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TABLE OF CONTENTS
Item 8. Financial Statements and Supplementary Data.
PART IV
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended March 31, 2013 |
||
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the transition period from to |
||
Commission File Number 001-33625
VIRTUSA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
| Delaware (State or Other Jurisdiction of Incorporation or Organization) |
04-3512883 (I.R.S. Employer Identification Number) |
2000 West Park Drive
Westborough, Massachusetts 01581
(Address of principal executive office)
(508) 389-7300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Common Stock, $0.01 par value per share (Title of each class) |
The NASDAQ Stock Market LLC (Name of exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No: ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No: ý
Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No: o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes o No: ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer ý | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No: ý
The aggregate market value of the registrant's voting and non-voting shares of common stock held by non-affiliates of the registrant on September 30, 2012, based on $17.77 per share, the last reported sale price on the NASDAQ Global Select Market on that date, was $257,502,173.
The number of shares outstanding of each of the issuer's class of common stock as of May 23, 2013:
| Class | Number of Shares | |
|---|---|---|
| Common Stock, par value $0.01 per share | 26,214,270 |
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive Proxy Statement for its 2013 annual meeting of stockholders pursuant to Regulation 14A within 120 days of the end of the fiscal year ended March 31, 2013. Portions of the registrant's Proxy Statement are incorporated by reference into Part III of this Form 10-K. With the exception of the portions of the Proxy Statement expressly incorporated by reference, such document shall not be deemed filed with this Form 10-K.
VIRTUSA CORPORATION
ANNUAL REPORT ON FORM 10-K
Fiscal Year Ended March 31, 2013
TABLE OF CONTENTS
This Annual Report on Form 10-K (the "Annual Report") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the "safe harbor" created by those sections. These statements relate to, among other things, our expectations concerning our business strategy. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. Some of the forward-looking statements can be identified by the use of forward-looking terms such as "believes," "expects," "may," "will," "should," "seek," "intends," "plans," "estimates," "projects," "anticipates," or other comparable terms. These forward-looking statements involve risk and uncertainties. We cannot guarantee future results, levels of activity, performance or achievements, and you should not place undue reliance on our forward-looking statements. Our actual results may differ significantly from the results discussed in the forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or strategic investments. Factors that might cause such a difference include, but are not limited to, those set forth in "Item 1A. Risk Factors" and elsewhere in this Annual Report. Except as may be required by law, we have no plans to update our forward-looking statements to reflect events or circumstances after the date of this report. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q and 8-K reports to the Securities and Exchange Commission (the "SEC").
Overview
Virtusa Corporation (the "Company", "Virtusa", "we", "us" or "our") is a global information technology services company. We use an enhanced global delivery model to provide end-to-end information technology ("IT") services to Global 2000 companies. These services, which include IT and business consulting, application support and maintenance, development, systems integration and managed services, leverage our unique platforming methodology that transforms our clients' businesses through IT rationalization. Our services enable our clients to accelerate business outcomes by consolidating, rationalizing, and modernizing our clients' core customer-facing processes into one or more core systems. We deliver cost-effective solutions through a global delivery model, applying advanced methods such as Agile, an industry standard technique designed to accelerate application development, and our consulting methodology, Accelerated Solution Design ("ASD"), which is a collaborative decision-making and design process that ensures our solutions meet the clients' specifications and requirements. We have targeted our solution offerings to enable our clients to simultaneously reduce their IT operations cost, while increasing their ability to meet changing business needs. Headquartered in Massachusetts, we have offices in the United States, the United Kingdom, Germany, and Singapore, with global delivery centers in Hyderabad, Bangalore and Chennai, India, Colombo, Sri Lanka, and Budapest, Hungary.
We combine our deep industry expertise with IT consulting and outsourcing services to deliver targeted and unique solutions and services that address the highest CIO priorities, including reducing total cost of ownership, accelerating time-to-market, increasing productivity and enhancing our clients' customer experience. Our deep expertise in core technology services allows us to help our clients to lower total cost of ownership of their overall IT investments. We also combine industry specialization with our core services to deliver high-impact solutions in critical business functions that help our clients transform their business performance and gain competitive advantage in the markets in which they operate.
We use our broad expertise in emerging technology areas like mobile, social, cloud and big data, to provide targeted IT solution offerings to respond to the growing need and desire of our clients to "millennial" enable their business, i.e., leverage these technological advancements to transform their business to meet the demands of customers and employees belonging to the millennial generation.
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Millennial is a term we use to describe the generation of people born after 1984. This generation, which is rapidly becoming the mainstay of consumer buying as well as employee populations, has grown up in an environment guided by social media, mobility and a demand for products and services anytime, anywhere and on their device of choice. We have tailored our IT solutions to address this growing market and opportunity.
We deliver our services using our enhanced global delivery model which leverages a highly efficient onsite-to-offshore service delivery mix and proprietary tools and processes to manage and accelerate delivery, foster innovation and promote continual improvement. Our global service delivery teams work seamlessly at our client locations and at our global delivery centers in India, Sri Lanka and Hungary to provide value-added services rapidly and cost-effectively. Our teams do this by using our enhanced global delivery model, which we manage to a targeted 25/75 onsite-to-offshore service delivery mix, although such delivery mix may be impacted by several factors, including our new and existing client delivery requirements.
We apply our innovative platforming approach across all of our services. Through our platforming approach, we help our clients combine common business processes and rules, technology frameworks and data into reusable application platforms that can be leveraged across the enterprise to build, enhance and maintain existing and future applications. Our platforming approach enables our clients to continually improve their software platforms and applications in response to changing business needs and evolving technologies, while also allowing them to improve business agility, realize long-term and ongoing cost savings and improve their return on investment. Our platforming methodology also reduces the effort and cost required to develop and maintain IT applications by streamlining and consolidating our clients' applications on an ongoing basis. We believe that our solutions provide our clients with the consultative and high-value services associated with large consulting and systems integration firms, the cost-effectiveness associated with offshore IT outsourcing firms and the ongoing benefits of our innovative platforming approach.
We provide our IT services primarily to enterprises engaged in the following industries: communications and technology ("C&T"); banking, financial services and insurance ("BFSI"); and media and information ("M&I"). Our current clients include leading global enterprises such as AIG Global Services, Inc. (primarily through its affiliates, Chartis Global Claims Services, Inc. and Chartis Global Services, Inc. ("AIG"), JPMorgan Chase Bank, N.A. ("JPMC"), British Telecommunications plc ("BT"), Aetna Life Insurance Company, Thomson Reuters (Healthcare) Inc., and leading enterprise software developers. We have a high level of repeat business among our clients. For instance, during the fiscal year ended March 31, 2013, 90% of our revenue came from clients to whom we had been providing services for at least one year. Our top ten clients accounted for approximately 60%, 59% and 60% of our total revenue in the fiscal years ended March 31, 2013, 2012 and 2011, respectively. Our largest client for the fiscal year ended March 31, 2013, AIG, accounted for 14% of our total revenue. During the fiscal years ended March 31, 2012 and 2011, AIG accounted for 6% and 2% of our total revenue, respectively. During our fiscal years ended March 31, 2013, 2012 and 2011, JPMC accounted for 14%, 16% and 12% and BT accounted for 11%, 12% and 14% of our total revenue, respectively.
We have master services agreements with each of AIG, JPMC and BT.
Our master services agreement with AIG is dated April 25, 2008 and has a perpetual term, but may be terminated sooner by either party in the event of, among other things, an uncured, material breach of the other party or by AIG for convenience upon 10 days prior written notice.
Virtusa Corporation's current agreement with JPMC, which we amended on March 31, 2012 to reflect certain rate card pricing terms with JPMC, expires on December 5, 2014. Our agreements with JPMC and AIG do not provide for any minimum purchase obligations.
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On January 31, 2012, Virtusa UK Limited, our UK subsidiary, entered into a Global Frame Contract (the "GFA") with BT which establishes Virtusa UK Limited as a preferred, but non-exclusive, vendor of BT for the provision of IT services to BT and its affiliates. The GFA replaces Virtusa UK Limited's previously disclosed master services agreement with BT dated March 29, 2007, as amended (the "MSA"), in its entirety.
Under the terms of the GFA, BT agreed to a minimum aggregate expenditure commitment of approximately £102 million over a term beginning April 1, 2007 to March 31, 2013, reflecting a continuation of the minimum commitment previously agreed under the MSA. As of March 31, 2013, the provisions regarding minimum commitments of BT have expired, although the GFA remains in effect. The GFA also added rate cards specific to certain other geographic locations not previously covered by the MSA. In addition, the GFA contains provisions regarding insurance, indemnities, limitations of liability and confidentiality that are materially similar to those contained in the MSA, as well as other provisions relating to warranty, service levels, liquidated damages and other customary terms and conditions.
The term of the GFA is from January 1, 2012 to December 31, 2014, although the GFA may be terminated sooner by either party in the event of, among other things, an uncured, material breach of the other party or by BT upon 90 days prior written notice. BT may also terminate without liability upon certain other conditions, including changes in control of Virtusa UK Limited.
These agreements generally may be terminated without additional liability by our clients for convenience on written notice of between 10 and 90 days, as well as by either party upon an uncured, material breach of the other party. There can be no assurance that these agreements will not be terminated or further amended prior to the end of their terms. The agreements with these clients also contain provisions for warranties, insurance, indemnification, limitations of liability, liquidated damages and other customary terms and conditions.
Our approach to global IT services
Broad range of IT services. We provide a broad range of IT services, either individually or as part of an end-to-end solution, from business and IT consulting, and technology implementation to application outsourcing. We have significant domain expertise in IT-intensive industries, such as C&T, BFSI and M&I. We have designed our portfolio of IT services and solutions to enable our clients to improve business performance, use IT assets more effectively and optimize IT costs.
Enhanced global delivery model. We provide our services through our enhanced global delivery model which leverages a highly-efficient onsite-to-offshore service delivery mix and proprietary tools and processes to manage and accelerate delivery, foster innovation and promote continual improvement.
Platforming approach. We apply our innovative platforming approach across our IT consulting, technology implementation and application outsourcing services to rationalize IT application portfolios and reduce costs, increase productivity and improve the efficiency and effectiveness of our clients' IT application environments.
Our Services
Business and IT consulting services. We provide business and IT consulting services to assist our clients to effectively manage their continually-changing IT environments and align their IT investments to effectively support current and future business requirements. Our goal is to help our clients to continually improve the effectiveness and efficiency of their IT application environments by adopting and evolving towards re-useable software platforms. We help clients analyze business and/or technology problems and identify and design platform-based solutions. We also assist our clients in planning and executing their IT initiatives and transition plans.
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Our business and IT consulting services include the following assessment and planning, architecture and design and governance-related services:
| Assessment and Planning Services | Architecture and Design Services | Governance-related Services | ||
|---|---|---|---|---|
• application inventory and portfolio assessment |
• enterprise architecture analysis |
• program governance and change management |
||
• business/technology
alignment analysis
• business process optimization
• IT strategic planning
• quality assurance process consulting |
• technology roadmaps
• product evaluation and selection
• business process analysis and design |
• program management planning
• IT process/methodology consulting |
On July 1, 2011, we acquired substantially all of the assets comprising the business of ALaS Consulting LLC, a New York limited liability company ("ALaS") to extend our position within the BFSI industries by adding capital markets domain expertise, consulting and program management skills. We now offer a wider range of consulting and advisory services to financial services companies in areas such as regulatory compliance, trading desk operations improvements and controls, software package selection, program management and functional testing, and increased automation to reduce our clients' costs.
During our consulting engagements, we often leverage proprietary frameworks and tools to differentiate our services from our competitors and to accelerate delivery. Examples of our unique frameworks and tools include our Strategic Enterprise Information Roadmap Framework, which is a structured service offering for recommending the right IT platform, solution architecture, transition strategy and approach to meet current and future business requirements, our Business Process Visualization tools, which enable us analyze, design and optimize enterprise business processes, and ASD. We believe that our consulting services are further differentiated by our ability to leverage our global delivery model across our engagements. Our onsite teams work directly with our clients to understand and analyze the current-state problems and to design conceptual solutions. Our offshore teams work seamlessly with our onsite teams to design and expand the conceptual solution, research alternatives, perform detailed analyses, develop prototypes and proofs-of-concept and produce detailed reports. We believe that this approach reduces cost, allows us to explore more alternatives in the same amount of time and improves the quality of our deliverables.
Technology implementation services. Our technology implementation services involve building, testing and deploying IT applications, and consolidating and rationalizing our clients' existing IT applications and IT environments into platforms.
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Our technology implementation services include the following development, legacy asset management, information management and testing services:
| Development Services | Legacy Asset Management Services |
Information Management Services | Testing Services | |||
|---|---|---|---|---|---|---|
• application
development • package implementation
and integration • software product
engineering • application maintenance and
support • business process
management services • CRM
implementations • SAP
implementations • customer
experience and content management services • enterprise content
management • portal and
search • document and records
management • emerging technology
services • mobility services • cloud computing • social solutions • big data |
• systems consolidation and
rationalization • technology
migration and porting • web-enablement of legacy applications |
• data management
services • business intelligence,
reporting and decision support • master data management • data integration • analytics |
• software quality
assurance • testing
frameworks • automation of test data
and cases • test cycle execution • performance testing • managed testing services |
Our technology implementation services span a variety of capabilities from custom application development, testing, maintenance and support services and packaged software implementation services. We have extensive and deep partnerships with leading technology platform vendors. We have incorporated rapid, iterative development techniques into our approach, extensively employing prototyping, solution demonstration labs and other collaboration tools that enable us to work closely with our clients to understand and deliver to their most challenging business requirements. Leveraging our business consulting services with advanced techniques like our ASD workshops, we are able to develop and deploy applications quickly, often within solution delivery cycles of less than three months.
Application outsourcing services. We provide a broad set of IT application outsourcing services that enable us to provide comprehensive support for our clients' needs to manage and maintain their software applications and platforms cost-effectively. We endeavor to continually improve the applications under our management and to evolve our clients' IT applications into platforms.
Our application outsourcing services include the following application and platform management, infrastructure management and quality assurance management services:
| Application and Platform Management Services |
Infrastructure Management Services | Software Quality Assurance Management Services |
||
|---|---|---|---|---|
• production support • maintenance and enhancement of custom-built
and package-based applications • ongoing software engineering services for software companies |
• systems
administration • database
administration • monitoring |
• outsourcing of quality
assurance planning • preparation of
test cases, scripts and data • execution of test cases, scripts and data |
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We believe that our application outsourcing services are differentiated because they are based on the principle of migrating installed applications to flexible platforms that can sustain further growth and business change. We do this by:
Global delivery model. We have developed an enhanced global delivery model that allows us to provide innovative IT services to our clients in a flexible, cost-effective and timely manner by leveraging an efficient onsite-to-offshore service delivery mix and our proprietary Global Innovation Process ("GIP"), to manage and accelerate delivery, foster innovation and promote continual improvement. We manage to a targeted 25% to 75% onsite-to-offshore service delivery mix, which allows us to provide value-added services rapidly and cost-effectively, although such delivery mix may be impacted by several factors, including our new and existing client delivery requirements, as well as the impact of any acquisitions. During the past four fiscal years, we performed at least 78% of our total annual billable hours at our offshore global delivery centers. However, for the fiscal year ending March 31, 2014, we anticipate the onsite ratio to slightly increase due to new client engagements and existing work on larger, more complex programs requiring a larger onsite presence. Using our global delivery model, we generally maintain onsite teams at our clients' locations and offshore teams at one or more of our global delivery centers. Our onsite teams are generally composed of program and project managers, industry experts and senior business and technical consultants. Our offshore teams are generally composed of project managers, technical architects, business analysts and technical consultants. These teams are typically linked together through common processes and collaboration tools and a communications infrastructure that features secure, redundant paths enabling seamless global collaboration. Our global delivery model enables us to provide around-the-clock, world-class execution capabilities that span multiple time zones.
Our enhanced global delivery model is built around our proprietary GIP, which is a software lifecycle methodology that combines our decade-long experience building platform-based solutions for global clients with leading industry standards such as Rational Unified Process, eXtreme Programming, Capability Maturity Model and Product Line Engineering. By leveraging GIP templates, tools and artifacts across diverse disciplines such as requirements management, architecture, design, construction, testing, application outsourcing and production support, each team member is able to leverage software engineering and platforming best practices and extend these benefits to clients.
During our fiscal year ended March 31, 2013, we augmented our GIP methodology through our offshore delivery centers in Chennai and Colombo being assessed at CMMI Level 5 maturity in the industry-standard capability maturity model developed and managed by the Software Engineering Institute. Our delivery center in Hyderabad, India had already been assessed at CMMI Level 5 in our fiscal year ending March 31, 2012. CMMI is a process improvement model used to improve a company's ability to manage project deliveries to guarantee predictable results. CMMI's process levels are regarded as the standard in the industry for evolutionary paths in software and systems development and management.
We have adapted and incorporated modern techniques designed to accelerate the speed of development into GIP, including rapid prototyping, Agile development and eXtreme Programming. During the initial process-tailoring phase of an engagement, we work with the client to define the specific approach and tools that will be used for the engagement. This process-tailoring takes into consideration the client's business objectives, technology environment and currently-established development approach. We believe our innovative approach to adapting proven techniques into a custom process has been an
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important differentiator that allows us to deliver substantially greater value to our clients in a cost-effective and timely manner. For example, a large high-tech manufacturer engaged us to use our process-tailoring approach to design a common, standards-based development process for use by its own product development teams.
The backbone of GIP is our global delivery operations infrastructure. This infrastructure combines enabling tools and specialized teams that assist our project teams with important enabling services such as workforce planning, knowledge management, integrated process and program management and operational reporting and analysis.
Two important aspects of our global delivery model are innovation and continual improvement. A dedicated process group provides three important functions: they continually monitor, test and incorporate new approaches, techniques, tools and frameworks into GIP; they advise project teams, particularly during the process-tailoring phase; and they monitor and audit projects to ensure compliance. New and innovative ideas and approaches are broadly shared throughout the organization, selectively incorporated into GIP and deployed through training. Clients also contribute to innovation and improvement as their ideas and experiences are incorporated into our body of knowledge. We also seek regular informal and formal client feedback. Our global leadership and executive team regularly interact with client leadership and each client is typically given a formal feedback survey on a quarterly basis. Client feedback is qualitatively and quantitatively analyzed and forms an important component of our teams' performance assessments and our continual improvement plans.
Platforming approach. We apply our innovative platforming approach across our business and IT consulting, technology implementation and application outsourcing services to rationalize IT application portfolios and reduce costs, increase productivity and improve the efficiency and effectiveness of our clients' IT application environments. As part of our platforming approach, we assess our clients' application environments to identify common elements, such as business processes and rules, technology frameworks and data. We incorporate those common elements into one or more application platforms that can be leveraged across the enterprise to build, enhance and maintain existing and future applications in a leaner environment. Our platforming approach enables our clients to continually improve their software platforms and applications in response to changing business needs and evolving technologies while also realizing long-term and ongoing cost savings.
Our platforming approach is embodied in a set of proprietary processes, tools and frameworks that address the fundamental challenges confronting IT executives. These challenges include managing the rising costs of technology ownership, while simultaneously supporting business demands to foster innovation, accelerate time-to-market, improve service and enhance productivity. Our platforming approach draws from analogs in industries that standardize on platforms composed of common components and assemblies used across multiple product lines. Similarly, we work with our clients to evolve their diverse software assets into unified, rationalized software platforms. Our platforming approach leads to simplified and standardized software components and assemblies that work together harmoniously and readily adapt to support new business applications. For example, a software platform for trading, once developed within an investment bank, can be the foundation for the bank's diverse trading applications in equities, bonds and currencies. Our platforming approach stands in contrast to traditional enterprise application development projects, where different applications remain separate and isolated from each other, replicating business logic, technology frameworks and enterprise data.
At the center of our platforming approach is a five-level maturity framework that allows us to adapt our service offerings to meet our clients' unique needs. Level 1 maturity in our platforming approach represents traditional applications where every line of code is embedded and unique to the application and every application is monolithic. Level 2 applications are less monolithic and more flexible and demonstrate characteristics such as configurability and customizability. Level 3 applications are advanced applications where the common code components and software assets are leveraged across multiple application families
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and product lines. Level 4 applications are framework-driven where the core business logic is reused with appropriate custom logic built around it. At the highest level of maturity are Level 5 applications, where platforms are greatly leveraged to simplify and accelerate application development and maintenance. At lower levels of maturity, few assets are created and reused. Consequently, agility, total cost of ownership and ability to quickly meet business needs are sub-optimal. As organizations mature along this continuum, from Level 1 to Level 5, substantial intellectual property is created and embodied in software platforms that enable steady gains in agility, reduce overall cost of ownership and accelerate time-to-market for business applications and services.
Our platforming approach improves software quality and IT productivity. Software assets within platforms are reused across applications, their robustness and quality improve with time and our clients are able to develop software with fewer defects. A library of ready-made building blocks significantly enhances productivity and reduces software development risks compared to traditional methods. This establishes a cycle of continual improvement in that the more an enterprise embraces platform-based solutions, the better the quality of its applications will be, and the less the effort required to build, enhance and maintain them.
Our IT solutions
Core solutions. We have designed our solutions to enable clients to improve core customer business processes resulting in high impact business outcomes including reducing total cost of ownership, accelerating time to market and enhancing our clients' customer experience. We use proprietary business consulting methodologies like ASD to help clients improve accuracy and scope of the solution being delivered, align organizational stakeholders on common, shared objectives, and accelerate the solution development process. Virtusa's unique platforming methodology helps clients rationalize their IT application infrastructure and develop lean, optimized enterprise application platforms that significantly lower the cost of maintenance while improving the agility of the business to respond to emerging market demands.
We provide the following specific core solutions across IT and business consulting, technology and application outsourcing areas:
IT & Business Consulting
|
Platforming | Solutions | Application Outsourcing | |||
|---|---|---|---|---|---|---|
• accelerated solution
design • business process re-engineering |
• lean outcomes • one process, one platform |
• business process
management • enterprise content management • data warehousing &
business intelligence • mobility • cloud computing |
• quality assurance
testing • managed
services |
Our expertise in emerging solutions across core technologies like business process management, enterprise content management, data warehousing and business intelligence, mobility, and cloud computing allow us to provide solutions to critical, customer facing business problems for our clients including improving operating efficiencies, reducing churn and improving retention, and delivering better compliance and regulatory adherence. Our core outsourcing services, including quality assurance testing and managed services, help our clients improve the quality of their software assets, resulting in lower cost of maintenance, improved manageability of software assets and lower risk to the business due to software defects. Our managed services offerings deliver enhanced value to our clients in managing their software assets through innovative engagement models built around concepts like outcome-based costing.
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Transformational solutions. We act as trusted advisors to our clients, combining our core services with deep industry specialization, to deliver transformational solutions that help position our clients' businesses for competitive advantage in their chosen markets.
Our transformational solutions across IT and business consulting, platforming, technology and application outsourcing areas include:
IT & Business Consulting
|
Platforming | Solutions | Application Outsourcing | |||
|---|---|---|---|---|---|---|
• domain
solutions • business process re-engineering • large program management |
• large global platforms |
• claims
management • policy
administration • client
onboarding • know your customer • regulatory &
compliance • billing
systems • customer experience management |
• application support & maintenance platforms |
We leverage our business consulting expertise to manage large, complex programs and deliver critical business process re-engineering advice to our clients. We have recently expanded our platforming expertise to cover large programs impacting global business platforms and multi-country implementations. The industry and domain expertise we have developed over the past decade has helped us develop business solutions like claims management and policy administration solutions for insurance companies; client onboarding, know your customer, and regulatory and compliance solutions for banks; member reach and care management solutions for healthcare providers; billing solutions for telecommunication providers; and customer experience management solutions for leisure and hospitality businesses.
Millennial solutions. Our millennial solutions are designed to enable our clients to harness the innovative advances in mobility, social media, cloud computing and big data analytics to modernize their IT application environments and enable their businesses to capitalize on the new wave of millennial consumer demand and expectations. Our business and IT consulting services help our clients determine the best approach to modernize their IT environments through specific solutions like gap analysis, user journey mapping, technology platform selection and consumer experience frameworks.
We offer the following solutions which enable our clients to address or serve the growing needs of the millennial generation:
IT & Business Consulting
|
Platforming | Solutions | Application Outsourcing | |||
|---|---|---|---|---|---|---|
• gap analysis • consumer experience solutions |
• application modernizations |
• mobility • cloud computing • big data • social media • speed data • service oriented architecture |
• millennial tech
labs • 24x7 managed services |
We have invested in creating millennial technology labs, innovation hubs within our global delivery centers, to foster the development of emerging technology solutions that will enable our clients to become millennial enterprises.
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Sales and marketing
Our global sales, marketing and business development teams seek to develop strong relationships with IT and business executives at prospective and existing clients to establish long-term business relationships that continue to grow in size and strategic value. At March 31, 2013 and 2012, we had 131 and 126 marketing and business development full time equivalents, respectively, including sales managers, sales representatives, client service partners, account managers, telemarketers, sales support personnel and marketing professionals.
The sales cycle for our services often includes initiating contact with a prospective client, understanding the prospective client's business challenges and opportunities, performing discovery or assessment activities, submitting proposals, providing client case studies and references and developing proofs-of-concept or solution prototypes. We organize our sales teams in strategic business units by geography and with professionals who have specialized industry knowledge. This industry focus enables our sales teams to better understand the prospective client's business and technology needs and to offer appropriate industry-focused solutions.
Sales and sales support. Our sales and sales support teams focus primarily on identifying, targeting and building relationships with prospective clients. These teams are supported in their efforts by industry specialists, technology consultants and solution architects, who work together to design client-specific solution proposals. Our sales and sales support teams are based in offices throughout the United States, Europe and Asia.
Account management. We assign experienced account managers who build and regularly update detailed account development plans for each of our clients. These managers are responsible for developing strong working relationships across the client organization, working day-to-day with the client and our service delivery teams to understand and address the client's needs. Our account managers work closely with our clients to develop a detailed understanding of their business objectives and technology environments. We use this knowledge to identify and target additional consulting engagements and other outsourcing opportunities.
