adversely affect our financial condition and results of operations.

Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your investment.

Although our reporting currency is in U.S. dollars, we earn revenues and incur costs and expenses in Renminbi. As a result, fluctuations in the exchange rate between the U.S. dollar and RMB will affect the relative purchasing power in RMB terms of the proceeds from this offering. As the functional currency for our PRC subsidiaries and consolidated VIEs is RMB, fluctuations in the exchange rate may also cause us to incur foreign exchange losses on any foreign currency holdings they may have. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. If we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.

The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. In July 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. However, the People’s Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in Renminbi exchange rates and achieve policy goals. During the period between July 2008 and June 2010, the exchange rate between the RMB and the U.S. dollar had been stable and traded within a narrow range. However, the Renminbi fluctuated significantly during that period against other freely traded currencies, in tandem with the U.S. dollar. Since June 2010, the Renminbi has started to slowly appreciate against the U.S. dollar, though there have been periods recently when the U.S. dollar has appreciated against the Renminbi. It is difficult to predict how long the current situation may last and when and how the relationship between the Renminbi and the U.S. dollar may change again.

There remains significant international pressure on the PRC government to adopt a flexible currency policy. Any significant appreciation or depreciation of the Renminbi may materially and adversely affect our net revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, to the extent that we need to convert U.S. dollars we receive from this initial public offering into Renminbi to pay our operating expenses, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, a significant depreciation of the Renminbi against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our ADSs.

Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.

 

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The approval of the CSRC may be required in connection with this offering under a regulation adopted in August 2006, and, if required, we cannot assure you that we will be able to obtain such approval.

The M&A Rules, among other things, requires offshore SPVs controlled by PRC companies or individuals formed for the purpose of an overseas listing of such PRC companies’ or individuals’ interests in PRC domestic companies, to obtain CSRC approval prior to listing their securities on an overseas stock exchange. The application of this regulation remains unclear. Our PRC counsel, Han Kun Law Offices, has advised us that, based on their understanding of the current PRC laws, rules and regulations, we are not required to submit an application to the CSRC for its approval of the listing and trading of our ADSs on the NASDAQ Global Market because:

 

    the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to this regulation; and

 

    we were established and Tarena Tech was acquired by us and converted into a wholly foreign owned enterprise before the M&A Rules took effect.

There is uncertainty as to how this regulation will be interpreted or implemented. If it is determined that the CSRC approval is required for this offering, we may face sanctions by the CSRC or other PRC regulatory agencies for failure to seek the CSRC approval for this offering. These sanctions may include fines and penalties on our operations in the PRC, delays or restrictions on the repatriation of the proceeds from this offering into the PRC, restrictions on or prohibition of the payments or remittance of dividends by our PRC subsidiaries, or other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable to us, to halt this offering before the settlement and delivery of the ADSs that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of the ADSs we are offering, you would be doing so at the risk that the settlement and delivery may not occur.

The audit report included in this prospectus is prepared by an auditor who is not inspected by the PCAOB and, as such, you are deprived of the benefits of such inspection

Auditors of companies that are registered with the U.S. Securities and Exchange Commission, or the SEC, and traded publicly in the United States, including our independent registered public accounting firm, must be registered with the PCAOB and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards. Because our auditor is located in the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditor is not currently inspected by the PCAOB. In May 2013, PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by PCAOB, the CSRC or the PRC Ministry of Finance in the United States and the PRC, respectively. PCAOB continues to be in discussions with the CSRC and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.

This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating audits and quality control procedures of any auditors operating in China, including our auditor. As a result, investors may be deprived of the benefits of PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

 

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Proceedings instituted recently by the SEC against five PRC-based accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.

In December 2012, the SEC brought administrative proceedings against five accounting firms in China, including our independent registered public accounting firm, alleging that they had refused to produce audit work papers and other documents related to certain China-based companies under investigation by the SEC for potential accounting fraud. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and suspending four of the five firms from practicing before the SEC for a period of six months. The decision is neither final nor legally effective unless and until reviewed and approved by the SEC. On February 12, 2014, four of these PRC-based accounting firms appealed to the SEC against this sanction. Accordingly, the sanction will not become effective until after a full appeal process is concluded and a final decision is issued by the SEC. We are not involved in the proceedings brought by the SEC against the accounting firms. However, our independent registered public accounting firm is one of the four accounting firms subject to the six-month suspension from practicing before the SEC in the initial administrative law decision. We may therefore be adversely affected by the outcome of the proceedings, along with other U.S.-listed companies audited by these accounting firms.

On May 24, 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in the United States and China, respectively. However, it is not clear how these developments could affect the SEC’s final decision in the case against the five accounting firms or any subsequent appeals that the accounting firms may initiate. Therefore, it is difficult to determine the final outcome of the administrative proceedings and the potential consequences thereof.

If our independent registered public accounting firm were denied temporarily the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delay or abandonment of this offering, or delisting of our ADSs from the NASDAQ Global Market or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

Risks Related to Our ADSs and This Offering

An active trading market for our ordinary shares or our ADSs may not develop and the trading price for our ADSs may fluctuate significantly.

We have applied to list our ADSs on the NASDAQ Global Market. Prior to the completion of this offering, there has been no public market for our ADSs or our Class A ordinary shares underlying the ADSs, and we cannot assure you that a liquid public market for our ADSs will develop or be sustained after this offering. If an active public market for our ADSs does not develop following the completion of this offering, the market price and liquidity of our ADSs may be materially and adversely affected. The initial public offering price for our ADSs will be determined by negotiation between us, the selling shareholders and the underwriters based upon several factors, and we can provide no assurance that the trading price of our ADSs after this offering will not decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their ADSs.

The trading prices of our ADSs are likely to be volatile, which could result in substantial losses to investors.

The trading prices of our ADSs are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their

 

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securities in the United States. In recent years, the widespread negative publicity of alleged fraudulent accounting practices and poor corporate governance of certain U.S. public companies with operations in China were believed to have negatively affected investors’ perception and sentiment towards companies with connection with China, which significantly and negatively affected the trading prices of some companies’ securities listed in the U.S. Once we become a public company, any similar negative publicity or sentiment may affect the performances of our ADSs. A number of PRC companies have recently listed or are in the process of listing their securities on U.S. stock markets. The securities of some of these companies have experienced significant volatility, including price declines in connection with their initial public offerings. The trading performances of these PRC companies’ securities after their offerings may affect the attitudes of investors toward PRC companies listed in the United States in general and consequently may impact the trading performance of our ADSs, regardless of our actual operating performance.

In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations, including the following:

 

    the financial projections that we may choose to provide to the public, any changes in those projections or our failure for any reason to meet those projections;

 

    variations in our net revenues, net income and cash flow;

 

    announcements of new investments, acquisitions, strategic partnerships, or joint ventures;

 

    announcements of new services and expansions by us or our competitors;

 

    changes in financial estimates by securities analysts;

 

    additions or departures of key personnel;

 

    release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities;

 

    potential litigation, regulatory investigations or other legal proceedings involving us; and

 

    detrimental negative publicity about us or our industry.

Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline.

The trading market for our ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our ADSs or publish unfavorable research about us, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for our ADSs to decline.

Our dual class share structure with different voting rights will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.

Immediately prior to the completion of this offering, our ordinary shares will be divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares will be entitled to one vote per share, while holders of Class B ordinary shares will be entitled to ten votes per share, with Class A and Class B ordinary shares voting together as one class on all matters subject to a shareholders’ vote. We will issue Class A

 

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ordinary shares represented by our ADSs in this offering. All of our outstanding shares will be redesignated as Class B ordinary shares immediately prior to the completion of this offering. Upon the completion of this offering, Mr. Shaoyun Han, our chief executive officer, together with three private equity investors and their affiliates will beneficially own an aggregate of 64.5% of our outstanding shares, or 60.3% if the underwriters exercise their option to purchase additional ADSs in full, representing 88.6% and 87.2% of the then total voting power of our outstanding shares, respectively, assuming we will issue and sell a total of 1,500,000 Class A ordinary shares to New Oriental Education & Technology Group Inc. through a concurrent private placement, which number of shares has been calculated based on an initial public offering price of US$9.00 per ADS, the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus.

As a result of the dual class share structure and the concentration of ownership, our existing shareholders have substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. They may take actions that are not in the best interest of us or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of our ADSs. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial. For more information regarding our principal shareholders and their affiliated entities, see “Principal and Selling Shareholders.”

The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.

Sales of substantial amounts of our ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act, and shares held by our existing shareholders and New Oriental Education & Technology Group Inc. may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. There will be 15,300,000 ADSs (equivalent to 15,300,000 Class A ordinary shares) outstanding immediately after this offering, or 17,595,000 ADSs (equivalent to 17,595,000 Class A ordinary shares) if the underwriters exercise their option to purchase additional ADSs in full. In connection with this offering and the concurrent private placement, we, our directors and executive officers, our existing shareholders, certain of our option holders and New Oriental Education & Technology Group Inc. have agreed not to sell any ordinary shares or ADSs for 180 days after the date of this prospectus without the prior written consent of the underwriters. However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs. In addition, certain holders of our preferred shares prior to the completion of this offering are entitled to certain registration rights, including demand registration rights, piggyback registration rights, and Form F-3 or Form S-3 registration rights. In connection with the concurrent private placement, we will enter into a registration rights agreement with New Oriental Education & Technology Group Inc., pursuant to which we will grant New Oriental Education & Technology Group Inc. Form F-3 registration rights and the piggyback registration rights. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the public market, or the perception that such sales could occur, could cause the price of our ADSs to decline. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.

 

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Because the initial public offering price is substantially higher than the pro forma net tangible book value per share, you will experience immediate and substantial dilution.

If you purchase ADSs in this offering, you will pay more for each ADS than the corresponding amount paid by existing shareholders for their ordinary shares. As a result, you will experience immediate and substantial dilution of approximately US$5.93 per ADS (assuming that no outstanding options to acquire Class A ordinary shares are exercised). This number represents the difference between our pro forma net tangible book value per ADS of US$3.07 as of December 31, 2013, after giving effect to this offering, the concurrent private placement, and the assumed initial public offering price of US$9.00 per ADS, the midpoint of the estimated initial public offering price range set forth on the front cover of this prospectus. See “Dilution” for a more complete description of how the value of your investment in our ADSs will be diluted upon the completion of this offering.

We may be classified as a passive foreign investment company for United States federal income tax purposes, which could result in adverse United States federal income tax consequences to United States investors in the ADSs or ordinary shares.

We will be classified as a “passive foreign investment company,” or PFIC, if, in the case of any particular taxable year, either (i) 75% or more of our gross income for such year consists of certain types of “passive” income or (ii) 50% or more of the average quarterly value of our assets (as determined on the basis of fair market value) during such year produce or are held for the production of passive income, or the “asset test.” Although the law in this regard is unclear, we treat our consolidated VIEs as being owned by us for United States federal income tax purposes, not only because we exercise effective financial control over the operation of such entities, but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their operating results in our consolidated financial statements. Assuming that we are the owner of our consolidated VIEs for United States federal income tax purposes, and based upon our current income and assets (taking into account the proceeds from this offering) and projections as to the value of our ADSs and ordinary shares following the offering, we do not presently expect to be classified as a PFIC for the current taxable year or the foreseeable future.

While we do not expect to become a PFIC, because the value of our assets for purposes of the asset test will generally be determined by reference to the market price of our ADSs or ordinary shares, fluctuations in the market price of our ADSs or ordinary shares may cause us to become a PFIC for the current or subsequent taxable years. The determination of whether we will be or become a PFIC will also depend, in part, on the composition of our income and assets, which will be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering. Under circumstances where we determine not to deploy significant amounts of cash for active purposes or not to treat our consolidated VIEs as owned by us for United States federal income tax purposes, our risk of being classified as a PFIC may substantially increase. Because there are uncertainties in the application of the relevant rules and PFIC status is a factual determination made annually after the close of each taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year.

If we are classified as a PFIC in any taxable year, a U.S. Holder (as defined in “Taxation—United States Federal Income Tax Considerations”) may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent such gain or distribution is treated as an “excess distribution” under the United States federal income tax rules and such holders may be subject to burdensome reporting requirements. Further, if we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ADSs or ordinary shares. For more information, see “Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Considerations.”

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.

We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law of the Cayman Islands

 

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(2013 Revision) and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

The Cayman Islands courts are also unlikely:

 

    to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws; and

 

    to impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature.

There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.

As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the Companies Law of the Cayman Islands (2013 Revision) and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital—Differences in Corporate Law.”

Judgments obtained against us by our shareholders may not be enforceable.

We are a Cayman Islands company and substantially all of our assets are located outside of the United States. All of our current operations are conducted in China. In addition, all of our current directors and executive officers are nationals and residents of countries other than the United States. Substantially all of the assets of these persons are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the United States federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

We have not determined a specific use for a portion of the net proceeds from this offering, and we may use these proceeds in ways with which you may not agree.

We have not determined a specific use for a portion of the net proceeds of this offering, and our management will have considerable discretion in deciding how to apply these proceeds. For more information, see “Use of Proceeds.” You will not have the opportunity to assess whether the proceeds are being used appropriately before you make your investment decision. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. We cannot assure you that the net proceeds will be used in a manner that would improve our results of operations or increase our ADS price, nor that these net proceeds will be placed only in investments that generate income or appreciate in value.

 

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The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote your Class A ordinary shares.

As a holder of our ADSs, you will only be able to exercise the voting rights with respect to the underlying Class A ordinary shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will vote the underlying Class A ordinary shares in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying shares unless you withdraw the shares. Under our post-offering memorandum and articles of association, the minimum notice period required for convening a general meeting is ten clear days. When a general meeting is convened, you may not receive sufficient advance notice to withdraw the shares underlying your ADSs to allow you to vote with respect to any specific matter. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to vote and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.

We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 for so long as we are an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.

The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic public companies.

Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:

 

    the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;

 

    the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act;

 

    the sections of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and

 

    the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the NASDAQ Global Market. Press releases relating to financial results and material events

 

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will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely as compared to that required to be filed with the SEC by United States domestic issuers. As a Cayman Islands company listed on the NASDAQ Global Market, we are subject to the NASDAQ Global Market corporate governance listing standards. However, NASDAQ Global Market rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the NASDAQ Global Market corporate governance listing standards. Although we do not currently plan to utilize the home country exemption for corporate governance matters, to the extent that we choose to do so in the future, our shareholders may be afforded less protection than they otherwise would under the NASDAQ Global Market corporate governance listing standards applicable to U.S. domestic issuers. As a result, you may not be afforded the same protections or information, which would be made available to you, were you investing in a United States domestic issuer.

You may not receive dividends or other distributions on our ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on Class A ordinary shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class A ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of our ADSs.

You may not be able to participate in rights offerings and may experience dilution of your holdings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs

 

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generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

Upon completion of this offering, we will become a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and NASDAQ Global Market, impose various requirements on the corporate governance practices of public companies. As a company with less than US$1.0 billion in revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 in the assessment of the emerging growth company’s internal control over financial reporting. These provisions also include permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements about:

 

    our goals and growth strategies;

 

    our expectations regarding demand for and market acceptance of our courses;

 

    our ability to retain and increase our student enrollments;

 

    our ability to offer new courses in existing and new subject areas;

 

    our ability to maintain and increase the tuition fees of our courses;

 

    our ability to deepen and expand our corporate employer relationships;

 

    our ability to maintain our relationships with universities and colleges;

 

    our future business development, results of operations and financial condition;

 

    the expected growth of, and trends in, the markets for our services in China;

 

    relevant government policies and regulations relating to our corporate structure, business and industry;

 

    our expectation regarding the use of proceeds from this offering; and

 

    assumptions underlying or related to any of the foregoing.

You should read thoroughly this prospectus and the documents that we refer to in this prospectus with the understanding that our actual future results may be materially different from and worse than what we expect. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering and the concurrent private placement of approximately US$107.4 million, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. These estimates are based upon an assumed initial offering price of US$9.00 per ADS, the mid-point of the range shown on the front cover page of this prospectus. We will not receive any of the proceeds from the sale of ADSs by the selling shareholders. A US$1.00 change in the assumed initial public offering price of US$9.00 per ADS would, in the case of an increase, increase and, in the case of a decrease, decrease the net proceeds of this offering by US$10.7 million, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

The primary purposes of this offering and the concurrent private placement are to create a public market for our shares for the benefit of all shareholders, retain talented employees by providing them with equity incentives and obtain additional capital. We plan to use the net proceeds of this offering primarily for general corporate purposes, which may include investing in course development, expanding our learning center network, sales and marketing activities, technology infrastructure and capital expenditures, upgrading facilities and other general and administrative matters. We may also use a portion of the net proceeds for investing in, or acquiring, complementary businesses, although we have not identified any near-term investment or acquisition targets.

The amounts and timing of any expenditures will vary depending on the amount of cash generated by our operations, and the rate of growth, if any, of our business. Accordingly, our management will have significant flexibility in applying the net proceeds of the offering and the concurrent private placement. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus.

In utilizing the proceeds from this offering and the concurrent private placement, we are permitted under PRC laws and regulations to provide funding to our existing PRC subsidiaries only through loans or capital contributions or to establish new PRC subsidiaries, subject to the applicable government registration and approval requirements. We cannot assure you that we will be able to meet these requirements on a timely basis, if at all. See “Risk Factors—Risks Related to Our Corporate Structure—PRC regulation of direct investment and loans by offshore holding companies to PRC entities and governmental control of currency conversion may delay or limit us from using the proceeds of this offering to make additional capital contributions or loans to our PRC subsidiaries.” We plan to use a portion of proceeds from this offering and the concurrent private placement to increase the registered capital of Tarena Hangzhou and will apply for approval from the Investment Promotion Bureau of Hangzhou Economic and Technological Development Zone for such capital increase, and register the change with the Hangzhou Administration for Industry and Commerce and the Zhejiang Bureau of the SAFE. We currently do not plan to use any of the proceeds from this offering or the concurrent private placement to fund the operations of our consolidated VIEs and their related entities.

Pending use of the net proceeds, we intend to hold our net proceeds in short-term, interest-bearing, financial instruments or demand deposits.

 

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DIVIDEND POLICY

We have not previously declared or paid cash dividends, and we have no plan to declare or pay any dividends in the near future on our shares or ADSs. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

We are a holding company incorporated in the Cayman Islands. We rely principally on dividends from our PRC subsidiaries for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “PRC Regulation—Regulations on Dividend Distribution.”

Our board of directors has discretion as to whether to distribute dividends, subject to applicable laws. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

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CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2013:

 

    on an actual basis;

 

    on a pro forma basis to reflect the automatic conversion of all of our outstanding preferred shares into 25,430,831 ordinary shares upon the completion of this offering; and

 

    on a pro forma as adjusted basis to reflect (i) the automatic conversion of all of our outstanding preferred shares into 25,430,831 ordinary shares upon the completion of this offering, (ii) the sale of 11,500,000 Class A ordinary shares in the form of ADSs by us in this offering at an assumed initial public offering price of US$9.00 per ADS, the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us (assuming the underwriters will not exercise their option to purchase additional ADSs) and (iii) the sale of 1,500,000 Class A ordinary shares by us to New Oriental Education & Technology Group Inc. through a concurrent private placement, which number of shares has been calculated based on an initial offering price of US$9.00 per ADS, the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus.

You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of December 31, 2013  
     Actual     Pro forma(1)     Pro forma
as adjusted(1)
 
     (in thousands of US$)  

Preferred Shares

      

Series A preferred shares (US$0.001 par value; 7,196,159 shares issued and outstanding on an actual basis; none outstanding on a pro forma or pro forma as adjusted basis)

     420        —          —     

Series B preferred shares (US$0.001 par value; 7,319,820 shares issued and outstanding on an actual basis; none outstanding on a pro forma or pro forma as adjusted basis)

     15,748        —          —     

Series C preferred shares (US$0.001 par value; 10,914,852 shares issued and outstanding on an actual basis; none outstanding on a pro forma or pro forma as adjusted basis)

     95,211        —          —     

Shareholders’ Equity (Deficit)

      

Ordinary shares (US$0.001 par value; 90,000,000 shares authorized, 12,226,558 shares issued and outstanding on an actual basis; 37,657,389 issued and outstanding on a pro forma basis; 16,800,000 Class A ordinary shares issued and outstanding on a pro forma as adjusted basis and 33,857,389 Class B ordinary shares issued and outstanding on a pro forma as adjusted basis)

     12        38        51   

Additional paid in capital

     —          111,353        218,776   

Accumulated other comprehensive income

     1,635        1,635        1,635   

Accumulated deficit

     (64,931     (64,931     (64,931
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity (deficit)(2)

     (63,284     48,095        155,531   
  

 

 

   

 

 

   

 

 

 

Total preferred shares and shareholders’ equity (deficit)(2)

     48,095        48,095        155,531   
  

 

 

   

 

 

   

 

 

 

 

Notes:

(1) The pro forma and pro forma as adjusted information discussed above is illustrative only. Our total shareholders’ equity and total capitalization following the completion of this offering are subject to adjustment based on the actual initial public offering price and other terms of this offering determined at pricing. Pro forma as adjusted numbers assumes that the underwriters will not exercise their option to purchase additional ADSs.
(2) Assuming the number of ADSs offered by us as set forth on the cover page of this prospectus remains the same, and after deduction of underwriting discounts and commissions and the estimated offering expenses payable by us, a US$1.00 change in the assumed initial public offering price of US$9.00 per ADS would, in the case of an increase, increase and, in the case of a decrease, decrease each of total shareholders’ equity and total capitalization by US$10.7 million.

 

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DILUTION

Our net tangible book value as of December 31, 2013 was approximately US$3.93 per ordinary share and US$3.93 per ADS. Net tangible book value per ordinary share represents the amount of total assets, minus the amount of total liabilities, divided by the total number of ordinary shares outstanding. Dilution is determined by subtracting net tangible book value per ordinary share from the assumed public offering price per ordinary share.

Without taking into account any other changes in such net tangible book value after December 31, 2013, other than to give effect to (i) the conversion of all of our Series A, Series B and Series C convertible preferred shares into 25,430,831 ordinary shares, which will occur automatically upon the completion of this offering, (ii) our issuance and sale of 11,500,000 ADSs in this offering, at an assumed initial public offering price of US$9.00 per ADS, the mid-point of the estimated public offering price range, and after deduction of underwriting discounts and commissions and estimated offering expenses payable by us (assuming the underwriters will not exercise their option to purchase additional ADSs), and (iii) our issuance and sale of 1,500,000 Class A ordinary shares to New Oriental Education & Technology Group Inc. concurrently with this offering, assuming an initial public offering price of US$9.00 per ADS, the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus, our pro forma net tangible book value at December 31, 2013 would have been US$3.07 per outstanding ordinary share, including ordinary shares underlying our outstanding ADSs, or US$3.07 per ADS. This represents an immediate increase in net tangible book value of US$1.79 per ordinary share, or US$1.79 per ADS, to existing shareholders and an immediate dilution in net tangible book value of US$5.93 per ordinary share, or US$5.93 per ADS, to purchasers of ADSs in this offering.

The following table illustrates the dilution on a per ordinary share basis assuming that the initial public offering price per ordinary share is US$9.00 and all ADSs are exchanged for ordinary shares:

 

Assumed initial public offering price per ordinary share

   US$ 9.00   

Net tangible book value per ordinary share

   US$ 3.93   

Pro forma net tangible book value per ordinary share after giving effect to the automatic conversion of all of our outstanding preferred shares

   US$ 1.28   

Pro forma net tangible book value per ordinary share as adjusted to give effect to the automatic conversion of all of our outstanding preferred shares, this offering and the concurrent private placement as of December 31, 2013

   US$ 3.07   

Amount of dilution in net tangible book value per ordinary share to new investors in the offering

   US$ 5.93   

Amount of dilution in net tangible book value per ADS to new investors in the offering

   US$ 5.93   

A US$1.00 change in the assumed public offering price of US$9.00 per ADS would, in the case of an increase, increase and, in the case of a decrease, decrease our pro forma net tangible book value after giving effect to the offering by US$10.7 million, the pro forma net tangible book value per ordinary share and per ADS after giving effect to this offering by US$0.22 per ordinary share and US$0.22 per ADS and the dilution in pro forma net tangible book value per ordinary share and per ADS to new investors in this offering by US$0.78 per ordinary share and US$0.78 per ADS, assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses. The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

 

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The following table summarizes, on a pro forma basis as of December 31, 2013, the differences between the shareholders as of December 31, 2013 and the new investors with respect to the number of ordinary shares purchased from us in this offering and the concurrent private placement, the total consideration paid and the average price per ordinary share paid at an assumed initial public offering price of US$9.00 per ADS, the mid-point of the estimated public offering price range, before deducting estimated underwriting discounts and commissions and estimated offering expenses.