Marketing. We maintain a marketing presence in the United States, Europe, including the United Kingdom, India, Sri Lanka and Singapore. Our marketing team seeks to build our brand awareness and generate target lists and sales leads through industry events, press releases, thought leadership publications, direct marketing campaigns and referrals from clients, strategic alliances and industry analysts. The marketing team maintains frequent contact with industry analysts and experts to understand market trends and dynamics.
Strategic alliances. We have strategic alliances with software companies, some of which are also our clients, to provide services to their customers. We believe these alliances differentiate us from our competition. Our extensive engineering, quality assurance and technology implementation and support services to software companies enable us to compete more effectively for the technology implementation and support services required by their customers. In addition, our strategic alliances with software companies allow us to share sales leads, develop joint account plans and engage in joint marketing activities.
Clients and industry expertise
We market and provide our services to companies in North America, Europe and Asia. For additional discussion regarding geographic information, see note 19 to our consolidated financial statements included elsewhere in this Annual Report. A majority of our revenue for the fiscal year ended March 31, 2013 was generated from Forbes Global 2000 firms or their subsidiaries. We believe that our regular, direct interaction with senior executives at these clients, the breadth of our client relationships and our reputation within these clients as a thought leader differentiates us from our competitors. The strength of
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our relationships has resulted in significant recurring revenue from existing clients. For instance, our largest client for the fiscal year ended March 31, 2013, AIG, accounted for 14% of our total revenue. During the fiscal years ended March 31, 2012 and 2011, AIG accounted for 6% and 2% of our total revenue, respectively. During our fiscal years ended March 31, 2013, 2012 and 2011, JPMC accounted for 14%, 16% and 12%, and BT accounted for 11%, 12% and 14% of our total revenue, respectively.
We focus primarily on three industries: C&T, BFSI and M&I. We build expertise in these industries through our customer experience and industry alliances, by hiring industry specialists and by training our business analysts and other team members in industry-specific topics. Drawing on this expertise, we strive to develop industry-specific perspectives and services.
Communications and technology. For our communications clients, we focus on customer service, sales and billing functions and regulatory compliance and help them improve service levels, shorten time-to-market and modernize their IT environments. For our technology clients, which include hardware manufacturers and software companies, we provide a wide range of industry-specific service offerings, including product management services, product architecture, engineering and quality assurance services, and professional services to support product implementation and integration. These clients often employ cutting-edge technology and generally require strong technical skills and a deep understanding of the software product lifecycle.
Banking, financial services and insurance. We provide services to clients in the retail, wholesale and investment banking areas; financial transaction processors; and insurance companies encompassing life, property-and-casualty and health insurance. For our BFSI clients, we have developed industry-specific services for each of these sectors, such as an account opening framework for banks, compliance services for financial institutions and customer self-service solutions for insurance companies. The need to rationalize and consolidate legacy applications is pervasive across these industries and we have tailored our platforming approach to address these challenges.
Media and information. We focus primarily on solutions involving electronic publishing, online learning, content management, information workflow and mobile content delivery as well as personalization, search technology and digital rights management. Many M&I providers are focused on building common platforms that provide customized content from multiple sources, customized and delivered to many consumers using numerous delivery mechanisms. We believe our platforming approach is ideally suited to these opportunities.
Competition
The IT services market in which we operate is highly competitive, rapidly evolving and subject to shifting client needs and expectations. This market includes a large number of participants from a variety of market segments, including:
We also occasionally compete with in-house IT departments, smaller vertically-focused IT service providers and local IT service providers based in the geographic areas where we compete. We expect additional competition from offshore IT outsourcing firms in emerging locations such as Eastern Europe, Latin America and China, offshore IT service providers with facilities in less expensive geographies within India and lower cost, near shore centers established by our competitors to provide accelerated staffing alternatives at competitive pricing.
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We believe that the principal competitive factors in our business include technical expertise and industry knowledge, a breadth of service offerings to provide one-stop solutions to clients, a well-developed recruiting, training and retention model, responsiveness to clients' business needs and quality of services. We believe that we compete favorably with respect to these factors. Many of our competitors, however, have significantly greater financial, technical and marketing resources and a greater number of IT professionals than we do. We cannot assure you that we will continue to compete favorably or that we will be successful in the face of increasing competition.
Human resources
We seek to maintain a culture of innovation by aligning and empowering our team members at all levels of our organization. Our success depends upon our ability to attract, develop, motivate and retain highly-skilled and multi-dimensional team members. Our people management strategy is based on six key components: recruiting, performance management, training and development, employee engagement and communication, compensation and retention. Although not currently a material component of our people management strategy, we also retain subcontractors at all of our locations on an as needed basis for specific client engagements.
Recruiting. Our global recruiting and hiring process addresses our need for a large number of highly-skilled, talented team members. In all of our recruiting and hiring efforts, we employ a rigorous and efficient interview process. We also employ technical and psychometric tests for our IT professional recruiting efforts in India and Sri Lanka. These tests evaluate basic technical skills, problem-solving capabilities, attitude, leadership potential, desired career path and compatibility with our team-oriented, thought-leadership culture.
We recruit from leading technical schools in India and Sri Lanka through dedicated campus hiring programs. We maintain a visible position in these schools through a variety of specialized programs, including IT curriculum development, classroom teaching and award sponsorships. We also recruit and hire laterally from leading IT service and software product companies and use employee referrals as a significant part of our recruitment process.
Performance management. We have a sophisticated performance assessment process that evaluates team members and enables us to tailor individual development programs. Through this process, we assess performance levels, along with each team member's potential. We create and manage development plans, adjust compensation and promote team members based on these assessments.
Training and development. We devote significant resources to train and integrate all new hires into our global team. We conduct a training program for all lateral hires that teaches them our culture and value system. We provide a comprehensive training program for our campus hires that combines classroom training with on-the-job learning and mentoring. We strive to continually measure and improve the effectiveness of our training and development programs based on team member feedback.
Employee engagement and communication. We believe open communication is essential to our team-oriented culture. We maintain multiple communication forums, such as regular company-wide updates from senior management, complemented by team member sessions at the regional, local and account levels, as well as regular town hall sessions to provide team members a voice with management.
Compensation. We consistently benchmark our compensation and benefits with relevant market data and make adjustments based on market trends and individual performance. Our compensation philosophy rewards performance by linking both variable compensation and salary increases to performance.
Retention. To attract, retain and motivate our team members, we seek to provide an environment that rewards entrepreneurial initiative, thought leadership and performance. During the twelve months ended March 31, 2013, we experienced voluntary team member attrition at a rate of 13.3% and involuntary
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team member attrition at a rate of 3.1%. We remain committed to improving and sustaining our voluntary attrition levels in-line with our long-term stated goals. We define attrition as the ratio of the number of team members who have left us during a defined period to the total number of team members that were on our payroll at the end of the period. Our human resources team, working with our business units, proactively manages voluntary team member attrition by addressing many factors that improve retention, including:
At March 31, 2013, we had 6,911 team members worldwide. We also retain outside contractors from time to time to supplement our services on an as needed basis. None of our team members are covered by a collective bargaining agreement or represented by a labor union. We consider our relations with our team members to be good.
Network and infrastructure
Our global IT infrastructure is designed to provide uninterrupted service to our clients. We use a secure, high-performance communications network to enable our clients' systems to connect seamlessly to each of our offshore global delivery centers. We provide flexibility for our clients to operate their engagements from any of our offshore global delivery centers by using mainstream network topologies, including site-to-site Virtual Private Networks, International Private Leased Circuits and MultiProtocol Label Switching. We also provide videoconferencing, voice conferencing and Voice over Internet Protocol capabilities to our global delivery teams and clients to enable clear and uninterrupted communication in our engagements, be it intra-company or with our clients.
We monitor our network performance on a 24x7 basis to ensure high levels of network availability and periodically upgrade our network to enhance and optimize network efficiency across all operating locations. We use leased telecommunication lines to provide redundant data and voice communication with our clients' facilities and among all of our facilities in Asia, the United States and Europe. We also maintain multiple sites across our global delivery centers in India, Sri Lanka and Hungary as back-up centers to provide for continuity of infrastructure and resources in the case of natural disasters or other events that may cause a business interruption.
We have also implemented numerous security measures in our network to protect our and our clients' data, including multiple layers of anti-virus solutions, network intrusion detection, host intrusions detection and information monitoring. We are ISO 27001 certified and believe that we meet all of our clients' stringent security requirements for ongoing business with them.
Intellectual property
We believe that our continued success depends in part on the skills of our team members, the ability of our team members to continue to innovate and our intellectual property rights. We rely on a
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combination of copyright, trademark and design laws, trade secrets, confidentiality procedures and contractual provisions to protect our intellectual property rights and proprietary methodologies. It is our policy to enter into confidentiality agreements with our team members and consultants and we generally control access to and distribution of our proprietary information. These agreements generally provide that any confidential or proprietary information developed by us or on our behalf be kept confidential. We pursue the registration of certain of our trademarks and service marks in the United States and other countries. We have registered the mark "Virtusa" in the United States, the European Community and India and have filed for registration of "Virtusa" in Sri Lanka. We have a registered service mark in the United States, "Productization", which we use to describe our methodology and approach to delivery services. We have also registered in the United States the service marks "BPM Test Drive" which we use to describe our consulting service offering involving business process management or BPM project implementation and "ACCELERATING BUSINESS OUTCOMES," which we use to describe the benefits of our services. We have no issued patents.
Our business also involves the development of IT applications and other technology deliverables for our clients. Our clients usually own the intellectual property in the software applications we develop for them. We generally implement safeguards designed to protect our clients' intellectual property in accordance with their needs and specifications. Our means of protecting our and our clients' proprietary rights, however, may not be adequate. Despite our efforts, we may be unable to prevent or deter infringement or other unauthorized use of our and our clients' intellectual property. Legal protections afford only limited protection for intellectual property rights and the laws of India and Sri Lanka do not protect intellectual property rights to the same extent as those in the United States and the United Kingdom. Time-consuming and expensive litigation may be necessary in the future to enforce these intellectual property rights.
In addition, we cannot assure you that our intellectual property or the intellectual property that we develop for our clients does not infringe the intellectual property rights of others, or will not in the future. If we become liable to third parties for infringing upon their intellectual property rights, we could be required to indemnify our client and pay substantial damage awards and be forced to develop non-infringing technology, obtain licenses or cease delivery of the applications that contain the infringing technology.
Business segments and geographic information
We view our operations and manage our business as one operating segment. For information regarding net revenue by geographic regions for each of the last three fiscal years, see note 19 to our consolidated financial statements for the fiscal year ended March 31, 2013 contained in this Annual Report.
For information regarding risks and dependencies associated with foreign operations, see our risk factors listed in "Item 1A. Risk Factors" contained in this Annual Report.
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Our corporate and available information
We were originally incorporated in Massachusetts in November 1996 as Technology Providers, Inc. We reincorporated in Delaware as eRunway, Inc. in May 2000 and subsequently changed our name to Virtusa Corporation in April 2002. Our principal executive offices are located at 2000 West Park Drive, Westborough, Massachusetts 01581, and our telephone number at this location is (508) 389-7300. Our website address is www.virtusa.com. We have included our website address as an inactive textual reference only. The information on, or that can be accessed through, our website is not part of this Annual Report. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through the investor relations page of our internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. In addition, we make available our Code of Business Conduct and Ethics free of charge through our website. We intend to disclose any amendments to, or waivers from, our Code of Business Conduct and Ethics that are required to be publicly disclosed pursuant to rules of the SEC and the NASDAQ Stock Market by filing such amendment or waiver with the SEC and posting it on our website.
No information on our Internet website is incorporated by reference into this Annual Report on Form 10-K.
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This discussion highlights some of the risks which may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. Our operating results and financial condition have varied in the past and may vary significantly in the future depending on a number of factors. We cannot be certain that we will successfully address these risks. If we are unable to address these risks, our business may not grow, our stock price may suffer and/or we may be unable to stay in business. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations.
Except for the historical information in this Annual Report, various matters contained in this Annual Report include forward-looking statements that involve risks and uncertainties. The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Annual Report and presented elsewhere by management from time to time. Such factors, among others, may have a material adverse effect upon our business, results of operations and financial condition. You should consider carefully the following risk factors, together with all of the other information included in this Annual Report. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock.
Risks relating to our business
Our revenue is highly dependent on a small number of clients and the loss of, or material reduction in, revenue from any one of our major clients could significantly harm our results of operations and financial condition.
We have historically earned, and believe that over the next few fiscal years we will continue to earn, a significant portion of our revenue from a limited number of clients. For instance, we generated approximately 39%, 34% and 35% of our revenue in our fiscal years ended March 31, 2013, 2012 and 2011, respectively, from our top three clients during those periods. For the fiscal year ended March 31, 2013, AIG Global Services, Inc. (primarily through its affiliates, Chartis Global Claims Services, Inc. and Chartis Global Services, Inc. ("AIG"), JPMC and BT accounted for 14%, 14% and 11% of our total revenue, respectively. In addition, during each of the fiscal years ended March 31, 2013 and 2012, 90% of our revenue came from clients to whom we had been providing services for at least one year. The loss of, or
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material reduction in, revenue from any one of our major clients could materially reduce our total revenue, harm our reputation in the industry and/or reduce our ability to accurately predict our revenue, net income and cash flow. The loss of, or material reduction in revenue from any one of our major clients could also adversely affect our gross profit and utilization as we seek to redeploy resources previously dedicated to that client. Generally, our clients retain us on a non-exclusive, engagement-by-engagement basis, rather than under exclusive long-term contracts and may typically terminate or reduce our engagements without termination related penalties. Accordingly, we cannot assure you that revenue from our major clients will not be significantly reduced in the future, including from factors unrelated to our performance or work product such as consolidation by or among our clients or the acquisition of a client. Further, the loss of, or material reduction in revenue from any one of our major clients has required, and could in the future require, us to increase involuntary attrition. This could have a material adverse effect on our attrition rate and make it more difficult for us to attract and retain IT professionals in the future.
We may not be able to maintain our client relationships with our major clients on existing or on continued favorable terms and our clients may not renew their agreements with us, in which case, our business, financial condition and results of operations would be adversely affected. For instance, on January 31, 2012, Virtusa UK Limited, our UK subsidiary, entered into a Global Frame Contract (the "GFA") with BT which replaced Virtusa UK Limited's previously disclosed master services agreement with BT dated as of March 29, 2007, as amended (the "MSA"), in its entirety. Under the terms of the GFA, BT had, among other terms, agreed to a minimum aggregate expenditure commitment of approximately £102 million over a term beginning April 1, 2007 to March 31, 2013, reflecting a continuation of the minimum commitment previously agreed under the MSA. As of March 31, 2013, the provisions regarding minimum commitments of BT have expired. While BT represented 11% of our revenue in the fiscal year ending March 31, 2013, there can be no assurance that BT's historical levels of spending with us will continue, if at all. Further, there can be no assurance that the GFA, which contains provisions regarding, insurance, indemnities, limitations of liability and confidentiality that are materially similar to those contained in the MSA, as well as other provisions relating to warranty, service levels, liquidated damages and other customary terms and conditions, will not be amended by BT on terms not favorable to us, will not be terminated prior to the end of its expiration date of January 1, 2015 or that the GFA will be renewed, and if so, on terms favorable to us.
Our client concentration may also subject us to perceived or actual leverage that our clients may have, given their relative size and importance to us. If our clients seek to negotiate their agreements on terms less favorable to us and we accept such unfavorable terms, such unfavorable terms may have a material adverse effect on our business, financial condition and results of operations. Accordingly, unless and until we diversify and expand our client base, our future success will significantly depend upon the timing and volume of business from our largest clients and the financial and operational success of these clients. If we were to lose one of our major clients or have a major client cancel substantial projects or otherwise significantly reduce its volume of business with us, our revenue and profitability would be materially reduced and our business and operating results would be seriously harmed.
If we cannot attract and retain highly-skilled IT professionals, our ability to obtain, manage and staff new projects and expand existing projects may result in loss of revenue and an inability to expand our business.
Our business is labor intensive and our ability to execute and expand existing projects and obtain new clients depends largely on our ability to hire, train and retain highly-skilled IT professionals, particularly project managers, IT engineers and other senior technical personnel. The improvement in demand for global IT services has further increased the need for employees with specialized skills or significant experience in IT services, particularly at senior levels and those with special skills. Further, there is intense worldwide competition for IT professionals with the skills necessary to perform the services we offer. If we cannot hire and retain such additional qualified personnel, our ability to acquire, manage and staff new projects and to expand, manage and staff existing projects, may be materially impaired. We may then lose
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revenue and our ability to expand our business may be harmed. For example, in our fiscal year ended March 31, 2013, our voluntary attrition rate was 13.3%. We, and the industry in which we operate, generally experience high employee attrition and we cannot assure you that we will be able to hire or retain the number and quality of technical personnel necessary to satisfy our current and future client needs. We also may not be able to hire and retain enough skilled and experienced IT professionals to replace those who leave. Additionally, if we have to replace personnel who have left our company, we will incur increased costs not only in hiring replacements but also in training such replacements until they can become productive and billable to our clients. In addition, we may not be able to redeploy and retrain our IT professionals in anticipation of continuing changes in technology, evolving standards and changing client preferences. Our inability to attract and retain IT professionals, or delays or inability to staff needed resources on client engagements may cause client dissatisfaction, project and staffing delays in new and existing engagements, project cancellations, project losses, higher project costs and loss of revenue, resulting in decreases in profits and a material adverse effect on our business, results of operations, financial condition and cash flows.
The IT services market is highly competitive and our competitors may have advantages that may allow them to compete more effectively than we do to secure client contracts and attract skilled IT professionals.
The IT services market in which we operate includes a large number of participants and is highly competitive. Our primary competitors include offshore IT outsourcing firms and consulting and systems integration firms. We also occasionally compete with in-house IT departments, smaller vertically-focused IT service providers and local IT service providers based in the geographic areas where we compete. We expect additional competition from offshore IT outsourcing firms in emerging locations such as Eastern Europe, Latin America and China, as well as offshore IT service providers with facilities in less expensive geographies within India.
The IT services industry in which we compete is experiencing rapid changes in its competitive landscape. Some of the large consulting firms and offshore IT service providers with which we compete have significant resources and financial capabilities combined with a greater number of IT professionals. Many of our competitors are significantly larger and some have gained access to public and private capital or have merged or consolidated with better capitalized partners, which events have created and may in the future create, larger and better capitalized competitors. Our competitors may have superior abilities to compete for market share, and compete against us for our existing and prospective clients. Our competitors may also have larger engagements with our existing or prospective clients which, due to our size and scale, may provide our competitors with significant advantages in any competitive bidding process. Our competitors may also be better able to use significant economic incentives, such as lower billing rates or non-billable resources, to secure contracts with our existing and prospective clients or gain a competitive advantage by being able to staff engagements that we are unable to staff, due to our shortage of resources, our lack of special skill sets or immigration delays. Our competitors may also be better able to compete for and retain skilled professionals by offering them more attractive compensation or other incentives. These factors may allow our competitors to have advantages over us to meet client demands in an engagement requiring large numbers and varied types of resources with specific experience or skill-sets that we may not have readily available in the short-term or the long-term. We cannot assure you that we can maintain or enhance our competitive position against current and future competitors. Our failure to compete effectively could have a material adverse effect on our business, financial condition or results of operations.
We depend on clients primarily located in the United States and Europe (primarily, the United Kingdom), and are therefore subject to the risks and events affecting these geographies and economies that may cause our clients to reduce or postpone their IT spending.
For our fiscal year ended March 31, 2013, we derived substantially all of our revenue from clients located in the United States and Europe (primarily, the United Kingdom). During the fiscal year ended
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March 31, 2013, we generated 75% of our revenue from clients in the United States, 20% of our revenue from clients in the Europe (primarily, the United Kingdom) and 5% from clients in the rest of the world. While the United States economy has marginally improved recently, the European economy remains weakened. If a weakening or slowing of these economies continues or accelerates, or deterioration in these financial markets occurs, pricing for our services may be depressed and our clients may reduce or postpone their technology spending significantly, which may in turn lower the demand for our services and negatively affect our revenue and profitability. Additionally, any prolonged recession or weakening of the growth rates and economies in the United States and/or Europe could have a material adverse impact on IT budgets, erode our client base and our target markets and have a material adverse impact on our revenue.
We depend on clients concentrated in specific industries, such as BFSI, and are therefore subject to risks relating to developments affecting these clients and industries that may cause them to reduce or postpone their IT spending.
In our fiscal year ended March 31, 2013, we derived substantially all of our revenue from clients in three industries: BFSI, C&T, and M&I. During our fiscal year ended March 31, 2013, we earned approximately 60% of our revenue from clients in the BFSI industries and our revenue from this industry vertical grew by approximately 24% from the prior fiscal year. If any decline in the growth of the BFSI industries, particularly the financial services industry, occurs, or if there is a significant consolidation in these industries or a decrease in growth or consolidation in other industry verticals on which we focus, such events could materially reduce the demand for our services and negatively affect our revenue and profitability. If economic conditions weaken or slow particularly in the industries in which we focus, our clients may significantly reduce or postpone their IT spending. Reductions in IT budgets, increased consolidation or increased competition in these industries could result in an erosion of our client base and a reduction in our target market. Any reductions in the IT spending of companies in any one of these industries may reduce the demand for our services and negatively affect our revenue and profitability.
Restrictions on immigration may affect our ability to compete for and provide services to clients in the United States, the United Kingdom, or other countries, which could result in lost revenue, lower gross margins, delays in client engagements and otherwise adversely affect our ability to meet our growth, revenue and profit projections.
The vast majority of our team members are Indian and Sri Lankan nationals. The ability of our IT professionals to work in the United States, the United Kingdom and other countries depends on our ability to obtain the necessary visas and entry permits. In recent years, the United States has increased the level of scrutiny in granting H-1(B), L-1 and other business visas. The H-1(B) visa classification enables U.S. employers to hire qualified foreign workers in positions that require an education at least equal to a four-year bachelor degree in the United States in specialty occupations such as IT systems engineering and systems analysis. The H-1(B) visa usually permits an individual to work and live in the United States for a period of up to six years. Under certain circumstances, H-1(B) visa extensions after the six-year period may be available. H-1B visa holders are required to be paid the higher of the actual wage, or the prevailing wage for their position at the site of their employment. In addition, there are strict labor regulations associated with the H-1(B) visa classification, including disclosure, attestations and document retention. All users of the H-1(B) program are subject to periodic site visits from the United States Citizenship and Immigration Services or USCIS to verify their compliance with immigration and Labor Regulations. In addition the Wage and Hour Division of the United States Department of Labor may also conduct H-1B audits to verify compliance with labor regulations. A finding by the United States Department of Labor of willful or substantial failure by us to comply with existing regulations on the H-1(B) classification may result in back-pay liability, substantial fines, and/or a ban on future use of the H-1(B) program and other immigration benefits. We are users of the H-1(B) visa classification with respect to some of our key offshore workers who have relocated onsite to perform services for our clients.
We also regularly transfer employees from our global subsidiaries, primarily those from India and Sri Lanka to the United States to work on projects and at client sites using the L-1 visa classification. The L-1
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visa allows companies abroad to transfer certain managers, executives and employees with specialized company knowledge to related United States companies such as a parent, subsidiary, affiliate, joint venture, or branch office. We have an approved "Blanket L Program," under which the corporate relationships of our transferring and receiving entities have been pre-approved by the USCIS, thus enabling individual L-1 visa applications to be presented directly to a visa-issuing United States consular post abroad rather than undergoing the individual petition pre-approval process through USCIS in the United States. In recent years, both the United States consular posts that review initial L-1 applications and USCIS, which adjudicates individual petitions for initial grants and extensions of L-1 status, have become increasingly restrictive with respect to their interpretation of the regulations governing this category and all applications are subject to increased scrutiny. For example, all L-1 applicants, including those brought to the United States under a Blanket L Program, must have worked abroad with the related company for one full year in the prior three years. In addition, L-1B "specialized knowledge" visa holders may not be primarily stationed at the work site of another employer if the L-1B visa holder will be principally controlled and supervised by an employer other than the petitioning employer. Finally, L-1B status may not be granted where placement of the L-1B visa holder at a third party site is part of an arrangement to provide labor for hire to the third party, rather than placement at the site in connection with the provision of a product or service involving specialized knowledge specific to the petitioning employer. As a result, the rate of refusals of both individual and blanket L-1 petitions and of extensions has materially increased. In addition, even where L-1 visas are ultimately granted and issued, security measures undertaken by United States consular posts around the world have substantially delayed visa issuances as they are allowed the right to further scrutinize the visa and request for additional supporting documentation. Any inability to bring, or delays in bringing, qualified technical personnel into the United States to staff on-site customer locations would have a material adverse effect on our client engagements, our business, results of operations and financial condition. Due to these immigration delays, we may also be required to hire or subcontract resources locally or perform more work onsite, thus negatively impacting our gross margins and overall profitability.
We also process immigrant visas for lawful permanent residence (green cards) in the United States for employees to fill positions for which there are an insufficient number of able, willing, and qualified United States workers available to fill the positions. Compliance with existing United States immigration and labor laws, or changes in those laws making it more difficult to hire foreign nationals or limiting our ability to successfully obtain permanent residence for our foreign employees in the United States, could require us to incur additional unexpected labor costs and expenses or could restrain our ability to retain the skilled professionals we need for our operations in the United States. Any of these restrictions or limitations on our hiring practices could have a material adverse effect on our business, results of operations and financial condition.
In response to terrorist attacks and global unrest, U.S. and U.K. immigration authorities, as well as other countries, have not only increased the level of scrutiny and conditions to granting visas, but have also introduced new security procedures, which include extensive background checks, personal interviews and the use of biometrics, as conditions to granting visas and work permits. A number of European countries are considering changes in immigration policies as well. The inability of key project personnel to obtain necessary visas or work permits could delay or prevent our fulfillment of client projects, which could hamper our growth and cause our revenue to decline. These restrictions and additional procedures may delay, or even prevent the issuance of a visa or work permit to our IT professionals and affect our ability to staff projects in a timely manner. Any delays in staffing a project can result in project postponement, delays or cancellation, which could result in lost revenue and decreased profitability and have a material adverse effect on our business, revenue, profitability and utilization rates.
Immigration laws in countries in which we seek to obtain visas or work permits may require us to meet certain other legal requirements as conditions to obtaining or maintaining entry visas. These immigration laws are subject to legislative change and varying standards of application and enforcement due to political
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forces, economic conditions or other events, including terrorist attacks. For instance, there are certain restrictions on transferring employees to work in the United Kingdom, where we have experienced growth. The United Kingdom requires that all employees who are not nationals of European Union countries (plus Bulgaria and Romania) to obtain work permission before obtaining a visa/entry clearance to travel to the United Kingdom. New European nationals from countries such as Hungary, Poland, Lithuania, Slovakia, and the Czech Republic do not have a work permit requirement but do need to obtain a worker registration within 30 days of arrival. The United Kingdom has introduced a points-based system under which certain certificates of sponsorship are issued by licensed employer sponsors, provided the employees they seek to employ in the United Kingdom can demonstrate that the employee can accumulate 50 points based on certain attributes, which include academic qualifications, intended salary and other factors plus 10 points for English language (not necessary where the employee is an intra company transferee) and 10 points for maintenance. Where the employee has not worked for a Virtusa group company outside the United Kingdom for at least 12 months, we will need to carry out a resident labor market test to confirm that the intended role cannot be filled by a European Economic Area national. While we are an A-rated sponsor and have been able to obtain certificates of sponsorship to satisfy our demand for transfers to the United Kingdom, we can make no assurance that we can continue to do so.
Further, we cannot predict the political or economic events that could affect immigration laws or any restrictive impact those events could have on obtaining or monitoring entry visas for our personnel. Our reliance on work visas and work permits for a significant number of our IT professionals makes us particularly vulnerable to such changes and variations, particularly in the United States and Europe, because these immigration and legislative changes affect our ability to staff projects with IT professionals who are not citizens of the country where the onsite work is to be performed. We may not be able to obtain a sufficient number of visas for our IT professionals or may encounter delays or additional costs in obtaining or maintaining such visas. To the extent we experience delays due to such immigration restrictions, we may encounter client dissatisfaction, project and staffing delays in new and existing engagements, project cancellations, project losses, higher project costs and loss of revenue, resulting in decreases in profits and a material adverse effect on our business, results of operations, financial condition and cash flows. Due to these immigration delays, we may also need to perform more work onsite, or hire more resources locally, thus reducing our gross margins and overall profitability.
Changes, and proposed changes, in U.S. immigration law, if approved into law, may increase our cost of revenue and may substantially restrict or eliminate our ability to obtain visas to use offshore resources onsite, which could have a material adverse impact on our business, revenue, profitability and utilization rates.
The issue of companies outsourcing services to organizations operating in other countries is a topic of political discussion in many countries, including the United States, which is our largest market. For example, measures aimed at limiting or restricting outsourcing by United States companies are periodically considered in the U.S. Congress and in numerous state legislatures to address concerns over the perceived association between offshore outsourcing and the loss of jobs domestically. On August 13, 2010, President Barack Obama signed legislation, which contained provisions to impose additional fees of $2,000 for certain H-1(B) petitions and $2,250 for certain L-1A and L-1B petitions beginning in August 2010 through September 20, 2014. These fees were extended through September 20, 2015 and already have had a negative impact on our gross profits and overall cost of operations, given especially the very competitive environment in which we operate, and despite our efforts to recoup these costs either directly from our clients or indirectly through our billing rates.
Legislators have also discussed comprehensive immigration reform. While the comprehensive immigration reform legislation focuses primarily on the millions of illegal immigrants in the United States, there is a likelihood that the law would include some content regarding H-1(B) and L-1 visas as described in the recently proposed legislation.
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In particular, the proposed legislation has many provisions that if enacted, may substantially and negatively impact our business. For instance, the new proposed legislation, if enacted, seeks to restrict companies with more than 50% of the U.S. based work force comprised of employees with an L-1 or H-1(B) visa from filing additional visa petitions, including visa petitions for H-1(B) or L-1 visas. In the first year of the proposed law, if enacted, companies must have fewer than 75% of their US employee base using H-1(B) and/or L-1 visas or the company would be prohibited from filing for any additional visa petitions, including visa petitions for H-1(B) or L-1 visas. In year two of the proposed law, the requirement would decline to 65%, and in year 3 of the proposed law, the requirement of a having a total population of a company's US workforce holding H-1(B) and L-1 visas would decline to 50% or the company would not be able to file for additional H-1(B) or L-1 visas.
The new legislation may also require that any company which is "H-1B dependent," meaning that the company has 15% or more of its US employees who are working for the company under a H-1(B) visa, not be allowed to place any additional H-1B or L-1 visa employees at a client site. Further, the new legislation would substantially increase visa fees to companies on an increasing sliding scale based on the percentage of that company's workers using the H-1(B) or L-1 visa, to the extent that the company had at least 30% of its US workforce using an H1-(B) or L-1 visa. The new legislation may also require companies seeking H-1(B) and L-1 visas to undertake a good faith recruitment process to prove that there is no displacement of U.S. workers. Finally, the new legislation may also require companies to pay higher wages for H-1B and L-1 visa holders, thus substantially increasing the cost of employing these H1-B and L-1 visa employees. If some or all of the legislation discussed above were passed into law, we may not be able to apply for or obtain necessary visas or work permits for key offshore personnel or other offshore resources in the numbers needed for onsite assignments and we may not be able to hire or engage suitable resources to staff current or future client engagements. Even if we are able to continue to use H1-B or L-1 visas, the proposed legislation would substantially increase the costs of visas which would materially and negatively impact our costs of revenue, our gross profits and our statement of operations unless we were able to pass off all or substantially all of the increased visa costs to our clients, which we may not able to do due to competitive pricing pressure and the general competitive environment in which we operate. If we become subject to the legislation which requires additional "good faith" recruiting processes to occur locally before applying for H-1(B) visas, our costs of hiring could increase, and our ability to staff appropriately skilled resources on client projects could be restricted or substantially delayed.
The potential risks and impact to our business if some or all of the proposed immigration legislation relating to use of H-1 (B) and L-1 visas is approved also could include:
Even if we are able to apply for, or obtain, such visas, we could incur substantial delays and costs in processing any such requests and our costs of operations could materially rise, thus materially and negatively impacting our gross margins and our statement of operations. Any inability to obtain, or extended delays in obtaining, these visas, or any delays or inability to hire resources for existing or future client projects could materially delay or prevent our commencement or fulfillment of client projects, which could hamper our growth and cause our revenue to decline. In addition, we may have to hire or use local onsite resources at substantially higher wage levels, rather than using existing offshore resources to staff onsite engagements which would materially reduce our gross margins. Even if we use our offshore resources, we may have to put offshore resources on U.S. payroll at U.S. prevailing wage levels and full
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benefits, rather than the existing practice of being able to provide a per diem reimbursement to the offshore resource on a tax free basis to cover living expenses while onsite. Our costs of revenue could then substantially increase and our gross profit and our gross margins could then be materially and adversely affected. Any such delays or inability to staff needed resources on client engagements may cause client dissatisfaction, project and staffing delays in new and existing engagements, project cancellations, higher project costs and loss of revenue, resulting in decreases in profits and a material adverse effect on our business, results of operations, financial condition and cash flows.
Our inability to manage to a desired onsite-to-offshore service delivery mix may negatively affect our gross margins and costs and our ability to offer competitive pricing.
We may not succeed in maintaining or increasing our profitability and could incur losses in future periods if we are not able to manage to a desired onsite-to-offshore service delivery mix. To the extent that our services engagements involve an increasing number of consulting, production support, software package implementation or other services typically requiring a higher percentage of onsite resources, we may not be able to manage to our desired service delivery mix. Additionally, other factors like client constraint or preferences or our inability to manage engagements effectively with limited resources onsite, or difficulty in staffing onsite projects due to immigration issues, resource constraints, new and complex client engagements or other related factors, may result in a higher percentage of onsite resources than our desired service delivery mix. Accordingly, we cannot assure you that we will be able to manage to our desired onsite-to-offshore service delivery mix. If we are unable to manage to our targeted service delivery mix, our gross margins may decline and our profitability may be reduced. Additionally, our costs will increase and we may not be able to offer competitive pricing to our clients which could result in lost opportunities or lost business.
The international nature of our business exposes us to many complex risks, which may be beyond our control.
We have operations in the United States, the United Kingdom, the Netherlands, India, Sri Lanka, Germany, Singapore, Austria, Hungary and Malaysia and we serve clients across North America, Europe and Asia. For the fiscal years ended March 31, 2013, 2012 and 2011, revenue generated outside of the United States accounted for 25%, 22% and 26% of total revenue, respectively. Our corporate structure also spans multiple jurisdictions, with Virtusa Corporation incorporated in Delaware and its operating subsidiaries organized in India, Sri Lanka, the United Kingdom, Hungary, Germany, Singapore, Austria, Malaysia and the Netherlands. As a result, our international revenue and operations are exposed to risks typically associated with conducting business internationally, many of which are beyond our control. These risks include:
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Negative developments in any of these areas in one or more countries could result in a reduction in revenue or demand for our services, the cancellation or delay of client contracts, business interruption, threats to our intellectual property, difficulty in collecting receivables and a higher cost of doing business, including higher taxes, any of which could negatively affect our business, financial condition or results of operations.
Our global operations expose us to numerous and sometimes conflicting legal and regulatory requirements, and violation of these regulations could harm our business.
We are subject to numerous, and sometimes conflicting, legal regimes on matters as diverse as anti-corruption, import/export controls, content requirements, trade restrictions, tariffs, taxation, sanctions, immigration, internal and disclosure control obligations, securities regulation, anti-competition, data privacy and protection, employment and labor relations. Some of these legal regimes are in emerging markets where legal systems may be less developed or familiar to us. Compliance with diverse legal requirements is costly, time-consuming and requires significant resources. Violations of one or more of these regulations in the conduct of our business could result in significant fines, criminal sanctions against us or our officers, prohibitions on doing business and damage to our reputation. Violations of these regulations in connection with the performance of our obligations to our clients also could result in liability for significant monetary damages, fines and/or criminal prosecution, unfavorable publicity and other reputational damage, restrictions on our ability to process information and allegations by our clients that we have not performed our contractual obligations. Due to the varying degrees of development of the legal systems of the countries in which we operate, local laws may not be well developed or provide sufficiently clear guidance and may be insufficient to protect our rights.
In particular, in many parts of the world, including countries in which we operate and/or seek to expand, it is possible that our employees, subcontractors or agents in the local business community might not conform to international business standards and could violate anti-corruption laws, or regulations, including the UK Bribery Act of 2010 and the U.S. Foreign Corrupt Practices Act ("FCPA") which prohibits improper payments or offers of improper payments to foreign officials to obtain business or any other benefit. The FCPA also requires covered companies to make and keep books and records that accurately and fairly reflect the transactions of the company and to devise and maintain an adequate system of internal accounting controls. Although we have policies and procedures in place that are designed to promote legal and regulatory compliance, our employees, subcontractors and agents could take actions that violate these policies or procedures or applicable anti-corruption laws, regulations or standards. Violations of these laws or regulations by us, our employees or any of these third parties could subject us to criminal or civil enforcement actions (whether or not we participated or knew about the actions leading to the violations), including fines or penalties, disgorgement of profits and suspension or disqualification from work, any of which could materially adversely affect our business, including our results of operations and our reputation.
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If we do not continue to maintain or improve our operational, financial and other internal controls and systems to manage our growth and size or if we are unable to enter, operate and compete effectively in new geographic markets, our business may suffer and the value of our stockholders' investment in our Company may be harmed.
Our growth will continue to place significant demands on our management and other resources and will require us to continue to develop and improve our operational, financial and other internal controls in the United States, Europe, India, Sri Lanka and elsewhere. In particular, our continued growth will increase the challenges involved in:
In addition, the increasing size and scope of our operations increase the possibility that a member of our personnel will engage in unlawful or fraudulent activity, breach our contractual obligations, or otherwise expose us to unacceptable business risks, despite our efforts to train our people and maintain internal controls to prevent such instances. If we do not continue to maintain and/or develop and implement the right processes and tools to manage our enterprise, our ability to compete successfully and achieve our business objectives could be impaired.
As part of our growth strategy, we plan to continue expanding globally. We may not be able to compete effectively in these markets and the cost of entering these markets may be substantially greater than we expect. If we fail to compete effectively in the new markets we enter, or if the cost of entering those markets is substantially greater than we expect, our business, results of operations and financial condition could be adversely affected. In addition, if we cannot compete effectively, we may be required to reconsider our strategy to invest in our international expansion plans and change our intent on the repatriation of our earnings.
Currency exchange rate fluctuations may materially and negatively affect our revenue, gross margin, operating margin, net income and cash flows.
The exchange rates among the Indian and Sri Lankan rupees and the U.S. dollar and the U.K. pound sterling, as well as the exchange rates between the U.S. dollar and the U.K. pound sterling, have changed substantially in recent periods and may continue to fluctuate substantially in the future. We expect that a majority of our revenue will continue to be generated in the U.S. dollar and U.K. pound sterling for the foreseeable future. During the fiscal year ended March 31, 2013, the U.K. pound sterling has shown less volatility than in previous years. However, future fluctuations in the exchange rate could have a materially negative impact on our revenue generated in the U.K. pound sterling, as well as on our operating income and net income. Any appreciation of the U.S. dollar against the U.K. pound sterling will likely have a negative impact on our revenue, operating income and net income. For the foreseeable future, we also expect that a significant portion of our expenses, including personnel costs and operating expenditures, will continue to be denominated in Indian and Sri Lankan rupees. Accordingly, any material appreciation of the Indian rupee or the Sri Lankan rupee against the U.S. dollar or U.K. pound sterling could have a material adverse effect on our cost of revenue, gross margins and net income, which may in turn have a negative impact on our business, operating results and financial condition and results of operations. Although we have entered into, and may continue to enter into, derivative contracts to mitigate the impact
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of the fluctuation in the U.K. pound sterling and the Indian rupee, we cannot assure you that these hedges will be effective. These hedges may also cause us to forego certain benefits including benefits caused by depreciation of the Indian rupee with respect to our expenses or by a depreciation of the U.K. pound sterling with respect to our revenue. In addition, use of derivatives includes the risk of non-performance of the counterparty. We have also initiated an investment program (short to medium term currency deposits) in Asia where we hold investments in local currency. Accordingly, any material depreciation of the UK pound sterling, the Indian rupee or the Sri Lankan rupee against the U.S. dollar could have a material adverse impact on our cash balances when consolidated and translated into U.S. dollars.
Our operating results may be adversely affected by our use of derivative financial instruments.
There is no guarantee that our financial results will not be adversely affected by currency exchange rate fluctuations or that any efforts by us to engage in currency hedging activities will be effective. In addition, in some countries we could be subject to strict restrictions on the movement of cash and the exchange of foreign currencies, which could limit our ability to use this cash across our global operations.
Although we have adopted a twelve quarter cash flow hedging program to minimize the effect of any Indian rupee fluctuation on our financial condition, these hedges may not be effective or may cause us to forego benefits, especially given the volatility of the currency. In addition, to the extent that these hedges cease to qualify for hedge accounting, we may have to recognize the derivative instruments unrealized gains or losses in earnings prior to maturity. If we are unable to accurately forecast our Indian-rupee denominated costs, we may lose our ability to qualify for hedge accounting. We cannot guarantee our ability to accurately forecast such expenses. Furthermore, we are exposed to foreign currency volatility related to the Canadian dollar, the euro, the Singapore dollar and the Sri Lankan rupee, which are not currently hedged. Any significant change as compared to the U.S. dollar could have a negative impact on our revenue, operating profit, and net income. Finally, as we continue to leverage our global delivery model, more of our expenses will be incurred in currencies other than those in which we bill for the related services. An increase in the value of these currencies, such as the Indian rupee or Sri Lankan rupee, against the U.S. dollar or U.K. pound sterling could increase costs for delivery of services at off-shore sites by increasing labor and other costs that are denominated in the respective local currency.
In July 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") which seeks to regulate, among other matters, the manner in which companies and their financial institutions engage in hedging activities. In addition, the Commodity Futures Trading Commission (the "CFTC") and the Securities and Exchange Commission have recently proposed rules to implement certain provisions of the of Dodd-Frank Act which, if enacted, may have a material and negative impact on the manner in which we are able to engage in hedging activities. For instance, certain proposed rules may require us to use cash or liquid investments (rather than a line of credit) to collateralize our hedging activities, which may require us to shift cash and cash equivalents freely available to us into restricted cash. Such requirement could become prohibitive and prevent us from continuing with our hedging program. Other proposed rules may also increase the costs of our hedging program, or may prevent us from working with our preferred banking institutions to effect these forward contracts or require us to clear these trades through a third party, each of which could materially increase our costs of operating our hedging program. While the proposed rules may change before enactment, if some of these rules are enacted, we can make no assurance that we will be able to continue to operate our hedging program, or if we are, on terms that are commercially viable to us.
We could be subject to strict restrictions on the movement of cash and the exchange of foreign currencies which could limit our access to cash in non-U.S. locations to fund our U.S. operations or otherwise make investments where needed.
In some countries, we could be subject to strict restrictions on the movement of cash and the exchange of foreign currencies, which would limit our ability to use this cash across our global operations. This risk
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could increase as we continue our geographic expansion in emerging markets, which are more likely to impose these restrictions than more established markets. We therefore may not have ready access to cash in geographies where we need to make investments. For instance, at March 31, 2013, we had approximately $95 million of cash, cash equivalents, short term investments and long term investments of which we hold approximately $53 million of cash, cash equivalents and short term investments in non-U.S. locations, particularly in India, Sri Lanka and the United Kingdom. Cash in these non-U.S. locations may not otherwise be available for potential investment or use for operations in the United States or other geographies where needed, as we have stated that this cash is indefinitely reinvested in these non-U.S. locations. Moreover, even if we were to repatriate this cash back to the United States for use in U.S. investments, this cash would be subject to substantial taxes. Our inability to access our cash where and when needed could impede our ability to make investments and support our operations.
Our ability to raise capital in the future may be limited and our failure to raise capital or have access to cash in the geography where or when needed could prevent us from growing.
We anticipate that our current cash and cash equivalents and short-term investments, together with cash generated from operations, will be sufficient to meet our current needs for general corporate purposes for the foreseeable future. However, we may also need additional financing to execute our current or future business strategies, including to:
As a global company, we also may not have ready access to cash in geographies where we need to make these strategic or additional investments.
For all of these reasons, we may need to raise additional capital for U.S. or other global investments. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we incur additional debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting funds available for our business activities. Any such debt financing could require us to comply with restrictive financial and operating covenants, which could have a material adverse impact on our business, results of operations or financial condition. We cannot assure you that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, when we desire them, our ability to fund our operations and growth, take advantage of unanticipated opportunities or otherwise respond to competitive pressures may be significantly limited.
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Acquisitions that we have completed and any future acquisitions, strategic investments, partnerships or alliances could be difficult to integrate and/or identify, divert the attention of key management personnel, disrupt our business, dilute stockholder value and adversely affect our financial results, including impairment of goodwill and other intangible assets.
If we do identify suitable acquisition, strategic investment or partnership or alliance candidates, we may not be able to complete transactions on terms commercially acceptable to us, if at all. These types of transactions involve numerous risks, including:
Our organizational structure could make it difficult for us to efficiently integrate acquired businesses or technologies into our ongoing operations and assimilate employees of those businesses into our culture and operations. Accordingly, we might fail to realize the expected benefits or strategic objectives of any acquisition we undertake. Acquisitions also frequently result in the recording of goodwill and other intangible assets that are subject to potential impairments in the future that could harm our financial results. We have completed three acquisitions from November 2009 to July 2011. In connection with these acquisitions, we are carrying $35.5 million in goodwill on our consolidated balance sheets at March 31, 2013. If we fail to successfully integrate these companies and maintain their value, or if these acquired companies materially fail to perform in a manner consistent with our valuations or forecasts, we may suffer an impairment of our assets, resulting in an immediate charge to our consolidated statement of income. Any such failure to integrate an acquired company or impairment of intangible assets or goodwill of any such company could have a material adverse impact on our consolidated balance sheet and consolidated statements of income.
It is also possible that we may not identify suitable acquisition, strategic investment or partnership or alliance candidates. Our inability to identify suitable acquisition targets, strategic investments, partners or alliances, or our inability to complete such transactions, may negatively affect our competitiveness and growth prospects. Moreover, if we fail to properly evaluate acquisitions, alliances or investments, we may not achieve the anticipated benefits of any such transaction and we may incur costs in excess of what we anticipate.
We may be subject to certain liabilities assumed in connection with our acquisitions that could harm our operating results.
Although we conduct due diligence in connection with each of our acquisitions, there may be liabilities that we fail to discover or that we inadequately assess in our due diligence efforts. In particular, to the extent that any acquired businesses or properties failed to comply with or otherwise violated applicable laws or regulations, or failed to fulfill their contractual obligations to clients, we, as the successor owner, may be financially responsible for these violations and failures and may suffer reputational harm or otherwise be adversely affected. While we generally require the selling party to indemnify us for any and all liabilities associated with such liabilities, if for any reason the seller does not perform their indemnification obligation, we may be held responsible for such liabilities. In addition, as part of an acquisition, we may assume responsibilities and obligations of the acquired business pursuant to
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the terms and conditions of services agreements entered into by the acquired entity that are not consistent with the terms and conditions that we typically accept and require. Although we attempt to structure acquisitions in such a manner as to minimize the liability that could arise from such contractual commitments, we cannot assure you that any of our efforts to minimize the liability will be effective in all instances or will otherwise protect us from liability for damages under such agreements. The discovery of any material liabilities associated with our acquisitions for which we are unable to receive indemnification could harm our operating results.
We may face damage to our professional reputation if our services do not meet our clients' expectations.
Many of our projects involve technology applications or systems that are critical to the operations of our clients' businesses and handle very large volumes of transactions. If we fail to perform our services correctly, we may be unable to deliver applications or systems to our clients with the promised functionality or within the promised time frame, or to satisfy the required service levels for support and maintenance. If a client is not satisfied with our services or products, including those of subcontractors we employ, we may not be able to invoice for our services, or if we do invoice, we may not be able to collect the fees due on such engagements, and our business may suffer. Moreover, if we fail to meet our contractual obligations, our clients may terminate their contracts and we could face legal liabilities and increased costs, including warranty claims against us. Any failure in a client's project could result in a claim for substantial damages, our inability to recognize all or some of the revenue for the client project, non-payment of outstanding invoices, increased expenses due to increase in reserves for doubtful accounts, loss of future business with such client and increased costs due to non-billable time of our resources dedicated to address any performance or client satisfaction issues, regardless of our responsibility for such failure.
If we are unable to collect our receivables from, or bill our unbilled services to, our clients, our results of operations and cash flows could be adversely affected.
Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed. We evaluate the financial condition of our clients and usually bill and collect on relatively short cycles. We maintain allowances against receivables and unbilled services. Actual losses on client balances could differ from those that we currently anticipate and, as a result, we might need to adjust our allowances. There is no guarantee that we will accurately assess the creditworthiness of our clients. Macroeconomic conditions, such as the continued credit crisis and related turmoil in the global financial system, could also result in financial difficulties, including limited access to the credit markets, insolvency or bankruptcy, for our clients, and, as a result, could cause clients to delay payments to us, request modifications to their payment arrangements that could increase our receivables balance, or default on their payment obligations to us. Timely collection of client balances also depends on our ability to complete our contractual commitments and bill and collect our contracted revenues. If we are unable to meet our contractual requirements, we might experience delays in collection of and/or be unable to collect our client balances, and if this occurs, our results of operations and cash flows could be adversely affected. In addition, if we experience an increase in the time to bill and collect for our services, our cash flows could be adversely affected.
We are investing substantial cash in new facilities and our profitability could be reduced if our business does not grow proportionately.
We intend to make increased investments in our existing global delivery centers in Hyderabad and Chennai, India and Colombo, Sri Lanka and other delivery centers globally. We may face cost overruns and project delays in connection with these facilities or other facilities we may construct or seek to lease in the future. Such delays may also cause us to incur additional leasing costs to extend the terms of existing facility leases or to enter into new short-term leases if we cannot move into the new facilities in a timely manner. Such investment may also significantly increase our fixed costs, including an increase in depreciation expense. If we are unable to expand our business and revenue proportionately, our profitability would be reduced.
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We may lose revenue if our clients terminate, reduce, or delay their contracts with us.
Our clients typically retain us on a non-exclusive, engagement-by-engagement basis, rather than under exclusive long-term contracts. Many of our contracts for services have terms of less than 12 months and permit our clients to terminate or reduce our engagements on prior written notice of 90 days or less for convenience, and without termination-related penalties. Further, many large client projects typically involve multiple independently defined stages, and clients may choose not to retain us for additional stages of a project or cancel or delay their start dates. These terminations, reductions, cancellations or delays could result from factors unrelated to our work product or the progress of the project, including:
If our contracts were terminated early, materially delayed or reduced in size or scope, our business and operating results could be materially harmed and the value of our common stock could be impaired. Unexpected terminations, reductions, cancellation or delays in our client engagements could also result in increased operating expenses as we transition our team members to other engagements.
We may not be able to continue to maintain or increase the profitability, and growth rates of previous fiscal years.
We may not succeed in maintaining our profitability and could incur losses in future periods. If we experience declines in demand, declines in, or inability to raise, pricing for our services, or if wages in India or Sri Lanka continue to increase at a faster rate than in the United States and the United Kingdom, we will be faced with continued growing costs for our IT professionals, including wage increases. We also expect to continue to make investments in infrastructure, facilities, sales and marketing and other resources as we expand, thus incurring additional costs and potentially reducing our operating margins. If our revenue does not increase to offset these increases in costs or operating expenses, our operating results would be negatively affected. In fact, in future quarters we may not have any revenue growth and our revenue and net income could decline. You should not consider our historic revenue and net income growth rates as indicative of future growth rates. Accordingly, we cannot assure you that we will be able to maintain or increase our profitability in the future.
Our profitability is dependent on our billing and utilization rates, which may be negatively affected by various factors.
Our profit margin is largely a function of the rates we are able to charge for our services and the utilization rate of our IT professionals. The rates we are able to charge for our services are affected by a number of factors, including:
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In addition, the factors impacting our utilization rate, include:
If we are not able to maintain the rates we charge for our services or maintain an appropriate utilization rate for our IT professionals, our revenue will decline, our costs will increase and we will not be able to sustain or increase our gross or operating profit margins, any of which could have a material adverse effect on our profitability.