 

     Ordinary shares
Purchased
    Total Consideration     Average Price
Per Ordinary
Share
     Average Price
Per ADS
 
     Number      Percent     Amount (US$)      Percent     US$      US$  

Existing shareholders

     37,657,389         74.3     26,985,030         18.7     0.72         0.72   

New investors

     13,000,000         25.7     117,000,000         81.3     9.00         9.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     50,657,389         100     143,985,030         100     2.84         2.84   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

A US$1.00 change in the assumed public offering price of US$9.00 per ADS would, in the case of an increase, increase and, in the case of a decrease, decrease total consideration paid by new investors, total consideration paid by all shareholders, average price per ordinary share and average price per ADS paid by all shareholders by US$10.7 million, US$10.7 million, US$0.24 and US$0.24, respectively, assuming the sale of 11,500,000 ADSs at US$9.00, the mid-point of the range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and the sale of 1,500,000 Class A ordinary shares by us to New Oriental Education & Technology Group Inc. through a concurrent private placement, which number of shares has been calculated based on an initial offering price of US$9.00 per ADS, the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus.

The discussion and tables above also assume no exercise of any outstanding share options outstanding as of the date of this prospectus. As of the date of this prospectus, options to purchase 9,940,614 ordinary shares are issued and outstanding, at a weighted average exercise price of US$2.46 per ordinary share. To the extent that any of these options are exercised, there will be further dilution to new investors.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

We were incorporated in the Cayman Islands in order to enjoy the following benefits:

 

    political and economic stability;

 

    an effective judicial system;

 

    a favorable tax system;

 

    the absence of exchange control or currency restrictions; and

 

    the availability of professional and support services.

However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include, but are not limited to, the following:

 

    the Cayman Islands has a less developed body of securities laws as compared to the United States and these securities laws provide significantly less protection to investors; and

 

    Cayman Islands companies may not have standing to sue before the federal courts of the United States.

Our constitutional documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.

All of our operations are conducted outside the United States, and substantially all of our assets are located outside the United States. All of our current directors and officers are nationals or residents of jurisdictions other than the United States and substantially all of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

We have appointed Law Debenture Corporate Services Inc. as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

Conyers Dill & Pearman (Cayman) Limited, our counsel as to Cayman Islands law, and Han Kun Law Offices, our counsel as to PRC law, have advised us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:

 

    recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

 

    entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

Conyers Dill & Pearman (Cayman) Limited has informed us that it is uncertain whether the courts of the Cayman Islands will allow shareholders of our company to originate actions in the Cayman Islands based upon securities laws of the United States. In addition, there is uncertainty with regard to Cayman Islands law related to whether a judgment obtained from the U.S. courts under civil liability provisions of U.S. securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature.

If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company, such as our company. As the courts of the Cayman Islands have yet to rule on making such a determination in relation to judgments obtained from U.S. courts under civil liability provisions of U.S. securities laws, it is uncertain whether such judgments would be enforceable in the Cayman

 

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Islands. Conyers Dill & Pearman (Cayman) Limited has further advised us that the courts of the Cayman Islands would recognize as a valid judgment a final and conclusive judgment in personam obtained in the federal or state courts in the United States under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) or, in certain circumstances, an in personam judgment for non-monetary relief, and would give a judgment based thereon provided that: (i) such courts had proper jurisdiction over the parties subject to such judgment; (ii) such courts did not contravene the rules of natural justice of the Cayman Islands; (iii) such judgment was not obtained by fraud; (iv) the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands; (v) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands; and (vi) there is due compliance with the correct procedures under the laws of the Cayman Islands.

Han Kun Law Offices has further advised us that the recognition and enforcement of foreign judgments are provided for under PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands.

 

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CORPORATE HISTORY AND STRUCTURE

We began our operations in Beijing in September 2002 through Beijing Tarena Technology Co., Ltd. In November 2012, we changed the name of Beijing Tarena Technology Co., Ltd. to Tarena Technologies Inc., or Tarena Tech. Tarena International, Inc. was incorporated in the Cayman Islands in October 2003 and became our ultimate holding company. We established Tarena Hong Kong Limited, or Tarena HK, as our wholly-owned subsidiary in October 2012. Tarena HK wholly owns Tarena Software Technology (Hangzhou) Co., Ltd., or Tarena Hangzhou, an entity that we established in January 2013.

Prior to 2012, we conducted a substantial portion of our operations through our consolidated VIEs and their respective subsidiaries and schools. On January 30, 2012, the new PRC Catalogue for the Guidance of Foreign Investment Industries (amended) became effective, which listed professional education service as an industry for which foreign investments are “encouraged” by the government. In light of such change of law, starting from the second half of 2012, we began to transfer the operations, including related assets and liabilities, of our consolidated VIEs to Tarena Tech and its subsidiaries and schools. As of December 31, 2013, all of our learning center operations of VIEs have been transferred to Tarena Tech and its subsidiaries and schools. We are in the process of winding down Shanghai Tarena. We expect to continue to control and consolidate Beijing Tarena, which holds an ICP license that is necessary for the operation of our www.it211.com.cn website. For a description of the risks relating to our corporate structure and the contractual arrangements we have entered into with our VIEs, see “Risk Factors—Risk Related to Our Corporate Structure.”

The table below sets forth the respective revenues contribution and assets of Tarena and our wholly-owned subsidiaries and our consolidated VIEs:

 

     Net Revenues(1)      Total Assets(1)  
     For the year ended
December 31, 2012
     For the year ended
December 31, 2013
     As of December 31,
2013
 

Tarena and its wholly-owned subsidiaries

     67.7%         92.0%         96.8%   

Consolidated VIEs

     32.3%         8.0%         3.2%   
  

 

 

    

 

 

    

 

 

 

Total

     100%         100%         100%   
  

 

 

    

 

 

    

 

 

 

 

Notes:

(1) The percentages exclude the inter-company transactions and balances between Tarena and wholly-owned subsidiaries and the consolidated VIEs.

 

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A list of our subsidiaries and VIEs is filed as exhibit 21.1 to the registration statement to which this prospectus is a part. The following diagram illustrates our current corporate structure:

 

LOGO

Notes:

(1) Mr. Shaoyun Han, our founder, chairman and chief executive officer, owns 70% of the equity interest in Beijing Tarena. Mr. Jianguang Li, our director, owns 30% of the equity interest in Beijing Tarena.
(2) Mr. Shaoyun Han and Mr. Jianguang Li own 49% and 51% of the equity interest in Shanghai Tarena, respectively.
(3) Shanghai Tarena is in the process of voluntary winding down.
(4) Tarena (Wuhan) Technology Co., Ltd., which is a wholly-owned subsidiary of Tarena Tech, wholly owns Wuhan Tarena Software Co., Ltd., which holds 100% of the sponsorship interest in Wuhan Tarena Professional Education School.
(5) Mr. Shaoyun Han is the principal of Shenyang Tarena Professional Education School, Jinan Tarena Professional Education School, Wuhan Tarena Professional Education School, Chongqing Jiulongpo Tarena Professional Education School and Nanjing Tarena Professional Education School; De Xun Wang is the principal of Guangzhou Tarena Professional Education School and Shenzhen Bao’an Tarena Professional Education School; Xuefeng Lu is the principal of Harbin Tarena Professional Education School; Qian Li is the principal of Qingdao Tarena Professional Education School; Ning Ding is the principal of Kunming Guandu Tarena Professional Education School; and Nini Tong is the principal of Zhuhai Tarena Professional Education School.

 

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Contractual Arrangements with our VIEs

Because of foreign ownership restriction on Internet content and other value-added telecommunication services in China, we operate our www.it211.com.cn website through our consolidated VIE, Beijing Tarena. Beijing Tarena holds our ICP license for www.it211.com.cn. Beijing Tarena is 70% owned by Mr. Shaoyun Han, our chief executive officer, and 30% owned by Mr. Jianguang Li, our director. Mr. Han and Mr. Li are both PRC citizens. We entered into a series of contractual arrangements with Beijing Tarena and its shareholders, which enable us to:

 

    exercise effective financial control over Beijing Tarena;

 

    receive substantially all of the economic benefits and bear the obligation to absorb substantially all of the losses of Beijing Tarena; and

 

    have an exclusive option to purchase all or part of the equity interests in Beijing Tarena when and to the extent permitted by PRC law.

Because of these contractual arrangements, we are the primary beneficiary of Beijing Tarena and consolidate its financial results in our consolidated financial statements in accordance with U.S. GAAP.

The following is a summary of the currently effective contracts by and among Tarena International, Inc., our subsidiary Tarena Tech, our VIE, Beijing Tarena, and the shareholders of Beijing Tarena.

Exclusive Business Cooperation Agreement

Under the exclusive business cooperation agreement between Beijing Tarena and Tarena Tech, as amended and restated, Tarena Tech has the exclusive right to provide, among other things, technical support, business support and related consulting services to Beijing Tarena and Beijing Tarena agrees to accept all the consultation and services provided by Tarena Tech. Without Tarena Tech’s prior written consent, Beijing Tarena is prohibited from engaging any third party to provide any of the services under this agreement. In addition, Tarena Tech exclusively owns all intellectual property rights arising out of or created during the performance of this agreement. Beijing Tarena agrees to pay a monthly service fee to Tarena Tech at an amount determined solely by Tarena Tech after taking into account factors including the complexity and difficulty of the services provided, the time consumed, the seniority of the Tarena Tech employees providing services to Beijing Tarena, the value of services provided, the market price of comparable services and the operating conditions of Beijing Tarena. Furthermore, to the extent permitted under the PRC law, Tarena Tech agrees to provide financial support to Beijing Tarena if Beijing Tarena has any operating loss or suffered any critical operation adversity. The term of the agreement will remain effective unless Tarena Tech terminates the agreement in writing or a competent governmental authority rejects the renewal applications by either Beijing Tarena or Tarena Tech to renew its respective business license upon expiration. Without the consent of Tarena Tech, Beijing Tarena is not permitted to terminate this agreement in any event unless required by applicable laws.

Power of Attorney

Pursuant to the power of attorney, as amended and restated, the shareholders of Beijing Tarena each irrevocably appointed Tarena Tech as the attorney-in-fact to act on their behalf on all matters pertaining to Beijing Tarena and to exercise all of their rights as a shareholder of Beijing Tarena, including but not limited to attend shareholders’ meetings, vote on their behalf on all matters of Beijing Tarena requiring shareholders’ approval under PRC laws and regulations and the articles of association of Beijing Tarena, and designate and appoint directors and senior management members. Tarena Tech may assign its rights under this power of attorney to any other person or entity at its sole discretion without prior notice to the shareholders of Beijing Tarena. Each power of attorney will remain in force until the shareholder ceases to hold any equity interest in Beijing Tarena.

 

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Equity Interest Pledge Agreements

Under the equity interest pledge agreements between Tarena Tech, Beijing Tarena and the shareholders of Beijing Tarena, as amended and restated, the shareholders pledged all of their equity interests in Beijing Tarena to Tarena Tech to guarantee Beijing Tarena’s and Beijing Tarena’s shareholders’ performance of their obligations under the contractual arrangements including, but not limited to the service fees due to Tarena Tech. If Beijing Tarena or any of Beijing Tarena’s shareholders breaches its contractual obligations under the contractual arrangements, Tarena Tech, as the pledgee, will be entitled to certain rights and entitlements, including receiving proceeds from the auction or sale of whole or part of the pledged equity interests of Beijing Tarena in accordance with legal procedures. Tarena Tech has the right to receive dividends generated by the pledged equity interests during the term of the pledge. If any event of default as provided in the contractual arrangements occurs, Tarena Tech, as the pledgee, will be entitled to dispose of the pledged equity interests in accordance with PRC laws and regulations. The equity interest pledge agreements became effective on the date when the agreements were duly executed. The pledge was registered with Changping Bureau of Beijing Administration for Industry and Commerce in December 2013, and will remain binding until Beijing Tarena and its shareholders discharge all their obligations under the contractual arrangements. The registration of the equity pledge enables Tarena Tech to enforce the equity pledge against third parties who acquire the equity interests of Beijing Tarena in good faith.

Exclusive Option Agreements

Under the exclusive option agreements between Tarena International, Inc., Tarena Tech, each of the shareholders of Beijing Tarena and Beijing Tarena, as amended and restated, each of the shareholders irrevocably granted Tarena International, Inc. or its designated representative(s) an exclusive option to purchase, to the extent permitted under PRC law, all or part of his equity interests in Beijing Tarena. In addition, Tarena International, Inc. has the option to acquire the equity interests of Beijing Tarena for a specified price equal to the loan provided by Tarena Tech to the individual shareholders. If the lowest price permitted under PRC law is higher than the above price, the lowest price permitted under PRC law shall apply. Tarena International, Inc. or its designated representative(s) has sole discretion as to when to exercise such options, either in part or in full. Without Tarena International, Inc.’s prior written consent, Beijing Tarena’s shareholders shall not sell, transfer, mortgage, or otherwise dispose any equity interests in Beijing Tarena. These agreements will remain effective until all equity interests in Beijing Tarena held by its shareholders are transferred or assigned to Tarena International, Inc. or Tarena International, Inc.’s designated representatives.

Loan Agreements

Pursuant to the loan agreements between Tarena Tech and each individual shareholder of Beijing Tarena, as amended and restated, Tarena Tech provided loans with an aggregate amount of RMB2 million (US$0.3 million) to the individual shareholders of Beijing Tarena for the sole purpose of providing capital for Beijing Tarena. The loans can only be repaid in a manner determined by Tarena Tech at its sole discretion, which repayment may take the form of transferring the individual shareholders’ equity interest in Beijing Tarena to Tarena or its designated person pursuant to the exclusive option agreements. The loan shall be interest-free, unless the transfer price exceeds the principal of the loan when each individual shareholder of Beijing Tarena transfers his equity interests in Beijing Tarena to Tarena or its designated person(s). Such excess over the principal of the loan shall be deemed the interest of the loan to the extent permitted under PRC law. The term of each loan agreement is ten years from the date of the agreement expiring in 2023 and can be extended with the written consent of both parties before expiration.

 

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Spousal Consent Letters

Ms. Ying Sun, the spouse of Mr. Shaoyun Han, and Ms. Nan Li, the spouse of Mr. Jianguang Li, executed spousal consent letters. Pursuant to the spousal consent letters, each of Ms. Ying Sun and Ms. Nan Li:

 

    undertook not to make any assertions in connection with the equity interests in Beijing Tarena held by her spouse;

 

    confirmed that her spouse can perform the amended and restated equity interest pledge agreements, the amended and restated exclusive option agreements, the power of attorney and the amended and restated loan agreements and to further amend or terminate such documents absent authorization or consent from her;

 

    undertook to execute all necessary documents and take all necessary actions to ensure appropriate performance of the amended and restated equity interest pledge agreements, the amended and restated exclusive option agreements, the power of attorney and the amended and restated loan agreements; and

 

    agreed and undertook to be bound by the amended and restated equity interest pledge agreements, the amended and restated exclusive option agreements, the power of attorney, the amended and restated loan agreements and the amended and restated exclusive business cooperation agreement and comply with the obligations thereunder as an equity holder of Beijing Tarena if she obtain any equity interests in Beijing Tarena held by her spouse for any reason.

The contractual arrangements by and among Tarena, our subsidiary Tarena Tech, Shanghai Tarena, and the shareholders of Shanghai Tarena are substantially the same as the contractual arrangements discussed above.

In the opinion of our PRC counsel, Han Kun Law Offices, these contractual arrangements are valid, binding and enforceable under current PRC laws. However, these contractual arrangements may not be as effective in providing control as direct ownership. There are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. For a description of the risks relating to our contractual arrangements, please see “Risk Factors—Risks Related to Our Corporate Structure.”

 

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SELECTED CONSOLIDATED FINANCIAL DATA AND OPERATING DATA

The following selected consolidated statements of comprehensive income data (other than ADS data) for the years ended December 31, 2011, 2012 and 2013 and the selected consolidated balance sheet data as of December 31, 2012 and 2013 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results for any period are not necessarily indicative of results to be expected for any future period. You should read the following summary financial information in conjunction with the consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

     For the Year Ended December 31,  
     2011     2012     2013  
     (in thousands of US$, except for share, per
share and per ADS data)
 

Selected Consolidated Statements of Comprehensive Income Data:

      

Net revenues

     25,741        56,820        92,834   

Cost of revenues(1)

     (8,714     (17,762     (29,068

Gross profit

     17,027        39,058        63,766   

Operating expenses(1):

      

Selling and marketing

     (7,676     (16,875     (30,252

General and administrative

     (7,832     (9,948     (16,224

Research and development

     (1,159     (1,792     (3,807

Operating income

     360        10,443        13,483   

Interest income

     275        1,165        1,541   

Income before income taxes

     840        11,771        16,318   

Income tax expense

     (139     (2,219     (2,271

Net income

     701        9,552        14,047   

Net loss attributable to ordinary shareholders

     (9,593     (16,993     (30,313

Weighted average number of ordinary shares used in per share calculations:

      

Basic

     12,518,419        10,851,287        10,930,412   

Diluted

     12,518,419        10,851,287        10,930,412   

Income (loss) per ordinary share

      

Basic

     (0.77     (1.57     (2.77

Diluted

     (0.77     (1.57     (2.77

Income (loss) per ADS(2)

      

Basic

     (0.77     (1.57     (2.77

Diluted

     (0.77     (1.57     (2.77

 

Notes:

(1) Share-based compensation expenses were allocated in cost of revenues and operating expenses as follows:

 

     For the Year Ended
December 31,
 
     2011      2012      2013  
     (in thousands US$)  

Cost of revenues

     —           —           17   

Selling and marketing expenses

     1         1         45   

General and administrative expenses

     59         125         654   

Research and development expenses

     3         3         48   

 

(2) Each ADS represents one Class A ordinary share.

 

 

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     As of December 31,  
     2012     2013  
     (in thousands of
US$)
 

Selected Consolidated Balance Sheet Data:

    

Cash and cash equivalents

     16,197        26,139   

Accounts receivable, net of allowance for doubtful accounts

     16,984        15,417   

Property and equipment, net

     8,172        12,806   

Total assets

     46,870        73,673   

Deferred revenue

     9,656        15,487   

Total liabilities

     14,738        25,578   

Total mezzanine equity

     67,099        111,379   

Total shareholders’ deficit

     (34,967     (63,284

The following tables present our selected operating data as of the dates and for the periods indicated:

 

     For the Year Ended December 31,  
     2011      2012      2013  

Student enrollments(1)

     16,282         31,340         46,458   

 

Note:

(1) The number of student enrollments as presented does not include student enrollments at our two franchised learning centers in Taiyuan and Xi’an.

 

     As of December 31,  
     2011      2012      2013  

Learning centers(1)

     34         57         92   

 

Note:

(1) The number of learning centers as presented does not include our two franchised learning centers in Taiyuan and Xi’an.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Financial Data and Operating Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We are a leading provider of professional education services in China. Our core strength is in IT professional education services, where we are the largest provider in China with a market share of 8.3% as measured by revenues in 2013 according to IDC, a third-party research firm. We currently offer courses in nine IT subjects and two non-IT subjects. Our courses provide students with practical education to prepare them for jobs in industries with significant growth potential and strong hiring demand.

We have an innovative education platform combining live distance instruction, classroom-based tutoring and online learning modules. For each class, instructors deliver lectures from one classroom in Beijing to both students in the same classroom as well as to students at our learning centers across China via simultaneous webcast. To facilitate a disciplined and focused learning environment, we staff each classroom at our learning centers with one or two on-site teaching assistants to tutor and supervise students. We complement the live instruction and tutoring with our proprietary learning management system TTS. TTS has five core functions, featuring course content, self-assessment exams, student and teaching staff interaction tools, student management tools and an online student community. Through this education platform, we provide job-oriented education with measurable outcomes, as demonstrated by our high job placement rates and students’ academic performance.

Capitalizing on our innovative education platform, we have built a highly scalable business that we can expand and replicate rapidly with consistent quality. We deliver high quality lectures through a group of experienced and passionate instructors based in Beijing to a nationwide network of 92 directly operated learning centers in 33 cities in China as of December 31, 2013. Compared to traditional classroom-based teaching, which requires hiring and training of instructors for local sites, we are able to expand our geographic footprint and class sizes without impacting the quality of our course offerings because we are generally able to provide our students across China with equal access to the same group of instructors. For our most established Java course, our student-to-instructor ratio increased from 1,624-to-1 in 2011 to 3,276-to-1 in 2013, and the average net revenues per instructor for our Java course increased from approximately US$2.7 million in 2011 to approximately US$6.9 million in 2013.

Selected Income Statement Items

Net Revenues

We derive substantially all of our net revenues from tuition fees that we charge students. In 2011, 2012 and 2013, we generated net revenues of US$25.7 million, US$56.8 million and US$92.8 million, respectively. We record tuition fees that we collect in advance as deferred revenues. We historically allowed students to pay our tuition fees within a period of time after graduation. We have gradually phased out this payment option since the beginning of 2013. The gradual cessation of such installment payment option has reduced our outstanding accounts receivable. Starting in 2013, we began to generally collect tuition fees in advance. Our net revenues are presented net of business tax and surcharges.

Number of Student Enrollments

Our ability to generate and increase revenues is primarily driven by our ability to increase the number of student enrollments. The number of our student enrollments is primarily driven by the number and popularity of

 

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our course offerings. We evaluate the market demands for our course offerings and open new learning centers to cater to such demands. Our total student enrollments increased from 16,282 in 2011 to 46,458 in 2013, representing a CAGR of 68.9%. The total number of our learning centers nationwide grew from 34 as of December 31, 2011 to 57 as of December 31, 2012 and to 92 as of December 31, 2013.

Our total student enrollment is affected by the continuing popularity of our existing courses and the number of new courses we offer. Between 2011 and 2013, annual student enrollment in our five main courses, namely Java, C++, Embedded, PHP and Software testing, increased from 15,035 to 37,868, representing a CAGR of 58.7%. To date, our Java and C++ courses remain among the largest and most important courses in terms of revenues and number of student enrollments. We derived approximately 70.6%, 71.3% and 59.3% of our net revenues from our Java course in 2011, 2012 and 2013, respectively. We derived approximately 12.4%, 12.5% and 12.0% of our net revenues from our C++ course in each of 2011, 2012 and 2013. Since 2011, we have developed and launched five new courses. Expanding our course offerings and diversifying our sources of revenues help protect us from potential reduced student enrollments due to down-turns in certain industries or professions.

Our total student enrollment is also affected by our ability to maintain our cooperative relationships with financing service providers for student loans. A significant portion of our students rely on loans provided or arranged by BOB CFC and CreditEase to pay for our tuition fees. Historically, a significant portion of our students also relied on loans arranged by Chuanbang, a credit-sourcing company in China owned by Mr. Shaoyun Han, our chief executive officer. In 2013, 56.9% of our students took out loans provided or arranged by these three financing service providers to pay for our tuition fees. Chuanbang ceased offering financing services to our students enrolled since January 1, 2014. We intend to continue our cooperation with BOB CFC in providing loans and CreditEase in providing person-to-person lending services to our students in the future.

Starting from 2011, Chuanbang began to offer person-to-person lending services to our students to help them pay for our tuition fees. In connection with the person-to-person lending services provided by Chuanbang, we serve as a guarantor of the loans taken out by students. We recognized US$6,087, US$70,245 and US$90,490 as guarantee fee revenue in 2011, 2012 and 2013, respectively. We have stopped providing guarantees for any new student loan arranged by Chuanbang since April 2013. We have not generated any interest income in connection with the person-to-person lending services provided by Chuanbang.

Tuition fees

Our net revenues are affected by the tuition fees for each of our courses. For our full-time classes, our standard tuition fees ranged from RMB13,800 (US$2,280) to RMB16,800 (US$2,775) per course in 2013. Our standard tuition fees for our part-time class are typically RMB13,800 (US$2,280) per course. We increased our tuition fees for most of our full-time classes by approximately RMB1,000 (US$165) from RMB13,800 (US$2,280) per course to RMB14,800 (US$2,445) per course in 2012 and further increased such tuition fees by RMB1,000 (US$165) to RMB15,800 (US$2,610) per course in 2013. We believe our high education quality and strong job placement track record have enabled us to charge above-market tuition fees during the past three years.

The actual tuition fees that we charge for our courses may vary according to the recruiting channel through which a student is enrolled. We recruit students either through our direct marketing efforts or from our network of cooperative universities and colleges. We generally offer a discount of approximately RMB4,000 (US$661) per person per full-time course for students enrolled through our network of cooperative universities and colleges. In 2013, we recruited approximately 22.9% of our students from these universities and colleges.

Our tuition fees are also affected by the payment option selected by our students. We primarily offer two payment options for our students, including one-time full payment upon enrollment and multiple payments within two months of enrollment. We historically allowed students to pay our tuition fees within a period of time

 

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after graduation. We have gradually phased out this payment option since the beginning of 2013. We charge RMB3,000 (US$496) higher in tuition fees to students electing to pay in multiple installments, as compared to students who elect to pay in full upfront.