We may be required to spend substantial time and expense in a fiscal period before we can recognize revenue in such fiscal period, if any, from a client contract.
The period between our initial contact with a potential client and the execution of a client contract for our services is lengthy, and can extend over one or more fiscal quarters. To sell our services successfully and obtain an executed client contract, we generally have to educate our potential clients about the use and benefits of our services, which can require significant time, expense and capital without the ability to realize revenue, if any. If our sales cycle unexpectedly lengthens for one or more large projects, it would negatively affect the timing of our revenue, and hinder our revenue growth. Furthermore, a delay in our ability to obtain a signed agreement or other persuasive evidence of an arrangement or to complete certain contract requirements in a particular fiscal quarter could reduce our revenue in that period. These delays or failures can cause our gross margin and profitability to fluctuate significantly from quarter to quarter. Overall, any significant failure to generate or recognize revenue or delays in recognizing revenue after incurring costs related to our sales processes or services performed in a particular fiscal period, due to factors such as lack of a fully executed agreement with the client, failure to satisfy other elements of generally accepted accounting standards for revenue recognition or otherwise, could have a material adverse effect on our business, financial condition and results of operations in such fiscal period or otherwise.
We may not be able to recognize revenue in the period in which our services are performed, which may cause our revenue and margins to fluctuate.
Our services are performed under both time-and-material and fixed-price arrangements. All revenue is recognized pursuant to generally accepted accounting standards. These standards require us to recognize revenue once evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable and collectability is reasonably assured. If we perform our services prior to the period when we are able to recognize the associated revenue, which may be due to our failure to obtain fully executed
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contracts from our clients during the performance period of our services, our revenue and margins may fluctuate significantly from quarter to quarter.
Additionally, a portion of our revenue is obtained from fixed-price arrangements with our clients. Payment of our fees on fixed-price contracts is based on our ability to provide deliverables on certain dates or meet certain defined milestones. Our failure to produce the deliverables or meet the project milestones in accordance with agreed upon specifications or timelines, or otherwise meet a client's expectations, may result in non-payment of invoices, termination of engagements and our having to record the cost related to the performance of services in the period that services were rendered, but delay the timing of revenue recognition to a future period in which the milestone is met, if we are able to achieve such milestone at all.
Unexpected costs or delays could make our contracts unprofitable.
A portion of our client engagements represent fixed- price engagements. When making proposals for engagements, especially our fixed-price engagements, we estimate the costs and timing for completion of the projects. These estimates reflect our best judgment regarding the efficiencies of our methodologies, staffing of resources, complexities of the engagement and costs. The profitability of our engagements, and in particular our fixed-price contracts, may be adversely affected by our ability to accurately estimate effort and resources needed to complete the project, increased or unexpected costs or unanticipated delays in connection with the performance of these engagements, including delays caused by factors outside our control, which could make these contracts less profitable or unprofitable. If we underestimate the effort and resources required to complete a project and cannot recoup additional costs from our client, or if we endure additional costs or delays, and cannot complete the project, our utilization rates may lower as we remediate project issues, our profit from these engagements may be adversely affected and we may be subject to litigation claims.
Our quarterly financial position, revenue, operating results and profitability are challenging to predict and may vary from quarter to quarter, which could cause our share price to decline significantly.
Our quarterly revenue, operating results and profitability have varied in the past and are likely to vary significantly from quarter to quarter in the future. The factors that are likely to cause these variations include:
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As a result, our revenue and our operating results for a particular period are challenging to predict and may decline in comparison to corresponding prior periods regardless of the strength of our business. Our future revenue is also challenging to predict because we derive a substantial portion of our revenue from fees for services generated from short-term contracts that may be terminated or delayed by our clients without penalty. In addition, a high percentage of our operating expenses, particularly related to salary expense, rent, depreciation expense and amortization of purchased intangible assets, are relatively fixed in advance of any particular quarter and are based, in part, on our expectations as to future revenue. If we are unable to predict the timing or amounts of future revenue accurately, we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall and fail to meet our forecasts. Unexpected revenue shortfalls may also decrease our gross margins and could cause significant changes in our operating results from quarter to quarter. As a result, and in addition to the factors listed above, any of the following factors could have a significant and adverse impact on our operating results, could result in a shortfall of revenue and could result in losses to us:
Due to the foregoing factors, it is possible that in some future periods our revenue and operating results may not meet the expectations of securities analysts or investors. If this occurs, the trading price of our common stock could fall substantially either suddenly, or over time, and our business, financial condition and results of operations would be adversely affected.
Adverse or uncertain conditions in the global economy and disruption of financial markets could negatively impact our clients and therefore our results of operations.
Recent global economic conditions have negatively impacted financial markets in the United States, Europe and Asia, resulting in extreme disruption and volatility in recent periods of financial markets, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of certain investments. These adverse economic developments affect our clients in a number of ways and could result in decreased
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global IT spending which, in turn, could result in delays, reductions in, or cancellation of engagements for our services. Regional and global economic weakness and uncertainty have also resulted in some companies reassessing their spending for technology and IT related projects and services. Our revenue and profitability depend on the overall demand for IT services from our clients, including discretionary IT spending. Portions of our expenses are fixed and other expenses are tied to expected levels of utilization. To the extent that we do not achieve anticipated levels of revenue growth, our gross profit and net income could be adversely affected until such expenses are reduced to an appropriate level.
A significant or prolonged economic downturn in the IT services industry, or industries in which we focus, may result in our clients reducing or postponing spending on the services we offer.
Our revenue is dependent on us entering into large contracts for our services with a limited number of clients each year. As we are not the exclusive IT service provider for our clients, the volume of work that we perform for any specific client is likely to vary from year to year. There are a number of factors, other than our performance, that could affect the size, frequency and renewal rates of our client contracts. For instance, if economic conditions weaken or deteriorate in the IT services industry, or in any industry in which we focus, our clients may reduce or postpone their IT spending significantly which may, in turn, lower the demand for our services and negatively affect our revenue and profitability. As a way of dealing with a challenging economic environment, clients may change their outsourcing strategy by performing more work in-house or replacing their existing software with packaged software supported by the licensor. The loss of, or any significant decline in business from, one or more of our major clients likely would lead to a significant decline in our revenue and operating margins, particularly if we are unable to make corresponding reductions in our expenses in the event of any such loss or decline. Moreover, a significant change in the liquidity or financial position of any of these clients could have a material adverse effect on the collectability of our accounts receivable, liquidity and future operating results.
We may be audited by software vendors from whom we license or use their software to train our resources or serve our clients, which may result in claims for infringement, violations of license provisions or other damages.
From time to time, we are subject to audit by our vendors from whom we license and use software to confirm compliance with usage and deployment requirements. If as a result of these audits or otherwise, vendors believe that we have committed usage or deployment violations, we may be required to purchase software from these vendors, and we may be subject to claims of infringement or wrongful usage which may result in legal liability to us, including damages, legal fees and expenses. In addition to legal liability and related expense of any litigation, which may include damages and the obligations to purchase software from such software vendor, we may be prevented from using the vendor's software in the future which may have a material and negative impact on our ability to service our customers, conduct training of our IT professionals and generally perform our services.
Negative public perception in the markets in which we sell services regarding offshore IT service providers and proposed anti-outsourcing legislation may adversely affect demand for our services.
We have based our growth strategy on certain assumptions regarding our industry, services and future demand in the market for such services. However, the trend to outsource IT services may not continue and could reverse. Offshore outsourcing is a politically sensitive topic in the United States and the United Kingdom. For example, recently many organizations and public figures in the United States and the United Kingdom have publicly expressed concern about a perceived association between offshore outsourcing providers and the loss of jobs in their home countries. In addition, there has been recent publicity about the negative experience of certain companies that use offshore outsourcing, particularly in India. Current or prospective clients may elect to perform such services themselves or may be discouraged from transferring these services from onshore to offshore providers to avoid negative perceptions that may be associated with using an offshore provider. Any slowdown or reversal of existing industry trends towards
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offshore outsourcing would seriously harm our ability to compete effectively with competitors that operate out of facilities located in the United States or the United Kingdom. Legislation in the United States or in certain European countries may be enacted that is intended to discourage or restrict outsourcing. Any changes to existing laws or the enactment of new legislation restricting offshore outsourcing in the United States or the United Kingdom may adversely affect our ability to do business in the United States or in the United Kingdom, particularly if these changes are widespread, and could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our failure to anticipate rapid changes in technology may negatively affect demand for our services in the marketplace.
Our success will depend, in part, on our ability to develop and implement business and technology solutions that anticipate rapid and continuing changes in technology, industry standards and client preferences. We may not be successful in anticipating or responding to these developments on a timely basis, which may negatively affect demand for our solutions in the marketplace. Also, if our competitors respond faster than we do to changes in technology, industry standards and client preferences, we may lose business and our services may become less competitive or obsolete. Any one or a combination of these circumstances could have a material adverse effect on our ability to obtain and successfully complete client engagements.
We may not be able to obtain, develop or implement new systems, infrastructure, procedures and controls that are required to support our operations, maintain cost controls, market our services and manage our relationships with our clients.
To manage our operations effectively, we must continue to maintain and may need to enhance our IT infrastructure, financial and accounting systems and controls and manage expanded operations in several locations. We also must attract, integrate, train and retain qualified personnel, especially in the areas of accounting, internal audit and financial disclosure. Further, we will need to manage our relationships with various clients, vendors and other third parties. We may not be able to develop and implement on a timely basis, if at all, the systems, infrastructure procedures and controls required to support our operations, including infrastructure management, and controls regarding usage and deployment of hardware and software, for performance of our services. Any failure by us to comply with these controls or our contractual obligations could result in legal liability to us, which would have a negative impact on our consolidated statements of income and consolidated balance sheets. Additionally, some factors, like changes in immigration laws or visa processing restrictions that limit our ability to engage offshore resources at client locations in the United States, the United Kingdom or other countries, are outside of our control. Our future operating results will also depend on our ability to develop and maintain a successful sales organization and processes that can ensure our ability to effectively monitor, manage and forecast our sales activities and resource needs. If we are unable to manage our operations effectively, our operating results could fluctuate from quarter to quarter and our financial condition could be materially adversely affected.
The failure to successfully and timely implement certain financial system changes to improve operating efficiency and enhance our reporting controls could harm our business.
We have implemented and continue to install several upgrades and enhancements to our financial systems. We expect these initiatives to enable us to achieve greater operating and financial reporting efficiency and also enhance our existing control environment through increased levels of automation of certain processes. Failure to successfully implement and execute these initiatives in a timely, effective and efficient manner could significantly increase our costs, distract our management and could result in the disruption of our operations, the inability to comply with our Sarbanes-Oxley obligations and the inability to report our financial results in a timely and accurate manner.
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Interruptions or delays in service from our third-party providers could impair our global delivery model, which could result in client dissatisfaction and a reduction of our revenue.
We depend upon third parties to provide a high speed network of active voice and data communications 24 hours per day and various satellite and optical links between our global delivery centers and our clients. Consequently, the occurrence of a natural disaster or other unanticipated problems with the equipment or at the facilities of these third-party providers could result in unanticipated interruptions in the delivery of our services. For example, we may not be able to maintain active voice and data communications between our global delivery centers and our clients' sites at all times due to disruptions in these networks, system failures or virus attacks. Any significant loss in our ability to communicate or any impediments to any IT professional's ability to provide services to our clients could result in a disruption to our business, which could hinder our performance or our ability to complete client projects in a timely manner. This, in turn, could lead to substantial liability to our clients, client dissatisfaction, loss of revenue and a material adverse effect on our business, our operating results and financial condition. We cannot assure you that our business interruption insurance will adequately compensate our clients or us for losses that may occur. Even if covered by insurance, any failure or breach of security of our systems could damage our reputation and cause us to lose clients.
Some of our client contracts contain restrictions or penalty provisions that, if triggered, could result in lower future revenue and decrease our profitability.
We have entered in the past, and may in the future enter, into contracts that contain restrictions or penalty provisions that, if triggered, may adversely affect our operating results. For instance, some of our client contracts provide that, during the term of the contract and for a certain period thereafter ranging from six to twelve months, we may not use the same personnel to provide similar services to any of the client's competitors. This restriction may hamper our ability to compete for and provide services to clients in the same industry. In addition, some contracts contain provisions that would require us to pay penalties or liquidated damages to our clients if we do not meet pre-agreed service level requirements. If any of the foregoing were to occur, our future revenue and profitability under these contracts could be materially harmed.
Our services may infringe on the intellectual property rights of others, which may subject us to legal liability, harm our reputation, prevent us from offering some services to our clients or distract management.
We cannot be sure that our services or the deliverables that we develop and create for our clients do not infringe on the intellectual property rights of third parties and infringement claims may be asserted against us or our clients. These claims may harm our reputation, distract management, increase costs and prevent us from offering some services to our clients. Historically, we have generally agreed to indemnify our clients for all expenses and liabilities resulting from infringement of intellectual property rights of third parties based on the services and deliverables that we have performed and provided to our clients. In some instances, the amount of these indemnities may be greater than the revenue we receive from the client. In addition, as a result of intellectual property litigation, we may be required to stop selling, incorporating or using products that use or incorporate the infringed intellectual property. We may be required to obtain a license or pay a royalty to make, sell or use the relevant technology from the owner of the infringed intellectual property. Such licenses or royalties may not be available on commercially reasonable terms, or at all. We may also be required to redesign our services or change our methodologies so as not to use the infringed intellectual property, which may not be technically or commercially feasible and may cause us to expend significant resources. Subject to certain limitations, under our indemnification obligations to our clients, we may also have to provide refunds to our clients to the extent that we must require them to cease using an infringing deliverable if we are unable to provide a work around or acquire a license to permit use of the infringing deliverable that we had provided to them as part of a service engagement. If we are
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obligated to make any such refunds or dedicate time to provide alternatives or acquire a license to the infringing intellectual property, our business and financial condition could be materially adversely affected.
Any claims or litigation involving intellectual property, whether we ultimately win or lose, could be extremely time-consuming, costly and injure our reputation.
As the number of patents, copyrights and other intellectual property rights in our industry increases, we believe that companies in our industry will face more frequent infringement claims. Defending against these claims, even if the claims have no merit, may not be covered by or could exceed the protection offered by our insurance and could divert management's attention and resources from operating our company.
We may face liability if we breach our obligations related to the protection, security, and nondisclosure of confidential client information.
In the course of providing services to our clients, we may have access to confidential client information, including nonpublic personal data. We are bound by certain agreements to use and disclose this information in a manner consistent with the privacy standards under regulations applicable to our clients and are subject to numerous U.S. and foreign jurisdiction laws and regulations designed to protect this information, such as the European Union Directive on Data Protection and various U.S. federal and state laws governing the protection of health or other individually identifiable information. If any person, including a team member of ours, misappropriates client confidential information, or if client confidential information is inappropriately disclosed due to a security breach of our computer systems, system failures or otherwise, or if a security breach occurs on a project on which we are engaged, we may have substantial liabilities to our clients or our clients' customers and may incur substantial liability and penalties in connection with any violation of applicable privacy laws and/or criminal prosecution. In addition, in the event of any breach or alleged breach of our confidentiality agreements with our clients, these clients may terminate their engagements with us or sue us for breach of contract, resulting in the associated loss of revenue and increased costs and damaged reputation. We may also be subject to civil or criminal liability if we are deemed to have violated applicable regulations. We cannot assure you that we will adequately address the risks created by the regulations to which we may be contractually obligated to abide.
In addition, many of our agreements with our clients do not include any limitation on our liability to them with respect to breaches of our obligation to keep the information we receive from them confidential. Although we have general liability insurance coverage, including coverage for errors or omissions, there can be no assurance that coverage will continue to be available on reasonable terms or will be sufficient in amount to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, results of operations and financial condition.
Our contractual limitations on liability with our clients and third parties may not be enforceable.
Under a majority of our agreements with our clients, our liability for breach of certain of our obligations is generally limited to actual damages suffered by the client and is typically capped at the greater of an agreed amount or the fees paid or payable to us for a period of time under the relevant agreement. These limitations and caps on liability may be unenforceable or otherwise may not protect us from liability for damages. In addition, certain liabilities, such as claims of third parties for which we may be required to indemnify our clients or liability for breaches of confidentiality, are generally not limited under those agreements. Our agreements are governed by laws of multiple jurisdictions, therefore the interpretation of such provisions, and the availability of defenses to us, may vary, which may contribute to the uncertainty as to the scope of our potential liability. In addition, many of our agreements with our
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clients do not include any limitation on our liability to them with respect to breaches of our obligation to keep the information we receive from them confidential.
New and changing corporate governance and public disclosure requirements add uncertainty to our compliance policies and increase our costs of, and time dedicated to, compliance.
Changing laws, regulations and standards relating to accounting, corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, other SEC regulations, and the NASDAQ Global Select Market rules, are creating uncertainty for companies like ours. These laws, regulations and standards may lack specificity and are subject to varying interpretations. Their application in practice may evolve over time, as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs of compliance as a result of ongoing revisions to such corporate governance standards.
In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors' audit of that assessment requires the commitment of significant financial and managerial resources. We consistently assess the adequacy of our internal controls over financial reporting, remediate any control deficiencies that may be identified, and validate through testing that our controls are functioning as documented. While we do not anticipate any material weaknesses, the inability of management and our independent auditor to provide us with an unqualified report as to the adequacy and effectiveness, respectively, of our internal controls over financial reporting for future year ends could result in adverse consequences to us, including, but not limited to, a loss of investor confidence in the reliability of our financial statements, which could cause the market price of our stock to decline.
Our management team and other personnel will need to devote a substantial amount of time to these compliance initiatives. In particular, these obligations will require substantial attention from our senior management and divert its attention away from the day-to-day management of our business, which could materially and adversely affect our business operations.
We are committed to maintaining high standards of corporate governance and public disclosure, and our efforts to comply with evolving laws, regulations and standards in this regard have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. In addition, the laws, regulations and standards regarding corporate governance may make it more difficult for us to obtain director and officer liability insurance. Further, our board members, chief executive officer and chief financial officer could face an increased risk of personal liability in connection with their performance of duties. As a result, we may face difficulties attracting and retaining qualified board members and executive officers, which could harm our business. If we fail to comply with new or changed laws, regulations or standards of corporate governance, our business and reputation may be harmed.
Our share price could be adversely affected if we are unable to maintain effective internal controls.
The accuracy of our financial reporting is dependent on the effectiveness of our internal controls. We are required to provide a report from management to our stockholders on our internal control over financial reporting that includes an assessment of the effectiveness of these controls. Internal control over financial reporting has inherent limitations, including human error, the possibility that controls could be circumvented or become inadequate because of changed conditions, and fraud. Because of these inherent limitations, internal control over financial reporting might not prevent or detect all misstatements or fraud. If we cannot maintain and execute adequate internal control over financial reporting or implement required new or improved controls to ensure the reliability of the financial reporting and preparation of our financial statements for external use, we could suffer harm to our reputation, fail to meet our public
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reporting requirements on a timely basis, or be unable to properly report on our business and the results of our operations, and the market price of our securities could be materially adversely affected.
The loss of key members of our senior management team may prevent us from executing our business strategy.
Our future success depends to a significant extent on the continued service and performance of key members of our senior management team. Our growth and success depends to a significant extent on our ability to retain Kris Canekeratne, our chief executive officer, who is a founder of our company and has led the growth, operation, culture and strategic direction of our business since its inception. The loss of his services or the services of other key members of our senior management could seriously harm our ability to execute our business strategy. Although we have entered into agreements with our executive officers providing for severance and change in control benefits to them, each of our executive officers or other key employees could terminate employment with us at any time. We also may have to incur significant costs in identifying, hiring, training and retaining replacements for key employees. The loss of any member of our senior management team might significantly delay or prevent the achievement of our business or development objectives and could materially harm our business. We do not maintain key man life insurance on any of our team members.
Risks related to our Indian and Sri Lankan operations
Political instability or changes in the central or state government in India could result in the change of several policies relating to foreign direct investment and repatriation of capital and dividends. Further, changes in the monetary and economic policies could adversely affect economic conditions in India generally and our business in particular.
We have three subsidiaries in India and a significant portion of our business, fixed assets and human resources are located in India. As a result, our business is affected by foreign exchange rates and controls, interest rates, local regulations, changes in government policy, taxation, social and civil unrest and other political, economic or other developments in or affecting India. Since 1991, successive Indian governments have pursued policies of economic liberalization. In the past, the Indian economy has experienced many of the problems that commonly confront the economies of developing countries, including high inflation, erratic gross domestic product growth and shortages of foreign exchange. The Indian government has exercised, and continues to exercise, significant influence over many aspects of the Indian economy and Indian government actions concerning the economy could have a material adverse effect on private sector entities like us. In the past, the Indian government has provided significant tax incentives and relaxed certain regulatory restrictions in order to encourage foreign investment in specified sectors of the economy, including the software development services industry. Programs that have benefited us include, among others, tax holidays, liberalized import and export duties and preferential rules on foreign investment and repatriation. Notwithstanding these benefits, as noted above, India's central and state governments remain significantly involved in the Indian economy as regulators. In recent years, the Indian government has introduced non-income related taxes, including the fringe benefit tax (which was repealed as of April 1, 2009) and new service taxes, and income-related taxes, including the Minimum Alternative Tax. In addition, a change in government leadership in India or change in policies of the existing government in India that results in the elimination of any of the benefits realized by us from our Indian operations or the imposition of new taxes applicable to such operations could have a material adverse effect on our business, results of operations and financial condition. For instance, certain changes to the application of the Minimum Alternative Tax with respect to Special Economic Zone ("SEZ") units may negatively impact our cash flows and other benefits enjoyed by us which could have a material adverse effect on our business, results of operations and financial condition.
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Changes in the policies or political stability of the government of Sri Lanka adversely affect economic conditions in Sri Lanka, which could adversely affect our business.
Our subsidiary in Sri Lanka has been approved as an export computer software developer by the Board of Investment in Sri Lanka, which is a statutory body organized to facilitate foreign investment into Sri Lanka and grant concessions and benefits to entities with which it has entered into agreements. Pursuant to our current agreement with the Board of Investment, our subsidiary is entitled to an exemption from income taxation on export revenue for a period of 12 years expiring on March 31, 2019 provided that certain job creation requirements are met by March 31, 2013. We believe we have achieved the job creation criteria and have notified the Sri Lanka Board of Investment ("BOI"). The BOI on review could challenge our hiring commitments in which case we would have to forego part of the 12 year tax holiday. Further, government policies relating to taxation other than on income would also have an impact on the subsidiary, and the political, economic or social factors in Sri Lanka may affect these policies. Historically, past incumbent governments have followed policies of economic liberalization. However, we cannot assure you that the current government or future governments will continue these liberal policies.
Regional conflicts or terrorist attacks and other acts of violence or war in the United States, the United Kingdom, India and Sri Lanka, or other regions could adversely affect financial markets, resulting in loss of client confidence and our ability to serve our clients which, in turn, could adversely affect our business, results of operations and financial condition.
The Asian region has from time to time experienced instances of civil unrest and hostilities among neighboring countries, including between India and Pakistan. Since May 1999, military confrontations between India and Pakistan have occurred in Kashmir. Also, there have been military hostilities and civil unrest in Iraq and Afghanistan. Terrorist attacks, such as the ones that occurred in Boston on April 15, 2013, New York and Washington, D.C., on September 11, 2001, New Delhi on December 13, 2001, Bali on October 12, 2002, London on July 7, 2005, and Mumbai on November 26, 2008, civil or political unrest and military hostilities in Sri Lanka and other acts of violence or war, including those involving India, Sri Lanka, the United States, the United Kingdom or other countries, may adversely affect U.S., U.K. and worldwide financial markets. Prospective clients may wish to visit several of our facilities, including our global delivery centers in India or Sri Lanka, prior to reaching a decision on vendor selection. Terrorist threats, attacks and international conflicts could make travel more difficult and cause potential clients to delay, postpone or cancel decisions to use our services. In addition, such attacks may have an adverse impact on our ability to operate effectively and interrupt lines of communication and restrict our offshore resources from traveling onsite to client locations, effectively curtailing our ability to deliver our services to our clients. These obstacles may increase our expenses and negatively affect our operating results. In addition, military activity, terrorist attacks, political tensions between India and Pakistan and, historically, conflicts within Sri Lanka, despite the current cessation of hostilities, could create a greater perception that the acquisition of services from companies with significant Indian or Sri Lankan operations involves a higher degree of risk that could adversely affect client confidence in India or Sri Lanka as a software development center, each of which would have a material adverse effect on our business.
In May 2009, the Sri Lankan government claimed victory in the ethnic conflict against the Tamil Tigers in Sri Lanka. The many years of the ethnic conflict have substantially affected the political and economic climate of Sri Lanka. With the military conflict now ended, the Sri Lankan economy may benefit from increased tourism, foreign investment and overall political stability. With economic growth and stability, the Sri Lankan currency may appreciate and there may be increased diversification in job opportunities for the Sri Lankan workforce. If the Sri Lankan rupee appreciates, our costs of operations may increase. In addition, if the Sri Lankan labor pool gains a growing number of alternatives due to an expanding and diversifying local economy, we may encounter increased competition and costs in recruiting, hiring and retaining qualified resources as well as the impact of wage inflation, each of which could have a negative impact on our costs of revenue and margins.
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Our net income may decrease if the governments of the United States, the United Kingdom, the Netherlands, India, Sri Lanka, Germany, Singapore, or Hungary adjust the amount of our taxable income by challenging our transfer pricing policies.
Our subsidiaries conduct intercompany transactions among themselves and with the U.S. parent company on an arm's-length basis in accordance with U.S. and local country transfer pricing regulations. The jurisdictions in which we operate could challenge our determination of arm's-length profit and issue tax assessments. Although the United States has income tax treaties with all countries in which we have operations, which should alleviate the risk of double taxation, the costs to appeal any such tax assessment and potential interest and penalties could decrease our earnings and cash flows.
The Indian taxing authorities issued assessment orders for the fiscal years ended March 31, 2004 to March 31, 2008 of our Indian subsidiary, Virtusa (India) Private Ltd. ("Virtusa India"). At issue in these assessments were several matters, the most significant of which was the re-determination of the arm's-length profit related to intercompany transactions. For fiscal year ended March 31, 2004 and 2005, we contested both assessments and also filed appeals with Indian tax authorities and U.S. Competent Authorities. Although we have settled certain tax obligations for the fiscal years ended March 31, 2004 and 2005, we have appealed certain other tax related matters effecting our fiscal year ended March 31, 2004 and 2005 with the Indian tax authorities. During the fiscal year ended March 31, 2005, we have appealed the redetermination of arm length pricing for transactions with our U.K subsidiary. We continue to appeal the remaining fiscal years assessments with the Indian tax authorities. If we do not prevail in our appeals, we may incur an additional legal liability and obligations to pay additional interest, penalties and costs related to such matters.
Our net income may decrease if the governments of India or Sri Lanka levy new taxes or reduce or withdraw tax benefits and other incentives provided to us.
Virtusa India is an export-oriented company under the Indian Income Tax Act of 1961 and is entitled to claim tax exemption for each Software Technology Park ("STP"), which it operates. Virtusa India historically has operated STPs in Hyderabad and in Chennai. The income tax benefits of the STP in Hyderabad and Chennai expired on March 31, 2010 and 2011, respectively. Historically, however, substantially all of the earnings of both STPs qualified as tax-exempt export profits. Although we believe we have complied with and were eligible for the STP holidays, the government of India may deem us ineligible for the STP holiday or make adjustments to the profit level in previous tax years, subject to the applicable statute of limitations, which could result in additional legal liability, including obligations to pay additional taxes, penalties, interest and other costs arising out of such matter. For instance, the Indian taxing authorities issued an assessment order for the fiscal years ended March 31, 2006 and 2007 of Virtusa India related to the denial of all STP benefits for our Chennai STP on the basis that it was formed by the splitting up or the reconstruction of our Hyderabad STP. Although we have filed appeals with the appropriate Indian tax authorities, we may incur additional legal liability and obligations to pay additional interest, penalties and costs related to such matter. We have appealed such assessment but we can make no assurance that our appeal will be successful.
We have located a portion of our Indian operations in areas designated as a SEZ, under the SEZ Act of 2005. In particular, we are continuing our construction of a facility on a 6.3 acre parcel of land in Hyderabad, India that has been designated as a SEZ. In addition, we have leased space and operate in a SEZ designated locations in Bangalore and Chennai, India. Although our profits from the SEZ operations would be eligible for certain income tax exemptions for a period up to 15 years, we may not be able to take full advantage of the tax holidays in each SEZ if we are not able to grow our operations, including the hiring of IT professionals into the SEZ facilities and there is no guarantee that we will secure SEZ status for any other future locations in India. Additionally, the government of India may deem us ineligible for a SEZ holiday or make adjustments to the transfer pricing profit levels resulting in an overall increase in our effective tax rate.
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In addition, our Sri Lankan subsidiary, Virtusa Private Ltd. ("Virtusa SL"), was approved as an export computer software developer by the Sri Lanka Board of Investment ("BOI") in 1998 and has been granted a tax holiday. Virtusa SL has negotiated various extensions and new arrangements of the original holiday period in exchange for further capital investments in Sri Lanka facilities. The most recent 12-year tax holiday agreement, which is set to expire on March 31, 2019, requires that we meet certain new job creation and investment criteria. As of March 31, 2013, we have met the job creation target. We have submitted the required details to BOI and awaiting their confirmation. At March 31, 2013, we are eligible for the entire 12-year tax holiday. Further, in relation to the two year tax holiday extension granted for the period ending March 31, 2007, we received notice that the BOI is unable to certify the tax holiday. While we will contest such findings, we cannot provide assurance that we will prevail or, if we settle, it will be on terms favorable to us. If any such tax assessment were ruled against us, such a ruling may materially harm our business, operating results, financial results and materially reduce our profitability.
Wage pressures and increases in government mandated benefits in India and Sri Lanka may reduce our profit margins.
Wage costs in India and Sri Lanka have historically been significantly lower than wage costs in the United States and Europe for comparably-skilled professionals. However, wages in India and Sri Lanka are increasing, which will result in increased costs for IT professionals, particularly project managers and other mid-level professionals. We may need to increase the levels of our team member compensation more rapidly than in the past to remain competitive without the ability to make corresponding increases to our billing rates. Compensation increases may reduce our profit margins, make us less competitive in pricing potential projects against those companies with lower cost resources and otherwise harm our business, operating results and financial condition.
In addition, we contribute to benefit funds covering our employees in India and Sri Lanka as mandated by the Indian and Sri Lankan governments. Benefits are based on the team member's, years of service and compensation. If the governments of India and/or Sri Lanka were to legislate increases to the benefits required under these plans or mandate additional benefits, our profitability and cash flows would be reduced.
Our facilities are at risk of damage by earthquakes, tsunamis and other natural disasters.
In December 2004, Sri Lanka and India were struck by multiple tsunamis that devastated certain areas of both countries. Our Indian and Sri Lankan facilities are located in regions that are susceptible to tsunamis and other natural disasters, which may increase the risk of disruption of information systems and telephone service for sustained periods. Damage or destruction that interrupts our ability to deliver our services could damage our relationships with our clients and may cause us to incur substantial additional expense to repair or replace damaged equipment or facilities. Our insurance coverage may not be sufficient to cover all such expenses. Furthermore, we may be unable to secure such insurance coverage or to secure such insurance coverage at premiums acceptable to us in the future. Prolonged disruption of our services as a result of natural disasters may cause our clients to terminate their contracts with us and may result in project delays, project cancellations and loss of substantial revenue to us. Prolonged disruptions may also harm our team members or cause them to relocate, which could have a material adverse effect on our business.
The laws of India and Sri Lanka do not protect intellectual property rights to the same extent as those of the United States and we may be unsuccessful in protecting our intellectual property rights. Unauthorized use of our intellectual property rights may result in loss of clients and increased competition.
Our success depends, in part, upon our ability to protect our proprietary methodologies, trade secrets and other intellectual property. We rely upon a combination of trade secrets, confidentiality policies, non-disclosure agreements, other contractual arrangements and copyright, patent, and trademark laws to
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protect our intellectual property rights. However, existing laws of India and Sri Lanka do not provide protection of intellectual property rights to the same extent as provided in the United States. The steps we take to protect our intellectual property may not be adequate to prevent or deter infringement or other unauthorized use of our intellectual property. Thus, we may not be able to detect unauthorized use or take appropriate and timely steps to enforce our intellectual property rights. Our competitors may be able to imitate or duplicate our services or methodologies. The unauthorized use or duplication of our intellectual property could disrupt our ongoing business, distract our management and team members, reduce our revenue and increase our costs and expenses. We may need to litigate to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Any such litigation could be extremely time-consuming and costly and could materially adversely impact our business.
Any changes in U.S. corporate income tax law to impose U.S. tax on untaxed foreign profits could result in a higher effective income tax rate for us and adversely impact net income.
The current administration has indicated it would support a tax policy that would limit certain incentives for U.S. companies which invest and reinvest overseas. If the current exemption for permanently reinvested foreign profits were to be repealed, it would have a material adverse impact on our effective tax rate and net income. We permanently reinvest our profits in and through our non-U.S. subsidiaries located in India and Sri Lanka where certain of such profits are not currently subject to tax under tax holidays in these countries. We can provide no assurance that a far reaching tax proposal impacting permanently reinvested foreign profits could be enacted which would reduce our net income and cash flows.
Risks related to our common stock
The market price of our common stock continues to be volatile.
The market price of our common stock has at times experienced substantial price volatility as a result of variations between our actual and anticipated financial results, announcements by us and our competitors, projections or speculation about our business or that of our competitors by the media or investment analysts or uncertainty about current global economic conditions. The stock market, as a whole, also has experienced extreme price and volume fluctuations that have affected the market price of the common stock of many technology companies in ways that may have been unrelated to such companies' operating performance. Furthermore, we believe the market price of our common stock should reflect future growth and profitability expectations. If we fail to meet these expectations, the market price of our common stock may significantly decline.
In addition, there are many other factors that may cause the market price of our common stock to fluctuate, including:
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If any of the foregoing occurs or continues to occur, it could cause our stock price to fall and may expose us to securities class action litigation. Any securities class action litigation could result in substantial costs and the diversion of management's attention and resources. Many of these factors are beyond our control.
Provisions in our charter documents and under Delaware law may prevent or delay a change of control of us and could also limit the market price of our common stock.
Certain provisions of Delaware law and of our certificate of incorporation and by-laws could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us, even if such a change in control would be beneficial to our stockholders or result in a premium for your shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:
The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions that are contained in our certificate of incorporation. In addition, our board of directors has the ability to designate the terms of and issue new series of preferred stock without stockholder approval. Also, absent approval of our board of directors, our by-laws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote.
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits business combination transactions with stockholders of 15% or more of our outstanding voting stock that our board of directors has not approved. These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation. These provisions may apply even if some stockholders may consider the transaction beneficial to them.
These provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock.
Item 1B. Unresolved Staff Comments.
None.
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Our principal executive offices are located in Westborough, Massachusetts, where pursuant to an amendment to our existing lease dated as of March 31, 2010, we lease approximately 22,147 square feet for a term expiring February 28, 2018. We also have a sales and business development office located in London in the United Kingdom. We also have a lease in Connecticut totaling approximately 8,535 square feet expiring in the fiscal year ending March 31, 2018. We also have two leases in New York totaling approximately 9,884 square feet expiring in the fiscal year ending March 31, 2015 and March 31, 2023.
We have global delivery centers located in Bangalore, Hyderabad and Chennai, India as well as in Colombo, Sri Lanka and Budapest, Hungary and a lease in Albany, New York to provide near shore staffing. We lease space at two facilities in Chennai, India, totaling approximately 280,802 square feet and two facilities in Bangalore, India, totaling approximately 21,587 square feet. In Colombo, Sri Lanka, we lease space at two facilities totaling approximately 142,537 square feet. Our leases in India and Sri Lanka vary in duration and term, have varying renewable terms and have expiration dates extending from 2013 to 2018. In addition, in March 2008, we entered into a 99-year lease, as amended in August 2008, with an option for an additional 99 years for approximately 6.3 acres of land in Hyderabad, India, where we are presently building a campus. We are in the process of constructing a facility on such campus which, when completed, will total approximately 325,000 square feet. Our lease in Albany New York is approximately 6,000 square feet and expires in 2019.
We also have sales and business development offices located in New York, California, Germany and Singapore. These are short term leases with maturities not longer than one year.
We believe that our existing and planned facilities are adequate to support our existing operations and that, as needed, we will be able to obtain suitable additional facilities on commercially reasonable terms.
We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of our management, the outcome of such claims and legal actions, if decided adversely, is not currently expected to have a material adverse effect on our operating results, cash flows or consolidated financial position.
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 5. Market for Our Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock commenced trading on the NASDAQ Global Market on August 3, 2007 under the symbol "VRTU". The following table sets forth, for the periods indicated, the high and low sale prices for our common stock for our fiscal years ended March 31, 2013 and March 31, 2012, respectively, as reported on the NASDAQ Global Market.
| |
High | Low | |||||
|---|---|---|---|---|---|---|---|
Fiscal 2012: |
|||||||
First quarter |
$ | 21.11 | $ | 16.75 | |||
Second quarter |
$ | 21.79 | $ | 12.31 | |||
Third quarter |
$ | 16.95 | $ | 11.87 | |||
Fourth quarter |
$ | 17.41 | $ | 14.20 | |||
Fiscal 2013: |
|||||||
First quarter |
$ | 17.56 | $ | 11.41 | |||
Second quarter |
$ | 18.61 | $ | 11.23 | |||
Third quarter |
$ | 18.63 | $ | 14.40 | |||
Fourth quarter |
$ | 24.63 | $ | 15.93 | |||
As of May 23, 2013, there were approximately 26,214,270 shares of our common stock outstanding held by approximately 174 stockholders of record and the last reported sale price of our common stock on the NASDAQ Global Market on May 23, 2013 was $24.65 per share.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We currently expect to retain future earnings, if any, to finance the growth and development of our business and we do not anticipate paying any cash dividends in the foreseeable future. We intend to permanently reinvest our foreign earnings. Our line of credit with a bank could restrict our ability to declare or make any dividends or similar distributions.
Equity Compensation Plan Information
The following table provides information as of March 31, 2013 with respect to the shares of our common stock that may be issued under our existing equity compensation plans. We have three equity compensation plans, each of which has been approved by our stockholders: (1) the Amended and Restated 2000 Stock Option Plan, which we refer to as the 2000 Plan; (2) the 2005 Stock Appreciation Rights Plan, which we refer to as the SAR Plan; and (3) the 2007 Stock Option and Incentive Plan, which we refer to as the 2007 Plan. For additional information on our equity compensation plans, including the material
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features of plans not approved by our stockholders, please see note 12 to the consolidated financial statements included elsewhere in this Annual Report.
Plan Category
|
Number of Securities to be Issued Upon Vesting of Awards or Exercise of Outstanding Options, Warrants and Rights |
Weighted Average Exercise Price of Awards or Outstanding Options Warrants and Rights |
Number of Securities Available for Future Issuance Under Equity Compensation Plans |
|
|||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
Equity compensation plans that have been approved by security holders—stock options(1) |
1,369,342 | $ | 10.56 | 1,383,295 | (2)(3) | ||||||
Equity compensation plans that have been approved by security holders—stock appreciation rights(4) |
22,369 | $ | 4.60 | — | (2) | ||||||
Equity compensation plans not approved by security holders(5) |
70,333 | $ | 6.89 | — | |||||||
Total |
1,462,044 | 1,383,295 | |||||||||
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
None.
Issuer Purchases of Equity Securities
Under the terms of our 2007 Plan, we have issued shares of restricted stock to our employees. On the date that these restricted shares vest, we automatically withhold, via a net exercise provision pursuant to our applicable restricted stock agreements and the 2007 Plan, the number of vested shares (based on the closing price of our common stock on such vesting date) equal to tax liability owed by such grantee. The shares withheld from the grantees to settle their tax liability are reallocated to the number of shares available for issuance under the 2007 Plan. For the three month period ended March 31, 2013, we withheld an aggregate of 8,780 shares of restricted stock at a price of $21.33 per share.
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On May 8, 2012, our board of directors authorized a share repurchase program of up to $15 million of shares of our common stock on or prior to May 8, 2013. A summary of our stock repurchase activity under this program for the fiscal year ended March 31, 2013 is set forth in the table below:
Issuer Purchases of Equity Securities
Period:
|
Total Number of Shares Purchased (#)(1) |
Average Price Paid per Share ($)(2) |
Total Number of Shares Purchased as Part of Publicly Announced Program (#)(1) |
Remaining Dollar Value that may yet be Purchased Under Our Program ($)(2) |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
May 1, 2012 - May 31, 2012 |
62,851 | $ | 14.47 | 62,851 | $ | 14,090,546 | |||||||
June 1, 2012 - June 30, 2012 |
34,464 | 14.42 | 34,464 | 13,593,575 | |||||||||
Total |
97,315 | $ | 14.45 | 97,315 | $ | 13,593,575 | |||||||
As of October 15, 2012, our board of directors suspended the share repurchase program.
Item 6. Selected Financial Data.
The selected historical financial data set forth below at March 31, 2013 and 2012 and for the fiscal years ended March 31, 2013, 2012 and 2011 are derived from our consolidated financial statements which are included elsewhere in this Annual Report on Form 10-K. The selected historical financial data at March 31, 2011, 2010 and 2009 and for the fiscal years ended March 31, 2010 and 2009 are derived from our consolidated financial statements which are not included elsewhere in this Annual Report. The following selected consolidated financial data should be read in conjunction with our consolidated financial statements, the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report. The historical results are not necessarily indicative of the results to be expected for any future period.
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Consolidated statements of income data
| |
Fiscal Year Ended March 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||
| |
(In thousands, except share and per share amounts) |
|||||||||||||||
Revenue |
$ | 333,175 | $ | 277,771 | $ | 217,979 | $ | 164,365 | $ | 172,942 | ||||||
Costs of revenue |
215,866 | 177,434 | 134,496 | 94,142 | 105,100 | |||||||||||
Gross profit |
117,309 | 100,337 | 83,483 | 70,223 | 67,842 | |||||||||||
Operating expenses |
84,450 | 76,438 | 65,697 | 57,330 | 57,864 | |||||||||||
Income from operations |
32,859 | 23,899 | 17,786 | 12,893 | 9,978 | |||||||||||
Other income |
3,000 | 2,547 | 441 | 56 | 2,888 | |||||||||||
Income before income tax expense |
35,859 | 26,446 | 18,227 | 12,949 | 12,866 | |||||||||||
Income tax expense |
7,461 | 6,411 | 2,027 | 820 | 809 | |||||||||||
Net income |
$ | 28,398 | $ | 20,035 | $ | 16,200 | $ | 12,129 | $ | 12,057 | ||||||
Net income per share of common stock |
||||||||||||||||
Basic |
$ | 1.14 | $ | 0.81 | $ | 0.68 | $ | 0.52 | $ | 0.53 | ||||||
Diluted |
$ | 1.11 | $ | 0.79 | $ | 0.66 | $ | 0.50 | $ | 0.50 | ||||||
Weighted average number of |
||||||||||||||||
Basic |
24,937,162 | 24,643,063 | 23,783,457 | 23,153,973 | 22,763,759 | |||||||||||
Diluted |
25,638,839 | 25,383,650 | 24,714,808 | 24,032,675 | 24,136,716 | |||||||||||
Consolidated balance sheets data
| |
At March 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||
| |
(In thousands) |
|||||||||||||||
Cash and cash equivalents |
$ | 57,199 | $ | 58,105 | $ | 50,218 | $ | 43,851 | $ | 55,698 | ||||||
Working capital |
$ | 145,650 | $ | 119,013 | $ | 123,264 | $ | 92,367 | $ | 94,823 | ||||||
Total assets |
$ | 303,919 | $ | 274,794 | $ | 246,177 | $ | 215,873 | $ | 187,023 | ||||||
Total stockholders' equity |
$ | 252,207 | $ | 218,174 | $ | 207,336 | $ | 181,794 | $ | 152,586 | ||||||
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of our operations should be read together with our consolidated financial statements and related notes to consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Annual Report.
Business overview
We are a global information technology services company. We use an offshore delivery model to provide a broad range of IT services, including IT consulting, technology implementation and application outsourcing. Using our enhanced global delivery model, innovative platforming approach and industry expertise, we provide cost-effective services that enable our clients to use IT to enhance business performance, accelerate time-to-market, increase productivity and improve customer service. Headquartered in Massachusetts, we have offices in the United States, the United Kingdom, Germany and
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Singapore and global delivery centers in Hyderabad, Chennai and Bangalore, India, Colombo, Sri Lanka and Budapest, Hungary. At March 31, 2013, we had 6,911 employees, or team members, an increase from 5,672 at March 31, 2012. For the fiscal year ended March 31, 2013, we had revenue of $333.2 million and income from operations of $32.9 million. In our fiscal year ended March 31, 2013, our revenue increased by $55.4 million, or 20%, to $333.2 million, as compared to $277.8 million in our fiscal year ended March 31, 2012. Our net income increased from $20.0 million in our fiscal year ended March 31, 2012 to $28.4 million in our fiscal year ended March 31, 2013.
The key drivers of the increase in revenue in our fiscal year ended March 31, 2013, as compared to our fiscal year ended March 31, 2012, were as follows:
The key drivers of our increase in net income in our fiscal year ended March 31, 2013, as compared to our fiscal year ended March 31, 2012, were as follows:
High repeat business and client concentration are common in our industry. During the fiscal year ended March 31, 2013, 90% of our revenue was derived from clients who had been using our services for more than one year. Accordingly, our global account management and service delivery teams focus on expanding client relationships and converting new engagements to long-term relationships to generate repeat revenue and expand revenue streams from existing clients. We also have a dedicated business development team focused on generating engagements with new clients to continue to expand our client base and, over time, reduce client concentration.
For the fiscal years ended March 31, 2013, 2012 and 2011, we generated 58%, 54%, and 49%, respectively, of revenue from application outsourcing and 42%, 46% and 51%, respectively, of revenue from consulting services. We perform our services under both time-and-materials and fixed-price contracts. Revenue from fixed-price contracts was 18%, 18%, and 19% of total revenue for the fiscal years ended March 31, 2013, 2012 and 2011, respectively. The revenue earned from fixed-price contracts reflects our clients' preferences during the fiscal years ended March 31, 2013, 2012 and 2011.
At March 31, 2013, we had cash and cash equivalents, short-term and long-term investments of $95.0 million as compared to $85.4 million at March 31, 2012. The increase related primarily to our growth in income from operations.
For the fiscal year ending March 31, 2014, we expect the following factors, among others, to affect our business and our operating results:
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For the fiscal year ending March 31, 2014, we plan to:
As an IT services company, our revenue growth has been, and will continue to be, highly dependent on our ability to attract, develop, motivate and retain skilled IT professionals. For the fiscal year ended March 31, 2013, we finished the fiscal year with a total headcount of 6,911, as compared with a total headcount of 5,672 for the fiscal year ended March 31, 2012. There is intense competition for IT professionals with the skills necessary to provide the type of services we offer. We closely monitor our overall attrition rates and patterns to ensure our people management strategy aligns with our growth objectives. For the last twelve months ended March 31, 2013, our voluntary attrition rate was 13.3%, while our involuntary attrition rate was 3.1%. The majority of our attrition occurs in India and Sri Lanka, and is weighted towards the more junior members of our staff. In response to higher attrition and as part of our retention strategies, we have experienced increases in compensation and benefit costs, which may continue in the future. However, we try to absorb such cost increases through price increases or cost management strategies such as managing discretionary costs, the mix of professional staff and utilization levels and achieving other operating efficiencies. If our attrition rate increases or is sustained at higher levels, our growth may slow and our cost of attracting and retaining IT professionals could increase.
We have continued to maintain a twelve quarter hedging program, which we believe has been effective since inception at reducing the impact of fluctuations in local currencies on our operating results, although there is no assurance that this hedging program will continue to be effective. These hedges may also cause us to forego benefits of a positive currency fluctuation, especially given the volatility of these currencies. In addition, to the extent that these hedges cease to qualify for hedge accounting, we may have to recognize gains or losses on the aggregate amount of hedges placed earlier than expected.
We monitor a number of operating metrics to manage and assess our earnings, including:
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Sources of revenue
We generate revenue by providing IT services to our clients located primarily in North America and Europe. We have historically earned, and believe that over the next few fiscal years we will continue to earn a significant portion of our revenue from a limited number of clients. For the fiscal year ended March 31, 2013, collectively, our five largest and ten largest clients accounted for 48% and 60% of our revenue, respectively. Our three largest clients accounted for 14%, 14% and 11% respectively, of our revenue for the fiscal year ended March 31, 2013. The loss of any one of our major clients could reduce our revenue and operating profit and harm our reputation in the industry. During the fiscal year ended
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March 31, 2013, 75% of our revenue was generated in North America, 20% in Europe and 5% in rest of the world. We provide IT services on either a time-and-materials or a fixed-price basis. For the fiscal year ended March 31, 2013, the percentage of revenue from time-and-materials and fixed-price contracts was 82% and 18%, respectively.
Revenue from services provided on a time-and-materials basis is derived from the number of billable hours in a period multiplied by the contractual rates at which we bill our clients. Revenue from services provided on a fixed-price basis is recognized as efforts are expended pursuant to the percentage-of-completion method. Revenue also includes reimbursements of travel and out-of-pocket expenses with equivalent amounts of expense recorded in costs of revenue. Most of our client contracts, including those that are on a fixed-price basis, can be terminated by our clients with or without cause on 30 to 90 days prior written notice. All fees for services provided by us through the date of cancellation are generally due and payable under the contract terms.
Our unit pricing is driven by business need, delivery timeframes, complexity of the engagement, operating differences (such as onsite/offshore ratio), competitive environment and engagement size or volume. As a pricing strategy to encourage clients to increase the volume of services that we provide to them, we may, on occasion, offer volume discounts or longer payment terms. We manage our business carefully to protect our account margins and our overall profit margins. We find that our clients generally purchase on the basis of total value, rather than on minimum cost, considering all of the factors listed above.
While we are subject to the effects of overall market pricing pressure, we believe that there is a fairly broad range of pricing offered by different competitors for each service we provide. We believe that no one competitor, or set of competitors, sets pricing in our industry. We find that our unit pricing, as a result of our global delivery model, is generally competitive with other firms who operate with a predominately offshore operating model.
The proportion of work performed at our offshore facilities and at onsite client locations varies from period-to-period. Effort, in terms of the percentage of hours billed to clients by onsite resources, was 22% and 20% of total hours billed in each of the fiscal years ended March 31, 2013 and 2012, respectively, while the revenue from resources located onsite and offshore accounted for 53% and 47% respectively in the fiscal year ended March 31, 2013, and 49% and 51% respectively during the fiscal year ended March 31, 2012. We charge higher rates and incur higher compensation costs and other expenses for work performed at client locations in the United States and the United Kingdom as compared to work performed at our global delivery centers in India, Sri Lanka and Hungary. Services performed at client locations or at our offices in the United States or the United Kingdom generate higher revenue per-capita at lower gross margins than similar services performed at our global delivery centers in India and Sri Lanka. We manage to a targeted 25% to 75% onsite-to-offshore service delivery mix, although such delivery mix may be impacted by several factors including our new and existing client delivery requirements as well as the impact of any acquisitions.
Costs of revenue and gross profit
Costs of revenue consist principally of payroll and related fringe benefits, reimbursable and non-reimbursable costs, immigration-related expenses, fees for subcontractors working on client engagements and share-based compensation expense for IT professionals including account management personnel.
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Wage costs in India and Sri Lanka have historically been significantly lower than wage costs in the United States and Europe for comparably-skilled IT professionals. However, wages in India and Sri Lanka are increasing in local currency, which will result in increased costs for IT professionals, particularly project managers and other mid-level professionals. We may need to increase the levels of our team member compensation more rapidly than in the past to remain competitive without the ability to make corresponding increases to our billing rates. Compensation increases may reduce our profit margins, make us less competitive in pricing potential projects against those companies with lower cost resources and otherwise harm our business, operating results and financial condition. We deploy a campus hiring philosophy and encourage internal promotions to minimize the effects of wage inflation pressure and recruiting costs. Additionally, any material appreciation in the Indian rupee or Sri Lankan rupee against the U.S. dollar or U.K. pound sterling could have a material adverse impact on our cost of services.