Cost of Revenues

Our cost of revenues primarily consists of payroll and employee benefits for our instructors (as apportioned based on the amount of time that they devote to teaching), teaching assistants, career counselors and employer cooperation representatives, as well as rental payments for our learning centers, and to a lesser extent, depreciation relating to property and equipment used at our learning centers. The following table sets forth a breakdown of our cost of revenues in absolute amounts and as percentages of net revenues for the periods indicated:

 

    For the Year Ended December 31,  
    2011     2012     2013  
    US$     % of
net
revenues
    US$     % of
net
revenues
    US$     % of
net
revenues
 
    (in thousands of US$, except percentages)  

Personnel cost and welfare

    2,901        11.3        6,560        11.5        11,109        12.0   

Rental cost

    2,312        9.0        5,112        9.0        8,668        9.3   

Others

    3,501        13.6        6,090        10.8        9,291        10.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    8,714        33.9     17,762        31.3     29,068        31.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our cost of revenues is primarily affected by the number of our learning centers. We operated a total of 34, 57 and 92 learning centers as of December 31, 2011, 2012 and 2013, respectively. Our cost of revenues as a percentage of net revenues was 33.9%, 31.3% and 31.3% in 2011, 2012 and 2013, respectively. We expect our cost of revenues to continue to increase as we plan to open more learning centers.

Operating Expenses

Our operating expenses consist primarily of selling and marketing expenses, general and administrative expenses and, to a lesser extent, research and development expenses. The following table sets forth our operating expenses in absolute amounts and as percentages of net revenues for the periods indicated:

 

    For the Year Ended December 31,  
    2011     2012     2013  
    US$     % of
net
revenues
    US$     % of
net
revenues
    US$     % of
net
revenues
 
    (in thousands of US$, except percentages)  

Selling and marketing expenses

    7,676        29.8        16,875        29.7        30,252        32.6   

General and administrative expenses

    7,832        30.4        9,948        17.5        16,224        17.6   

Research and development expenses

    1,159        4.5        1,792        3.2        3,807        4.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    16,667        64.7     28,615        50.4     50,283        54.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our selling and marketing expenses primarily consist of compensation expenses relating to our personnel involved in selling and marketing, including our enrollment advisors and our university cooperation representatives based at our learning centers, advertising expenses relating to our marketing activities, and, to a lesser extent, travel expenses incurred by our selling and marketing staff. We expect our selling and marketing expenses to increase as we further expand our business.

Our general and administrative expenses primarily consist of compensation expenses relating to our management and administrative personnel. To a lesser extent, our general and administrative expenses include rental and utility costs related to office and administrative functions. We expect our general and administrative expenses to increase in the future on an absolute basis as our business grows and we incur increased costs related to complying with our reporting obligations after we become a public company under U.S. securities laws.

 

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Our research and development expenses primarily consist of a portion of the personnel costs of our instructors as determined based on the amount of time that they devote to research and development-related activities, as well as the personnel costs of our software engineers.

Taxation

Cayman Islands

We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands.

Hong Kong

Our wholly-owned subsidiary in Hong Kong, Tarena Hong Kong Limited, is subject to Hong Kong profits tax on its activities conducted in Hong Kong. No provision for Hong Kong profits tax has been made in the consolidated financial statements as Tarena Hong Kong Limited has no assessable income since its inception on October 22, 2012 to December 31, 2013.

China

Pursuant to the EIT Law and its Implementation Rules, which became effective on January 1, 2008, foreign-invested enterprises and domestic companies are subject to enterprise income tax at a uniform rate of 25%. In addition, “high and new technology enterprises,” or HNTEs, will enjoy a preferential enterprise income tax rate of 15% under the EIT Law. Tarena Tech qualified as a HNTE under the EIT Law and is eligible for a preferential enterprise income tax rate of 15% for the period from 2009 to 2014, so long as it completes the filing with the competent tax authority. Tarena Software Technology (Hangzhou) Co., Ltd. was established in 2013 and qualified as an eligible software enterprise, which entitles it to two years of full exemption followed by three years of 50% exemption, commencing from the year in which its taxable income is greater than zero.

Internal Control over Financial Reporting

In connection with the audit of our consolidated financial statements as of December 31, 2012 and 2013 and for the three years ended December 31, 2013, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting as of December 31, 2013. As defined in standards established by the PCAOB, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness is related to the lack of sufficient personnel with adequate knowledge and experience in accounting for income taxes under U.S. GAAP.

Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal controls for purposes of identifying and reporting material weaknesses and other control deficiencies in our internal control over financial reporting, as we and they will be required to do under the Section 404 of the Sarbenes-Oxley Act of 2002. Had we performed a complete assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control deficiencies may have been identified.

To remedy our control deficiencies, we have adopted several measures to improve our internal control over financial reporting. We recently hired a chief financial officer with U.S. public company and securities regulation experience and additional finance and accounting personnel, including a finance director and a finance manager

 

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with U.S. GAAP and SEC reporting experience and we plan to hire additional personnel with adequate knowledge and experience in dealing with income taxes under U.S. GAAP. In addition, we have (i) provided, and intend to continue to provide, on-going training to our accounting and operating personnel across different subsidiaries to improve their income tax accounting knowledge under U.S. GAAP; (ii) included the accounting for income taxes in our accounting manual under U.S. GAAP with detailed guidance on accounting policies and procedures and will continue to update the manual as needed; and (iii) begun to prepare technical accounting memos for complex transactions related to income taxes under U.S. GAAP. We will continue to implement measures to remedy our internal control deficiencies in order to meet the requirements under Section 404 of the Sarbanes-Oxley Act. However, the implementation of these measures may not fully address the deficiencies in our internal control over financial reporting. We are not able to estimate with reasonable certainty the costs that we will need to incur to implement these and other measures designed to improve our internal control over financial reporting. See “Risk Factors—Risks Related to Our Business—If we fail to implement or maintain an effective system of internal controls, we may be unable to accurately report our results of operations or prevent fraud or fail to meet our reporting obligations, and investor confidence and the market price of our ADSs may be materially and adversely impacted.”

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (i) the reported amounts of our assets and liabilities; (ii) the disclosure of our contingent assets and liabilities at the end of each reporting period; and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these judgments, estimates and assumptions based on our own historical experience, knowledge and assessment of current business and other conditions and our expectations regarding the future based on available information, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.

When reading our consolidated financial statements, you should consider our selection of critical accounting policies, the judgment and other uncertainties affecting the application of such policies and the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

Revenue recognition

We derive substantially all of our net revenues from tuition fees, a portion of which we allow qualified students to pay on installment for a period of time exceeding one year. When tuition services are sold on repayment terms that exceed one year beyond the point in time that revenue is recognized, the receivable, and therefore the revenue is recorded at the present value of the total payments. The difference between the present value of the receivable and the nominal or principal value of the tuition fees is recognized as interest income over the contractual collection period using the effective interest rate method. The interest rate used to determine the present value of the total amount receivable is the rate at which students can obtain financing of a similar nature from other sources at the date of the transaction. Revenue is presented net of business tax and value added taxes at rates ranging between 3% and 6%, and surcharges.

Allowance for doubtful accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our students to make payments according to their respective payment plans stipulated on the arrangement. We determine the allowance by analyzing specific students’ accounts that have known or potential collection issues and applying historical loss rates to the aging of the remaining balances of accounts receivable. In the event that

 

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we believe an account receivable will become uncollectible, we record an additional provision to increase the allowance for doubtful accounts.

Long-lived assets

Our long-lived assets include property and equipment. We depreciate our property and equipment using the straight-line method over the estimated useful lives of the assets. We make estimates of the useful lives of property and equipment, including the salvage values, in order to determine the amount of depreciation expense to be recorded during each reporting period. We amortize leasehold improvements of our learning center facilities and offices over the shorter of the lease term or the estimated useful life of the assets. We estimate the useful lives of our other property and equipment at the time the assets are acquired based on historical experience with similar assets, as well as anticipated technological or other changes. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may be shortened, which would result in the recognition of increased depreciation expense in future periods. There has been no change to the estimated useful lives or salvage values of our property and equipment in 2011, 2012 and 2013.

We evaluate property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We assess recoverability by comparing the carrying amount of a long-lived asset or asset group to the estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated undiscounted future cash flows, we recognize an impairment charge based on the amount by which the carrying amount exceeds the estimated fair value of the asset or asset group. We estimate the fair value of the asset or asset group based on the best information available, including prices for similar assets, and in the absence of an observable market price, the results of using a present value technique to estimate the fair value of the asset or asset group.

No impairment on our long-lived assets was recognized in 2011, 2012 and 2013.

Share-based Compensation

We measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award and recognize the cost over the period the employee is required to provide service in exchange for the award, which is generally the vesting period. We have elected to recognize the compensation cost for an award with only service conditions that have a graded vesting schedule on a straight-line basis over the requisite service period for the entire award, net of estimated forfeitures, provided that the cumulative amount of compensation cost recognized at any date at least equals the portion of the grant-date value of such award that is vested at that date. Forfeiture rates are estimated based on historical and future expectations of employee turnover rates.

On September 22, 2008, we adopted the 2008 Plan, pursuant to which we can issue share options and other share-based awards to our key employees, directors and consultants to purchase up to 6,002,020 of our ordinary shares (being retroactively adjusted to reflect the effect of the share split). On November 28, 2012, we increased the number of our ordinary shares authorized for issuance under the 2008 Plan to 8,184,990. Share options issued before September 22, 2008 are also administered under the 2008 Plan. In February 2014, we adopted the 2014 Plan. Pursuant to the 2014 Plan, we may issue options, restricted shares and restricted share units to our qualified employees, directors and consultants on a regular basis. The maximum aggregate number of shares which may be issued pursuant to all awards under the 2014 Plan, or the Award Pool, is 1,833,696, provided that the shares reserved in the Award Pool shall be increased on the first day of each calendar year, commencing with January 1, 2015, if the unissued shares reserved in the Award Pool on such day account for less than 2% of the total number of shares issued and outstanding on a fully diluted basis on December 31 of the immediately preceding calendar year, as a result of which increase the shares unissued and reserved in the Award Pool immediately after each such increase shall equal 2% of the total number of shares issued and outstanding on a fully-diluted basis on December 31 of the immediately preceding calendar year.

 

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Since January 1, 2004, our board of directors has granted the following options to our executive officers and employees:

 

     Number of
options
     Exercise price
(US$)
     Fair value of
ordinary share
(US$)
 

Grant date

        

Prior to January 1, 2012

     7,117,020         0.058-1.00         0.04-0.83   

January 1, 2013

     2,029,386         1.83         3.75   

September 16, 2013

     488,424         1.83         5.69   

On February 20, 2014, we granted options to acquire a total of 1,805,784 ordinary shares under our 2014 Plan to a number of executive officers and employees.

In determining the estimated fair value of share options granted to executive officers and certain employees, we have considered the guidance prescribed by the AICPA Audit and Accounting Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid, which sets forth the preferred types of valuation that should be used. We have followed the “Level B” recommendation, and established the fair value of our ordinary shares at the dates of grant using a retrospective valuation for valuation dates prior to September 2013 with the assistance of an independent valuation firm. We obtained a retrospective valuation instead of contemporaneous valuation for valuation dates prior to September 2013, because at that time, our financial and managerial resources were limited. The valuation as of September 2013 was prepared on contemporaneous basis. We are ultimately responsible for all the fair value measurements in relation to the options and ordinary shares.

In determining the fair value of our ordinary shares for the purpose of determining the fair value of the share options, we followed a two-step process. In the first step, the equity value of our company was determined by taking into consideration the income approach, or the discounted cash flow on DCF, method. We considered the market approach and searched for public companies located in China with business nature and in a development stage similar to ours. However, no companies were similar to us in all aspects. We therefore did not apply any weight for the market approach to arrive at the equity value of our company and only used the market approach to corroborate the valuation results based on the income approach.

In estimating the total equity value of our ordinary shares, we considered the DCF method, which incorporates the projected cash flow of our management’s best estimation as of each measurement date. The projected cash flow estimation includes, among others, analysis of projected net revenue growth, gross margins and terminal value. The assumptions used in deriving the fair value of ordinary shares are consistent with our business plan.

The key assumptions used in developing the cash flow forecasts include: (i) compounded annualized growth rates of net revenue range from 19% to 52% for the forecasted period; (ii) gross margin forecast to improve with increasing economies of scale; and (iii) a terminal growth rate after the projection period.

The DCF method of the income approach involves applying appropriate weighted average cost of capital, or WACC, to discount the future cash flows forecast to present value. WACC comprises a required rate of return on equity plus the current tax effected rate of return on debt, weighted by the relative percentages of equity and debt in the capital structure of comparable public companies whose business operations are similar to that of ours. The required rates of return on equity were based on an estimation of the market required rate of return for investing in business similar to ours, which were derived by using the capital asset pricing model, or CAPM. Under CAPM, the discount rate was determined with consideration of the risk-free rate, industry-average correlated relative volatility coefficient beta, equity risk premium, size of our company, the scale of our business and our ability in achieving forecasted projections.

 

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The risks associated with achieving the forecasts were assessed in selecting the appropriate WACC, which had been determined to range from 17.5% to 30%. The determined WACC decreased from 30% as of 2004 to 17.5% as of 2013 was due to decrease in uncertainties associated with our financial forecast as we achieved millstones, progressed to later stage of development and developed solid track records.

In estimating the fair value of our ordinary shares by the DCF method, our management does not think there would be disproportionate returns of cash flows to different shareholders. Therefore, neither control premium nor a lack of control discount was considered in our valuations.

We also applied a discount for lack of marketability, or DLOM, ranging from 15% to 35%, to reflect the fact that there is no ready market for shares in a closely-held company like us. When determining the DLOM, the Black-Scholes option pricing model was used. Under this option-pricing method, the cost of the put option, which can hedge the price change before the privately held shares can be sold, was considered as a basis to determine the DLOM. This option pricing method was used because it takes into account certain company-specific factors, including the timing of the expected initial public offering and the volatility of the share price of the guideline companies engaged in the same industry.

The above assumptions used in determining the fair values were consistent with our business plan and major milestones we achieved. We also applied general assumptions, including the following:

 

    there will be no major changes in the existing political, legal, fiscal and economic conditions in countries in which we will carry on our business;

 

    there will be no major changes in the current tax laws in countries in which we operate and, that the rates of tax payable remain unchanged and that all applicable laws and regulations will be complied with;

 

    exchange rates and interest rates will not differ materially from those presently prevailing;

 

    the availability of financing will not be a constraint on the future growth of our operation;

 

    we will retain and have competent management, key personnel, and technical staff to support our ongoing operations; and

 

    industry trends and market conditions for related industries will not deviate significantly from economic forecasts.

In the second step, since our capital structure comprised convertible redeemable preferred shares and ordinary shares at each grant date, we allocated our equity value among each class of equity securities using the option-pricing method. The option-pricing method treats ordinary shares and preferred shares as call options on our company’s equity value and liquidation preference, redemption preference and conversion threshold of the preferred shares as exercise price of the call options.

The increase in the fair value of our ordinary shares from US$3.75 per share as of January 1, 2013 to US$5.69 per share as of September 16, 2013 was primarily attributable to the following factors:

 

    We offered more courses at our learning centers in 2013. As a result of these offerings, we experienced rapid revenue and student growth in the nine-month period ended September 30, 2013. Our net revenues in the nine-month period ended September 30, 2013 were US$64.5 million, an increase of 64.5% from US$39.2 million in the nine-month period ended September 30, 2012. The number of learning centers increased from 57 as of December 31, 2012 to 86 as of September 30, 2013, and the number of student enrollments increased from 31,340 in 2012 to 33,289 in the nine months ended September 30, 2013, respectively. In view of the above, we adjusted our estimated earning upwards when we prepared financial forecast for valuation as of September 16, 2013, and lowered the discount rate used in valuation from 19.5% as of January 1, 2013 to 17.5% as of September 16, 2013.

 

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    As we progressed towards an initial public offering, or IPO, leading time to an expected liquidity event decreased, resulting in a decrease of DLOM from 20% as of January 1, 2013 to 15% as of September 16, 2013. We also increased our estimated probability of IPO from 50% to 60%. As preferred shares would be automatically converted into ordinary shares upon IPO, the increase in estimated probability of IPO results in allocation of a higher portion of our business enterprise value to ordinary shares.

In determining the fair value of share options granted to executive officers and certain employees, we have used the binomial option pricing model. Under this option pricing model, certain assumptions, including the risk-free interest rate, the expected dividends on the underlying ordinary shares and the expected volatility of the price of the underlying shares for the contract term of the options, are required in order to determine the fair value of the options. Changes in these assumptions could significantly affect the fair value of share options and hence the amount of compensation expense we recognize in our consolidated financial statements.

For the options granted, we used the following assumptions on the date of grant in determining the estimated fair value per option:

 

     Options granted in  
     2011     2012      2013  

Expected volatility

     45-46     —           52

Expected dividends yield

     0     —           0

Exercise multiple

     2.2        —           2.2   

Risk-free interest rate per annum

     3.89%-3.93     —           2.27%-3.38

Estimated fair value of underlying ordinary shares (per share)

   US$ 0.63-0.83        —         US$ 3.75-5.69   

For the purpose of determining the estimated fair value of our share options, we believe the expected volatility and the estimated fair value of our ordinary shares are the most critical assumptions since we are a privately held company when we granted these share options.

Since we did not have a trading history at the time the share options were granted and we did not have sufficient share price history to calculate our own historical volatility, expected volatility of our future ordinary share price was estimated based on the price volatility of the shares of comparable public traded companies engaged in the similar industry.

Income taxes

The realization of the future tax benefits of deferred income tax assets is dependent on future taxable income against which such tax benefits can be applied or utilized and any tax planning strategies. In assessing the realizability of deferred income tax assets, we consider whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. All available evidence must be considered in determining the realizability of the deferred income tax assets. Such evidence includes, but is not limited to, the financial performance of subsidiaries and consolidated VIEs, the market environment in which these entities operate, the utilization of past tax credits, and the length of relevant carryforward periods. Sufficient negative evidence, such as a cumulative net loss during a three-year period that includes the current year and the prior two years, may require that a valuation allowance be established with respect to existing and future deferred income tax assets. In view of cumulative losses sustained by our PRC subsidiaries and consolidated VIEs, valuation allowances of US$0.73 million and US$0.60 million were provided as of December 31, 2012 and 2013, respectively. If, in the future, taxable incomes are available for each tax-paying component, the valuation allowances against our deferred income tax assets may be adjusted.

Recently Issued Accounting Policies

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). The standard requires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from

 

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each component of accumulated other comprehensive income based on its source (e.g., the release due to cash flow hedges from interest rate contracts) and the income statement line items affected by the reclassification (e.g., interest income or interest expense). If a component is not required to be reclassified to net income in its entirety (e.g., the net periodic pension cost), companies would instead cross reference to the related footnote for additional information (e.g., the pension footnote). ASU 2013-02 is effective for interim and annual reporting periods beginning after December 15, 2012. We adopted the new standard on January 1, 2013.

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The new standard is to be applied prospectively but retrospective application is permitted. We expect the adoption of ASU 2013-11 will not have a material impact on our consolidated financial statements.

Results of Operations

The following table sets forth a summary of our consolidated results of operations for the periods indicated, both in absolute amounts and as percentages of our net revenues. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

 

     For the Year Ended December 31,  
     2011     2012     2013  
     US$     %of Net
Revenues
    US$     %of Net
Revenues
    US$     %of Net
Revenues
 
     (in thousands, except for percentages)  

Net revenues

     25,741        100.0     56,820        100.0     92,834        100.0

Cost of revenues(1)

     (8,714     (33.9     (17,762     (31.3     (29,068     (31.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     17,027        66.1        39,058        68.7        63,766        68.7   

Operating expenses(1):

            

Selling and marketing

     (7,676     (29.8     (16,875     (29.7     (30,252     (32.6

General and administrative

     (7,832     (30.4     (9,948     (17.5     (16,224     (17.6

Research and development

     (1,159     (4.5     (1,792     (3.2     (3,807     (4.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     360        1.4        10,443        18.3        13,483        14.4   

Interest income

     275        1.1        1,165        2.1        1,541        1.7   

Interest expense

     —          —          (6     —          —          —     

Other income

     205        0.8        169        0.3        1,294        1.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     840        3.3        11,771        20.7        16,318        17.5   

Income tax expense

     (139     (0.6     (2,219     (3.9     (2,271     (2.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     701        2.7     9,552        16.8     14,047        15.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes:

(1) Share-based compensation expenses were allocated in cost of revenues and operating expenses as follows:

 

     For the Year Ended
December 31,
 
     2011      2012      2013  
     (in thousands of US$)  

Cost of revenues

     —           —           17   

Selling and marketing expenses

     1         1         45   

General and administrative expenses

     59         125         654   

Research and development expenses

     3         3         48   

 

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The Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012

Net revenues

Our net revenues increased by 63.4% from US$56.8 million in 2012 to US$92.8 million in 2013. This increase was primarily due to new student enrollments. The number of total student enrollments grew by 48.2% from 31,340 in 2012 to 46,458 in 2013. The number of our student enrollments is primarily driven by the number and popularity of our course offerings. While our existing courses continued to attract increased student enrollments, we launched three new courses in 2013. For example, we launched our digital art course in February 2013, which enrolled 5,003 students in 2013. The number of our learning centers increased from 57 as of December 31, 2012 to 92 as of December 31, 2013 to cater to the increased demand for our courses. To a lesser degree, our net revenues increase was also attributable to the increase of our tuition fees. In 2013, we raised the standard tuition fees on most of our courses by RMB1,000 (US$165) per course.

Cost of Revenues

Our cost of revenues increased by 63.7% from US$17.8 million in 2012 to US$29.1 million in 2013. This increase was primarily due to higher personnel cost and welfare expenses resulting from increased number of teaching and advisory staff at our learning centers. Our instructors, teaching assistants, career counselors and employer cooperation representatives at our learning centers increased from 921 as of December 31, 2012 to 1,179 as of December 31, 2013. The increase in cost of revenues was also attributable to increased rental payments for our learning centers. The number of our learning centers increased from 57 as of December 31, 2012 to 92 as of December 31, 2013.

Gross Profit

As a result of the foregoing, our gross profit increased by 63.3% from US$39.1 million in 2012 to US$63.8 million in 2013. Our gross profit margin was 68.7% in each of 2012 and 2013.

Operating Expenses

Our operating expenses increased by 75.7% from US$28.6 million in 2012 to US$50.3 million in 2013 as a result of increases in our selling and marketing, general and administrative and research and development expenses.

Selling and Marketing Expenses

Our selling and marketing expenses increased by 79.3% from US$16.9 million in 2012 to US$30.3 million in 2013. This increase was partially due to increased personnel cost and welfare expenses related to growth in our selling and marketing headcount from 959 as of December 31, 2012 to 1,321 as of December 31, 2013. The amount of personnel cost and welfare expenses for our selling and marketing staff increased from US$6.2 million in 2012 to US$12.9 million in 2013. The increase in selling and marketing expenses was also due to expanded marketing efforts, which increased advertising expenses from US$5.9 million in 2012 to US$11.6 million in 2013, primarily as a result of increased spending on search engine advertising as we expand our network of learning centers.

General and Administrative Expenses.

Our general and administrative expenses increased by 63.1% from US$9.9 million in 2012 to US$16.2 million in 2013 primarily due to increased headcount to support our growing operations from 456 as of December 31, 2012 to 591 as of December 31, 2013 and higher office expenses and office rental payments.

 

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Research and Development Expenses.

Our research and development expenses increased by 112.5% from US$1.8 million in 2012 to US$3.8 million in 2013 primarily due to increased personnel cost and welfare expenses of our instructors allocated to their content development activities for our new courses.

Interest Income, Net

Our net interest income increased from US$1.2 million in 2012 to US$1.5 million in 2013. Our interest income in both periods consisted of interest earned on our cash and time deposits deposited in commercial banks and interest income recognized in relation to our installment payment plan for students.

Income Tax Expense

Our income tax expense increased from US$2.2 million in 2012 to US$2.3 million in 2013 due to the increase in our taxable income, partially offset by a decrease in our effective income tax rate. The decrease in our effective income tax rate is primarily due to the effect of the higher proportion of taxable income generated by Tarena Tech which enjoys preferential income tax rate of 15%.

The effective income tax rate of 19% in 2012 was lower than the statutory income tax rate of 25% primarily because of (i) the preferential income tax rate of 15% enjoyed by Tarena Tech, (ii) the deemed profit method in determining income tax used by certain of our subsidiaries and consolidated VIEs, and (iii) the effect of research and development expenses bonus deduction allowed under PRC tax regulations, partially offset by recognition of valuation allowances for deferred income tax assets of certain subsidiaries, which were at cumulative loss position.

The effective income tax rate of 14% in 2013 was lower than the statutory income tax rate of 25% primarily because of the effect of the abovementioned Tarena Tech’s preferential income tax rate and the effect of research and development expenses bonus deduction allowed under PRC tax regulations.

Net Income

As a result of the foregoing, our net income increased from US$9.6 million in 2012 to US$14.0 million in 2013.

The Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011

Net revenues

Our net revenues increased by 120.7% from US$25.7 million in 2011 to US$56.8 million in 2012. This increase was primarily due to new student enrollments. The total number of student enrollments grew by 92.5% from 16,282 in 2011 to 31,340 in 2012. The number of our student enrollments is primarily driven by the number and popularity of our course offerings. Our existing courses continued to attract increased student enrollments and we launched our iOS course in 2012. The total number of our learning centers nationwide increased by 23 from 2011 to 2012 to cater to the increased demand for our courses. To a lesser degree, our net revenues increase was also attributable to the increase of our tuition fees. In 2012, we raised the standard tuition fees on most of our courses by RMB1,000 (US$165) per course.

Cost of Revenues

Our cost of revenues increased by 103.8% from US$8.7 million in 2011 to US$17.8 million in 2012. The increase in cost of revenues was primarily due to an increase in aggregate personnel cost and welfare expenses related to our teaching and advisory staff at our learning centers. Our instructors, teaching assistants, career counselors and employer cooperation representatives increased from 479 as of December 31, 2011 to 921 as of

 

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December 31, 2012. The increase in cost of revenues was also attributable to increased rental payments for our learning centers. The number of our learning centers increased from 34 as of December 31, 2011 to 57 as of December 31, 2012.

Gross Profit

As a result of the foregoing, our gross profit increased by 129.4% from US$17.0 million in 2011 to US$39.1 million in 2012. Our gross profit margin increased from 66.1% in 2011 to 68.7% in 2012.

Operating Expenses

Our operating expenses increased by 71.7% from US$16.7 million in 2011 to US$28.6 million in 2012 as a result of increases in our selling and marketing, general and administrative and research and development expenses.

Selling and Marketing Expenses

Our selling and marketing expenses increased by 119.8% from US$7.7 million in 2011 to US$16.9 million in 2012. This increase was partially due to our expanded marketing effort, which increased advertising expenses from US$2.2 million in 2011 to US$5.9 million in 2012. The increase in advertising expenses primarily related to greater spending on search engine advertising as we expand our network of learning centers and price increase by major search engines. The increase in selling and marketing expenses was also due to increased personnel cost and welfare expenses related to the growth of our selling and marketing headcount from 528 as of December 31, 2011 to 959 as of December 31, 2012. The amount of personnel cost and welfare expenses related to our selling and marketing staff increased from US$2.8 million in 2011 to US$6.2 million in 2012.

General and Administrative Expenses

Our general and administrative expenses increased by 27.0% from US$7.8 million in 2011 to US$9.9 million in 2012, due to increased headcount to support our growing operations from 243 as of December 31, 2011 to 456 as of December 31, 2012 and higher office expenses and office rental. In 2011, in connection with the issuance of Series C convertible redeemable preferred shares, we incurred compensation charge of US$2.5 million in relation to ordinary share repurchases from Connion Capital Limited, a company owned by Mr. Shaoyun Han. The amount represents the excess between the repurchase price of our ordinary shares and the fair value of our ordinary shares on the date of repurchase.

Research and Development Expenses.

Our research and development expenses increased by 54.6% from US$1.2 million in 2011 to US$1.8 million in 2012 primarily due to increased personnel cost and welfare expenses of our instructors allocated to their content development activities.

Interest Income, Net

Our net interest income increased from US$0.3 million in 2011 to US$1.2 million in 2012. Our interest income in both years consisted of interest earned on our cash and time deposits deposited in commercial banks and interest income recognized in relation to our installment payment plan for students.

Income Tax Expense

Our income tax expense increased significantly from US$0.1 million for the year ended December 31, 2011 to US$2.2 million for the year ended December 31, 2012, primarily due to the increase in our taxable income and

 

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an increase in our effective income tax rate. The increase in our effective income tax rate is primarily due to a number of our previously loss-making learning centers becoming profitable in 2012.

The effective income tax rate of 17% for the year ended December 31, 2011 was lower than the statutory income tax rate of 25% primarily because of the reduction in valuation allowance for the deferred income tax assets of certain of our subsidiaries and consolidated VIEs, and the deemed profit method in determining income tax used by certain of our subsidiaries and consolidated VIEs, which is calculated based on revenues less deemed expenses equal to 85% to 90% of revenues, partially offset by our non-PRC entities not subject to income taxes.

The effective income tax rate of 19% for the year ended December 31, 2012 was lower than the statutory income tax rate of 25% primarily because of (i) the preferential income tax rate of 15% enjoyed by Tarena Tech, (ii) the deemed profit method in determining income tax used by certain of our subsidiaries and consolidated VIEs, and (iii) the effect of research and development expenses bonus deduction allowed under PRC tax regulations, partially offset by recognition of valuation allowances for deferred income tax assets of certain subsidiaries, which were at cumulative loss position.

Net Income

As a result of the foregoing, our net income increased from US$0.7 million in 2011 to US$9.6 million in 2012.

Selected Quarterly Results of Operations

The following table sets forth our unaudited condensed consolidated quarterly results of operations for each of the eight quarters in the period from January 1, 2012 to December 31, 2013. You should read the following table in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. The unaudited condensed consolidated quarterly results of operations includes all adjustments that we consider necessary for a fair presentation of our operating results for the quarters presented. Our historical results for any particular quarter are not necessarily indicative of our future results.

 

    For the Three Months Ended  
    March 31,
2012
    June 30,
2012
    September 30,
2012
    December 31,
2012
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
 
                (in thousands of US$)              

Selected Consolidated Statement of Comprehensive Income Data:

               

Net revenues

    8,147        13,318        17,721        17,634        15,142        20,826        28,491        28,375   

Cost of revenues(1)

    (3,124     (3,634     (4,971     (6,033     (6,014     (6,616     (8,017     (8,421
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    5,023        9,684        12,750        11,601        9,128        14,210        20,474        19,954   

Operating expenses(1):

               

Selling and marketing

    (2,982     (4,000     (4,523     (5,370     (5,518     (7,671     (8,672     (8,391

General and administrative

    (2,076     (2,296     (2,467     (3,109     (3,221     (3,804     (4,182     (5,017

Research and development

    (364     (447     (433     (548     (627     (996     (997     (1,187
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (399     2,941        5,327        2,574        (238     1,739        6,623        5,359   

Interest income

    233        261        238        433        293        512        639        97   

Interest expense

    (5     (1     —          —          —          —          —          —     

Other income

    86        52        9        22        1        38        95        1,160   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (85     3,253        5,574        3,029        56        2,289        7,357        6,616   

Income tax benefit (expense)

    17        (596     (949     (691     (10     (407     (1,331     (523
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (68     2,657        4,625        2,338        46        1,882        6,026        6,093   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Note:

(1) Share-based compensation expenses were allocated in cost of revenues and operating expenses as follows:

 

    For the Three Months Ended  
    March 31,
2012
    June 30,
2012
    September 30,
2012
    December 31,
2012
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
 
                (in thousands of US$)              

Cost of revenues

    —          —          —          —          4        4        4        4   

Selling and marketing expenses

    —          —          —          —          11        11        11        11   

General and administrative expenses

    31        31        31        31        149        149        158        198   

Research and development expenses

    1        1        1        1        12        12        12        12   

The growth of our quarterly net revenues was primarily driven by the increases in student enrollments over the eight quarters in the period from January 1, 2012 to December 31, 2013. The following table sets forth our student enrollments for each of the eight quarters in the period from January 1, 2012 to December 31, 2013:

 

    For the Three Months Ended  
    March 31,
2012
    June 30,
2012
    September 30,
2012
    December 31,
2012
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
 

Student enrollments(1)

    6,239        8,618        8,354        8,129        8,473        11,341        13,475        13,169   

 

Note:

(1) The number of student enrollments as presented does not include student enrollments at our two franchised learning centers in Taiyuan and Xi’an.

Seasonal fluctuations have affected, and are likely to continue to affect, our business. Historically, we typically generate the highest net revenues in the third and fourth quarters because of the increased student enrollments during summer vacation. We generally generate less tuition fees in the first quarter of each year due to the Chinese New Year holiday. For example, we expect our net revenues in the quarter ended March 31, 2014 to be lower than in the quarter ended December 31, 2013 primarily due to the Chinese New Year holiday consistent with prior years. Our quarterly cost of revenue, selling and marketing expenses, general and administrative expenses and research and development expenses have generally been increasing in absolute amounts during the period from January 1, 2012 to December 31, 2013 as we expanded our network of learning centers, increased the number of our personnel and enhanced our marketing efforts. We may experience fluctuations in our quarterly results of operations after this offering, for the reasons given above or other reasons, which may be significant. See also “Risk Factors—Risks Related to Our Business—Our business is subject to seasonal fluctuations, which may cause our operating results to fluctuate from quarter to quarter. This may result in volatility in and adversely affect the price of our ADSs.”

Liquidity and Capital Resources

Cash Flows and Working Capital

Our principal sources of liquidity have been cash generated from operating activities and proceeds from the issuance and sale of our preferred shares. As of December 31, 2013, we had US$38.3 million in cash, cash equivalents and time deposits and we had no bank borrowings. Our cash consists of cash on hand and cash in bank, which are unrestricted as to withdrawal. Cash and cash equivalents of our consolidated VIEs, in the amount of US$0.2 million as of December 31, 2013, can be used only to settle obligations of our consolidated VIEs. Cash equivalents consist of interest-bearing certificates of deposit with initial term of no more than three months when purchased. Time deposits represent certificates of deposit and those that mature over one year as of the balance sheet date are included in non-current assets.

We believe that our current cash, cash equivalents and time deposits and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for at least the next 12 months.

 

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The following table sets forth a summary of our cash flows for the periods indicated:

 

    For the Year Ended December 31,  
    2011     2012     2013  
    (in thousands of US$)  

Net cash provided by (used in) operating activities

    (1,004     7,444        29,706   

Net cash used in investing activities

    (1,563     (7,915     (19,537

Net cash provided by (used in) financing activities

    17,560        (227     (591

Net increase (decrease) in cash and cash equivalents

    15,081        (653     9,942   

Cash and cash equivalents at the beginning of the year

    1,769        16,850        16,197   

Cash and cash equivalents at end of the year

    16,850        16,197        26,139   

Operating Activities

Net cash provided by operating activities increased to US$29.7 million in 2013 from US$7.4 million in 2012, primarily due to an increase of approximately US$48 million in cash collected from our students in 2013, which were partially offset by an increase of approximately US$25 million in cash operating expenditures and an increase of approximately US$1 million in income tax payment in 2013.

Net cash provided by operating activities was US$7.4 million in 2012 compared with net cash used in operating activities of US$1.0 million in 2011, primarily due to an increase of approximately US$28 million in cash collected from our students in 2012, which were partially offset by an increase of approximately US$20 million in cash operating expenditures and an increase of approximately US$1 million in income tax payment in 2012.

Investing Activities

We lease all of our facilities. Our cash used in investing activities is primarily related to leasehold improvements, purchase of property and equipment, and investments in time deposits and short-term financial products.

Net cash used in investing activities was US$19.5 million in 2013, consisting of purchases of property and equipment, including computers and servers, of approximately US$9 million in connection with the expansion of our network of learning centers; purchase of time deposits of approximately US$17 million; purchase of short-term investment in the amount of approximately US$11 million; and partially offset by the maturity of short-term investment of approximately US$11 million, maturity of time deposits of approximately US$6 million, and proceeds from repayment of housing loans from employees in the amount of approximately US$1 million.

Net cash used in investing activities was US$7.9 million in 2012, consisting of purchases of property and equipment, including computers and servers, of approximately US$7 million in connection with the expansion of our network of learning centers, purchase of time deposits of approximately US$1 million and issuance of housing loans to employees in the amount of approximately US$1 million, partially offset by the maturity of time deposits in the amount of approximately US$1 million. Our loans to employees were aimed at helping them finance their purchase of apartments. Our loans issued to our employees in 2012 have been collected as of December 31, 2013.

Net cash used in investing activities was US$1.6 million in 2011, consisting of purchase of equipment of approximately US$3 million in connection with the expansion of our network of learning centers, partially offset by the maturity of time deposits of approximately US$1 million.

 

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Financing Activities

Net cash used in financing activities in 2013 was US$0.6 million, which was primarily attributable to the payment of costs related to this offering in the amount of US$0.5 million.

Net cash used in financing activities in 2012 was US$0.2 million.

Net cash provided by financing activities in 2011 was US$17.6 million, which was primarily attributable to our issuance of Series C preferred shares, which contributed approximately US$20 million in cash after deducting payment of relevant issuance costs, partially offset by our repurchase of certain ordinary shares from Connion Capital Limited, a company wholly owned by Mr. Shaoyun Han, of approximately US$3 million.

Capital Expenditures

Our capital expenditures are primarily related to leasehold improvements and investments in computers, network equipment and software. Our capital expenditures were US$2.9 million, US$7.2 million and US$9.1 million in 2011, 2012 and 2013, respectively. We intend to continue to lease facilities for our learning centers in order to allocate our capital resources cost-efficiently. We may make acquisitions of businesses and properties that complement our operations when suitable opportunities arise. We expect our capital expenditures will continue to be significant for the near future as we continue to expand our network of learning centers.

Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2013:

 

     Payment due by December 31,  
     Total      2014      2015      2016      2017      2018      2019 and
thereafter
 
     (in thousands of US$)  

Operating lease commitments(1)

     26,227         9,085         6,198         3,868         2,737         1,307         3,032   

 

Note:

(1) Represents our non-cancelable leases for our offices and learning centers.

Holding Company Structure

We are a holding company with no material operations of our own. We conduct our operations primarily through our wholly-owned subsidiaries in China. As a result, our ability to pay dividends depends upon dividends paid by our wholly-owned subsidiaries. If our wholly-owned subsidiaries or any newly formed subsidiaries incur any debt in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly-owned subsidiaries are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our subsidiaries is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory surplus reserve until such reserve reaches 50% of its registered capital. Although the statutory surplus reserves can be used to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation. As a result of these PRC laws and regulations, as of December 31, 2013, we had US$2.8 million in statutory surplus reserves that are not distributable as cash dividends. Our PRC subsidiaries have not historically paid any dividends to our offshore entities from their accumulated profits. However, we do not expect that the statutory surplus reserve requirement will materially limit our ability to pay dividends to our shareholders or our plan to expand our business because we are only required to set aside an additional US$12.0 million to satisfy the maximum requirement of statutory surplus reserves for all of our PRC subsidiaries. In addition, our private schools requiring reasonable returns are required to appropriate no less than 25% of their net income to a

 

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statutory development fund, whereas in the case of private schools requiring reasonable return, this amount shall be no less than 25% of the annual increase of their net assets. As of December 31, 2013, we had US$0.9 million in statutory development fund that are not distributable as cash dividends.

Off-Balance Sheet Commitments and Arrangements

Starting from 2011, Chuanbang, a credit-sourcing company in China owned by Mr. Shaoyun Han, our chief executive officer, began to offer person-to-person lending services to our students to help them pay for our tuition fees. Under the person-to-person lending service, we serve as the guarantor of the loans taken out by students. Starting from April 2013, we had stopped providing guarantees for any new student loans arranged by Chuanbang. See “Related Party Transactions—Transactions with Shareholders and Affiliates—Transactions with Chuanbang.” As of December 31, 2012 and 2013, our maximum exposure to guarantees of student loans obtained through Chuanbang was US$7.4 million and US$4.4 million, respectively.

Other than the above, we have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Quantitative and Qualitative Disclosure about Market Risk

Interest Rate Risk

Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. We have not used any derivative financial instruments to manage our interest risk exposure. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed, nor do we anticipate being exposed, to material risks due to changes in interest rates. However, our future interest income may be lower than expected due to changes in market interest rates.

Foreign Exchange Risk

Substantially all of our net revenues, costs and expenses are denominated in Renminbi. The Renminbi is not freely convertible into foreign currencies for capital account transactions. The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the PRC government has allowed the Renminbi to appreciate slowly against the U.S. dollar again. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk.

We estimate that we will receive net proceeds of approximately US$107.4 million from this offering and the concurrent private placement, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us, based on the initial offering price of US$9.00 per ADS (the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus). Assuming that we convert the full amount of the net proceeds from this offering and the concurrent private placement into RMB, a

 

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10% appreciation of the U.S. dollar against RMB, from a rate of RMB6.0537 to US$1.00 to a rate of RMB5.5034 to US$1.00, will result in a decrease of RMB59.1 million in our net proceeds from this offering and the concurrent private placement. Conversely, a 10% depreciation of the U.S. dollar against the RMB, from a rate of RMB6.0537 to US$1.00 to a rate of RMB6.7263 to US$1.00, will result in an increase of RMB72.3 million in our net proceeds from this offering and the concurrent private placement.

Inflation Risk

Since our inception, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the consumer price index in China increased by 5.4%, 2.6% and 2.6% in 2011, 2012 and 2013, respectively. Although we have not in the past been materially affected by inflation since our inception, we can provide no assurance that we will not be affected in the future by higher rates of inflation in China.

 

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INDUSTRY

We define the professional education services market in China as non-degree granting, post-secondary education programs focused on professional career advancement. We believe this market is highly attractive due to its large addressable population, strong growth rate and high fragmentation. According to IDC, the professional education services market, which includes IT, computer graphics, online marketing, finance and accounting, and management, grew from RMB48.8 billion (US$8.1 billion) in 2010 to RMB67.5 billion (US$11.1 billion) in 2013, representing a CAGR of 11.4% and is projected to grow to RMB89.0 billion (US$14.7 billion) in 2017, representing a CAGR of 7.2% from 2013. In addition, the professional education services market in China is highly fragmented with no single company holding significant market share. We believe this fragmentation enables market players with high quality curricula and a track record of delivering strong educational outcomes to attract more students and further grow market share.

Key Market Growth Drivers

Growth in China’s professional education services market is a result of a number of factors including favorable economic and demographic trends, an intensely competitive employment market, a significant demand and supply gap for qualified skilled professionals and government support for the professional education services industry.

Favorable economic and demographic trends

China’s rapid economic growth has stimulated increasing spending on professional education services. According to the National Bureau of Statistics of China, or the NBSC, China’s GDP reached RMB51.9 trillion (US$8.6 trillion) in 2012, representing a CAGR of 14.3% from 2007. In addition, annual consumption expenditure on education, cultural and recreational services per capita in urban households reached RMB2,034 (US$336) in 2012, representing a CAGR of 8.9% from 2007, according to the NBSC.

China’s favorable demographic trends, including a large young population and rapid urbanization, have also contributed to the growth of the professional education services market. Based on figures cited in NBSC’s 2013 China Statistical Yearbook, the Chinese population between the ages of 20 and 29 reached 231 million in 2012. China has also experienced tremendous urban population growth, which increased by 105 million from 2007 to 2012, according to the NBSC. Increased urbanization has boosted demand for skilled workers especially in the services industry, further driving growth of the professional education services market.

Intensely competitive employment market

According to the NBSC, the number of college graduates in China increased from 4.5 million in 2007 to 6.2 million in 2012. Given the significant influx of college graduates, we believe China’s employment market for new graduates has become intensely competitive and prospective job seekers are facing increasing challenges in securing employment post-graduation, particularly for more desirable, higher paying jobs. The heightened level of competition is motivating new job market entrants to equip themselves with broader skill sets and more job-ready, practical training, which fosters greater demand for professional education services.

Significant demand and supply gap for qualified skilled professionals

Despite growing demand for qualified skilled professionals in areas such as IT, Chinese universities have not been able to generate a sufficient number of qualified candidates. Universities and colleges in China generally offer fewer courses designed to provide students with practical training and skill sets in preparation for employment. As a result, a significant gap exists between the knowledge that students gain through their

 

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university education and the practical skills required for entry-level positions in the competitive professional job market. Professional education services providers are helping to close this gap by offering practical, competency-based training through relatively short and flexible programs and better connections to prospective employers.

Government support for the professional education services industry

The Chinese government has published a series of laws and regulations over the past two decades that are favorable to the professional education services industry. Under the Vocational Education Law of the PRC adopted in 1996, vocational education is recognized as an important path for promotion of economic and social development and higher employment rates. Under the Employment Promotion Law of the PRC that became effective in 2008, enterprises in China are required to set aside financial resources for the skill training and continued education of their employees, which we believe has further encouraged enterprises spending on professional education services. The PRC Catalogue for the Guidance of Foreign Investment Industries (amended) that became effective on January 30, 2012 listed professional education services as an industry in which foreign investments are encouraged by the government. Such government support is expected to foster further expansion of the industry in China.

Learning Modalities

Historically, classroom-based learning has been the most common format for professional education services delivery in China. Classroom-based learning has traditionally been viewed as an effective teaching format due to students’ ability to interact with instructors in person in a closer and more disciplined learning environment. However, classroom-based education services providers generally face the challenge of scalability due to limited availability of high quality teachers and the significant costs associated with expansion of physical learning center networks. In addition, prospective students may not have the ability to physically attend classes on a regular basis and are increasingly demanding more flexible learning formats.

With increasing Internet penetration, online learning has risen in popularity in China’s education services market in recent years. While online learning allows students more flexibility in pursuing their education, it has not achieved widespread acceptance in the professional services market as practical skills training is difficult to do solely online. Without strong education pedigrees, the major online learning players in China have mostly focused on the test preparation market. However, both employers and students are now increasingly focusing on practical training for job-ready skills.

The hybrid learning model, which combines the benefits of both traditional classroom-based learning and online learning, is an emerging and innovative modality for professional education services in China. With the hybrid learning model, professional education service providers deliver live courses to multiple classrooms simultaneously through webcasts. Teaching assistants tutor students on-site during and after these webcasts to ensure adequate retention and understanding of the subject matter. This combination of tutoring and live instruction is typically supplemented with online learning modules that students use to learn, practice and assess progress at their own pace.

Unlike the traditional classroom-based learning model, which requires the hiring and retention of local teachers, the hybrid learning model is highly scalable given its ability to deliver instruction via webcast to a widespread audience. In addition, the hybrid learning model is capable of creating a more disciplined learning environment and driving greater persistence among students, which are advantages over the purely online learning model.

Key Market Verticals

Professional education service providers in China generally target industries with high employment demand, such as IT, computer graphics, online marketing, finance and accounting, and management, which are

 

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categorized by strong career prospects with attractive salaries, a broad and diverse prospective trainee base and high professional requirements that are evolving given rapid technological innovation.

Information Technology

According to IDC, the IT professional education services market in China grew from RMB5.3 billion (US$875 million) in 2010 to RMB7.7 billion (US$1.3 billion) in 2013, representing a CAGR of 13.7%, and is expected to further grow at a CAGR of 11.6% to RMB12.0 billion (US$2.0 billion) in 2017. A number of factors are expected to contribute to this growth, including:

 

    Growing IT industry in China. China’s IT industry has experienced solid growth over the past several years, creating increasing demand for IT-related services among both corporations and individuals. According to IDC, China’s IT services industry grew at a CAGR of 12% in 2013 compared to 2012. The rapid growth of China’s IT industry has created significant demand for qualified students with practical IT training.

 

    Rapid innovation in IT. The rapid development of new IT technologies, along with emerging platforms and trends, such as mobile Internet, cloud computing and big data, make it difficult for university curricula and IT professionals to stay current on the latest technologies. According to IDC, the rapid transformation in the IT sector is expected to continue for at least a decade, leading corporations to seek out enhanced IT training for in-house staff, and IT professionals and students to seek training on the latest technologies on a regular basis. The impact of IT innovation is not confined to technology firms alone. For example, 40% of graduates from IT professional education providers are employed by non-IT companies, according to IDC.

 

    Government support for IT industry in China. The Chinese government has increasingly focused on supporting the growth of the IT industry. China’s education reform agenda as set forth in its central government’s “Five Year Plan,” among other policies, demonstrates strong support for the expansion of the IT sector. The government has invested in critical infrastructure, such as modern telecommunication networks and high-speed broadband connections, for the development of the IT industry. The government has also supported the development of IT industry parks to attract multinational IT firms. Furthermore, in February 2013, the Office of the State Council issued extended tax incentives for outsourcing service sectors, including IT, in selected cities through December 2018. Such government support will likely continue to generate significant demand for qualified professionals in the expanding IT industry.

While the IT professional education services market in China remains fragmented, Tarena is the largest provider with 8.3% market share as measured by revenues in 2013, more than double that of the second largest provider, according to IDC. Tarena is also able to charge premium prices compared to its major competitors.

Computer Graphics

According to IDC, the computer graphics training market grew from RMB1.9 billion (US$314 million) in 2010 to RMB2.8 billion (US$463 million) in 2013, representing a CAGR of 13.3%, and is expected to further grow at a CAGR of 12.0% to RMB4.4 billion (US$727 million) in 2017.

Computer graphics is generally defined as the application of computer technology to visual design and production, and covers a wide range of professions, including graphic design, web design, three dimensional animation, film effect, multi-media technology and computer-aided architectural and industry design. The growing web and mobile-based presence of businesses throughout China is driving strong market demand and high salary levels for qualified professionals. As such, quality training institutions are able to charge premium tuition fees for computer graphics courses.