Our revenue and gross profit are also affected by our ability to efficiently manage and utilize our IT professionals and fluctuations in foreign currency exchange rates. We define utilization rate as the total number of days billed in a given period divided by the total available days of our IT professionals during that same period, excluding trainees. We manage employee utilization by continually monitoring project requirements and timetables to efficiently staff our projects and meet our clients' needs. The number of IT professionals assigned to a project will vary according to the size, complexity, duration and demands of the project. An unanticipated termination or reduction of a significant project could cause us to experience a higher than expected number of unassigned IT professionals, thereby lowering our utilization rate.
Although, we have adopted a twelve quarter cash flow hedging program to minimize the effect of the Indian rupee movement on our financial condition, particularly our costs of revenue, these hedges may not be effective or may cause us to forego benefits, especially given the volatility of these currencies. In addition, to the extent that these hedges do not qualify for hedge accounting, we may have to recognize gains or losses on the aggregate amount of hedges remaining outstanding as of the balance sheet date.
Operating expenses
Operating expenses consist primarily of payroll and related fringe benefits, commissions, selling, share-based compensation and non-reimbursable costs, as well as promotion, communications, management, finance, administrative, occupancy, marketing and depreciation and amortization expenses. In the fiscal years ended March 31, 2013, 2012, and 2011, we invested in all aspects of our business, including sales, marketing, IT infrastructure, facilities, human resources programs and financial operations. Additionally, any material appreciation in the Indian rupee or Sri Lankan rupee against the U.S. dollar or U.K. pound sterling could have a material adverse impact on our cost of operating expenses.
Other income (expense)
Other income (expense) includes interest income, interest expense, investment gains and losses, foreign currency transaction gains and losses and disposal of fixed assets. We generate interest income by investing in time deposits, money market instruments, short-term investments and long-term investments. The functional currencies of our subsidiaries are their local currencies, except for Hungary which operates in the euro zone. Foreign currency gains and losses are generated primarily by fluctuations of the Indian rupee, Sri Lankan rupee and U.K. pound sterling against the U.S. dollar on intercompany transactions. We place our cash in liquid investments at highly-rated financial institutions based on our investment policy approved by our audit committee and board of directors. We believe that our credit policies reflect normal industry terms and business risk.
Income tax expense
Our net income is subject to income tax in those countries in which we perform services and have operations, including the United States, the United Kingdom, India, Sri Lanka, the Netherlands, Germany,
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Singapore and Hungary. In the fiscal year ended March 31, 2013, our effective tax rate was impacted by the mix of income by jurisdiction, availability and term of certain tax holidays and settlement of uncertain tax positions identified during the fiscal year ended March 31, 2013. Historically, we have benefited from long-term income tax holiday arrangements in both India and Sri Lanka that are offered to certain export-oriented IT services firms. As a result of these tax holiday arrangements, our worldwide profit has been subject to a relatively low effective tax rate as compared to the statutory rates in the countries in which we operate. The effect of the income tax holidays in India and Sri Lanka decreased our income tax expense in the fiscal years ended March 31, 2013 and 2012 by $5.6 million and $5.1 million, respectively. However, our tax expense increased by $1.1 million in the fiscal year ended March 31, 2013 compared to our tax expense for our fiscal year ended March 31, 2012 due to the increase in income from operations offset by the election of SEZ (Co-developer) holiday benefits and settlement of uncertain tax positions during the period. Increases in our effective tax rate, or a high effective tax rate, has a negative effect on our earnings in future periods.
Our effective tax rate was 20.8% and 24.2% for each of the fiscal years ended March 31, 2013 and 2012 respectively. Our effective tax rate in future periods will be affected by the geographic distribution of our earnings, as well as the availability of tax holidays in India and Sri Lanka. We expect our effective tax rate to increase as a result of a higher tax rate in India and geographical mix of our profits.
Application of critical accounting estimates and risks
Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of revenue and expenses, assets and liabilities and the disclosure of contingent assets and liabilities. We consider an accounting estimate to be critical to the preparation of our consolidated financial statements when both of the following are present:
We have discussed the development and selection of our critical accounting estimates and related disclosures with the audit committee of our board of directors. Those estimates critical to the preparation of our consolidated financial statements are listed below.
Revenue recognition
Our revenue is derived from a variety of IT consulting, technology implementation and application outsourcing services. Our services are performed under both time-and-material and fixed-price arrangements. All revenue is recognized pursuant to U.S. GAAP. Revenue is recognized as work is performed and amounts are earned. We consider amounts to be earned once evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable and collectability is reasonably assured. For contracts with fees billed on a time-and-materials basis, we generally recognize revenue as the service is performed.
Fixed-price engagements are accounted for under the percentage-of-completion method. Under the percentage-of-completion method, we estimate the percentage-of-completion by comparing the actual number of work days performed to date to the estimated total number of days required to complete each engagement. The use of the percentage-of-completion method requires significant judgment relative to estimating total contract revenue and costs to completion, including assumptions and estimates relative to the length of time to complete the project, the nature and complexity of the work to be performed and anticipated changes in other engagement-related costs. Our analysis of these contracts also contemplates whether contracts should be combined or segmented. We combine closely related contracts when all the
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applicable criteria under GAAP are met. Similarly, we may segment a project, which may consist of a single contract or a group of contracts, with varying rates of profitability, only if all the applicable criteria under GAAP are met. Estimates of total contract revenue and costs to completion are continually monitored during the term of the contract and are subject to revision as the contract progresses. Unforeseen circumstances may arise during an engagement requiring us to revise our original estimates and may cause the estimated profitability to decrease. When revisions in estimated contract revenue and efforts are determined, such adjustments are recorded in the period in which they are first identified.
Valuation and impairment of investments and/or marketable securities
We classify our marketable securities as available-for-sale or trading securities, and carry them at fair market value. Changes in fair value subsequent to the balance sheet date are recorded in the period in which they occur. The difference between amortized cost and fair market value, net of tax effect, for available-for-sale securities is recorded as a separate component of stockholders' equity. The difference between amortized cost and fair market value for trading securities is reflected in "other income, net" on our consolidated statements of income. Investments and/or marketable securities classified as available-for-sale are considered to be impaired when a decline in fair value below cost basis is determined to be other than temporary. We conduct a periodic review and evaluation of our investment securities to determine if the decline in fair value of any security is deemed to be other-than-temporary. Other-than-temporary impairment losses are recognized on securities when: (i) the holder has an intention to sell the security; (ii) it is more likely than not that the security will be required to be sold prior to recovery; or (iii) the holder does not expect to recover the entire amortized cost basis of the security. Other-than-temporary losses are reflected in earnings as a charge against gain on sale of investments to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. We have no intention to sell any securities in an unrealized loss position at March 31, 2013 nor is it more likely than not that we would be required to sell such securities prior to the recovery of the unrealized losses and we expect to recover the entire amortization cost basis of the security. At March 31, 2013, we believe that all impairments of investment securities are temporary in nature.
Our investments in auction rate securities are valued primarily based on an income approach using an estimate of future cash flows because there are currently no active markets or observable market prices. We have estimated the fair value using a discounted cash flow analysis which considered the following key inputs: (i) the underlying structure and maturity of each security; (ii) the timing of expected future principal and interest payments; and (iii) discount rates that are believed to reflect current market conditions and the relevant risk associated with each security.
Derivative instruments and hedging activities
We enter into forward foreign exchange contracts to mitigate the risk of changes in foreign exchange rates on intercompany transactions and forecasted transactions denominated in foreign currencies. Certain of these transactions meet the criteria for hedge accounting as cash flow hedges under accounting standards codification. Changes in the fair values of these hedges are deferred and recorded as a component of accumulated other comprehensive income (loss), net of tax, until the hedged transactions occur and are then recognized in the consolidated statements of income in the same line item as the item being hedged. The Company measures the effectiveness of these hedges at the time of inception, as well as on an ongoing basis. If any portion of the hedges is deemed ineffective, the respective portion is recorded in the consolidated statement of income in other income (expense). At maturity changes in the fair value for other derivative contracts, if any, are recognized in the same line item as the underlying exposure being hedged in the statements of income. We value our derivatives based on market observable inputs including both forward and spot prices for currencies. Any significant change in the forward or spot prices for currencies would have a significant impact on the value of our derivatives.
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Goodwill and other intangible assets
We allocate the cost of an acquired entity to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price for acquisitions over the fair value of the net assets acquired, including other intangible assets, is recorded as goodwill. Goodwill is not amortized but is tested for impairment at the reporting unit level, defined at the Company level, at least annually in the fourth quarter of each fiscal year or more frequently when events or circumstances occur that indicate that it is more likely than not that an impairment has occurred. In assessing goodwill for impairment, an entity has the option to assess qualitative factors to determine whether events or circumstances indicate that it is not more likely than not that fair value of a reporting unit is less than its carry amount. If this is the case, then performing the quantitative two-step goodwill impairment test is unnecessary. An entity can choose not to perform a qualitative assessment for any or all of its reporting units, and proceed directly to the use of the two-step impairment test. The two-step process begins with an estimation of the fair value of a reporting unit. Goodwill impairment exists when a reporting unit's carrying value of goodwill exceeds its implied fair value. Significant judgment is applied when goodwill is assessed for impairment.
For the Company's goodwill impairment analysis, the Company operates under one reporting unit. Any impairment would be measured based upon the fair value of the related assets. In performing the first step of the goodwill impairment testing and measurement process, the Company compares its entity-wide estimated fair value to net book value to identify potential impairment. Management estimates the entity-wide fair value utilizing the Company's market capitalization, plus an appropriate control premium. Market capitalization is determined by multiplying the shares outstanding on the assessment date by the market price of the Company's common stock. If the market capitalization is not sufficiently in excess of the Company's book value, the Company will calculate the control premium which considers appropriate industry, market and other pertinent factors. If the fair value of the reporting unit is less than the book value, the second step is performed to determine if goodwill is impaired. If the Company determines through the impairment evaluation process that goodwill has been impaired, an impairment charge would be recorded in the consolidated statement of income. The Company completed the annual impairment test required during the fourth quarter of the fiscal year ended March 31, 2013 and determined that there was no impairment. The Company continues to closely monitor its market capitalization. If the Company's market capitalization, plus an estimated control premium, is below its carrying value for a period considered to be other-than-temporary, it is possible that the Company may be required to record an impairment of goodwill either as a result of the annual assessment that the Company conducts in the fourth quarter of each fiscal year, or in a future quarter if an indication of potential impairment is evident. The estimated fair value of goodwill on the assessment date exceeded the carrying book value by 73%.
Other intangible assets with definite lives are tested for impairment when events or circumstances occur that indicate that it is more likely than not that an impairment has occurred. We test other intangible assets with definite lives for impairment by comparing the carrying amount to the sum of the net undiscounted cash flows expected to be generated by the asset whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying amount of the asset exceeds its net undiscounted cash flows, then an impairment loss is recognized for the amount by which the carrying amount exceeds its fair value. We use a discounted cash flow approach or other methods, if appropriate, to assess fair value. The intangible impairment test is performed at the reporting unit level, and the Company is considered a single reporting unit for goodwill and intangible impairment testing purposes.
Income taxes
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in multiple jurisdictions where the Company has operations. We record liabilities for estimated tax obligations in the United States and other tax jurisdictions. Determining the consolidated
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provision for income tax expense, tax reserves, deferred tax assets and liabilities and related valuation allowance, if any, involves judgment. We calculate and provide for income taxes in each of the jurisdictions in which we operate, including the United States, the United Kingdom, India, Sri Lanka, the Netherlands, Germany, Singapore and Hungary, and these calculations and determinations can involve complex issues which require an extended period of time to resolve. In the fiscal year of any such resolution, additional adjustments may need to be recorded that result in increases or decreases to income. Our overall effective tax rate fluctuates due to a variety of factors, including arm's-length prices for our intercompany transactions, changes in the geographic mix or estimated level of annual pretax income, as well as newly enacted tax legislation in each of the jurisdictions in which we operate. Applicable transfer pricing regulations require that transactions between and among our subsidiaries be conducted at an arm's-length price. On an ongoing basis, we estimate appropriate arm's-length prices and use such estimates for our intercompany transactions.
At each financial statement date, we evaluate whether a valuation allowance is needed to reduce our deferred tax assets to the amount that is more likely than not to be realized. This evaluation considers the weight of all available evidence, including both future taxable income and ongoing prudent and feasible tax planning strategies. In the event that we determine that we will not be able to realize a recognized deferred tax asset in the future, an adjustment to the valuation allowance would be made, resulting in a decrease in income (or equity in the case of excess stock option tax benefits) in the period such determination was made. Likewise, should we determine that we will be able to realize all or part of an unrecognized deferred tax asset in the future, an adjustment to the valuation allowance would be made, resulting in an increase to income (or equity in the case of excess stock option tax benefits).
We have benefited from long-term income tax holiday arrangements in both India and Sri Lanka. One of our Indian subsidiaries is an export-oriented company that is entitled to claim a tax exemption for a period of ten years for each STP it operates. Our STP holiday for Hyderabad and Chennai, India was completely phased out by March 31, 2010 and March 31, 2011 respectively. Subsequent to that date, any profits generated in expired STPs will be fully taxable at the Indian statutory rate, which is currently 32.45%. Although we believe we have complied with and are eligible for the STP holiday, it is possible that upon examination the government of India may deem us ineligible for the STP holidays or make adjustments to the profit level in previous tax years. We have located new development centers in areas designated as Special Economic Zones ("SEZ") to secure additional tax exemptions for these operations for a period of ten years, which could extend to 15 years if we meet certain reinvestment requirements. During the fiscal year ending March 31, 2013, we elected the tax holiday for our SEZ Co-developer located in Hyderabad, India for a period of 10 years. Our Sri Lanka subsidiary has been granted an income tax holiday by the Sri Lanka Board of Investment ("BOI") which expires on March 31, 2019. The tax holiday is contingent upon a certain level of job creation by us during a given timetable. Although we believe we have met the job creation requirements, if the BOI concludes otherwise, this would jeopardize the maximum benefits from this holiday arrangement. Primarily as a result of these tax holiday arrangements, our worldwide profit has been subject to a relatively low effective tax rate, and the loss of any of these arrangements would increase our overall effective tax rate and reduce our net income.
It is our intent to reinvest all accumulated earnings from foreign operations back into their respective businesses to fund growth. As a component of this strategy, we do not accrue incremental U.S. taxes on foreign earnings as these earnings are considered to be indefinitely reinvested outside of the United States. If such earnings were to be repatriated in the future or are no longer deemed to be indefinitely reinvested, we will accrue the applicable amount of taxes associated with such earnings, which would increase our overall effective tax rate.
Share-based compensation
Under the fair value recognition provisions of accounting standards, share-based compensation cost is measured at the grant date based on the value of the award and is recognized over the vesting period.
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Determining the fair value of the share-based awards at the grant date requires judgment, including estimating the expected term over which stock options will be outstanding before they are exercised, the expected volatility of our stock and the number of share-based awards that are expected to be forfeited. If actual results differ significantly from our estimates, share-based compensation expense and our results of operations could be materially impacted.
The risk-free interest rate assumptions are based on the interpolation of various U.S. Treasury bill rates in effect during the month in which stock option awards are granted. Our volatility assumption is based on the historical volatility rates of the common stock of our publicly held peers over periods commensurate with the expected term of each grant.
The expected term of employee share-based awards represents the weighted average period of time that awards are expected to remain outstanding. The determination of the expected term of share-based awards assumes that employees' behavior is a function of the awards vested, contractual lives, and the extent to which the award is in the money. Accordingly, we have elected to use the "simplified" method of determining the expected term or life of its share-based awards due to our limited trading history.
Results of operations
Fiscal year ended March 31, 2013 compared to fiscal year ended March 31, 2012
The following table presents an overview of our results of operations for the fiscal years ended March 31, 2013 and 2012:
| |
Fiscal Year Ended March 31, |
|
|
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | $ Change | % Change | |||||||||
| |
(Dollars in thousands) |
||||||||||||
Revenue |
$ | 333,175 | $ | 277,771 | $ | 55,404 | 19.9 | % | |||||
Costs of revenue |
215,866 | 177,434 | 38,432 | 21.7 | % | ||||||||
Gross profit |
117,309 | 100,337 | 16,972 | 16.9 | % | ||||||||
Operating expenses |
84,450 | 76,438 | 8,012 | 10.5 | % | ||||||||
Income from operations |
32,859 | 23,899 | 8,960 | 37.5 | % | ||||||||
Other income |
3,000 | 2,547 | 453 | 17.8 | % | ||||||||
Income before income tax expense |
35,859 | 26,446 | 9,413 | 35.6 | % | ||||||||
Income tax expense |
7,461 | 6,411 | 1,050 | 16.4 | % | ||||||||
Net income |
$ | 28,398 | $ | 20,035 | $ | 8,363 | 41.7 | % | |||||
Revenue
Revenue increased by 19.9%, or $55.4 million, from $277.8 million during the fiscal year ended March 31, 2012 to $333.2 million in the fiscal year ended March 31, 2013, due primarily to broad based growth in all geographies, led by North America and Europe. Revenue from clients existing as of March 31, 2012 increased by $51.4 million and revenue from new clients increased by $4.0 million during the fiscal year ended March 31, 2013, as compared to the fiscal year ended March 31, 2012. Revenue from North American clients increased by $35.5 million, or 16.5%, as compared to the fiscal year ended March 31, 2012. Revenue from European clients in the fiscal year ended March 31, 2013 increased by $16.0 million, or 32.2%, as compared to the fiscal year ended March 31, 2012. Revenue growth was broad based across all of our industry groups, led by BFSI and M&I industries which increased by 24% and 25% respectively, in the fiscal year ended March 31, 2013 as compared to the fiscal year ended March 31, 2012. We had 92 active clients at March 31, 2013 as compared to 89 active clients at March 31, 2012.
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Costs of revenue
Costs of revenue increased from $177.4 million in the fiscal year ended March 31, 2012 to $215.9 million in the fiscal year ended March 31, 2013, an increase of $38.5 million, or 21.7%. A significant portion of the increase was attributable to an increase in compensation and benefit costs of $20.2 million due to an increase in headcount and percentage of onsite work and associated increases in compensation. The increased costs of revenue are also attributable to increased use of subcontractors of $10.9 million to support increases in onsite work and an increase of $3.0 million in travel expenses, as well as an increase in hedging losses of $4.0 million recorded as a result of our cash flow hedging program in the fiscal year ended March 31, 2013 as compared to the fiscal year ended March 31, 2012.
Gross profit
Our gross profit increased by $17.0 million or 16.9%, to $117.3 million for the fiscal year ended March 31, 2013 as compared to $100.3 million in the fiscal year ended March 31, 2012 primarily due to our growth in revenue. As a percentage of revenue, our gross margin was 35.2% and 36.1% in the fiscal years ended March 31, 2013 and 2012, respectively. The principal reason for the decrease in gross margin during the fiscal year ended March 31, 2013 as compared to the fiscal year ended March 31, 2012, was higher cost of revenue during the fiscal year ended March 31, 2013 due in part to a higher percentage of onsite effort, increased cost of subcontractors and compensation increases of our IT professionals.
Operating expenses
Operating expenses increased from $76.4 million in the fiscal year ended March 31, 2012 to $84.4 million in the fiscal year ended March 31, 2013, an increase of $8.0 million. The increase in operating expenses was primarily due to an increase of $3.1 million in compensation related expense, $2.1 million increase in foreign currency forward contract losses as part of our hedging program, $1.8 million in facilities expenses, $0.8 million increase in travel expenses and a $0.6 million increase in professional services. These increases were partially offset by a decrease of $0.4 million in bad debt expense during the fiscal year ended March 31, 2013 as compared to the fiscal year ended March 31, 2012. As a percentage of revenue, our operating expenses decreased from 27.5% in the fiscal year ended March 31, 2012 to 25.3% in the fiscal year ended March 31, 2013 due in part to an increase in operating efficiencies and a larger revenue base.
Income from operations
Income from operations increased from $23.9 million in the fiscal year ended March 31, 2012 to $32.9 million in the fiscal year ended March 31, 2013, an increase of $9.0 million or 37.5%. This increase in income from operations resulted primarily from higher gross profit and our operating expenses being allocated over a larger revenue base. As a percentage of revenue, income from operations increased from 8.6% in the fiscal year ended March 31, 2012 to 9.9% in the fiscal year ended March 31, 2013.
Other income
Other income increased from $2.5 million in the fiscal year ended March 31, 2012 to $3.0 million in the fiscal year ended March 31, 2013. The increase is primarily attributed to an increase in interest income of $0.5 million.
Income tax expense
We had income tax expense of $7.5 million and $6.4 million for the fiscal years ended March 31, 2013 and 2012 respectively. Our effective tax rate was 20.8% and 24.2% for the fiscal years ended March 31, 2013 and 2012 respectively. The decrease in the effective tax rate is primarily attributable to Co-developer tax holiday benefits elected and the impact of uncertain tax positions settled in the fiscal year ended March 31, 2013.
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Net income
Net income for the fiscal year ended March 31, 2013 was $28.4 million, increasing by 42% or $8.4 million compared to net income of $20.0 million for the fiscal year ended March 31, 2012 due in part to higher revenue partially offset by higher cost of revenue and increased operating expenses, which were leveraged over a larger revenue base.
Fiscal year ended March 31, 2012 compared to fiscal year ended March 31, 2011
The following table presents an overview of our results of operations for the fiscal years ended March 31, 2012 and 2011:
| |
Fiscal Year Ended March 31, |
|
|
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2012 | 2011 | $ Change | % Change | |||||||||
| |
(Dollars in thousands) |
||||||||||||
Revenue |
$ | 277,771 | $ | 217,979 | $ | 59,792 | 27.4 | % | |||||
Costs of revenue |
177,434 | 134,496 | 42,938 | 31.9 | % | ||||||||
Gross profit |
100,337 | 83,483 | 16,854 | 20.2 | % | ||||||||
Operating expenses |
76,438 | 65,697 | 10,741 | 16.3 | % | ||||||||
Income from operations |
23,899 | 17,786 | 6,113 | 34.4 | % | ||||||||
Other income |
2,547 | 441 | 2,106 | 477.6 | % | ||||||||
Income before income tax expense |
26,446 | 18,227 | 8,219 | 45.1 | % | ||||||||
Income tax expense |
6,411 | 2,027 | 4,384 | 216.3 | % | ||||||||
Net income |
$ | 20,035 | $ | 16,200 | $ | 3,835 | 23.7 | % | |||||
Revenue
Revenue increased by 27.4%, or $59.8 million, from $218.0 million during the fiscal year ended March 31, 2011 to $277.8 million in the fiscal year ended March 31, 2012, due primarily to higher revenue contribution from all of our industry groups led by BFSI and C&T and revenue contribution of clients acquired in the ALaS acquisition. Revenue from clients existing as of March 31, 2011 increased by $35.7 million and revenue from new clients added during the fiscal year ended March 31, 2012 was $24.1 million. Revenue from European clients in the fiscal year ended March 31, 2012 increased by $4.8 million, or 10.6%, as compared to the fiscal year ended March 31, 2011. Excluding BT, our largest European client, our European revenue increased by $1.8 million, or 12.2%, in the fiscal year ended March 31, 2012 as compared to the fiscal year ended March 31, 2011. Revenue from North American clients increased by $53.2 million, or 32.7%, as compared to the fiscal year ended March 31, 2011. Revenue from clients in the BFSI and C&T industries increased by 37% and 23% respectively, in the fiscal year ended March 31, 2012 as compared to the fiscal year ended March 31, 2011. We had 89 active clients at March 31, 2012 as compared to 80 active clients at March 31, 2011.
Costs of revenue
Costs of revenue increased from $134.5 million in the fiscal year ended March 31, 2011 to $177.4 million in the fiscal year ended March 31, 2012, an increase of $42.9 million, or 31.9%. A significant portion of the increase was attributable to an increase in compensation and benefit costs of $31.1 million due to an increase in headcount, and an increase in base and variable compensation. The increased costs of revenue is also attributable to increased use of subcontractors of $7.4 million and an increase of $1.2 million in immigration expenses, as well as a decrease in hedging gains of $2.2 million recorded as a result of our cash flow hedging program in the fiscal year ended March 31, 2012 as compared to the fiscal year ended March 31, 2011.
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Gross profit
Our gross profit increased by $16.8 million or 20.2%, to $100.3 million for the fiscal year ended March 31, 2012 as compared to $83.5 million in the fiscal year ended March 31, 2011 primarily due to our growth in revenue. As a percentage of revenue, our gross margin was 36.1% and 38.3% in the fiscal years ended March 31, 2012 and 2011, respectively. The principal reason for the decrease in gross margin during the fiscal year ended March 31, 2012 as compared to the fiscal year ended March 31, 2011, was higher cost of revenue during the fiscal year ended March 31, 2012 due in part to a higher percentage of onsite effort, increased cost of subcontractors and compensation increases of our IT professionals.
Operating expenses
Operating expenses increased from $65.7 million in the fiscal year ended March 31, 2011 to $76.4 million in the fiscal year ended March 31, 2012, an increase of $10.7 million. The increase in operating expenses was due to an increase of $5.0 million in base and variable compensation, $1.8 million in facilities expenses, a $1.5 million increase in professional services, a $0.8 million increase in travel expenses and a $1.1 million reduction in foreign currency forward contract gains as part of our hedging program. These increases were partially offset by a decrease of $0.3 million in amortization of intangibles during the fiscal year ended March 31, 2012 as compared to the fiscal year ended March 31, 2011. As a percentage of revenue, our operating expenses decreased from 30.1% in the fiscal year ended March 31, 2011 to 27.5% in the fiscal year ended March 31, 2012 due in part to an increase in operating efficiencies and a larger revenue base.
Income from operations
Income from operations increased from $17.8 million in the fiscal year ended March 31, 2011 to $23.9 million in the fiscal year ended March 31, 2012, an increase of $6.1 million or 34.4%. This increase in income from operations resulted primarily from higher gross profit and our operating expenses being allocated over a larger revenue base. As a percentage of revenue, income from operations increased from 8.2% in the fiscal year ended March 31, 2011 to 8.6% in the fiscal year ended March 31, 2012.