Online Marketing

According to IDC, online marketing training market grew from RMB550 million (US$91 million) in 2010 to RMB870 million (US$144 million) in 2013, representing a CAGR of 16.7%, and is expected to further grow at a CAGR of 15.3% to RMB1.5 billion (US$248 million) in 2017.

 

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This increasing demand for training is mainly driven by the rapid growth of Internet advertising in China. With the emergence of widely available Internet access in China, online marketing has become an essential tool for corporations due to its relatively low costs and broad reach. According to iResearch, online advertising market in China has grown at a CAGR of 46.5% in 2010 to 2013. The increasing demand for personnel with online sales and marketing skills is the key driver for professional training services in this field.

Finance and Accounting

According to IDC, the finance and accounting training market grew from RMB2.5 billion (US$413 million) in 2010 to RMB3.5 billion (US$578 million) in 2013, representing a CAGR of 11.6%, and is expected to further grow at a CAGR of 9.7% to RMB5.1 billion (US$842 million) in 2017.

Training in finance and accounting is mostly driven by a demand for qualifications and professional certifications, which are earned through professional exams. Training in these areas is thus exam-centric, often targeted to current professionals, and lends itself well to an online learning model. The market is highly fragmented and dominated by small and medium-sized institutions, creating an opportunity for market share consolidation by reputable national training providers.

Management

According to IDC, the management training market grew from RMB38.5 billion (US$6.4 billion) in 2010 to RMB52.6 billion (US$8.7 billion) in 2013, representing a CAGR of 10.9%, and is expected to further grow at a CAGR of 5.8% to RMB65.9 billion (US$10.9 billion) in 2017. A number of factors are expected to contribute to this growth, including:

 

    Demands of a market-oriented economy. China’s entry into the WTO has created increased global competition for companies operating in China, driving demand for more capable management teams.

 

    Government support. The Chinese government’s Regulations on Vocational Skill Training and Appraisal require employers to allocate funds for employee training. This drives a high level of demand from corporations for management training.

 

    Rising consumer demand. Corporations have traditionally accounted for the majority of spending in the professional training market in China. However, given an increasingly competitive job market as well as intensifying competition for upward mobility for existing corporate employees, individuals are increasingly paying out-of-pocket for management courses. For mid- and upper-level managers, management training courses are viewed as an effective means of broadening professional networks, which are important resources in China’s business culture.

 

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BUSINESS

Overview

We are a leading provider of professional education services in China. Our core strength is in IT professional education services, where we are the largest provider in China with a market share of 8.3% as measured by revenues in 2013 according to IDC, a third-party research firm. Since our inception in 2002, we have trained over 130,000 students, cooperated with more than 500 universities and colleges and placed students with approximately 35,000 corporate employers in a variety of industries. Our six-month post-course job placement rates for students enrolled in 2011 and 2012 have averaged over 90%. The average starting salary of our students enrolled in 2012 was 14.3% higher than the national average of college graduates in 2012, calculated based on data from IDC.

We have an innovative education platform combining live distance instruction, classroom-based tutoring and online learning modules. For each class, instructors deliver lectures from one classroom in Beijing to students in the same classroom as well as to students at our learning centers across China via simultaneous webcast. To facilitate a disciplined and focused learning environment, we staff each classroom at our learning centers with one or two on-site teaching assistants to tutor and supervise students. We complement the live instruction and tutoring with our proprietary learning management system TTS. TTS has five core functions, featuring course content, self-assessment exams, student and teaching staff interaction tools, student management tools and an online student community. Through this education platform, we provide job-oriented education with measurable outcomes, as demonstrated by our high job placement rates and students’ academic performance.

We currently offer courses in nine IT subjects and two non-IT subjects. Our courses provide students with practical education to prepare them for jobs in industries with significant growth potential and strong hiring demand. We believe we have successfully established “Tarena ( LOGO )” as a respected professional education brand known for high teaching quality and an excellent student placement track record. In 2013, we were recognized as the Outstanding Training Institute by China’s Ministry of Industry and Information Technology.

With a strong commitment to career services, we have established an outstanding job placement record and a broad network of corporate employers. Our team of over 200 career counselors advise students through mandatory job skill seminars, one-on-one interview workshops and systematic career assessment and planning. We have over 100 employer cooperation representatives who liaise closely with employers, alumni, human resources websites and other employment recruiters to maximize job opportunities for our students. We have a track record of producing qualified, job-ready candidates for many corporate employers in China, including global Fortune 500 companies and leading technology companies. Our access to a large number of corporate employers is appealing to prospective students, which in turn contributes to our student enrollment growth and further allows us to provide a larger pool of qualified candidates to employers.

Capitalizing on our innovative education platform, we have built a highly scalable business that we can expand and replicate rapidly with consistent quality. We deliver high quality lectures through a group of experienced and passionate instructors based in Beijing to a nationwide network of 92 directly operated learning centers in 33 cities in China as of December 31, 2013. Compared to traditional classroom-based teaching, which requires hiring and training of instructors for local sites, we are able to expand our geographic footprint and class sizes without impacting the quality of our course offerings because we are generally able to provide our students across China with equal access to the same group of instructors. For our most established Java course, our student-to-instructor ratio increased from 1,624-to-1 in 2011 to 3,276-to-1 in 2013, and the average net revenues per instructor for our Java course increased from approximately US$2.7 million in 2011 to approximately US$6.9 million in 2013.

We have experienced significant growth in recent years. Our student enrollments grew from 16,282 in 2011 to 46,458 in 2013, representing a CAGR of 68.9%. Our net revenues increased from US$25.7 million in 2011 to

 

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US$92.8 million in 2013, representing a CAGR of 89.9%. A substantial portion of our total net revenues are generated from Java courses, which contributed 70.6%, 71.3% and 59.3% of our total net revenues in 2011, 2012 and 2013, respectively. Our net income increased from US$0.7 million in 2011 to US$14.0 million in 2013.

We are a holding company with no material operations of our own. We conduct our operations primarily through our wholly-owned subsidiaries in China. We also control and consolidated a VIE, Beijing Tarena Jinqiao Technology Co., Ltd., or Beijing Tarena. Beijing Tarena holds an ICP license that is necessary for the operation of our website, www.it211.com.cn, which primarily serves a marketing function for our business. We are currently not eligible as a foreign-invested enterprise to hold an ICP license. If Beijing Tarena or its shareholders fail to perform their respective obligations under the contractual arrangements, we could be limited in our ability to enforce the contractual arrangements that give us effective control. If we are unable to maintain effective control over Beijing Tarena, we would not be able to continue to use the ICP license to operate our www.it211.com.cn website.

Our Value Proposition to Students and Employers

Our services bridge the gap between students’ need for practical training and employers’ demand for trained professionals.

 

    Value proposition to students: For students, we provide practical training necessary to succeed in highly competitive professional job markets. Our job-oriented education offers students valuable practical skills that post-secondary institutions in China are less-equipped to provide. In addition, our personalized job placement services prepare students to perform well in the recruiting and interview processes.

 

    Value proposition to employers: For employers, we provide a large and stable pool of job-ready prospective employees and tailored recruitment services that meet their hiring needs in a cost-effective and time-efficient manner. We address their needs for skilled entry-level professionals by closely aligning our course offerings with the practical knowledge needed in the marketplace.

Our Strengths

We believe the following competitive strengths are essential for our success and differentiate us from our competitors:

Highly innovative and effective education platform

We have developed an innovative education platform combining three key components: live distance instruction, classroom-based tutoring and online learning modules.

 

    Live distance instruction. As compared to traditional local classroom-based teaching with multiple local instructors whose teaching capabilities vary, we generally provide our students throughout China with real-time access to the same group of experienced and high quality instructors, which ensures consistent teaching quality across geographies. We believe live instruction fosters a better student learning experience than pre-recorded lectures because students perceive instructors to be more engaging and interactive. Furthermore, delivering live instruction enables instructors to receive daily feedback from students and to make timely adjustments to their lecture content and pace.

 

    Classroom-based tutoring. We require our students to attend classes at our learning centers where our teaching assistants are physically present to tutor and supervise students, thereby facilitating a disciplined and focused learning environment. We believe such an environment is essential for our students to master the technical subjects of our courses. Physical class attendance also enables us to assess student engagement in real-time and to provide personalized tutoring services to students.

 

   

Online learning modules. Online learning modules delivered via our proprietary TTS learning management system are a critical component of our education platform. TTS supplements our lectures

 

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and allows students to practice and assess their understanding of lecture materials, as well as interact with instructors, teaching assistants and classmates, thereby further enhancing student engagement and performance. TTS also provides tools for instructors and teaching assistants to respond to student requests and questions, and to monitor the academic performance and class attendance of students.

Through this innovative effective education platform, we provide job-oriented education with measurable outcome as demonstrated by our high job placement rates and students’ academic performance. Our education platform has been well received by the market, as demonstrated by our position as the largest IT professional education service provider in China, as measured by revenues in 2013, according to IDC.

Scalable and efficient business model

Capitalizing on our innovative education platform, we have built a highly scalable business model that we can expand and replicate rapidly with consistent quality. We have a group of experienced and passionate instructors delivering lectures from our headquarters in Beijing to our nationwide network of 92 directly operated learning centers in 33 cities in China as of December 31, 2013. Our instructors provided training to over 46,000 students in 2013. Compared to traditional classroom-based teaching, which requires hiring and training of instructors for local sites, we are able to expand our geographic footprint and class sizes rapidly without impacting the quality of our course offerings. For example, for our most established Java course, our student-to-instructor ratio increased from 1,624-to-1 in 2011 to 3,276-to-1 in 2013, and the average net revenues per instructor for our Java course increased from approximately US$2.7 million in 2011 to approximately US$6.9 million in 2013.

Our business model enables us to be quick-to-market, replicating our learning centers with efficiency. We centralize our instructor recruiting, continuous training and content development efforts in Beijing, enabling our local learning centers to focus their resources on marketing and job placement services. We are generally able to commence classes at a new learning center within seven weeks after we decide to open such learning center. We operated 34 and 92 learning centers as of December 31, 2011 and 2013, respectively, representing a CAGR of 64.5%.

Respected brand known for high quality professional education

We believe our “Tarena ( LOGO )” brand is known for high teaching quality and an excellent student placement track record. In 2013, we were recognized as the Outstanding Training Institute by the MIIT. Our commitment to high quality instructors is reflected in our highly selective instructor hiring process, emphasis on rigorous evaluation and competitive performance-based compensation. Our instructors generally have industry background with many years of corporate work experience. Our internal quality control personnel monitor the teaching quality of each instructor. We collect feedback on our instructors from students on a daily basis through multiple channels and provide professional development training for instructors on an ongoing basis. We provide our instructors with performance-based compensation packages which we believe are among the highest in the professional education services market in China. This has helped us retain our best teaching talent as evidenced by our annual instructor retention rate of approximately 87% in the past two years.

We develop all of our programs and content in-house. We have formulated a systematic approach to identify, develop and evaluate new courses based on job market demand and industry trends. With our experienced and passionate instructor team, we are able to offer a variety of high quality and practical IT, software and other professional education services while adding new courses and updating existing programs to meet market demands from time to time. For example, we launched our digital art, Linux and network engineering, and online sales and marketing courses in 2013 in response to the latest industry demands for trained professionals in these areas.

Our strong brand allows us to maintain premium tuition fees relative to our competitors while continuing to periodically increase tuition fees. Over the past three years, we have increased tuition fees for our courses twice

 

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while maintaining strong enrollment growth. Furthermore, we are able to leverage our brand to rapidly and successfully expand into new fields of professional education. For example, we launched our new course in digital art in February 2013 and recruited 5,003 students in 2013.

Outstanding job placement record supported by our access to a broad network of corporate employers

We have a track record of producing job-ready and highly qualified candidates for many corporate employers. Since our inception in 2002, we have placed students with approximately 35,000 corporate employers in a variety of industries. In addition to referrals and recruiting events, we offer customized courses designed to recruit and train students that suit the needs of specific employers upon graduation. Our access to a large number of corporate employers is appealing to potential students, which in turn contributes to our student enrollment growth and further allows us to provide a larger pool of qualified candidates to employers.

We offer personalized and systematic job placement services through hundreds of in-house career counselors. Our career counselors organize a series of seminars on job-seeking skills and professionalism in the workplace and conduct one-on-one interview training sessions with students. Our employer cooperation representatives liaise closely with employers, alumni, human resources websites and other employment recruiters, and regularly organize recruiting events at our learning centers and refer qualified students to employers.

Our high quality education, extensive employer network and dedicated job placement services allow us to achieve high student job placement rates. Our six-month post-course job placement rates for students enrolled in 2011 and 2012 have averaged over 90%.

Experienced management team with a proven track record

We have a strong management team with extensive experience in and passion for the professional education services industry. Mr. Shaoyun Han, our founder, chairman and chief executive officer, is an IT industry veteran with over 20 years of experience. Prior to founding Tarena, Mr. Han was deputy chief engineer and director of the software division of AsiaInfo-Linkage, Inc., or AsiaInfo-Linkage, a leading provider of software solutions and IT services in China. We have a seasoned team of senior officers and regional managers with significant prior experience in related industries. Over the past decade, our management team has organically built a leading professional education services business with national scale and successfully established an effective and comprehensive management system.

Our Strategies

We are dedicated to improving careers and changing lives by delivering high quality professional education services. Our goal is to become the world’s leading and most innovative professional education services provider. We intend to achieve our goal by pursuing the following strategies:

Grow our student enrollments

We plan to grow student enrollments in our existing courses by adding new classrooms, opening new learning centers in cities with our presence and launching courses currently unavailable in such cities. We also plan to grow our student enrollments by expanding our geographic footprint into new cities with high, unmet professional education demand and strong employment opportunities. We experienced rapid expansion in the past three years, increasing our network cities from 14 at the beginning of 2011 to 33 as of December 31, 2013.

In addition, we intend to drive greater demand by further increasing the efficiency of our marketing efforts. We plan to increase our participation in and visibility at career recruiting events to enhance our direct communications with job-seeking recent college graduates, who form the majority of our prospective students. In addition to search-engine based advertising, which currently is our most important marketing channel, we plan to

 

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increase targeted advertising on leading education portals, career sites and industry-specific websites. We intend to increase the frequency and breadth of marketing activities at our learning centers to attract students to physically experience our learning environment and services.

Expand our course offerings

We intend to expand our course offerings in response to evolving job-market demands and recent graduates’ ongoing needs for continuing education. We plan to leverage our in-house development capability and corporate employer network to better understand market needs and develop new courses in areas that we believe will enhance our growth and profitability. We also intend to leverage our respected brand and existing teaching infrastructure to attract highly qualified instructors to develop education materials for our new courses.

We have historically added at least one course every year since 2009. We have recently accelerated the pace and expanded the scope of new course offerings. In 2013, we launched two new non-IT professional education courses, namely digital art and online sales and marketing, and one new IT course, namely Linux and network engineering. We have enrolled over 5,000 students in these courses since their launch. In addition, we are leveraging our platform to expand into other professional education sectors over time, such as accounting, financial management, human resources management and other management-related courses.

We intend to selectively pursue strategic cooperation with, or acquisition of, domestic or international professional education services providers whose operations are complementary to our strategic goal. By pursuing such new strategic opportunities, we can gain access to new sectors and educational content to further drive our long-term growth strategy.

Continuously enhance the quality of our education services

We plan to continuously enhance all aspects of our education platform, including the quality of our instructors, content, infrastructure and operational efficiency, in order to maintain our high educational standards and drive premium tuition fees. We will continue to invest in attracting, developing, and continuously training highly qualified instructors and teaching assistants who are experienced in and passionate about professional education. We plan to strengthen our distance learning infrastructure to maintain and improve the reliability and quality of video streaming at remote learning centers. In anticipation of increasing student enrollments, we will continue to improve our operational efficiency. We believe our continued focus on enhancing our education platform will allow us to maintain our premium pricing power.

Expand our corporate employer network

We plan to expand our corporate employer network by further aligning our course offerings with employers’ needs for entry-level professionals. Leveraging our team of over 100 employer cooperation representatives, we intend to continue to maintain and deepen our communication with corporate employers regarding their specific technical competency and skill-set requirements for job-seekers. We will continue to update our course content to reflect the feedback we receive from corporate employers and ensure that we consistently produce job-ready and highly qualified job candidates. We plan to engage more corporate employers to jointly offer customized courses with us. Furthermore, as we expand our course offerings into new professional education areas, we expect to cooperate with more corporate employers in a broader variety of industries.

Our Education Platform

We have developed an innovative education platform combining three key components: live distance instruction, classroom-based tutoring and online learning modules.

Live distance instruction

From our headquarters in Beijing, our instructors deliver live courses primarily via live webcast to our learning centers across China. Students attending class watch live audio-video broadcasts of lectures delivered

 

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using streaming media and other Internet-based technologies. Our full-time students typically watch live lectures for approximately five hours a day and work on practice exercises assigned by instructors for approximately two hours every day during the classroom sessions, which generally last from 9:30 a.m. to 6:00 p.m., six days a week.

Our live broadcast method of lecture delivery ensures consistency in teaching quality across our learning centers. All of our instructors are located in Beijing, where we centralize our training support. Our headquarter-level quality control department monitors the performance of each lecturer on a daily basis. We typically have multiple instructors for each course, with each instructor focusing on separate topic areas. We believe this allows our instructors to focus, and offer more in-depth teaching, on their specific areas of expertise within a subject.

Our live distance instruction model has enabled us to rapidly expand our enrollment in our existing programs without significantly increasing our number of instructors. For example, the total enrollment in our Java courses increased from 11,370 in 2011 to 26,205 in 2013, while the number of Java instructors increased from seven in 2011 to eight in 2013.

Classroom-based tutoring

Our students are required to physically attend classes at our learning centers. We believe physical attendance is important as it creates a disciplined and focused learning environment for students to effectively master the course content. Requiring students to physically attend classes also facilitates the delivery of personalized and systematic tutoring and job placement services to our students.

Our classrooms are equipped with computers for each student, as well as projectors and other equipment necessary for the live broadcast of our lectures. Our classroom technology infrastructure allows students to interact with instructors and teaching assistants online during lecture hours to receive help on course materials and to use online modules in TTS to take notes and conduct practice exercises.

Our learning centers function both as classrooms for delivering lectures and self-study rooms after class hours. As of December 31, 2013, we had a total of 92 learning centers in 33 major cities across China. Our learning centers vary in terms of size, typically having between 5 and 20 classrooms, with each classroom typically able to host between 30 and 80 students. We have significantly expanded our network of learning centers in recent years. We directly operated a total of 34, 57 and 92 learning centers as of December 31, 2011, 2012 and 2013, respectively. In addition to the learning centers that we operate directly, we also have two franchised learning centers in Taiyuan and Xi’an. We enrolled a total of 694, 1,102 and 1,505 students in our two franchised learning centers in 2011, 2012 and 2013, respectively. Franchise fees we earned from these two franchised learning centers in 2011, 2012 and 2013 accounted for less than 1.2% of our total net revenues in each of these years.

 

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The following table provides an overview of our national network of learning centers that we operate directly and the courses offered in each city as of December 31, 2013 and student enrollments in each city in 2013:

 

Cities

  Number
of
Learning
Centers
    Student
Enrollments
    Courses Offered  
      Java     C++     Digital
art
    Software
testing
    PHP     Embedded     Android     .NET     iOS     Linux and
network
engineering
    Online sales
& marketing
 

Beijing

    10        7,839                                                                                

Shanghai

    9        3,845                                                                                

Hangzhou

    7        2,973                                                                                

Shenzhen

    8        3,219                                                                                

Guangzhou

    9        3,100                                                                                

Nanjing

    4        2,309                                                                                

Wuhan

    4        1,864                                                                                

Chengdu

    4        2,030                                                                                

Chongqing

    3        1,670                                                                                

Hefei

    4        1,538                                                                                

Shenyang

    3        1,622                                                                                

Changsha

    2        1,112                                                                                

Zhengzhou

    2        1,441                                                                                

Harbin

    2        1,338                                                                                

Changchun

    1        1,016                                                                                

Jinan

    2        1,010                                                                                

Qingdao

    1        977                                                                                

Nanchang

    1        881                                                                                

Dalian

    1        907                                                                                

Kunming

    1        738                                                                                

Tianjin

    2        737                                                                                

Nanning

    1        628                                                                                

Wuxi

    1        470                                                                                

Suzhou

    1        500                                                                                

Ningbo

    1        459                                                                                

Shijiazhuang

    1        427                                                                                

Fuzhou

    1        372                                                                                

Xi’an

    1        454                                                                                

Zhuhai

    1        313                                                                                

Daqing

    1        374                                                                                

Yan Tai

    1        142                                                                                

Xiamen

    1        153                                                                                

Dongguan(1)

    1        0                                                                                

 

Notes:

    : offered as of December 31, 2013
–    : not offered as of December 31, 2013
(1) Our learning center in Dongguan was established in December 2013.

Online learning modules

Our live distance instruction and classroom-based tutoring are supplemented by our proprietary online learning modules featured on our TTS platform. TTS has the following five core functions:

 

    Course content. TTS contains lecture slides, key lecture video recordings, case studies, practice exercises and supplemental reading materials. In addition to recordings of past lectures, TTS also features exclusive online videos on key course materials. Students may view lecture videos using the computers at our learning centers. To foster effective learning of our course lecture materials, especially theoretical knowledge points, TTS features software development case studies and practice exercises. TTS contains supplemental reading materials on areas in which we have historically received frequent questions from students. TTS also allows students to download coding materials and study notes that they have prepared for reference in their future jobs.

 

   

Self-assessment exams. TTS features daily and weekly interactive mock examinations to measure learning outcomes. Students use the mock exams to assess their learning results and gauge their grasp

 

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of course content. After students complete a self-assessment exam, TTS automatically provides students with detailed explanations on each of the exam questions.

 

    Student and teaching staff interaction. TTS allows students to interact with instructors and teaching assistants. In class, students may raise questions for instructors and teaching assistants using the messaging tools on TTS. After class, students can post questions to the teaching assistants through the online question and answer board in TTS. Teaching assistants are able to provide timely and accurate responses typically within 30 minutes after a question is submitted. To ensure the accuracy of responses and to identify questions of common interest, our instructors also actively review questions posted on TTS and regularly provide answers. Students are given the opportunity to provide feedback for each answer or tutorial service provided by teaching assistants using the evaluation functions on TTS.

 

    Student management tools. TTS allows instructors to receive daily ratings and feedback from students. Instructors may then adjust their lecture pace and coverage of course materials each day. TTS enables teaching assistants to evaluate each student’s academic performance. The teaching assistant interface of TTS contains each student’s monthly performance test scores, as well as each student’s ranking within the class and nationally. Teaching assistants are required to follow-up with underperforming students regarding their academic status and to adopt concrete action plans with such students to improve their future performance. TTS also allows teaching assistants to monitor each student’s attendance and to log their daily tutoring activities.

 

    Online student community. TTS serves as an online student community that fosters academic collaboration among students. We encourage students to post course-related articles and comments sharing their study experiences on the bulletin board forum.

Our Course Offerings

Our courses provide students with practical education to prepare them for jobs in industries with significant growth potential and strong hiring demand. We currently offer courses in nine IT subjects and two non-IT subjects.

We generally offer the following two types of classes in order to accommodate the different scheduling and training needs of our students:

 

    Full-time class. The term for a full-time class is typically four months and includes approximately 1,000 learning hours. Full-time classes meet from Monday to Saturday. In 2013, approximately 89% of our enrolled students attended our full-time classes.

 

    Part-time class. Part-time classes typically have terms of four to five months. We allow students to attend part-time classes either exclusively during weekends or on a combination of weekday nights and weekends, as these students typically have full-time jobs. In 2013, approximately 11% of our enrolled students attended our part-time classes.

We have adopted stringent quality control procedures to ensure that we produce high quality graduates. We use entrance exams to assess the level of our students. Prospective full-time students with low entrance exam scores are recommended to enroll in preparatory training camps. We have a total of four monthly closed-book performance tests to evaluate the learning status of our students. For underperforming students who have failed the first monthly performance test, we offer them the opportunity to re-take the first month classes at no extra cost. We believe physical class attendance is important, and students with attendance rates below 90% are generally not given graduation certificates at the end of our program.

Our full-time classes also include short term, project-based training programs designed for college students to gain practical IT experience such training programs are not material for our business as a whole.

 

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IT education courses

We offer education courses covering the following nine IT subjects:

 

          Student Enrollments in       

Subject

  Year of
Launch
    2011     2012     2013     

Focus of Course Content

Java

    2002        11,370        22,588        26,205       Programming for Windows and Linux-based desktop software and web-based software

C++

    2009        2,220        3,984        4,671       Programming for Windows and Linux-based desktop software

Software testing

    2009        186        584        2,419       Practical software testing and quality assurance training

PHP

    2010        582        1,072        2,366       Web-based software development for e-commerce industries

Embedded

    2009        677        1,117        2,207       Development of software to control machines and devices

Android

    2011        N/A        733        1,580       Programming for Android-based applications

.NET

    2007        233        252        720       Development of software based on the .NET framework that runs primarily on Windows

iOS

    2012        N/A        N/A        627       Programming for iOS-based applications

Linux and network engineering

    2013        N/A        N/A        274       Linux operating system and network management technology

Successful graduates of our IT education courses are qualified to obtain the intermediate-advanced software engineer certificate issued by the MIIT for their respective field of study, subject to such graduates passing the relevant examination. Graduates of our Java courses are granted ORACLE Certified Java Programmer certificates by ORACLE Corporation after passing the relevant exams. Graduates of our Linux and network engineering courses are awarded the international network engineer certificate issued by CompTIA upon passing the relevant exams. Graduates of our embedded course are awarded the Embedded Engineer Certificate issued by ARM upon passing the relevant exams.