Other income
Other income increased from $0.4 million in the fiscal year ended March 31, 2011 to $2.5 million in the fiscal year ended March 31, 2012. The increase is primarily attributed to an increase in interest income of $0.5 million and a decrease in foreign currency transaction losses of $1.7 million in the fiscal year ended March 31, 2012 as compared to the fiscal year ended March 31, 2011.
Income tax expense
We had income tax expense of $6.4 million and $2.0 million for the fiscal years ended March 31, 2012 and 2011 respectively. Our effective tax rate was 24.2% and 11.1% for the fiscal years ended March 31, 2012 and 2011 respectively. The increase in the effective tax rate results from the expiration of STP holiday for Chennai, India, geographical income distribution and uncertain tax positions identified in the fiscal year ended March 31, 2012.
Net income
Net income for the fiscal year ended March 31, 2012 was $20.0 million, increasing by 23.7% or $3.8 million compared to net income of $16.2 million for the fiscal year ended March 31, 2011 due in part to higher revenue partially offset by higher cost of revenue and increased operating expenses, which were leveraged over a larger revenue base.
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Liquidity and capital resources
We have financed our operations primarily from sales of shares of common stock and from cash from operations. We have not borrowed against our existing or preceding credit facilities.
In May 2012, our board of directors authorized a share repurchase program of up to $15.0 million of our common stock over a 12 month period from the approval date, subject to certain price and other trading restrictions. During the year ended March 31, 2013, we purchased 97,315 shares of our common stock for an aggregate purchase price of approximately $1.4 million (excluding commissions). (See Part II, Item 5 of this Annual Report on Form 10-K). As of October 15, 2012, our board of directors suspended the share repurchase program and the program has now expired.
On July 1, 2011, we acquired substantially all of the assets of ALaS for the purchase price of approximately $27.8 million in cash, 10% of which was held back by us for a period of 12 months as security for the indemnification obligations of ALaS and its members. In July 2012, we released $2.8 million to ALaS and its members with respect to the holdback plus interest and retained $16,000 to satisfy certain indemnification obligations. This resulted in a decrease to short-term restricted cash of $2.8 million.
On July 30, 2010, we entered into a $3.0 million credit agreement with J.P. Morgan Chase Bank, N.A. ("JPMC") which expires on July 31, 2013. The primary purpose of this credit agreement is to support our foreign currency hedging programs. The credit agreement is secured by a grant of a security interest in our U.S. assets in favor of JPMC as well as other collateral. The agreement contains financial and reporting covenants and limitations. At March 31, 2013, there were no amounts outstanding under this credit facility and we are in compliance with all covenants.
At March 31, 2013, we had approximately $95 million of cash, cash equivalents, short term investments and long term investments, of which we hold approximately $53 million of cash, cash equivalents, and short term investments in non-U.S. locations, particularly in India, Sri Lanka and the United Kingdom. Cash in these non-U.S. locations may not otherwise be available for potential investments or operations in the United States or certain other geographies where needed, as we have stated that this cash is indefinitely reinvested in these non-U.S. locations. We do not currently plan to repatriate this cash to the United States. However, if our intent were to change and we elected to repatriate this cash back to the United States, or this cash was deemed no longer permanently invested, this cash would be subject to substantial taxes and the change in such intent could have a material adverse effect on our cash balances as well as our overall statement of operations. Due to various methods by which cash could be repatriated to the United States in the future, the amount of taxes attributable to the cash is dependent on circumstances existing if and when remittance occurs. We estimate that it could cost us as much as $18.3 million to repatriate cash back to the United States. In addition, some countries could have tight restrictions on the movement and exchange of foreign currencies which could further limit our ability to use such funds for global operations or capital or other strategic investments.
Beginning in fiscal 2009, our U.K. subsidiary entered into an agreement with an unrelated financial institution to sell, without recourse, certain of its European-based accounts receivable balances from one client to such financial institution. During the fiscal year ended March 31, 2013, we sold $9.8 million of receivables under the terms of the financing agreement. Fees paid pursuant to this agreement were immaterial during the fiscal year ended March 31, 2013. We may elect to use this program again in future periods. However, we cannot provide any assurance that this or any other financing facilities will be available or utilized in the future.
We expect capital expenditures in the normal course of business during the year ended March 31, 2014 to be consistent with our historical capital expenditures.
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Cash flows
The following table summarizes our cash flows for the periods presented:
| |
Fiscal Year Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
| |
(In thousands) |
|||||||||
Net cash provided by operating activities |
$ | 22,753 | $ | 20,917 | $ | 19,766 | ||||
Net cash used for investing activities |
(23,705 | ) | (9,293 | ) | (18,345 | ) | ||||
Net cash provided by financing activities |
494 | 832 | 4,291 | |||||||
Effect of exchange rates on cash |
(448 | ) | (4,569 | ) | 655 | |||||
Net increase (decrease) in cash and cash equivalents |
(906 | ) | 7,887 | 6,367 | ||||||
Cash and cash equivalents, beginning of fiscal year |
58,105 | 50,218 | 43,851 | |||||||
Cash and cash equivalents, end of fiscal year |
$ | 57,199 | $ | 58,105 | $ | 50,218 | ||||
Net cash provided by operating activities
Net cash provided by operating activities was $22.8 million during the fiscal year ended March 31, 2013 as compared to $20.9 million during the fiscal year ended March 31, 2012. This increase was primarily attributable to an increase in net income of $8.4 million, an increased change in other long-term assets and liabilities of $3.7 million, an increased change in deferred income taxes of $4.8 million, an increase in depreciation, amortization and share based compensation of $1.5 million and an increased change in excess tax benefits from stock option exercises of $0.7 million. These were partially offset by a decreased change in income tax payable $9.4 million, decreased change due to payments in accrued employee compensation by $5.5 million, decreased change in accounts receivable, net of $2.0 million and a decreased change in prepaid expenses and other current assets of $0.3 million.
Net cash provided by operating activities was $20.9 million during the fiscal year ended March 31, 2012 as compared to $19.8 million during the fiscal year ended March 31, 2011. This increase was primarily attributable to an increase in liabilities of $11.9 million, an increase in net income of $3.8 million, and an increase in depreciation, amortization and share based compensation expenses of $1.1 million, partially offset by an increase in deferred tax benefits of $5.6 million, an increase in accounts receivable of $5.3 million, an increase in other assets of $1.3 million, an increase in foreign currency gain of $1.7 million, a decrease in prepaid and other current assets of $0.4 million and a decrease in excess tax benefits of $0.7 million.
Net cash used for investing activities
Net cash used for investing activities was $23.7 million during the fiscal year ended March 31, 2013 as compared to $9.3 million during the fiscal year ended March 31, 2012. The change was primarily due to the net decreases in the proceeds of investments of $42.9 million. These decreases were partially offset by a reduction in cash used for the business acquisition of ALaS of $22.3 million, a decrease in the change in restricted cash of $5.2 million, which includes the $2.8 million holdback related to the ALaS acquisition and a decrease in purchase of property and equipment of $1.0 million.
Net cash used for investing activities was $9.3 million during the fiscal year ended March 31, 2012 as compared to $18.3 million used during the fiscal year ended March 31, 2011. The net cash used during the fiscal year ended March 31, 2012 was due primarily to the net proceeds of short term and long term investments of $31.9 million, which was used for the acquisition of ALaS of $27.8 million and capital expenditures on property and equipment of $13.6 million.
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Net cash provided by financing activities
Net cash provided by financing activities was $0.5 million during the fiscal year ended March 31, 2013, as compared to $0.8 million during the fiscal year ended March 31, 2012. The decrease in cash provided is primarily due to repurchase of shares of our common stock of $1.4 million under our stock repurchase program, a decrease in excess tax benefits from stock option exercises of $0.7 million, partially offset by an increase in proceeds from the exercise of common stock options of $0.2 million and a reduction in the payment of contingent consideration of $1.6 million in connection with the ConVista acquisition.
Net cash provided by financing activities was $0.8 million during the fiscal year ended March 31, 2012, as compared to net cash provided by financing activities of $4.3 million during the fiscal year ended March 31, 2011. The primary change in net cash provided was due to a decrease in proceeds from stock option exercises of $2.7 million and payment of ConVista contingent consideration of $1.6 million, partially offset by a decrease in capital lease obligations of $0.2 million and a decrease in excess tax benefits from stock options of $0.7 million.
Contractual obligations
We have no long term debt and have various contractual obligations and commercial commitments. The following table sets forth our future contractual obligations and commercial commitments at March 31, 2013.
| |
Payments Due by Period | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Total | Less Than 1 Year |
2 - 3 Years |
4 - 5 Years |
5+ Years |
|||||||||||
| |
(In thousands) |
|||||||||||||||
Operating lease obligations(1) |
$ | 23,209 | $ | 4,876 | $ | 9,595 | $ | 7,190 | $ | 1,548 | ||||||
Capital lease obligation(2) |
41 | 13 | 24 | 4 | — | |||||||||||
Defined benefit plans(3) |
7,852 | 505 | 1,047 | 1,392 | 4,908 | |||||||||||
Capital and other purchase commitments(4) |
2,542 | 2,542 | — | — | — | |||||||||||
Total |
$ | 33,644 | $ | 7,936 | $ | 10,666 | $ | 8,586 | $ | 6,456 | ||||||
As of March 31, 2013, we had $4,823 of unrecognized tax benefits. This represents the tax benefits associated with certain tax positions on our domestic and international tax returns that have not been recognized on our financial statements due to uncertainty regarding their resolution. Resolution of the related tax positions with the relevant tax authorities may take years to complete, since such timing is not entirely within our control. It is reasonably possible that within the next 12 months certain positions will be resolved, which could result in a decrease in unrecognized tax benefits. These decreases may be offset by increases to unrecognized tax benefits if new positions are identified. The resolution or settlement of positions with the relevant taxing authorities is at various stages and therefore it is not practical to estimate the eventual cash flows by period that may be required to settle these matters.
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Off-balance sheet arrangements
We do not have any investments in special purpose entities or undisclosed borrowings or debt.
We have entered into foreign currency derivative contracts with the objective of limiting our exposure to changes in the Indian rupee as described below and in "Qualitative and Quantitative Disclosures about Market Risk."
We maintain a foreign currency cash flow hedging program designed to further mitigate the risks of volatility in the Indian rupee against the U.S. dollar and U.K. pound sterling as described below in "Qualitative and Quantitative Disclosures about Market Risk." From time to time, we may also purchase multiple foreign currency forward contracts designed to hedge fluctuation in foreign currencies, such as the U.K. pound sterling, against the U.S. dollar, or the U.K. pound sterling against the Sri Lankan rupee, and multiple foreign currency hedges designed to hedge foreign currency transaction gains and losses on our intercompany balances. Other than these foreign currency derivative contracts, we have not entered into off-balance sheet transactions, arrangements or other relationships with unconsolidated entities or other persons that are likely to affect liquidity or the availability of or requirements for capital resources.
Recent accounting pronouncements
In June 2011, the Financial Accounting Standards Board ("FASB") amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The provisions of this new guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this new disclosure requirement did not have a material impact on the Company's disclosure or consolidated financial position, financial results or cash flows.
In September 2011, FASB issued updated guidance on the periodic testing of goodwill for impairment. The updated guidance gives companies the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The updated accounting guidance is effective for fiscal years beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company's consolidated financial position or financial results.
In July 2012, the FASB issued guidance on the testing of indefinite-lived intangible assets for impairment in order to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance. The new guidance allows an entity the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should then perform a quantitative impairment test. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 and earlier adoption is permitted. We do not expect the adoption of this guidance to have a material impact on the consolidated financial statements of the Company.
In February 2013, FASB issued guidance related to accumulated other comprehensive income, requiring the presentation of significant amounts reclassified out of accumulated other comprehensive income to the respective line items in the statement of operations. For those amounts required by U.S. GAAP to be reclassified to earnings in their entirety in the same reporting period, this presentation is required either on the statement of operations or in a single footnote. For items that are not required to be reclassified in their entirety to earnings, the presentation requirement can be met by cross-referencing
65
disclosures elsewhere in the footnotes. The pronouncement is effective on a prospective basis effective for interim and annual reporting periods that start after December 15, 2012. The adoption of this standard affects financial statement presentation only and will have no effect on our financial condition or consolidated results of operations.
Item 7A. Quantitative and qualitative disclosures about market risk.
Foreign currency exchange rate risk
We are exposed to foreign currency exchange rate risk in the ordinary course of business. We have historically entered into, and in the future we may enter into, foreign currency derivative contracts to minimize the impact of foreign currency fluctuations on both foreign currency denominated assets and forecasted expenses. Certain of these contracts meet the criteria for hedge accounting as cash flow hedges. We evaluate our foreign exchange policy on an ongoing basis to assess our ability to address foreign exchange exposures on our consolidated balance sheets, consolidated statements of income and operating cash flows from all foreign currencies, including most significantly the Indian rupee, U.K. pound sterling, and the Sri Lankan rupee.
We have entered into a series of foreign exchange forward contracts that are designated as cash flow hedges, designed to mitigate the impact of volatility in the U.S. dollar equivalent of our Indian rupee denominated expenses over a rolling 36 month period. As of March 31, 2013, the notional value of these contracts was $96.6 million. The outstanding contracts as of March 31, 2013 are scheduled to mature each month through fiscal years ending March 31, 2014 and December 31, 2015. At March 31, 2013, the net unrealized loss on our outstanding cash flow hedge contracts was $1.8 million. Based upon a sensitivity analysis of our cash flow hedge contracts at March 31, 2013, which estimates the fair value of the contracts based upon market exchange rate fluctuations, a 10% change in the foreign currency exchange rate against the U.S. dollar with all other variables held constant would have resulted in an increase or decrease in fair value of approximately $9.63 million.
Interest rate risk
We had no debt outstanding at March 31, 2013. We do not believe we are exposed to material direct risks associated with changes in interest rates other than with our cash and cash equivalents, short-term investments and long-term investments. At March 31, 2013, we had $95 million in cash and cash equivalents, short-term investments and long-term investments, the interest income from which is affected by changes in interest rates. Our invested securities primarily consist of government sponsored entity bonds, money market mutual funds, commercial paper, corporate debts and auction-rate securities. Our investments in debt securities are classified as "available-for-sale" and are recorded at fair value. Our "available-for-sale" investments are sensitive to changes in interest rates. Interest rate changes would result in a change in the net fair value of these financial instruments due to the difference between the market interest rate and the market interest rate at the date of purchase of the financial instrument. A 100 basis point increase or decrease in market interest rates at March 31, 2013 would impact the net fair value of such interest-sensitive financial instruments by $0.14 million.
Concentration of credit risk
Financial instruments which potentially expose us to concentrations of credit risk primarily consist of cash and cash equivalents, short-term investments and long-term investments, accounts receivable, derivative contracts, other financial assets and unbilled accounts receivable. We place our operating cash, investments and derivatives in highly-rated financial institutions. We adhere to a formal investment policy with the primary objective of preservation of principal, which contains credit rating minimums and diversification requirements. We believe that our credit policies reflect normal industry terms and business risk. We do not anticipate non-performance by the counterparties and, accordingly, do not require collateral. Credit losses and write-offs of accounts receivable balances have historically not been material to our consolidated financial statements and have not exceeded our expectations.
66
Item 8. Financial Statements and Supplementary Data.
Virtusa Corporation and Subsidiaries
Index to Consolidated Financial Statements
67
Report of Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders
Virtusa Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Virtusa Corporation and Subsidiaries (the Company) as of March 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 2013. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II, Valuation and Qualifying Accounts. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Virtusa Corporation and Subsidiaries as of March 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of March 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 29, 2013 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
| /s/ KPMG LLP |
Boston,
Massachusetts
May 29, 2013
68
Report of Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders
Virtusa Corporation and Subsidiaries:
We have audited Virtusa Corporation and Subsidiaries' (the Company) internal control over financial reporting as of March 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of March 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 2013, and our report dated May 29, 2013 expressed an unqualified opinion on those consolidated financial statements.
| /s/ KPMG LLP |
Boston,
Massachusetts
May 29, 2013
69
Virtusa Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share amounts)
| |
March 31, 2013 |
March 31, 2012 |
|||||
|---|---|---|---|---|---|---|---|
ASSETS |
|||||||
Current assets: |
|||||||
Cash and cash equivalents |
$ | 57,199 | $ | 58,105 | |||
Short-term investments |
29,452 | 23,055 | |||||
Accounts receivable, net of allowance of $740 and $582 at March 31, 2013 and 2012, respectively |
68,612 | 58,789 | |||||
Unbilled accounts receivable |
15,702 | 7,634 | |||||
Prepaid expenses |
7,562 | 7,759 | |||||
Deferred income taxes |
7,674 | 8,470 | |||||
Restricted cash |
350 | 2,828 | |||||
Other current assets |
8,333 | 5,831 | |||||
Total current assets |
194,884 | 172,471 | |||||
Property and equipment, net |
36,775 | 32,843 | |||||
Long-term investments |
8,319 | 4,269 | |||||
Deferred income taxes |
9,275 | 8,348 | |||||
Goodwill |
35,472 | 35,472 | |||||
Intangible assets, net |
15,692 | 18,248 | |||||
Other long-term assets |
3,502 | 3,143 | |||||
Total assets |
$ | 303,919 | $ | 274,794 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|||||||
Current liabilities: |
|||||||
Accounts payable |
$ | 9,231 | $ | 8,649 | |||
Accrued employee compensation and benefits |
17,683 | 17,844 | |||||
Accrued expenses and other |
17,811 | 22,011 | |||||
Income taxes payable |
4,509 | 4,954 | |||||
Total current liabilities |
49,234 | 53,458 | |||||
Long-term liabilities |
2,478 | 3,162 | |||||
Total liabilities |
51,712 | 56,620 | |||||
Commitments and contingencies (See Note 17) |
|||||||
Stockholders' equity: |
|||||||
Undesignated preferred stock, $0.01 par value; Authorized 5,000,000 shares at March 31, 2013 and 2012, respectively; Issued zero shares at March 31, 2013 and 2012, respectively |
— | — | |||||
Common stock, $0.01 par value; Authorized 120,000,000 shares at March 31, 2013 and 2012, respectively; Issued 27,033,818 and 26,553,299 shares at March 31, 2013 and 2012, respectively; Outstanding 25,177,115 and 24,793,911 shares at March 31, 2013 and 2012, respectively |
270 | 266 | |||||
Treasury stock, 1,856,703 and 1,759,388 common shares, at cost, at March 31, 2013 and 2012, respectively |
(9,652 | ) | (8,244 | ) | |||
Additional paid-in capital |
173,056 | 165,646 | |||||
Retained earnings |
107,247 | 78,849 | |||||
Accumulated other comprehensive loss |
(18,714 | ) | (18,343 | ) | |||
Total stockholders' equity |
252,207 | 218,174 | |||||
Total liabilities, undesignated preferred stock and stockholders' equity |
$ | 303,919 | $ | 274,794 | |||
See accompanying notes to consolidated financial statements
70
Virtusa Corporation and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share amounts)
| |
Year Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
Revenue |
$ | 333,175 | $ | 277,771 | $ | 217,979 | ||||
Costs of revenue |
215,866 | 177,434 | 134,496 | |||||||
Gross profit |
117,309 | 100,337 | 83,483 | |||||||
Operating expenses: |
||||||||||
Selling, general and administrative expenses |
84,450 | 76,438 | 65,697 | |||||||
Income from operations |
32,859 | 23,899 | 17,786 | |||||||
Other income (expense): |
||||||||||
Interest income |
2,977 | 2,478 | 1,974 | |||||||
Foreign currency transaction (losses) gains |
(68 | ) | 227 | (1,436 | ) | |||||
Other, net |
91 | (158 | ) | (97 | ) | |||||
Total other income |
3,000 | 2,547 | 441 | |||||||
Income before income tax expense |
35,859 | 26,446 | 18,227 | |||||||
Income tax expense |
7,461 | 6,411 | 2,027 | |||||||
Net income |
$ | 28,398 | $ | 20,035 | $ | 16,200 | ||||
Net income per share of common stock: |
||||||||||
Basic |
$ | 1.14 | $ | 0.81 | $ | 0.68 | ||||
Diluted |
$ | 1.11 | $ | 0.79 | $ | 0.66 | ||||
See accompanying notes to consolidated financial statements
71
Virtusa Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(In thousands)
| |
Year Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
Net income |
$ | 28,398 | $ | 20,035 | $ | 16,200 | ||||
Other comprehensive (loss) income, net of tax: |
||||||||||
Foreign currency translation adjustments, net of tax effect of $201, $419, $46 |
(3,809 | ) | (11,457 | ) | 2,168 | |||||
Pension plan adjustment |
(78 | ) | 153 | (479 | ) | |||||
Unrealized gain (loss) on available-for-sale securities, net of tax effect of $0, $3, $48 |
5 | (6 | ) | (90 | ) | |||||
Unrealized gain (loss) on effective cash flow hedges, net of tax effect of $1,517, $2,719, $675 |
3,511 | (5,200 | ) | (1,210 | ) | |||||
Other comprehensive (loss) income |
$ | (371 | ) | $ | (16,510 | ) | $ | 389 | ||
Comprehensive income |
$ | 28,027 | $ | 3,525 | $ | 16,589 | ||||
See accompanying notes to consolidated financial statements
72
Virtusa Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
| |
Common Stock | Treasury Stock | |
|
Accumulated Other Comprehensive Loss |
|
|||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Additional Paid-in Capital |
Retained Earnings |
Total Stockholder's Equity |
||||||||||||||||||||||
| |
Shares | Amount | Shares | Amount | |||||||||||||||||||||
Balance at March 31, 2010 |
25,197,790 | $ | 252 | (1,759,388 | ) | $ | (8,244 | ) | $ | 149,394 | $ | 42,614 | $ | (2,222 | ) | $ | 181,794 | ||||||||
Proceeds from the exercise of stock options and vesting of restricted stock |
896,628 | 9 | — | — | 4,640 | — | — | 4,649 | |||||||||||||||||
Restricted stock awards withheld for tax |
— | — | — | — | (375 | ) | — | — | (375 | ) | |||||||||||||||
Share based compensation |
— | — | — | — | 3,921 | — | — | 3,921 | |||||||||||||||||
Excess tax benefits from stock option exercises |
— | — | — | — | 758 | — | — | 758 | |||||||||||||||||
Other comprehensive income |
— | — | — | — | — | — | 389 | 389 | |||||||||||||||||
Net income |
— | — | — | — | — | 16,200 | — | 16,200 | |||||||||||||||||
Balance at March 31, 2011 |
26,094,418 | $ | 261 | (1,759,388 | ) | $ | (8,244 | ) | $ | 158,338 | $ | 58,814 | $ | (1,833 | ) | $ | 207,336 | ||||||||
Proceeds from the exercise of stock options and vesting of restricted stock |
458,881 | 5 | — | — | 1,960 | — | — | 1,965 | |||||||||||||||||
Restricted stock awards withheld for tax |
— | — | — | — | (1,176 | ) | — | — | (1,176 | ) | |||||||||||||||
Share based compensation |
— | — | — | — | 5,102 | — | — | 5,102 | |||||||||||||||||
Excess tax benefits from stock option exercises |
— | — | — | — | 1,422 | — | — | 1,422 | |||||||||||||||||
Other comprehensive income |
— | — | — | — | — | — | (16,510 | ) | (16,510 | ) | |||||||||||||||
Net income |
— | — | — | — | — | 20,035 | — | 20,035 | |||||||||||||||||
Balance at March 31, 2012 |
26,553,299 | $ | 266 | (1,759,388 | ) | $ | (8,244 | ) | $ | 165,646 | $ | 78,849 | $ | (18,343 | ) | $ | 218,174 | ||||||||
Proceeds from the exercise of stock options and vesting of restricted stock |
480,519 | 4 | — | — | 2,165 | — | — | 2,169 | |||||||||||||||||
Restricted stock awards withheld for tax |
— | — | — | — | (1,390 | ) | — | — | (1,390 | ) | |||||||||||||||
Share based compensation |
— | — | — | — | 5,876 | — | — | 5,876 | |||||||||||||||||
Repurchase of common stock |
— | — | (97,315 | ) | (1,408 | ) | — | — | — | (1,408 | ) | ||||||||||||||
Excess tax benefits from stock option exercises |
— | — | — | — | 759 | — | — | 759 | |||||||||||||||||
Other comprehensive income |
— | — | — | — | — | — | (371 | ) | (371 | ) | |||||||||||||||
Net income |
— | — | — | — | — | 28,398 | — | 28,398 | |||||||||||||||||
Balance at March 31, 2013 |
27,033,818 | $ | 270 | (1,856,703 | ) | $ | (9,652 | ) | $ | 173,056 | $ | 107,247 | $ | (18,714 | ) | $ | 252,207 | ||||||||
See accompanying notes to consolidated financial statements
73
Virtusa Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
| |
Year Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
Cash provided by operating activities: |
||||||||||
Net income |
$ | 28,398 | $ | 20,035 | $ | 16,200 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||
Depreciation and amortization |
9,040 | 8,305 | 8,398 | |||||||
Share-based compensation expense |
5,876 | 5,102 | 3,921 | |||||||
Provision for doubtful accounts |
193 | 602 | 690 | |||||||
(Gain) loss on disposal of property and equipment |
(100 | ) | 16 | (33 | ) | |||||
Deferred income taxes, net |
(1,836 | ) | (6,555 | ) | (986 | ) | ||||
Foreign currency loss (gain), net |
68 | (227 | ) | 1,436 | ||||||
Excess tax benefits from stock option exercises |
(759 | ) | (1,422 | ) | (758 | ) | ||||
Net changes in operating assets and liabilities: |
||||||||||
Accounts receivable and unbilled |
(19,462 | ) | (17,883 | ) | (12,668 | ) | ||||
Prepaid expenses and other current assets |
(3,501 | ) | (3,196 | ) | (2,783 | ) | ||||
Other long-term assets |
471 | (2,805 | ) | (677 | ) | |||||
Accounts payable |
1,604 | 1,579 | 245 | |||||||
Accrued employee compensation and benefits |
(1,440 | ) | 4,088 | 3,496 | ||||||
Accrued expenses and other |
3,883 | 3,983 | 2,612 | |||||||
Income taxes payable |
550 | 9,965 | 1,774 | |||||||
Other long-term liabilities |
(232 | ) | (670 | ) | (1,101 | ) | ||||
Net cash provided by operating activities |
22,753 | 20,917 | 19,766 | |||||||
Cash flows used for investing activities: |
||||||||||
Proceeds from sale of property and equipment |
117 | 114 | 101 | |||||||
Purchase of short-term investments |
(13,676 | ) | (9,481 | ) | (20,647 | ) | ||||
Proceeds from sale or maturity of short-term investments |
12,717 | 36,825 | 30,441 | |||||||
Purchase of long-term investments |
(11,303 | ) | (5,900 | ) | (30,815 | ) | ||||
Proceeds from sale or maturity of long-term investments |
1,258 | 10,406 | 11,808 | |||||||
Business acquisition, net of cash acquired |
(2,775 | ) | (25,055 | ) | (3,219 | ) | ||||
Decrease (increase) in restricted cash |
2,544 | (2,645 | ) | 3,704 | ||||||
Purchase of property and equipment |
(12,587 | ) | (13,557 | ) | (9,718 | ) | ||||
Net cash used for investing activities |
(23,705 | ) | (9,293 | ) | (18,345 | ) | ||||
Cash flows provided by financing activities: |
||||||||||
Proceeds from exercise of common stock options |
2,169 | 1,962 | 4,649 | |||||||
Purchases of common stock |
(1,408 | ) | — | — | ||||||
Payment of contingent consideration related to acquisitions |
— | (1,620 | ) | — | ||||||
Principal payments on capital lease obligation |
(1,026 | ) | (932 | ) | (1,116 | ) | ||||
Excess tax benefits from stock option exercises |
759 | 1,422 | 758 | |||||||
Net cash provided by financing activities |
494 | 832 | 4,291 | |||||||
Effect of exchange rate changes on cash and cash equivalents |
(448 | ) | (4,569 | ) | 655 | |||||
Net (decrease) increase in cash and cash equivalents |
(906 | ) | 7,887 | 6,367 | ||||||
Cash and cash equivalents, beginning of year |
58,105 | 50,218 | 43,851 | |||||||
Cash and cash equivalents, end of year |
$ | 57,199 | $ | 58,105 | $ | 50,218 | ||||
Supplemental disclosure of cash flow information: |
||||||||||
Cash paid for interest |
$ | 73 | $ | 146 | $ | 19 | ||||
Cash receipts from interest |
$ | 2,740 | $ | 2,683 | $ | 1,800 | ||||
Cash paid for income tax |
$ | 8,426 | $ | 6,814 | $ | 4,281 | ||||
Non cash investing activities |
||||||||||
Assets acquired under capital lease |
$ | 37 | $ | — | $ | — | ||||
See accompanying notes to consolidated financial statements
74
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(thousands, except share and per share amounts)
(1) Nature of the Business
Virtusa Corporation (the "Company" or "Virtusa") is a global information technology services company. The Company uses a global delivery model to provide a broad range of information technology, or IT, services, including IT consulting, technology implementation and application outsourcing. Using its enhanced global delivery model, innovative platforming approach and industry expertise, the Company provides cost-effective services that enable its clients to accelerate time to market, improve service and enhance productivity. Headquartered in Massachusetts, Virtusa has offices in the United States, the United Kingdom, Germany and Singapore and global delivery centers in Hyderabad, Bangalore and Chennai, India, Colombo, Sri Lanka and Budapest, Hungary.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements reflect the accounts of the Company and its direct and indirect subsidiaries, Virtusa (India) Private Limited, Virtusa Consulting Services Private Limited and Virtusa Software Services Private Limited, each organized and located in India, Virtusa (Private) Limited, organized and located in Sri Lanka, Virtusa UK Limited, organized and located in the United Kingdom, Virtusa Securities Corporation, a Massachusetts securities corporation, InSource Holdings, Inc., a company incorporated in the State of Connecticut, InSource LLC, a Connecticut limited liability company located in Connecticut, Virtusa International, B.V., organized and located in the Netherlands, Virtusa Hungary Kft., incorporated and located in Hungary, Virtusa Germany GmbH, organized and located in Germany, Virtusa Singapore Private Limited, organized and located in Singapore, Virtusa Malaysia Private Limited Company and Virtusa Austria GmbH, organized and located in Austria. All intercompany transactions and balances have been eliminated in consolidation.