Non-IT education courses

We recently began offering courses in non-IT subjects. We launched our digital art course in February 2013 and our online sales and marketing course in November 2013. The following table describes the two non-IT courses that we currently offer:

 

Subject

   Year of Launch   

Focus of Course Content

Digital art

   2013    Latest Adobe user interface design technology for graphic, webpage and mobile sites design

Online sales and marketing

   2013    Search engine marketing, search engine optimization, and other Internet based marketing, including microblog marketing

We enrolled over 5,000 students in our non-IT courses in 2013. Graduates of our online sales and marketing courses are awarded the SEM Certificate issued by Baidu without additional examination.

 

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Our Teaching Staff

Our instructors

As of December 31, 2013, we employed 76 full-time instructors based in Beijing. Most of our instructors have industry backgrounds in global and domestic technology companies. Our instructors also provide us with unique access to a large pool of experts on industry trends that is especially valuable in our decision-making and development process for new courses. We believe we attract highly qualified instructors by virtue of our respected brand, our well-established teaching infrastructure and sales team and our competitive compensation.

We believe that developing and maintaining highly capable and motivated instructors is critical to our success. We seek qualified instructor candidates who have extensive IT industry experience or come from other professional education service providers. These candidates are subject to multiple rounds of interviews conducted by our director of teaching, vice-president for teaching and the chief executive officer. All instructors are required to undergo training in teaching skills and techniques. We require our instructors to regularly update their course materials to remain current with evolving employer needs, industry developments and other key trends necessary to teach effectively. We typically have a back up instructor assigned to each course to meet any emergency needs.

To align incentives, instructors receive bonuses based on students ratings and the number of class sessions taught, in addition to their base compensation. Our instructors have demonstrated high loyalty as evidenced by our annual instructor retention rate of approximately 87% in the past two years. We had a total of 37, 55 and 76 instructors as of December 31, 2011, 2012 and 2013, respectively.

Our teaching assistants

We believe that our dedicated teaching assistants are essential to the success of our education model. Our teaching assistants interact with and tutor our students on a daily basis, and are instrumental in facilitating a disciplined and focused learning environment. Each classroom is staffed with one or two teaching assistants, who attends lectures together with students. Teaching assistants are available during class hours to answer student questions in person, and after class hours to address inquiries online via TTS. Teaching assistants are also responsible for offering focused tutoring services to underperforming students and continuously monitoring their academic results. We have adopted a comprehensive set of key performance indicators, or KPIs, to evaluate the performance of our teaching assistants. Such KPIs include student satisfaction, exam scores of students on monthly performance tests, the improvement of underperforming students and employment results after graduation, among other indicators.

We primarily seek teaching assistant candidates from our graduates who have demonstrated strong command of materials in the relevant subject areas. We provide necessary training to newly hired teaching assistants to tutor effectively. Our teaching assistants are frequently evaluated by students on the quality of their assistance. We had a total of 317, 569 and 763 teaching assistants as of December 31, 2011, 2012 and 2013, respectively.

Course Content Development

In addition to teaching, our instructors also develop the course content in their respective subject areas. We regularly update our existing programs, typically every six months, to stay abreast of the latest technology developments and industry trends. For example, since the introduction of our flagship Java course in 2002, we have updated this program approximately 20 times, and launched the latest version in July 2013. Our instructors are also responsible for producing practice exercises and exam questions for monthly performance tests to evaluate the effectiveness of our student self-assessment tests in TTS.

We regularly engage in new course development in order to capture demands created by evolving job market and industry trends. We have a set of procedures for new course development. Prior to developing a new

 

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course, we gather market intelligence by collecting job market demand information to ensure that we are developing relevant and up-to-date courses. We conduct a series of surveys, each with clear parameters, to determine various aspects of the proposed new course. Once we gather enough market intelligence, we recruit, or identify from within Tarena, instructors with the appropriate industry and academic background to form a course-specific development task team. We generally require four or five instructors for each new course, and we historically have been able to recruit or identify such instructors within three months. We have generally been able to complete the teaching material development process for a new course in three months after we have finished instructor recruitment. All of our new courses are then pilot tested in selected learning centers in Beijing for student satisfaction, training practicality and employment outcomes. The time frame between our identification of a new course area and pilot testing is typically three to six months. We typically pilot test new courses for three to five months, and new courses that have passed our pilot tests are then introduced nationally. We recently introduced two new non-IT courses, namely digital art, launched in February 2013, and online sales and marketing, which began in November 2013. We also launched our Linux and network engineering in July 2013. We plan to introduce new courses in accounting, financial management, human resources management and other management-related courses.

Our software research and development department is tasked with improving the technical performance and user experience of TTS. Since introducing TTS student version 1.0 in 2006, we have produced five major upgrades to TTS. The current version that our students use is TTS student version 6.1.

Our Students

The vast majority of our students are college students and graduates. In 2013, approximately 91% of our enrolled students were either studying towards, or already held, a post-secondary degree. We have experienced significant growth in student enrollment in recent years. Our student enrollments increased from 16,282 in 2011 to 46,458 in 2013, representing a CAGR of 68.9%.

Student recruitment

We rely primarily on Internet-based marketing to attract students and increase enrollments. We advertise on the Internet using search engine keywords on leading search engines. We also use banners and other advertising placements on targeted sites, such as education portals, career sites and industry-specific websites. We actively monitor the effectiveness of our advertising and adjust marketing spending accordingly.

As part of our online marketing efforts, we operate a promotional website www.it211.com.cn. Our www.it211.com.cn website features sample lecture videos and class materials covering the vast majority of our course subjects, as well as subjects beyond our current course offerings. We provide prospective students with prepaid study cards to purchase sample content on our www.it211.com.cn website.

Student recruitment generally occurs at the learning center level. Our learning centers host seminars, information sessions and preparatory training camps for prospective students, and distribute print and Internet-based advertising materials, including prepaid study cards for www.it211.com.cn. When a prospective student responds to our advertisements and contacts a learning center, an enrollment advisor generates a prospective student profile and advises the candidate, either online or in a face-to-face meeting, on various aspects of our courses and educational experience. As of December 31, 2013, we had a total of 935 enrollment advisors nationally.

To promote brand awareness, we place advertisements in industry trade publications and present at industry trade seminars and conventions. We also began to host our annual Tarena-Discovery Cup Chinese University Students Software Design Competition in April 2012. The first competition attracted over 10,000 participants from over 1,000 universities and colleges in China.

 

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In addition to our marketing efforts, we recruit a significant portion of our students directly from universities and colleges. We have cooperated with over 500 universities and colleges in China under one of the three following modes of cooperation:

 

    Joint-majors. We offer joint-majors with five universities and colleges in China, namely Jiangsu Normal University, Kunming University of Science and Technology, Northeast Forestry University, Qingdao Vocational Technology Institute and Zhejiang Haiyang University. These universities offer students the option to major in one of the subject areas that we teach and include our selected courses in their standard undergraduate curriculum. Students in selected majors at these universities take our courses full-time for one semester and receive academic credits from these universities and colleges after successfully completing our courses.

 

    On-campus learning sites. We have established on-campus learning sites with over 190 universities and colleges in China to offer our courses, without live broadcast, to students attending these universities and colleges. Students enrolled in our on-campus learning sites typically attend part of our course in the on-campus learning sites and part of the course at our learning centers. We pay universities and colleges for the cost of classroom facilities used in the learning sites but do not share revenue with these universities and colleges.

 

    Enrollment cooperation. We have enrollment cooperation with over 300 universities and colleges in China. These universities and colleges allow us to organize marketing and promotional events on campus in order to attract students.

We had a total of 90, 186 and 173 university cooperation representatives as of December 31, 2011, 2012 and 2013, respectively. Our university cooperation representatives are responsible for establishing new and maintaining current cooperative relationships between us and universities in China. In 2011, 2012 and 2013, we enrolled approximately 37.5%, 28.3% and 22.9%, respectively, of our students from universities and colleges with which we cooperated.

Student job placement services

We have an effective job placement program for our students. Each learning center retains full-time career counselors who meet with students on the first day of class to discuss their career goals and to build an employment profile for each student. Our career counselors host a series of mandatory career development seminars for students throughout the term. During the final weeks of each course, our career counselors meet with students one-on-one to offer training on interview and résumé preparation. In addition to the scheduled career service activities, our career counselors are generally available to meet with students one-on-one during office hours. Our career counselors also monitor the employment results of our students and actively offer personalized assistance to students facing difficulties in securing job offers. We had a total of 101, 234 and 214 career counselors as of December 31, 2011, 2012 and 2013, respectively.

Each learning center also retains full-time employer cooperation representatives who routinely collaborate with employers, alumni, human resources websites and other employment recruiters to maximize opportunities for job placements. We had a total of 24, 63 and 126 employer cooperation representatives as of December 31, 2011, 2012 and 2013, respectively. We invite corporate employers to host recruiting events and interviews at our learning centers and offer students with interview opportunities across the country. In 2013, we organized or arranged over 800 recruiting events every month across our nationwide network.

Our Network of Employers

We have a track record of producing job-ready and highly qualified candidates for many corporate employers. Since our inception, our network of potential employers for our students covered approximately 35,000 corporate employers, including Global Fortune 500 companies, such as Infosys, China Unicom and Huawei, and leading technology, IT services and Internet companies in China, such as Sinosoft, iSoftStone, Chinasoft International and Pactera.

 

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We offer the following recruiting services to corporate employers:

 

    General recruiting services. We offer corporate employers candidate referral services and other recruitment-related services. Once an employer communicates its hiring needs to us, we direct the relevant learning centers to produce a list of student candidates that meet the hiring criteria of such employer, and refer such candidates to the employer for interviews and assessments. We also offer space at our learning centers for employers to host recruiting events targeting our students and to conduct interviews.

 

    Customized courses. We offer customized courses targeting specific employers with large demands for trained professionals. Prospective students for our customized courses generally undergo interviews conducted by the employers before the start of classes. In addition to our standard curriculum, students enrolled in customized courses must participate in additional training provided by employers at our learning centers. Such additional training is tailored according to the particular skill requirements of the employers. Successful graduates of our customized courses who have passed the relevant qualifying exams are granted job offers by the employers. Examples of companies that have engaged our customized training services include Asiainfo-Linkage, CVIC Software Engineering, Digital China, Founder Group and PCCW.

The top ten employers of Tarena students, as measured by the cumulative number of graduates hired during the past three years, are Sinosoft, iSoftStone, Chinasoft International, Pactera, AsiaInfo-Linkage, PCCW, Agree Technology, BroadenGate, Yucheng Tech and CVIC Software Engineering. While we do not generate revenue from any of our recruiting services for corporate employers, we believe such services enhance our brand recognition and are instrumental in our ability to help students achieve high job placement rates.

Tuition Fees

For our full-time classes, our standard tuition fees range from RMB13,800 (US$2,280) to RMB16,800 (US$2,775) per course in 2013. Our standard tuition fees for our part-time classes are typically RMB13,800 (US$2,280) per course. We increased our tuition fees for most of our full-time classes by approximately RMB1,000 (US$165) from RMB13,800 (US$2,280) per course to RMB14,800 (US$2,445) per course in 2012 and further increased such tuition fees by RMB1,000 (US$165) from RMB14,800 (US$2,445) per course to RMB15,800 (US$2,610) per course in 2013. We also increased our tuition fees for part-time classes by RMB1,000 (US$165) per course in 2013. We believe our high education quality and strong job placement track record have enabled us to charge above-market tuition fees during the past three years.

We primarily offer two payment options for our students, including one-time full payment upon enrollment and multiple payments within two months of enrollment. We historically also offered an option whereby students could pay our tuition fees within a period of time after graduation, which we have gradually reduced since the beginning of 2013.

To assist our students in paying our tuition fees, we have formed cooperative relationships with the following three credit sources to provide financing services for our students to make one-time, up-front tuition payments:

 

    Bank of Beijing Consumer Financing Company. We launched the BOB CFC student loan program in September 2012. Approximately 61.4% of our students who obtained financing for tuition fees in 2013 elected BOB CFC as the lender.

 

   

CreditEase. CreditEase, a credit management and microfinancing company in China, assists our students in obtaining loans to pay for their tuition. CreditEase utilizes a “person-to-person” lending method to enable qualified students to borrow unsecured loans from unrelated individuals without using a bank as an intermediary. Under this person-to-person lending method, CreditEase identifies third-party individual lenders and matches their lending needs with the loan demands of our students.

 

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CreditEase began to offer this service to our students in July 2013. Approximately 32.7% of our students who obtained financing for tuition fees in 2013 obtained funding sourced by CreditEase.

 

    Chuanbang. Chuanbang utilizes a person-to-person lending method similar to the one used by CreditEase to assist our students in obtaining loans to pay for their tuition. Chuanbang is owned by Mr. Shaoyan Han, our chief executive officer. Chuangbang began to offer this service to our students in 2011. Approximately 5.8% of our students who obtained financing in 2013 elected funding sourced by Chuanbang. Chuanbang has ceased offering financing services to our students enrolled since January 1, 2014.

Approximately 56.9% of our students enrolled in 2013 obtained financing from one of the three abovementioned sources.

Technology

Building a reliable, scalable and secure technology infrastructure is crucial to our ability to support our live lecture broadcasts, online TTS and the various services that we provide to our students. We manage our lecture delivery system and TTS using a combination of commercially available software, hardware systems and proprietary technology. Since 2006, we have established a powerful online platform that enables thousands of students to simultaneously log onto our TTS and participate in activities online.

All of our servers and routers, including backup servers, are currently hosted at our learning centers or by third-party service providers in multiple cities in China. We regularly back up our databases. Our network administration department regularly monitors the performance of our websites and infrastructure to enable us to respond quickly to potential problems. We deliver live broadcast of audio and video of the lectures given in Beijing via the dedicated networks of China Telecom or China Unicom to terminals located in selected learning centers with high student enrollment, and via public Internet infrastructure to our other learning centers.

We use CRM software to manage our student and corporate employer information, as well as to integrate our key administrative functions.

Intellectual Property

Our trademarks, copyrights, domain names, trade secrets and other intellectual property rights distinguish our courses and services from those of our competitors and contribute to our ability to compete in our target markets. We rely on a combination of copyright and trademark law, trade secret protection and employment and confidentiality agreements with executive officers and most other employees, to protect our intellectual property rights. Our employment agreements with our executive officers contain confidentiality and non-disclosure clauses that impose confidentiality obligations on the executive officers at all times during and after their employment with us. Furthermore, the executive officers acknowledge, pursuant to the employment agreements, that copyrightable works prepared by them within the scope of and during the period of their employment with us are “works for hire” and that we will be considered the author thereof. In addition, we require certain key employees to enter into separate confidentiality agreements with us under which they acknowledge that all inventions, utility models, designs, know-how, copyrights and other forms of intellectual property made by them within the scope of their employment with us, pursuant to job assignments or using our materials and technology, or during the one year after their employment that relates to their employment with us, are our property and they should assign the same to us if we so require. We also regularly monitor any infringement or misappropriation of our intellectual property rights.

We have registered 13 software copyrights for our proprietary TTS with the National Copyright Administration of the PRC. We have also registered two trademarks with the China Trademark Office.

As of December 31, 2013, we had registered 40 domain names relating to our business, including our www.tarena.com.cn and www.it211.com.cn websites, with the Internet Corporation for Assigned Names and

 

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Numbers and China Internet Network Information Center. Tarena Tech holds 13 registered software copyrights, two trademarks and 39 registered domain names including www.tarena.com.cn. Beijing Tarena holds one domain name, namely, www.it211.com.cn.

Employees

We are currently headquartered in Beijing, where all of our instructors and software engineers are based. We have divided our national network of learning centers into three regions, namely northern region, southern region, and central and western region, and we have regional offices that are responsible for managing the daily operations of learning centers located within each territory.

We had a total of 1,265, 2,352 and 3,104 employees as of December 31, 2011, 2012 and 2013, respectively. As of December 31, 2013, we had 590 employees in Beijing and 2,514 employees in other areas within China. The following table sets forth the number of our employees, categorized by function, as of December 31, 2013:

 

Functions

   Number of Employees  

Teaching and content development

     852   

Selling and marketing

     1,321   

Career development

     214   

Employer cooperation

     126   

General and administration

     591   
  

 

 

 

Total

     3,104   
  

 

 

 

We enter into employment contracts with all of our employees. We also enter into separate confidentiality agreements with certain key employees that impose confidentiality obligations until the relevant information becomes public or is no longer considered confidential by us. In addition to salaries and benefits, we provide performance-based bonuses for our employees and commission-based compensation for our sales force.

As required by regulations in China, we participate in various employee social security plans that are organized by municipal and provincial governments, including pension, unemployment insurance, childbirth insurance, work-related injury insurance, medical insurance and housing insurance. We are required under PRC law to make contributions from time to time to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government.

We believe that we maintain a good working relationship with our employees, and we have not experienced any significant labor disputes.

Competition

The professional education services market in China is fragmented, rapidly evolving and highly competitive. We face competition in our offered courses and in many of the geographic markets in which we operate. We may also face competition from IT professional education providers that offer specialized training programs targeting certain niche job markets in the IT industry. In the future, we may also face competition from new entrants into the Chinese IT professional education market. As we expand beyond IT education into other fields of professional education, we face competition for student enrollment from existing large online and offline providers of professional education services, as well as smaller regional professional education services providers in China.

We believe that the principal competitive factors in our markets include the following:

 

    scope and quality of course offerings and services;

 

    student placement and employer satisfaction with our graduates;

 

    brand recognition;

 

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    ability to effectively market course offerings and services to a broad base of prospective students;

 

    cost effectiveness of the education; and

 

    ability to align course offerings and services to specific needs of students and employers.

We believe that we are well-positioned to effectively compete in markets in which we operate on the basis of our innovative education platform, scalable and efficient business model, unparalleled access to corporate employers, training quality, strong content development capabilities and experienced management team. However, some of our current or future competitors may have longer operating histories, greater brand recognition, or greater financial, technical or marketing resources than we do. For a discussion of risks relating to competition, see “Risk Factors—Risk Related to Our Business—We may lose market share and our profitability may be materially and adversely affected, if we fail to compete effectively with our present and future competitors or to adjust effectively to changing market conditions and trends.”

Facilities

Our current principal executive offices are located at our headquarters in Beijing, comprising 792 square meters, at Suite 10017, Building E, Zhongkun Plaza, A18 Bei San Huan West Road, Haidian District, Beijing, PRC, 100098. This facility currently accommodates our management headquarters, research and development and general and administrative activities. Pursuant to our agreement with the local government in Hangzhou, China, we placed certain of our management and administrative functions in our offices in Hangzhou. Our executive offices in Hangzhou are located at 1/F, Block A, Training Building, 65 Kejiyuan Road, Baiyang Jie Dao, Economic Development District, Hangzhou, 310000, China, comprising approximately 5,000 square meters.

In addition to our principal executive offices in Beijing, we maintain a number of offices, classrooms and student dormitories with an aggregate of approximately 100,000 square meters in 33 cities in the PRC. We lease all of the facilities that we currently occupy.

We believe that the facilities that we currently lease are adequate to meet our needs for the foreseeable future, and we believe that we will be able to obtain adequate facilities, principally through leasing of additional properties, to accommodate our future expansion plans.

Insurance

We do not maintain any liability insurance or property insurance policies covering students, equipment and facilities for injuries, death or losses due to fire, earthquake, flood or any other disaster. Consistent with customary industry practice in China, we do not maintain business interruption insurance, nor do we maintain key-man life insurance. We maintain accident injury insurance and accident injury medical insurance for our employees based in our headquarters in Beijing. Uninsured injury or death to our students or staff, or damage to any of our equipment or buildings could have a material adverse effect on our results of operations. See “Risk Factors—Risks Related to Our Business—We have limited insurance coverage for our operations in China.”

Legal Proceedings

We are currently not a party to, and are not aware of any threat of, any legal, arbitration or administrative proceedings that, in the opinion of our management, are likely to have a material and adverse effect on our business, financial condition or results of operations. From time to time, we have become, and may in the future become, a party to various legal or administrative proceedings or claims arising in the ordinary course of our business. Regardless of the outcome, legal or administrative proceedings or claims may have an adverse impact on us because of defense and settlement costs, diversion of management attention and other factors.

 

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PRC REGULATION

This section sets forth a summary of the significant regulations or requirements that affect our business activities in China or our shareholders’ rights to receive dividends and other distributions from us.

Regulations on Private Education

The principal regulations governing private education in China consist of the Education Law of the PRC, the Law for Promoting Private Education and the Implementation Rules for the Law for Promoting Private Education, or the PE Implementation Rules, and the Regulations on Chinese-Foreign Cooperation in Operating Schools.

Education Law of the PRC

On March 18, 1995, the PRC National People’s Congress promulgated the Education Law of the PRC, or the Education Law. Pursuant to the Education Law, enterprises, social organizations and individuals are generally encouraged to operate schools and other types of educational organizations in accordance with PRC laws and regulations, though private schools are prohibited from providing military, police, political and other kinds of education which are of a special nature. Although no organization or individual may establish or operate a school or any other institution of education for profit-making purposes, private schools may be operated for “reasonable returns,” as described in more detail below.

The Law for Promoting Private Education and its Implementation Rules

On December 28, 2002, the Standing Committee of the PRC National People’s Congress promulgated the Law for Promoting Private Education, or the Private Education Law, which became effective on September 1, 2003 and was amended on June 29, 2013. On March 5, 2004, the PRC State Council promulgated the Implementation Rules for the Law for Promoting Private Education, which became effective on April 1, 2004, or the PE Implementation Rules. Under the Private Education Law and the PE Implementation Rules, “private schools” are defined as schools established by social organizations or individuals using non-government funds. Private schools providing certifications, pre-school education, education for self-study aid and other academic education shall be subject to approval by the education authorities, while private schools engaging in professional qualification training and professional education training shall be subject to approvals from the authorities in charge of labor and social welfare. A duly approved private school engaging in professional qualification training and professional education training shall (i) be granted a Permit for Operating a Private School by the authorities in charge of human resources and social security, (ii) be registered with the Ministry of Civil Affairs or its local counterparts as a privately run non-enterprise institution and (iii) pass the annual inspection with the Ministry of Civil Affairs or its local counterparts. As of the date of this prospectus, we operate 11 schools, all of which are engaged in professional education training. Each has (i) obtained a Permit for Operating a Private School issued by the authorities in charge of human resources and social security or education, (ii) been registered with the relevant local counterpart of the Ministry of Civil Affairs and (iii) passed the annual inspection, as applicable, with the Ministry of Civil Affairs or its local counterparts.

The types and amounts of fees charged by a private school providing degree certifications shall be approved by the governmental pricing authority and be publicly disclosed. A private school that does not provide certifications shall file its pricing information with the governmental pricing authority and publicly disclose such information. A private school shall file its advertisement and school enrollment brochure with the relevant governmental authorities of human resources and social security or education. None of our schools provides a diploma or degree certification to students, and ten of our schools have filed their pricing information with the governmental pricing authority and publicly disclose such information. Seven of our schools have filed their advertisement and school enrollment brochure with the relevant governmental authorities of human resources and social security or education. See “Risk Factors—Risks Related to Our Business—The operations of certain of our learning centers are, or may be deemed by relevant PRC government authorities to be, beyond their

 

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authorized business scope or without proper license or registration. If the relevant PRC government authorities take actions against such learning centers, our business and operations could be materially and adversely affected.”

Private education is treated as a public welfare undertaking under relevant regulations, and entities and individuals who establish private schools are commonly referred to as “sponsors” instead of “owners” or “shareholders” under the regulations. Nonetheless, sponsors of a private school may choose to require “reasonable returns” from the annual net balance of the school after deduction of costs, donations received, government subsidies, if any, the reserved development fund and other expenses as required by the regulations. Private schools are divided into three categories: private schools established with donated funds; private schools that require reasonable returns and private schools that do not require reasonable returns.

The election to establish a private school requiring reasonable returns shall be provided in the articles of association of the school. The percentage of the school’s annual net balance that can be distributed as a reasonable return shall be determined by the school’s board of directors, taking into consideration the following factors: (i) school fee types and collection criteria, (ii) the ratio of the school’s expenses used for educational activities and improving the educational conditions to the total fees collected, and (iii) the admission standards and educational quality. The relevant information relating to the above factors shall be publicly disclosed before the school’s board determines the percentage of the school’s annual net balance that can be distributed as reasonable returns. Such information and the decision to distribute reasonable returns shall also be filed with the approval authorities within 15 days from the decision made by the board. However, none of the current PRC laws and regulations provides a formula or guidelines for determining “reasonable returns.” In addition, none of the current PRC laws and regulations sets forth sponsors’ economic rights in schools that do not distribute reasonable returns, nor do they have different requirements or restrictions on a private school’s ability to operate its education business based on such school’s status as a school that requires reasonable returns or a school that does not require reasonable returns.

At the end of each fiscal year, every private school is required to allocate a certain amount to its development fund for the construction or maintenance of the school or procurement or upgrade of educational equipment. In the case of a private school that requires reasonable returns, this amount shall be no less than 25% of the annual net income of the school, while in the case of a private school that does not require reasonable returns, this amount shall be equal to no less than 25% of the annual increase in the net assets of the school, if any. Private schools that do not require reasonable returns shall be entitled to the same preferential tax treatment as public schools, while the preferential tax treatment policies applicable to private schools requiring reasonable returns shall be formulated by the finance authority, taxation authority and other authorities under the State Council. To date, however, no regulations have been promulgated by the relevant authorities in this regard.

Regardless of whether distributing reasonable return or not, the Private Education Law provides that properties that remain upon termination and liquidation of a school after payment of relevant fees and compensations shall be made in accordance with other relevant laws and regulations. However, there have been no other relevant national laws and regulations addressing the distribution of residual properties upon termination and liquidation of a private school.

Except for aforementioned differences, the “sponsorship interest” that a sponsor holds in a private school is, for all other practical purposes, substantially equivalent under PRC law and practice to the “equity interest” a shareholder holds in a company. A sponsor of a private school has the obligation to make capital contributions to the school in a timely manner. The contributed capital can be in the form of tangible or non-tangible assets such as materials in kind, land use rights or intellectual property rights. The capital contributed by the sponsor becomes assets of the school and the school has independent legal person status. In addition, the sponsor of a private school has the right to exercise ultimate control over the school by becoming the member of and controlling the composition of the school’s decision making body. Specifically, the sponsor has control over the private school’s constitutional documents and has the right to elect and replace the private school’s decision

 

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making bodies, such as the school’s board of directors, and therefore controls the private school’s business and affairs.

As of the date of this prospectus, we had two schools registered as schools requiring reasonable returns, while all other schools are registered as schools not requiring reasonable returns.

Regulations on Chinese-Foreign Cooperation in Operating Schools

Chinese-foreign cooperation in operating schools or training programs is specifically governed by the Regulations on Operating Chinese-foreign Schools, promulgated by the State Council in 2003 in accordance with the Education Law, the Occupational Education Law and the Private Education Law. The Implementing Rules for the Regulations on Operating Chinese-foreign Schools, or the Implementing Rules, were issued by the Ministry of Education in 2004. The Regulations on Operating Chinese—Foreign Schools and its Implementing Rules encourage substantive cooperation between overseas educational organizations with relevant qualifications and experience in providing high-quality education and Chinese educational organizations to jointly operate various types of schools in the PRC. Cooperation in the areas of higher education and occupational education is especially encouraged. Chinese-foreign cooperative schools are not permitted, however, to engage in compulsory education or military, police, political and other kinds of education that are of a special nature in China. The Regulations on Operating Chinese-foreign Schools prohibits foreign institutions or individuals from independently establishing schools in China, which provide educational services mainly for Chinese citizens.

The Ministry of Human Resources and Social Security (formerly known as Ministry of Labor and Social Security) also promulgated the Regulations on Operation Chinese-foreign Cooperation School in Professional Education Training to implement the Regulations on Operating Chinese-foreign Schools on July 26, 2006, which took effect on October 1, 2006. The Regulations on Operation Chinese-foreign Cooperation School in Professional Education Training prohibits foreign institutions or individuals from independently establishing professional education training institutions in China, which provide educational services mainly for Chinese citizens.

We have not operated or applied for any Chinese-foreign schools. Prior to 2012, we operated a substantial portion of our learning centers through subsidiaries of our consolidated VIEs and schools to which our consolidated VIEs or their respective subsidiaries are sponsors. Starting from the second half of 2012, we began to transfer our operations to our wholly-owned subsidiary, Tarena Tech, and its subsidiaries and schools. As of December 31, 2013, all of our learning center operations of VIEs have been transferred to Tarena Tech and its subsidiaries and schools. As of December 31, 2013, we operated 29 of our learning centers through private schools owned by subsidiaries of Tarena Tech. However, there are still uncertainties under the current PRC laws as to whether a wholly foreign-owned enterprise (such as Tarena Tech) is allowed to indirectly invest in and own private schools through its PRC subsidiaries. See “Risk Factors—Risks Related to Our Business—If the relevant PRC authorities determine that we can no longer own and operate certain of our learning centers through our PRC subsidiaries, we may need to restructure the ownership and operation of these learning centers (including possibly transferring these learning centers to our consolidated VIEs), our business may be disrupted and we may be exposed to increased risks associated with the contractual arrangements relating to our consolidated VIEs.”

Regulations on Professional Education

On May 15, 1996, the Standing Committee of the PRC National People’s Congress promulgated the Professional Education Law of the PRC, or the Professional Education Law, which became effective on September 1, 1996. Pursuant to the Professional Education Law, professional training includes training pre-employment, training for military personnel transferring to civil positions, training for apprentices, on-the-job training, job-transfer training and other professional training. Professional training may be classified as junior, middle or senior level according to the actual situations. It shall be conducted by either professional training institutions or professional schools, which may develop various professional training to satisfy the needs of the society. The PRC government encourages institutional organizations, social organizations, other social groups and citizens to establish professional schools and professional training institutions, and the financial allocation

 

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for professional schools and professional training institutions from the governments at various levels shall be gradually increased. The PRC government also encourages financial institutions to support and develop professional education by means of credit facilities.

On August 3, 2007, the Standing Committee of the PRC National People’s Congress promulgated the Employment Promotion Law of the PRC, or the Employment Promotion Law, which became effective on January 1, 2008. Pursuant to the Employment Promotion Law, the PRC government at and above the county level shall encourage and support professional schools, professional training institutions and corporations to carry out pre-employment training, employment training, re-employment training and entrepreneurship training, and encourage workers to attend various types of training programs. Corporations in China are requested to set aside financial resources for the training and continued education of their employees.

Foreign Investments in Professional Education Services

The Catalogue for the Guidance of Foreign Investment Industries, or the Catalogue, as promulgated and amended from time to time by the MOFCOM and the National Development and Reform Commission, is the principal guide to foreign investors’ investment activities in the PRC. The most updated version of the Catalogue, which was promulgated in 2011 and became effective in 2012, divides the industries into three categories: encouraged, restricted and prohibited. Industries not listed in the Catalogue are generally open to foreign investment unless specifically restricted by other PRC laws and regulations. A wholly foreign-owned enterprise is generally permitted to engage in encouraged industries and industries not listed in the Catalogue, while there are some limitations to the ownership and/or corporate structure of the foreign-invested companies that operate in restricted industries. Industries in the prohibited category are not open to foreign investors. According to the latest Catalogue, foreign investment is encouraged in professional education services and there is no limitation with respect to maximum percentage of foreign ownership in a company conducting business in professional education services.

Regulations on For-profit Private Training Institutions

The Private Education Law provides that the regulations applicable to private training institutions registered with the SAIC and its local counterparts shall be formulated by the State Council separately. On July 29, 2010, the PRC central government promulgated the Outline of China’s National Plan for Medium- and Long-Term Education Reform and Development (2010-2020), which announced the policy that the government will implement a reform to divide private schools into two categories: (i) for-profit private schools and (ii) not-for-profit private schools. On October 24, 2010, the General Office of the State Council issued the Notices on the National Education System Innovation Pilot. Under this notice, the PRC government plans to implement a for-profit and non-profit classified management system for the private schools in Shanghai, Zhejiang, Shenzhen and Jilin Huaqiao Foreign Language School. However, the above outline and the pilot program is still new and no further national law or regulation has been promulgated to implement them and, except in Shanghai, no other local government of the pilot areas has promulgated relevant regulations on differentiated management of the private schools and for-profit training institutions.

On June 20, 2013, Shanghai promulgated the Interim Measures for Administration of Operational Private Training Institutions, or Measure No. 5, which requires for-profit private training institutions to register with local counterparts of the SAIC. The local counterparts of the SAIC shall consult with the local human resources and social securities authorities before completion of registration of for-profit private training institutions. Measure No. 5 came into effect on July 20, 2013 and will remain effective for two years.

As of the date of this prospectus, 32 of our PRC subsidiaries, consolidated VIEs and subsidiaries of consolidated VIEs, including 18 branch companies, had computer technology training or training in its approved business scope.

 

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Regulations on Online and Distance Education

Pursuant to the Administrative Regulations on Educational Websites and Online and Distance Education Schools issued by the Ministry of Education on July 5, 2000, educational websites and online education schools may provide educational services in relation to higher education, elementary education, pre-school education, teaching education, occupational education, adult education, other education and public educational information services. “Educational websites” refer to organizations providing education or education-related information services to website visitors by means of a database or online education platform connected via the Internet or an educational television station through an Internet Service Provider, or ISP. “Online education schools” refer to education websites providing academic education services or training services with the issuance of various certificates.

Setting up education websites and online education schools is subject to approval from relevant education authorities, depending on the specific types of education. Any education website and online education school shall, upon the receipt of approval, indicate on its website such approval information as well as the approval date and file number.

On June 29, 2004, the State Council promulgated the Decision on Setting Down Administrative Licenses for the Administrative Examination and Approval Items Really Necessary to be Retained, pursuant to which the administrative license for “online education schools” was retained, while the administrative license for “educational websites” was not retained. Accordingly, Beijing Tarena, which holds our ICP license for our www.it211.com.cn website is not required to obtain approval to operate “educational websites” from the Ministry of Education. On January 28, 2014, the State Council promulgated the Decision on Abolishing and Delegating Certain Administrative Examination and Approval Items, pursuant to which the administrative approval for “online education schools” of higher education was abolished. Beijing Tarena is not required to obtain a license to operate “online education schools,” as it does not directly offer government accredited degrees or certifications.

Regulations on Online Publications

On June 27, 2002, the SAPPRFT and the MIIT jointly promulgated the Tentative Internet Publishing Administrative Measures, or the Internet Publishing Measures, which took effect on August 1, 2002. The Internet Publishing Measures require entities that engage in Internet publishing to obtain an Internet Publishing License for engaging in Internet publishing from the SAPPRFT. Pursuant to the Internet Publishing Measures, the definition of “Internet publishing” is broad and refers to the act of online spreading of articles, whereby the Internet information service providers select, edit and process works created by themselves or others and subsequently post such works on the Internet or transmit such works to the users’ end through Internet for the public to browse. These works include contents from books, newspapers, periodicals, audio-video products, electronic publications that have already been formally published or works that have been made public in other media.

Beijing Tarena has offered videos of lectures on its website www.it211.com.cn for trial purposes and has not obtained an Internet Publishing License from the SAPPRFT. Currently, “Internet publishing” is not officially defined in any publicly available regulations. However, governmental authorities could determine that Beijing Tarena’s online content services fall within the scope of “internet publishing,” and therefore require Beijing Tarena to apply for an Internet Publishing License. Beijing Tarena may not be able to obtain such a license, and it may become subject to penalties, fines, legal sanctions or be ordered to suspend the video content on the website.

Regulation on Broadcasting Audio-Video Programs through the Internet or Other Information Network

The SAPPRFT promulgated the Rules for Administration of Broadcasting of Audio-Video Programs through the Internet and Other Information Networks, or the Broadcasting Rules, in 2004, which became

 

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effective on October 11, 2004. The Broadcasting Rules apply to the activities of broadcasting, integration, transmission, downloading of audio-video programs with computers, televisions or mobile phones as the main terminals and through various types of information networks. Pursuant to the Broadcasting Rules, a Permit for Broadcasting Audio-video Programs via Information Network is required to engage in these Internet broadcasting activities. On April 13, 2005, the State Council announced a policy on private investments in businesses in China that relate to cultural matters, which prohibits private investments in businesses relating to the dissemination of audio-video programs through information networks.

On December 20, 2007, the SAPPRFT and MIIT issued the Internet Audio-Video Program Measures, which became effective on January 31, 2008. Among other things, the Internet Audio-Video Program Measures stipulate that no entities or individuals may provide Internet audio-video program services without a Permit for Broadcasting Audio-video Programs via Information Network issued by the SAPPRFT or its local counterparts and only entities wholly owned or controlled by the PRC government may engage in the production, editing, integration or consolidation, and transfer to the public through the Internet, of audio-video programs, and the provision of audio-video program uploading and transmission services. On September 15, 2009, SAPPRFT promulgated the Notice on Several Issues regarding the Permit for Broadcasting Audio-video Programs via Information Network. This Notice restates the necessity of applying for such license and sets forth the legal liabilities for those providing Internet audio-video program services without the license.

On April 1, 2010, SAPPRFT promulgated the Test Implementation of the Tentative Categories of Internet Audio-Visual Program Services, or the Categories, which clarified the scope of Internet audio-video programs services. According to the Categories, there are four categories of Internet audio-visual program services which are further divided into seventeen sub-categories. The third sub-category to the second category covers the making and editing of certain specialized audio-video programs concerning, among other things, educational content, and broadcasting such content to the general public online.

In the course of offering our lecture videos, we transmit our audio-video educational programs live through the Internet only to enrolled course participants, not to the general public. The limited scope of our audience distinguishes us from general online audio-video broadcasting companies. In addition, we do not provide audio-video program uploading and transmission services. As a result, we believe that we are not subject to the Internet Audio-Video Program Measures. However, there is no further official or publicly available interpretation of these definitions, especially the scope of “Internet audio-video program service.” If the governmental authorities determine that our provision of lecture videos falls within the Internet Audio-Video Program Measures, we may not be able to obtain the License for Disseminating Audio-Video Programs through Information Network. If this occurs, we may become subject to significant penalties, fines, legal sanctions or an order to suspend our use of audio-video content.

Regulations on Value-Added Telecommunications Services

Licenses for Value-Added Telecommunication Services

On September 25, 2000, the Telecommunications Regulations of the People’s Republic of China, or the Telecom Regulations, were issued by the State Council as the primary governing law on telecommunication services. The Telecom Regulations set out the general framework for the provision of telecommunication services by PRC companies. Under the Telecom Regulations, it is a requirement that telecommunications service providers procure operating licenses prior to their commencement of operations. The Telecom Regulations draw a distinction between “basic telecommunications services” and “value-added telecommunications services.” A “Catalog of Telecommunications Business” was issued as an attachment to the Telecom Regulations to categorize telecommunications services as basic or value-added. In February 2003, the Catalog was updated and the information services such as content service, entertainment and online games services are classified as value-added telecommunications services.

On March 1, 2009, the MIIT issued the Administrative Measures for Telecommunications Business Operating Permit, or the Telecom Permit Measures, which took effect on April 10, 2009. The Telecom Permit

 

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Measures confirm that there are two types of telecom operating licenses for operators in China, namely, licenses for basic telecommunications services and licenses for value-added telecommunications services. The operation scope of the license will detail the permitted activities of the enterprise to which it was granted. An approved telecommunication services operator shall conduct its business in accordance with the specifications recorded on its value-added telecommunications services operating license, or VATS license. In addition, a VATS license’s holder is required to obtain approval from the original permit-issuing authority prior to any change to its shareholders.

On September 25, 2000, the State Council promulgated the Administrative Measures on Internet Information Services, or the Internet Measures, which was amended in January 2011. Under the Internet Measures, commercial Internet information services operators shall obtain an ICP license from the relevant government authorities before engaging in any commercial Internet information services operations within the PRC. The ICP license has a term of five years and shall be renewed within 90 days before expiration. Our consolidated VIE, Beijing Tarena, obtained an ICP license issued by Beijing Communications Administration on March 1, 2012, which will expire on March 1, 2017.

Foreign Investment in Value-Added Telecommunication Services

Pursuant to the Provisions on Administration of Foreign Invested Telecommunications Enterprises promulgated by the State Council on December 11, 2001 and amended on September 10, 2008, the ultimate foreign equity ownership in a value-added telecommunications services provider may not exceed 50%. Moreover, for a foreign investor to acquire any equity interest in a value-added telecommunication business in China, it must satisfy a number of stringent performance and operational experience requirements, including demonstrating good track records and experience in operating value-added telecommunication business overseas. Foreign investors that meet these requirements must obtain approvals from the MIIT and the MOFCOM or their authorized local counterparts, which retain considerable discretion in granting approvals. Pursuant to publicly available information, the PRC government has issued telecommunications business operating licenses to only a limited number of foreign invested companies, all of which are Sino-foreign joint ventures engaging in the value-added telecommunication business.

The MIIT Circular issued by the MIIT in July 2006 reiterated the regulations on foreign investment in telecommunications businesses, which require foreign investors to set up foreign-invested enterprises and obtain an ICP license to conduct any value-added telecommunications business in China. Under the MIIT Circular, a domestic company that holds an ICP license is prohibited from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors that conduct value-added telecommunications business illegally in China. Furthermore, the relevant trademarks and domain names that are used in the value-added telecommunications business must be owned by the local ICP license holder or its shareholder. The MIIT Circular further requires each ICP license holder to have the necessary facilities for its approved business operations and to maintain such facilities in the regions covered by its license. Currently, Beijing Tarena, our VIE, owns the related domain name www.it211.com.cn and holds the ICP license necessary to operate our www.it211.com.cn website in China, while the trademarks relating to our operations are held by Tarena Tech, our wholly foreign-owned subsidiary. If the relevant PRC government authorities determine in the future that the current ownership of our trademarks do not comply with the relevant regulations and the trademarks relating to our operations must be held by our VIE, we may need to transfer the trademarks to our VIE, which may severely disrupt our business. The Internet Electronic Messaging Service Administrative Measures promulgated by the MIIT in November 2000 require ICP operators to obtain specific approvals before providing BBS services. BBS services include electronic bulletin boards, electronic forums, message boards and chat rooms. On July 4, 2010, the approval requirement for operating BBS services was terminated by a decision issued by the State Council. However, in practice, the competent authorities in Beijing still require the relevant operating companies to obtain such approval for the operation of BBS services which we have not obtained.

 

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In light of the aforesaid restrictions, we rely on Beijing Tarena, our consolidated VIE in China, to hold and maintain the licenses necessary to provide online education and other value-added telecommunications services in China. We operate our www.it211.com.cn website and value-added telecommunications services through Beijing Tarena. Beijing Tarena holds an ICP license that is valid until March 1, 2017.

Regulations on Intellectual Property Rights

Copyright and Software Products

The National People’s Congress adopted the Copyright Law in 1990 and amended it in 2001 and 2010, respectively. The amended Copyright Law extends copyright protection to Internet activities, products disseminated over the Internet and software products. In addition, there is a voluntary registration system administered by the China Copyright Protection Center. The amended Copyright Law also requires registration of a copyright pledge.

To address the problem of copyright infringement related to the content posted or transmitted over the Internet, the National Copyright Administration and the MIIT jointly promulgated the Measures for Administrative Protection of Copyright Related to Internet on April 29, 2005. This measure became effective on May 30, 2005.

The Administrative Measures on Software Products, issued by the MIIT in October 2000 and subsequently amended, provide a registration and filing system with respect to software products made in or imported into China. These software products may be registered with the relevant local authorities in charge of software industry administration. Registered software products may enjoy preferential treatment status granted by relevant software industry regulations. Software products can be registered for five years, and the registration is renewable upon expiration.

In order to further implement the Computer Software Protection Regulations promulgated by the State Council on December 20, 2001 and amended on January 30, 2013, the State Copyright Bureau issued the Computer Software Copyright Registration Procedures on February 20, 2002, which apply to software copyright registration, license contract registration and transfer contract registration. In compliance with, and in order to take advantage of the above rules, as of the date of this prospectus, we had registered 13 software programs in China.

Trademarks

Trademarks are protected by the PRC Trademark Law which was adopted in 1982 and subsequently amended in 1993, 2001 and 2013 as well as the Implementation Regulation of the PRC Trademark Law adopted by the State Council in 2002. The Trademark Office under the SAIC handles trademark registrations and grants a term of ten years to registered trademarks which may be renewed for consecutive ten-year periods upon request by the trademark owner. Trademark license agreements must be filed with the Trademark Office for record. The PRC Trademark Law has adopted a “first-to-file” principle with respect to trademark registration. Where a trademark for which a registration has been made is identical or similar to another trademark which has already been registered or been subject to a preliminary examination and approval for use on the same kind of or similar commodities or services, the application for registration of such trademark may be rejected. Any person applying for the registration of a trademark may not prejudice the existing right first obtained by others, nor may any person register in advance a trademark that has already been used by another party and has already gained a “sufficient degree of reputation” through such party’s use. We have registered two trademarks in China as of the date of this prospectus.

Regulations on Foreign Currency Exchange

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Foreign Exchange Regulations, Renminbi is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of China, unless the prior approval of the SAFE is obtained and prior registration with the SAFE is made. Though there are restrictions on the convertibility of Renminbi for capital account transactions, which principally include investments and loans, we generally follow the regulations and apply to obtain the approval of the SAFE and other relevant PRC governmental authorities.

On August 29, 2008, the SAFE promulgated SAFE Circular 142, regulating the conversion by a foreign invested company of foreign currency into Renminbi by restricting how the converted Renminbi may be used. SAFE Circular 142 requires that the registered capital of a foreign invested enterprise settled in Renminbi converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within China. In addition, the SAFE strengthened its oversight of the flow and use of the registered capital of a foreign invested enterprise settled in Renminbi converted from foreign currencies. The use of such Renminbi capital may not be changed without the SAFE’s approval, and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used. Furthermore, the SAFE promulgated SAFE Circular 59 on November 9, 2010, which tightens the regulation over settlement of net proceeds from overseas offerings and requires that the settlement of net proceeds must be consistent with the description in the prospectus for the relevant offering. The SAFE also promulgated SAFE Circular 45 in November 2011, which, among other things, restricts a foreign-invested enterprise from using Renminbi funds converted from its registered capital to provide entrusted loans or repay loans between non-financial enterprises. These circulars may delay or limit us from using the proceeds of this offering to make additional capital contributions or loans to our PRC subsidiaries and violations of these circulars could result in severe monetary or other penalties. See also “Risk Factors—Risks Related to Doing Business in China—PRC regulation of direct investment and loans by offshore holding companies to PRC entities and governmental control of currency conversion may delay or limit us from using the proceeds of this offering to make additional capital contributions or loans to our PRC subsidiaries.”

Regulations on Dividend Distribution

Under our current corporate structure, our Cayman Islands holding company primarily relies on dividend payments from Tarena Tech, which is a wholly foreign-owned enterprise incorporated in the PRC, to fund any cash and financing requirements we may have. The principal regulations governing distribution of dividends of foreign invested enterprises include the Foreign Invested Enterprise Law, as amended on October 31, 2000, and the Implementation Rules of the Foreign Invested Enterprise Law, as amended on April 12, 2001.

Under these laws and regulations, wholly foreign owned enterprises in China may pay dividends only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign owned enterprises in China are required to allocate at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until these reserves have reached 50% of the registered capital of the enterprises. Wholly foreign owned companies may, at their discretion, allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserves are not distributable as cash dividends.

Regulations on Overseas Listings

On August 8, 2006, six PRC regulatory agencies, namely, the MOFCOM, the State Assets Supervision and Administration Commission, or SASAC, the SAT, the SAIC, the CSRC, and the SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which became effective on September 8, 2006 and was amended on June 22, 2009. The M&A Rules purport, among other things, to require offshore SPVs formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals, to obtain the approval of CSRC prior to publicly listing their securities on an overseas stock exchange.

 

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While the application of this new regulation remains unclear, we believe, based on the advice of our PRC counsel, Han Kun Law Offices, that CSRC’s approval is not required in the context of this offering because (i) CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to this regulation and (ii) we were established before the M&A Rules took effective and Tarena Tech was acquired by us and converted into a wholly foreign owned enterprise before the M&A Rules took effect. See “Risk Factors—Risks Related to Doing Business in China—The approval of the CSRC may be required in connection with this offering under a regulation adopted in August 2006, and, if required, we cannot assure you that we will be able to obtain such approval.”

Regulations on Foreign Exchange Registration of Overseas Investment by PRC Residents

Pursuant to SAFE’s Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special Purpose Vehicles, or SAFE Circular No. 75, issued in October 2005, and a series of implementation rules and guidance, PRC residents, including PRC resident natural persons or PRC companies, must register with local branches of SAFE in connection with their direct or indirect offshore investment in an overseas SPV for the purposes of overseas equity financing activities. Such PRC residents are also required to amend their registration or filing with the local branches of SAFE for the injection of equity interests or assets of an onshore enterprise into the offshore company, or the overseas funds raised by such offshore company or any other material change involving a change in the capital of the offshore company. PRC residents who are shareholders or beneficial owner of SPVs that were established or controlled and which have completed their inbound investment before November 1, 2005 were required to register with the local SAFE branch before March 31, 2006. The term “control” under SAFE Circular 75 is broadly defined as the operation rights, beneficiary rights or decision-making rights acquired by the PRC residents in the offshore SPVs or PRC companies by such means as acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other arrangements.

Failure to comply with the registration procedures set forth in SAFE Circular 75 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the increase of its registered capital, the payment of dividends and other distributions to its offshore parent or affiliate and the capital inflow from the offshore entities, and may also subject relevant onshore company or PRC residents to penalties under the Foreign Exchange Regulations. PRC residents who control our company from time to time are required to register with SAFE in connection with their investments in us. We have requested all of our current shareholders and/or beneficial owners to disclose whether they or their shareholders or beneficial owners fall within the ambit of SAFE Circular 75 and its guidance and will urge relevant shareholders and beneficial owners, upon learning they are PRC residents, to make the necessary applications, filings and amendments as required under SAFE Circular 75 and other related rules. To our knowledge, Mr. Shaoyun Han and Ms. Mei Zhao have each registered with the local SAFE branch as required under SAFE Circular 75 and are in the process of amending certain applicable registrations with the local SAFE pursuant to SAFE Circular 75. See “Risk Factors—Risks Related to Doing Business in China—PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, limit our ability to inject capital into our PRC subsidiaries, or otherwise expose us to liability and penalties under PRC law.”

Regulations on Stock Incentive Plans

In February 2012, SAFE promulgated the Stock Option Rules. Under the Stock Option Rules and other relevant rules and regulations, PRC residents who participate in stock incentive plan in an overseas publicly-listed company are required to register with SAFE or its local branches and complete certain other procedures. Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of the overseas publicly listed company or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of its participants. The participants must also retain an overseas entrusted institution to handle matters in

 

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connection with their exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or the overseas entrusted institution or other material changes. The PRC agents must, on behalf of the PRC residents who have the right to exercise the employee share options, apply to SAFE or its local branches for an annual quota for the payment of foreign currencies in connection with the PRC residents’ exercise of the employee share options. The foreign exchange proceeds received by the PRC residents from the sale of shares under the stock incentive plans granted and dividends distributed by the overseas listed companies must be remitted into the bank accounts in the PRC opened by the PRC agents before distribution to such PRC residents.

We adopted two share incentive plans, namely the 2008 Plan and the 2014 Plan. Pursuant to the 2008 Plan, we may issue options, restricted shares (or share appreciation rights or other similar awards) and rights to purchase restricted shares to our key employees and directors and consultants on a regular basis. Pursuant to the 2014 Plan, we may issue options, restricted shares and restricted share units to our qualified employees, directors and consultants on a regular basis. After this offering, we plan to advise our employees, directors and consultant participating in the employee stock option plan to handle foreign exchange matters in accordance with the Stock Option Rules.

In addition, the SAT has issued circulars concerning employee share options, under which our employees working in the PRC who exercise share options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee share options with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or if we fail to withhold their income taxes as required by relevant laws and regulations, we may face sanctions imposed by the PRC tax authorities or other PRC government authorities.

Regulation on Tax

PRC Enterprise Income Tax Law

On March 16, 2007, the National People’s Congress enacted the EIT Law. Both the EIT Law and its Implementing Rules, which was enacted on December 6, 2007 by the State Council, became effective on January 1, 2008. Under the EIT Law, enterprises are classified as PRC resident enterprises and non-PRC-resident enterprises. PRC resident enterprises typically pay an enterprise income tax at the rate of 25%. An enterprise established outside of the PRC with its “de facto management bodies” located within the PRC is considered a PRC “resident enterprise,” meaning that it shall be treated in a manner similar to a PRC resident enterprise for enterprise income tax purposes. The Implementing Rules to the EIT Law defines “de facto management body” as a managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of an enterprise.

The SAT issued Circular 82 on April 22, 2009, as amended in January 2014. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled and offshore-incorporated enterprise is located in China, which include all of the following conditions: (i) the location where senior management members responsible for an enterprise’s daily operations discharge their duties; (ii) the location where financial and human resource decisions are made or approved by organizations or persons; (iii) the location where the major assets and corporate documents are kept; and (iv) the location where more than half (inclusive) of all directors with voting rights or senior management have their habitual residence. In addition, the SAT issued a bulletin on July 27, 2011, effective September 1, 2011, or Bulletin 45, providing more guidance on the implementation of Circular 82. Bulletin 45 clarifies matters including PRC resident enterprise status determination, post-determination administration and competent tax authorities etc. Although both Circular 82 and Bulletin 45 only apply to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign individuals like us, the determining criteria set forth in Circular 82 and Bulletin 45 may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the PRC tax resident enterprise status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, PRC enterprise groups or by PRC or foreign individuals.

 

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We do not believe that Tarena International, Inc. meets all of the conditions above, and thus we do not believe that Tarena International, Inc. is a PRC resident enterprise despite the fact that all members of our management team as well as the management team of our offshore holding company are located in China. However, if the PRC tax authorities determine that Tarena International, Inc. is a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. See “Risk Factors—Risks Related to Doing Business in China—Under the PRC Enterprise Income Tax Law, we may be classified as a PRC “resident enterprise” for PRC enterprise income tax purposes. Such classification would likely result in unfavorable tax consequences to us and our non-PRC shareholders and have a material adverse effect on our results of operations and the value of your investment.”

Pursuant to the Arrangement Between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income, or the Hong Kong Tax Treaty, and other applicable PRC regulations, if a Hong Kong resident enterprise is determined by the competent PRC tax authority to have satisfied the relevant conditions and requirements under such Hong Kong Tax Treaty and other applicable regulations, the 10% withholding tax on the dividends the Hong Kong resident enterprise receives from a PRC resident enterprise may be reduced to 5% upon receiving approval from in-charge tax authority. However, based on the Notice on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties issued on February 20, 2009 by the SAT, or Circular 81, if the relevant PRC tax authorities determine, in their discretion, that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may adjust the preferential tax treatment; and based on the Notice on the Interpretation and Recognition of Beneficial Owners in Tax Treaties, or Circular 601, issued on October 27, 2009 by the SAT, and the Announcement on the Recognition of Beneficial Owners in Tax Treaties issued on June 29, 2012 by the SAT, conduit companies, which are established for the purpose of evading or reducing tax, or transferring or accumulating profits, shall not be recognized as beneficial owners and thus are not entitled to the above-mentioned reduced income tax rate of 5% under the Hong Kong Tax Treaty. Tarena HK has not obtained the approval for a withholding tax rate of 5% from the local tax authority and does not plan to obtain such approval in the near future, as Tarena Hangzhou has not paid dividends in the past and does not plan to pay dividends in the future as it may continue to incur losses. See “Risk Factors—Risks Related to Doing Business in China—We may not be able to obtain certain treaty benefits on dividends paid to us by our PRC subsidiary through our Hong Kong subsidiary.”

In January 2009, the SAT promulgated the Provisional Measures for the Administration of Withholding of Enterprise Income Tax for Non-resident Enterprises, or the Non-resident Enterprises Measures, pursuant to which, the entities which have the direct obligation to make certain payments to a non-resident enterprise shall be the relevant tax withholders for such non-resident enterprise. Further, the Non-resident Enterprises Measures provides that in case of an equity transfer between two non-resident enterprises which occurs outside China, the non-resident enterprise which receives the equity transfer payment shall, by itself or engage an agent to, file tax declaration with the PRC tax authority located at the place of the PRC company whose equity has been transferred, and the PRC company whose equity has been transferred shall assist the tax authorities to collect taxes from the relevant non-resident enterprise. On April 30, 2009, the Ministry of Finance and the SAT jointly issued the Notice on Issues Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59. On December 10, 2009, the SAT issued Circular 698. Both Circular 59 and Circular 698 became effective retroactively as of January 1, 2008. By promulgating and implementing these two circulars, the PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of equity interests in a PRC resident enterprise by a non-resident enterprise. Under Circular 698, where a non-resident enterprise transfers the equity interests of a PRC “resident enterprise” indirectly by disposition of the equity interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in certain low tax jurisdictions, the non-resident enterprise, being the transferor, shall report to the competent tax authority of the PRC “resident enterprise” this Indirect Transfer. The PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC tax at a rate of up to 10%. Although it appears that Circular 698 was not intended to apply to purchase and sale of shares of

 

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publicly traded companies in the open market, the PRC tax authorities may determine that Circular 698 is applicable to our non-resident shareholders who acquired our shares outside of the open market and subsequently sell our shares in our private financing transactions or in the open market if any of such transactions were determined by the tax authorities to lack reasonable commercial purpose, and we and our non-resident shareholders may be at risk of being required to file a return and being taxed under Circular 698, and we may be required to expend valuable resources to comply with Circular 698 or to establish that we should not be taxed under Circular 698. On March 28, 2011, the SAT released SAT Bulletin (2011) No. 24, or SAT Bulletin 24, to clarify several issues related to Circular 698. SAT Bulletin 24 became effective on April 1, 2011. According to SAT Bulletin 24, the term “effective tax” refers to the effective tax on the gain derived from disposition of the equity interests of an overseas holding company; and the term “does not impose income tax” refers to the cases where the gain derived from disposition of the equity interests of an overseas holding company is not subject to income tax in the country/region where the overseas holding company is a resident.

In addition, the EIT Law and its Implementation Rules permit certain “high and new technology enterprises strongly supported by the state” that hold independent ownership of core intellectual property and simultaneously meet a list of other criteria, financial or non-financial, as stipulated in the Implementation Rules and other regulations, to enjoy a reduced 15% enterprise income tax rate. The SAT, the Ministry of Science and Technology and the Ministry of Finance jointly issued the Administrative Measures on the Recognition Criteria and Procedures for Advance and New Technology Enterprise delineating the specific criteria and procedures for the “high and new technology enterprises” certification in April 2008. Enterprises recognized as “high and new technology enterprises” will enjoy a reduced 15% enterprise income tax rate after they go through tax reduction application formalities with relevant tax authorities. Tarena Tech, renewed its “high and new technology enterprise” certificate in 2012, which will be valid until the end of 2014. Tarena Tech will be eligible for a preferential tax rate of 15% as long as it maintain its “high and new technology enterprise” status. Tarena Hangzhou was established in 2013 and is qualified as an eligible software enterprise, which entitles it to two years of full tax exemption followed by three years of 50% tax exemption, commencing from the year in which its taxable income is greater than zero.

PRC Value-added Tax (VAT) in lieu of Business Tax (the VAT Pilot Program)

An enterprise or individual providing taxable service within the territory of China has been historically required to pay business tax at the rate of 3% or 5% on the revenues generated from provision of such services in accordance with applicable PRC tax regulations. However, if the services provided are technical transfer or technical development, or technical consulting and technical service related to technology transfer or technical development, business tax may be exempted subject to approval by the relevant tax authorities.

In November 2011, the Ministry of Finance and the SAT promulgated the Notice on the Pilot Program in Shanghai Replacing BT with VAT in Transportation and Some Modern Service Sectors. Pursuant to this circular and other relevant notices, VAT shall be imposed in lieu of business tax in transportation and some modern service sectors firstly in Shanghai starting from January 1, 2012. Afterwards the VAT Pilot Program is expanded to Beijing from September 1, 2012, and then is rolled out to the whole country from August 1, 2013. Under the VAT Pilot Program, VAT at a rate of 6% applies to some modern service industries.

Local Surcharges

The city construction tax and education surcharge are local surcharges imposed as a certain percentage of PRC turnover taxes (i.e., business tax, value-added tax and consumption tax). The city construction tax is charged at rates of 1%, 5% or 7% (the applicable city construction tax rate depends on the location of the taxpayer) of the turnover tax paid while the education surcharge rate is currently at 3% of the turnover tax paid. Though in the past, foreign-invested enterprises, foreign enterprises and foreign individuals were exempted from such surcharges, these entities were required to make such payments from December 1, 2010 according to a notice issued by the State Council in October 2010.

 

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In addition to the city construction tax and the education surcharge, the Ministry of Finance issued Circular Caizong (2010) No. 98, or Circular 98, that requires all entities and individuals (including foreign-invested enterprises, foreign enterprises and foreign individuals) to pay a local education surcharge, or LES, at 2% on turnover tax paid. Local governments are required to report their implementation measures on LES to the Ministry of Finance. LES became applicable to all entities and individuals in Beijing on January 1, 2012.

Employment Laws and Social Insurance

We are subject to laws and regulations governing our relationship with our employees, including wage and hour requirements, working and safety conditions, and social insurance, housing funds and other welfare. The compliance with these laws and regulations may require substantial resources.

China’s National Labor Law, which became effective on January 1, 1995, and China’s National Labor Contract Law, which became effective on January 1, 2008 and was amended on December 28, 2012, permit workers in both state-owned and private enterprises in China to bargain collectively. The National Labor Law and the National Labor Contract Law provide for collective contracts to be developed through collaboration between the labor union (or worker representatives in the absence of a union) and management that specify such matters as working conditions, wage scales, and hours of work. The laws also permit workers and employers in all types of enterprises to sign individual contracts, which are to be drawn up in accordance with the collective contract. The National Labor Contract Law has enhanced rights for the nation’s workers, including permitting open-ended labor contracts and severance payments. The legislation requires employers to provide written contracts to their workers, restricts the use of temporary labor and makes it harder for employers to lay off employees. It also requires that employees with fixed-term contracts be entitled to an indefinite-term contract after a fixed-term contract is renewed twice or the employee has worked for the employer for a consecutive ten-year period.

On October 28, 2010, the National People’s Congress promulgated the PRC Social Insurance Law, which became effective on July 1, 2011. In accordance with the PRC Social Insurance Law and other relevant laws and regulations, China establishes a social insurance system including basic pension insurance, basic medical insurance, work-related injury insurance, unemployment insurance and maternity insurance. An employer shall pay the social insurance for its employees in accordance with the rates provided under relevant regulations and shall withhold the social insurance that should be assumed by the employees. The authorities in charge of social insurance may request an employer’s compliance and impose sanctions if such employer fails to pay and withhold social insurance in a timely manner. Under the Regulations on the Administration of Housing Fund effective in 1999, as amended in 2002, PRC companies must register with applicable housing fund management centers and establish a special housing fund account in an entrusted bank. Both PRC companies and their employees are required to contribute to the housing funds.

 

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MANAGEMENT

Directors and Executive Officers

The following table sets forth information regarding our executive officers and directors as of the date of this prospectus.

 

Directors and Executive Officers

   Age     

Position/Title

Shaoyun Han

     43       Founder, chairman and chief executive officer

Jianguang Li

     49       Director

Yongji Sun(1)

     49       Independent director appointee

Xiaosong Zhang(2)

     50       Independent director appointee

Ya-Qin Zhang(3)

     48       Independent director appointee

Suhai Ji

     37       Chief financial officer

Ying Sun

     37       Vice president

Yi Li

     38       Vice president

Yinan Qi

     35       Vice president and general manager of northern region

Jiangyou Wang

     36       General manager of southern region

Xiaolan Tang

     34       General manager of central and western region

 

(1) Mr. Sun has accepted appointment as our independent director, effective upon the effectiveness of the registration statement of which this prospectus is a part.
(2) Mr. Zhang has accepted appointment as our independent director, effective upon the effectiveness of the registration statement of which this prospectus is a part.
(3) Mr. Zhang has accepted appointment as our independent director, effective upon the effectiveness of the registration statement of which this prospectus is a part.

Shaoyun Han is our founder and has served as chairman of our board of directors and chief executive officer since our inception. Before founding Tarena in September 2002, Mr. Han was deputy chief engineer and director of the software division of AsiaInfo-Linkage between 1995 and 2002, responsible for software research and development and corporate management. Mr. Han received a bachelor’s degree in computer application from Jilin University in China.

Jianguang Li is our director. Mr. Li has served as our director since January 2004. Mr. Li has been a partner of IDG Capital Partners since March 2006, responsible for providing venture capital and private equity investment-related advice. Between 1999 and 2006, Mr. Li served as a vice-president of IDG Technology Venture Investment Inc. Prior to joining IDG in 1999, Mr. Li worked in Crosby Assets Management Limited as an investment manager. Mr. Li received a bachelor’s degree in management from Peking University and a master’s of science degree from the University of Guelph.

Yongji Sun will serve as our independent director immediately upon the effectiveness of our registration statement on Form F-1, of which this prospectus is a part. Mr. Sun currently serves as the chairman of Dilato Infotech Inc. and the chief executive officer of Shangxue Education Technology Inc. Between 2005 and 2011, Mr. Sun served as executive vice president of special projects and strategic relationships at HiSoft Technology International Ltd., or HiSoft . Prior to joining HiSoft in November 2005, Mr. Sun founded Beijing Tianhai Hongye International Software Co., Ltd. (Ensemble) in 2002 and served as its chief executive officer from 2003 to 2005. He founded and served as chief executive officer of Newland Network Co. from 2000 to 2002. He founded Lotus China in 1993 and served as the head of the research and development center until 1998. Mr. Sun received a bachelor’s degree from North Eastern Machinery Institute in 1985, a master’s degree in Computer Science from Nanjing Aerospace & Aeronautic University in 1988, and received a master of business administration from Babson College in 2000.

 

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Xiaosong Zhang will serve as our independent director immediately upon the effectiveness of our registration statement on Form F-1, of which this prospectus is a part. Mr. Zhang has served as an independent director and chairman of the audit committee of Sungy Mobile Limited, a NYSE-listed mobile internet company, since November 2013. Mr. Zhang has served as the chief financial officer of iSoftStone Holdings Limited, a NYSE-listed company, since July 2010 and was an independent director of iSoftStone between February 2010 and July 2010. Prior to joining iSoftStone, Mr. Zhang served as chief financial officer of BJB Career Education Company Limited from 2009 to June 2010, as chief financial officer of Emarket Holding Group, Ltd. from 2008 to 2009, as chief financial officer of Chinacars, Inc. from 2007 to 2008 and as chief financial officer of Vimicro International Corporation, a NASDAQ-listed company, from 2004 to 2007. From 2000 to 2004, Mr. Zhang was a manager and then a senior manager at the Beijing office of PricewaterhouseCoopers. From 1995 to 1999, Mr. Zhang was an auditor and then a senior auditor at the Los Angeles office of KPMG LLP. Mr. Zhang received his master degree in accountancy from University of Illinois, his master degree in professional meteorology from Saint Louis University, and his bachelor degree in meteorology from Peking University. Mr. Zhang is a Certified Public Accountant in the State of California.

Mr. Ya-Qin Zhang will serve as our independent director immediately upon the effectiveness of our registration statement on Form F-1, of which this prospectus is a part. Mr. Zhang has served as an independent director and member of the audit committee of Autohome Inc., a NYSE-listed company, since December 2013. Mr. Zhang has served as a director of ChinaCache International Holdings Ltd., a NASDAQ-listed company, since September 2010. Mr. Zhang has been serving as the chairman of Microsoft Asia-Pacific R&D Group since 2005 and is in charge of the research and development of Microsoft Corporation in the Asia-Pacific region. Mr. Zhang is one of the founding members of the Microsoft Research Asia lab, where he served as managing director and chief scientist, and he also founded the Advanced Technology Center in 2003. Before joining Microsoft in 1999, Mr. Zhang was a director for the Multimedia Technology Laboratory at Sarnoff Corp. and worked as a senior technical staff member for GTE Laboratories Inc. and Contel Corp. From 2009 to 2012, Mr. Zhang served as an independent director of China Real Estate Information Corporation, a provider of real estate information, consulting and online services in China. Mr. Zhang received his bachelor’s and master’s degrees in electrical engineering from the University of Science and Technology of China and a Ph.D. in electrical engineering from George Washington University.

Suhai Ji is our chief financial officer. Mr. Ji has served as our chief financial officer since September 2013. From November 2010 to September 2013, Mr. Ji served as the chief financial officer of NQ Mobile Inc., a NYSE-listed company. From June 2009 to November 2010, Mr. Ji was a director in the NYSE Beijing Representative Office where he was responsible for NYSE’s business development in China. From 2005 to 2009, Mr. Ji worked as an associate and vice president in investment banking at Deutsche Bank AG, Hong Kong Branch. Prior to that, Mr. Ji was a management consultant at A.T. Kearney Beijing Office from 2003 to 2005. Mr. Ji received a bachelor’s degree in economics and a master’s degree in international economics and finance from Brandeis University, as well as an MBA degree in finance from Columbia Business School.

Ying Sun is our vice president. Ms. Sun has served as our vice president since December 2009, responsible for our nation-wide operations. Ms. Sun joined us in June 2005 as the general manager of our Beijing learning centers. Between 2007 and 2009, she was the general manager of our northern region. From 1999 to 2005, Ms. Sun worked in Gloria Hotels and Resorts, serving in various sales and human resources-related roles. Ms. Sun received a bachelor’s degree in tourism economics management from Dongbei University of Finance and Economics in China. Ms. Sun is the spouse of Shaoyun Han.

Yi Li is our vice president. Mr. Li has served as our vice president since January 2012, responsible for our teaching and research efforts. Mr. Li joined us in November 2008, serving as our director of teaching between 2008 and 2012. Prior to joining us, Mr. Li was a senior teacher and later a general supervisor of the JAVA training course at Oriental Standard between 2005 and 2008. From 2004 to 2005, Mr. Li was a senior development engineer at IBM China R&D center. Mr. Li received a bachelor’s degree in Automation from the Institute of Technology of Taiyuan and a master’s degree in software engineering from Beihang University.

 

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Yinan Qi is our vice president and general manager of northern region. Mr. Qi has served as our vice president since September 2013, responsible for our selling and marketing efforts, and as our general manager of northern region since June 2010, responsible for our operations in Northern China. Mr. Qi joined us in March 2007, previously serving in roles including the deputy general manager of northern region, deputy general manager of our Beijing learning centers and director of our Hangzhou learning center. Prior to joining us, Mr. Qi served as the general manager of the Beihang campus of GAMFE between 2005 and 2006 and as director of technology at Zhonghe Wangxun (Beijing) Information Technology Co., Ltd. between 2002 and 2005. Mr. Qi received a bachelor’s degree in optoelectronic technology from China Jiliang University and a master’s degree in multimedia technologies from the University of Science and Technology Beijing.

Jiangyou Wang is our general manager of southern region. Mr. Wang has served as our general manager of southern region since January 2010, responsible for our operations in Southern China. Mr. Wang joined us in March 2008 as the director of our Hangzhou learning center before being promoted to his current position. Between 2007 and 2008, Mr. Wang founded Hangzhou Daowei Information Technology Co., Ltd., an IT operating services provider. Between 2006 and 2007, Mr. Wang co-founded Hangzhou Beiteng Technology Co., Ltd., a business simulation and course content provider. Between 2005 and 2006, Mr. Wang served as general manager of Talking Street English School in Ningbo. Between 2001 and 2004, Mr. Wang worked in Hangzhou New Grand Software Co., Ltd. as a regional sales director and general manager of the Ningbo branch. Mr. Wang received an associate’s degree in sales and marketing management from Zhejiang Industrial & Commercial University.

Xiaolan Tang is our general manager of central and western region. Mr. Tang has served as our general manager of central and western region since January 2011, responsible for our operations in central and western China. Mr. Tang joined us in October 2007, serving as marketing director of our Beijing branch, marketing director of the northern region and vice-general manager of northern region before being promoted to his current position. From 2006 to 2007, Mr. Tang worked as the director of marketing at Beijing Blue Point Technology Co., Ltd. From 2002 to 2006, Mr. Tang served as executive assistant to the general manager and training school headmaster of Jilin Education Technology Co., Ltd. Mr. Li received a bachelor’s degree in management from Jilin University.

Employment Agreements

We have entered into employment agreements with each of our executive officers. We may terminate an executive officer’s employment for cause at any time without advanced notice or remuneration for certain acts of the officer, such as (i) being convicted or pleading guilty to a felony or to an act of fraud, misappropriation or embezzlement, (ii) being negligent or acting dishonestly to our detriment, (iii) engaging in actions amounting to misconduct or failing to perform his/her duties hereunder and such failure continues after the executive officer is afforded a reasonable opportunity to cure such failure, (iv) death, and (v) having a disability which, as reasonably determined by our board of directors, renders the executive officer unable to perform the essential functions of his/her employment, even with reasonable accommodation that does not impose an undue hardship on us, for more than 180 days in any 12-month period, unless a longer period is required by applicable law, in which case that longer period would apply. In such case, the executive officer will not be entitled to receive any severance payment by reason of the termination. We may also terminate an executive officer’s employment without cause at any time upon three months prior written notice. In such case of such termination by us, we shall provide severance payments to the executive officer as expressly required by applicable law of the jurisdiction where the executive officer is based. An executive officer may terminate his or her employment at any time by giving three months prior written notice.

Each of our executive directors have agreed to hold, both during and after the termination or expiry of his or her employment agreement, in strict confidence and not to use or disclose, except as required in the performance of his or her duties in connection with the employment or pursuant to applicable law, any of our confidential information or trade secrets, or the confidential or proprietary information of any third party received by us and