(b) Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including the recoverability of tangible assets, disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the reported period. Management re-evaluates these estimates on an ongoing basis. The most significant estimates relate to the recognition of revenue and profits based on the percentage of completion method of accounting for fixed-price contracts, share- based compensation, income taxes, including reserves for uncertain tax positions, deferred taxes and liabilities and valuation of financial instruments including derivative contracts and investments. Management bases its estimates on historical experience and on various other factors and assumptions that are believed to be reasonable under the circumstances. The actual amounts may vary from the estimates used in the preparation of the accompanying consolidated financial statements.
(c) Foreign Currency Translation
The functional currencies of the Company's non-U.S. subsidiaries are the local currency of the country in which the subsidiary operates except for Hungary, which operates in the euro. Operating and capital expenditures of the Company's subsidiaries located in India, Sri Lanka, the Netherlands, Singapore, Austria and the United Kingdom, are denominated in their local currency which is the currency most
75
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(2) Summary of Significant Accounting Policies (Continued)
compatible with their expected economic results. India and Sri Lanka local expenditures form the underlying basis for intercompany transactions which are subsequently conducted in both U.S. dollars and U.K. pounds sterling. U.K. client sales contracts are primarily conducted in U.K. pounds sterling.
All transactions and account balances are recorded in the functional currency. The Company translates the value of these non-U.S. subsidiaries' local currency denominated assets and liabilities into U.S. dollars at the rates in effect at the balance sheet date. Resulting translation adjustments are recorded in stockholders' equity as a component of accumulated other comprehensive income (loss). The local currency denominated statement of income amounts are translated into U.S. dollars using the average exchange rates in effect during the period. Realized foreign currency transaction gains and losses are included in the consolidated statements of income. The Company's non-U.S. subsidiaries do not operate in "highly inflationary" countries.
(d) Derivative Instruments and Hedging Activities
The Company enters into forward foreign exchange contracts to mitigate the risk of changes in foreign exchange rates on intercompany transactions and forecasted transactions denominated in foreign currencies. The Company designates derivative contracts as cash flow hedges if they satisfy the criteria for hedge accounting. Changes in fair values of derivatives designated as cash flow hedges are deferred and recorded as a component of accumulated other comprehensive income net of taxes until the hedged transactions occur and are then recognized in the consolidated statements of income. Changes in fair value of derivatives not designated as hedging instruments and the ineffective portion of derivatives designated as cash flow hedges are recognized immediately in the consolidated statements of income.
With respect to derivatives designated as cash flow hedges, the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. The Company also formally assesses both at the inception of the hedge and on an ongoing basis, whether each derivative will be highly effective in offsetting changes in fair values or cash flows of the hedged item. If the Company determines that a derivative or a portion thereof is not highly effective as a hedge, or if a derivative ceases to qualify for hedge accounting, the Company prospectively discontinues hedge accounting with respect to that derivative.
(e) Cash and Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with a remaining maturity of three months or less from the date of purchase to be cash equivalents. At March 31, 2013, cash equivalents consisted of money market instruments and certificates of deposit. The Company had short-term and long-term restricted cash totaling $453 and $3,000 at March 31, 2013 and 2012, respectively. Restricted cash at March 31, 2012 included $2,775 related to the Company's acquisition of substantially all the assets of ALaS Consulting LLC ("ALaS"). Restricted cash also includes restricted deposits with banks to secure the import of computer and other equipment, bank guarantees associated with the construction of the Company's facility in India, and also a bank guarantee related to value added tax ("VAT") with the government of Sri Lanka.
76
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(2) Summary of Significant Accounting Policies (Continued)
(f) Investment Securities
The Company classifies all debt securities as "available for sale". These securities are classified as short-term investments and long-term investments on the consolidated balance sheet and are carried at fair market value. Any unrealized gains and losses on available for sale securities are reported in other comprehensive income (loss), net of tax, as a separate component of stockholders' equity unless the decline in value is deemed to be other-than-temporary, in which case, investments are written down to fair value and the loss is charged to the consolidated statement of income. Any realized gains and losses on trading securities are charged to the consolidated statement of income. The Company determines the cost of the securities sold based on the specific identification method.
The Company conducts a periodic review and evaluation of its investment securities to determine if the decline in fair value of any security is deemed to be other-than-temporary. Other-than-temporary impairment losses are recognized on securities when: (i) the holder has an intention to sell the security; (ii) it is more likely than not that the security will be required to be sold prior to recovery; or (iii) the holder does not expect to recover the entire amortized cost basis of the security. Other-than-temporary losses are reflected in earnings as a charge against gain on sale of investments to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. The Company has no intention to sell any securities in an unrealized loss position at March 31, 2013 nor is it more likely than not that the Company would be required to sell such securities prior to the recovery of the unrealized losses. As of March 31, 2013, the Company believes that all impairments of investment securities are temporary in nature.
(g) Goodwill and Other Intangible Assets
The Company allocates the cost of an acquired entity to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price for acquisitions over the fair value of the net assets acquired, including other intangible assets, is recorded as goodwill. Goodwill is not amortized but is tested for impairment at the reporting unit level, defined as the Company level, at least annually in the fourth quarter of each fiscal year or more frequently when events or circumstances occur that indicate that it is more likely than not that an impairment has occurred. In assessing goodwill for impairment, an entity has the option to assess qualitative factors to determine whether events or circumstances indicate that it is not more likely than not that fair value of a reporting unit is less than its carry amount. If this is the case, then performing the quantitative two-step goodwill impairment test is unnecessary. An entity can choose not to perform a qualitative assessment for any or all of its reporting units, and proceed directly to the use of the two-step impairment test. The two-step process begins with an estimation of the fair value of a reporting unit. Goodwill impairment exists when a reporting unit's carrying value of goodwill exceeds its implied fair value. Significant judgment is applied when goodwill is assessed for impairment.
For the Company's goodwill impairment analysis, the Company operates under one reporting unit. Any impairment would be measured based upon the fair value of the related assets. In performing the first step of the goodwill impairment testing and measurement process, the Company compares its entity-wide estimated fair value to net book value to identify potential impairment. Management estimates the entity-wide fair value utilizing the Company's market capitalization, plus an appropriate control premium. Market capitalization is determined by multiplying the shares outstanding on the assessment date by the
77
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(2) Summary of Significant Accounting Policies (Continued)
market price of the Company's common stock. If the market capitalization is not sufficiently in excess of the Company's book value, the Company will calculate the control premium which considers appropriate industry, market and other pertinent factors. If the fair value of the reporting unit is less than the book value, the second step is performed to determine if goodwill is impaired. If the Company determines through the impairment evaluation process that goodwill has been impaired, an impairment charge would be recorded in the consolidated statement of income. The Company completed the annual impairment test required during the fourth quarter of the fiscal year ended March 31, 2013 and determined that there was no impairment. The Company continues to closely monitor its market capitalization. If the Company's market capitalization, plus an estimated control premium, is below its carrying value for a period considered to be other-than-temporary, it is possible that the Company may be required to record an impairment of goodwill either as a result of the annual assessment that the Company conducts in the fourth quarter of each fiscal year, or in a future quarter if an indication of potential impairment is evident. The estimated fair value of goodwill on the assessment date exceeded the carrying book value by 73%.
Other intangible assets with definite lives are tested for impairment when events or circumstances occur that indicate that it is more likely than not that an impairment has occurred. The Company tests other intangible assets with definite lives for impairment by comparing the carrying amount to the sum of the net undiscounted cash flows expected to be generated by the asset whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the carrying amount of the asset exceeds its net undiscounted cash flows, then an impairment loss is recognized for the amount by which the carrying amount exceeds its fair value. The Company uses a discounted cash flow approach or other methods, if appropriate, to assess fair value. The intangible impairment test is performed at the reporting unit level, and the Company is considered a single reporting unit for goodwill and intangible impairment testing purposes.
(h) Fair Value of Financial Instruments
At March 31, 2013 and 2012, the carrying amounts of certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, unbilled accounts receivable, restricted cash, accounts payable, accrued employee compensation and benefits and other accrued expenses, approximate their fair values due to the nature of the items. See note 7 for a discussion of the fair value of the Company's other financial instruments.
(i) Concentration of Credit Risk and Significant Customers
Financial instruments which potentially expose the Company to concentrations of credit risk are primarily comprised of cash and cash equivalents, investments, derivatives, accounts receivable and unbilled accounts receivable. The Company places its cash, investments and derivatives in highly-rated financial institutions. The Company adheres to a formal investment policy with the primary objective of preservation of principal, which contains credit rating minimums and diversification requirements. Management believes its credit policies reflect normal industry terms and business risk. The Company does not anticipate non-performance by the counterparties and, accordingly, does not require collateral.
78
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(2) Summary of Significant Accounting Policies (Continued)
At March 31, 2013, two clients accounted for 20% and 10%, respectively, of gross accounts receivable. At March 31, 2012, two clients accounted for 11% and 10%, respectively, of gross accounts receivable. Revenue from significant clients as a percentage of the Company's consolidated revenue was as follows:
| |
Year Ended March 31, |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
Customer A |
14 | % | 6 | % | 2 | % | ||||
Customer B |
14 | % | 16 | % | 12 | % | ||||
Customer C |
11 | % | 12 | % | 14 | % | ||||
(j) Property and Equipment
Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized over the shorter of their lease term or the estimated useful life of the related asset. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income. Repair and maintenance costs are expensed as incurred.
(k) Long-Lived Assets
The Company reviews the carrying value of its long-lived assets or asset groups with definite useful lives to be held and used for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying value of an asset to the future net cash flows directly associated with the asset. If assets are considered to be impaired, the impairment recognized is the amount by which the carrying value exceeds the fair value of the asset. The Company uses a discounted cash flow approach or other methods, if appropriate, to assess fair value.
Long-lived assets to be disposed of by sale are reported at the lower of carrying value or fair value less cost to sell and depreciation is ceased. Long-lived assets to be disposed of other than by sale are considered to be held and used until disposal.
(l) Internally-Developed Software
The Company capitalizes costs incurred during the application development stage, which include costs to design the software configuration and interfaces, coding, installation and testing. Costs incurred during the preliminary project stage, along with post-implementation stages of internal use computer software, are expensed as incurred. Capitalized development costs are typically amortized over the estimated life of the software, typically three to six years, using the straight line method, beginning with the date that an asset is ready for its intended use. At March 31, 2013 and 2012, capitalized software development costs, which include software development work in progress were approximately $4,854 and $3,198, respectively. These costs were recorded in property and equipment. For the fiscal years ended March 31, 2013, 2012 and 2011, amortization of capitalized software development costs amounted to approximately $351, $174 and $270, respectively.
79
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(2) Summary of Significant Accounting Policies (Continued)
(m) Income Taxes
Income taxes are accounted for using the asset and liability method whereby deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
The calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax regulations in multiple jurisdictions. The Company records liabilities for estimated tax obligations in the United States and other tax jurisdictions in which it has operations (see note 13).
(n) Revenue Recognition
The Company derives its revenue from a variety of IT consulting, technology implementation and application outsourcing services. Contracts for these services have different terms and conditions based on the scope, deliverables, and complexity of the engagement which require management to make judgments and estimates in determining the overall cost to the customer. Fees for these contracts may be in the form of time-and-materials or fixed-price arrangements and volume discounts are recorded as a reduction of revenue over the contractual period as services are performed.
Revenue on time-and-material contracts is recognized as the services are performed and amounts are earned. The Company considers amounts to be earned once evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable, and collectability is reasonably assured. For contracts with fees based on time-and-materials, the Company recognizes revenue over the period of performance.
Revenue from fixed-price contracts is accounted for under the percentage-of-completion method. Under the percentage-of-completion method, management estimates the percentage of completion based upon efforts incurred as a percentage of the total estimated efforts for the specified engagement. When total cost estimates exceed revenue, the Company accrues for the estimated losses immediately. The use of the percentage-of-completion method requires significant judgment relative to estimating total contract revenue and efforts, including assumptions relative to the length of time to complete the project, the nature and complexity of the work to be performed, and anticipated changes in other engagement-related costs. Our analysis of these contracts also contemplates whether contracts should be combined or segmented. We combine closely related contracts when all the applicable criteria under GAAP are met. Similarly, we may segment a project, which may consist of a single contract or a group of contracts, with varying rates of profitability, only if all the applicable criteria under GAAP are met. Estimates of total contract revenue and efforts are continuously monitored during the term of the contract and are subject to revision as the contract progresses. When revisions in estimated contract revenue and efforts are determined, such adjustments are recorded in the period in which they are first identified.
Revenue includes reimbursements of travel and out-of-pocket expenses, with equivalent amounts of expense recorded in costs of revenue, of $7,001, $6,226 and $5,837 for the fiscal years ended March 31, 2013, 2012 and 2011, respectively.
80
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(2) Summary of Significant Accounting Policies (Continued)
Any tax assessed by a governmental authority that is incurred as a result of a revenue transaction (e.g. sales tax) is excluded from revenue and reported on a net basis.
(o) Costs of Revenue and Operating Expenses
Costs of revenue consist principally of salaries, employee benefits and stock compensation expense, reimbursable and non-reimbursable travel costs, subcontractor fees, and immigration related expenses for IT professionals. Selling and marketing expenses are charged to operating expenses as incurred. Selling and marketing expenses are those expenses associated with promoting and selling the Company's services and include such items as sales and marketing personnel salaries, stock compensation expense and related fringe benefits, commissions, travel, and the cost of advertising and other promotional activities. Advertising and promotional expenses incurred were approximately $204, $253 and $243 for the fiscal years ended March 31, 2013, 2012 and 2011, respectively.
General and administrative expenses include other operating items such as officers' and administrative personnel salaries, stock compensation expense and related fringe benefits, legal and audit expenses, public company related expenses, insurance, provision for doubtful accounts, depreciation and operating lease expenses.
(p) Share-Based Compensation
Share-based compensation cost is determined by estimating the fair value at the grant date of the Company's common stock using the Black-Scholes option pricing model, and expensing the total compensation cost on a straight line basis (net of estimated forfeitures) over the requisite employee service period. The allocation of total share-based compensation expense between costs of revenue and selling, general and administrative expenses were as follows:
| |
Year Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
Costs of revenue |
$ | 718 | $ | 924 | $ | 422 | ||||
Selling, general and administrative expenses |
5,158 | 4,178 | 3,499 | |||||||
Total share-based compensation expense |
$ | 5,876 | $ | 5,102 | $ | 3,921 | ||||
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing valuation model with the following assumptions:
| |
Year Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
Weighted Average Fair Value Options Pricing Model Assumptions
|
2013 | 2012 | 2011 | |||||||
Risk-free interest rate |
0.88 | % | 1.12 | % | 2.23 | % | ||||
Expected term (in years) |
6.15 | 6.37 | 6.16 | |||||||
Anticipated common stock volatility |
62.53 | % | 62.14 | % | 61.74 | % | ||||
Expected dividend yield |
0 | % | 0 | % | 0 | % | ||||
The risk-free interest rate assumptions are based on the interpolation of various U.S. Treasury bill rates in effect during the month in which stock option awards are granted. The Company's volatility
81
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(2) Summary of Significant Accounting Policies (Continued)
assumption is based on the historical volatility rates of the common stock of its publicly held peers over periods commensurate with the expected term of each grant.
The expected term of employee share-based awards represents the weighted average period of time that awards are expected to remain outstanding. The determination of the expected term of share-based awards assumes that employees' behavior is a function of the awards vested, contractual lives, and the extent to which the award is in the money. Accordingly, the Company has elected to use the "simplified" method of determining the expected term or life of its share-based awards due to the Company's limited trading history.
As of March 31, 2013, there was $10,507 of total unrecognized compensation cost related to unvested stock options and restricted stock awards granted under the Company's Amended and Restated 2000 Option Plan and the Company's 2007 Stock Option and Incentive Plan (see note 12 for a more complete description of these plans). That cost is expected to be recognized over a remaining weighted average period of 2.61 years.
The allocation of compensation expense related to stock appreciation rights between costs of revenue and selling, general and administrative expenses as well as the related income tax benefit were as follows:
| |
Year Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
Costs of revenue |
$ | — | $ | 20 | $ | 51 | ||||
Selling, general and administrative expenses |
— | 5 | 15 | |||||||
Total compensation expense related to stock appreciation rights |
$ | — | $ | 25 | $ | 66 | ||||
(q) Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of clients to make required payments. The allowance for doubtful accounts is determined by evaluating the relative credit worthiness of each client, historical collections experience and other information, including the aging of the receivables.
(r) Unbilled Accounts Receivable
Unbilled accounts receivable represent revenue on contracts to be billed, in subsequent periods, as per the terms of the related contracts.
(s) Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board ("FASB") amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The provisions of this new guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this new disclosure
82
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(2) Summary of Significant Accounting Policies (Continued)
requirement did not have a material impact on the Company's disclosure or consolidated financial position, financial results or cash flows.
In September 2011, FASB issued updated guidance on the periodic testing of goodwill for impairment. The updated guidance gives companies the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The updated accounting guidance is effective for fiscal years beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company's consolidated financial position or financial results.
In July 2012, the FASB issued guidance on the testing of indefinite-lived intangible assets for impairment in order to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance. The new guidance allows an entity the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should then perform a quantitative impairment test. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 and earlier adoption is permitted. We do not expect the adoption of this guidance to have a material impact on the consolidated financial statements of the Company.
In February 2013, FASB issued guidance related to accumulated other comprehensive income, requiring the presentation of significant amounts reclassified out of accumulated other comprehensive income to the respective line items in the statement of operations. For those amounts required by U.S. GAAP to be reclassified to earnings in their entirety in the same reporting period, this presentation is required either on the statement of operations or in a single footnote. For items that are not required to be reclassified in their entirety to earnings, the presentation requirement can be met by cross-referencing disclosures elsewhere in the footnotes. The pronouncement is effective on a prospective basis effective for interim and annual reporting periods that start after December 15, 2012. The adoption of this standard affects financial statement presentation only and will have no effect on our financial condition or consolidated results of operations.
(t) Reclassifications
Certain prior-year amounts have been reclassified to conform to the fiscal year ended March 31, 2013 presentation.
(3) Net Income per Share
Basic net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding for the period, and diluted earnings per share is computed by including the dilutive impact of common stock equivalents outstanding for the period in the denominator. Common stock equivalents include shares issuable upon the exercise of outstanding stock options, SARs, unvested restricted stock, net of shares assumed to have been purchased with the proceeds, using the
83
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(3) Net Income per Share (Continued)
treasury stock method. The following table sets forth the computation of basic and diluted net income per share for the periods set forth below:
| |
Year Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
Numerators: |
||||||||||
Net income available to common stockholders |
$ | 28,398 | $ | 20,035 | $ | 16,200 | ||||
Denominators: |
||||||||||
Weighted average common shares outstanding |
24,937,162 | 24,643,063 | 23,783,457 | |||||||
Dilutive effect of employee stock options and unvested restricted stock awards |
683,470 | 714,316 | 894,729 | |||||||
Dilutive effect of stock appreciation rights |
18,207 | 26,271 | 36,622 | |||||||
Weighted average shares—diluted |
25,638,839 | 25,383,650 | 24,714,808 | |||||||
Net income per share—basic |
$ | 1.14 | $ | 0.81 | $ | 0.68 | ||||
Net income per share—diluted |
$ | 1.11 | $ | 0.79 | $ | 0.66 | ||||
During the fiscal years ended March 31, 2013, 2012, and 2011, unvested restricted stock and options to purchase 450,299, 489,987 and 726,499 shares of common stock, respectively, were excluded from the calculations of diluted earnings per share as their effect would have been anti-dilutive.
(4) Acquisitions
On July 1, 2011, the Company acquired substantially all of the assets of ALaS, pursuant to an asset purchase agreement with ALaS and the members of ALaS, dated as of July 1, 2011. The acquisition is intended to extend the Company's position within the banking, financial services and insurance industries by adding capital markets domain expertise, consulting, and program management skills.
(5) Goodwill and Intangible Assets
Goodwill:
The Company has one reportable segment at March 31, 2013. There were no changes to the goodwill balance during the fiscal year ended March 31, 2013. The acquisition costs and goodwill balance deductible for tax purposes are $36,464.
The Company performed the annual assessment of its goodwill during the fourth quarter of the fiscal year ended March 31, 2013 and determined that the estimated fair value of the Company's reporting unit exceeded its carrying value and therefore goodwill was not impaired. The Company will continue to complete goodwill impairment assessment at least annually during the fourth quarter of each ensuing fiscal year. The Company will continue to evaluate whether events or circumstances have occurred that indicate that the estimated remaining useful life of its long-lived assets, including intangible assets, may warrant revision or that the carrying value of these assets may be impaired. Any write downs are treated as permanent reductions in the carrying amount of the assets.
84
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(5) Goodwill and Intangible Assets (Continued)
Intangible Assets:
The following are details of the Company's intangible asset carrying amounts acquired and amortization for the fiscal year ended March 31, 2013 and March 31, 2012.
| |
March 31, 2013 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Weighted Average Useful Life |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||||
Amortizable intangible assets: |
|||||||||||||
Customer relationships |
9.0 | $ | 21,600 | $ | 6,239 | $ | 15,361 | ||||||
Partner relationships |
6.5 | 700 | 369 | 331 | |||||||||
Trademark |
1.0 | 200 | 200 | — | |||||||||
Backlog |
1.4 | 2,100 | 2,100 | — | |||||||||
|
8.1 | $ | 24,600 | $ | 8,908 | $ | 15,692 | ||||||
| |
March 31, 2012 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Weighted Average Useful Life |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||||
Amortizable intangible assets: |
|||||||||||||
Customer relationships |
9.0 | $ | 21,600 | $ | 3,800 | $ | 17,800 | ||||||
Partner relationships |
6.5 | 700 | 252 | 448 | |||||||||
Trademark |
1.0 | 200 | 200 | — | |||||||||
Backlog |
1.4 | 2,100 | 2,100 | — | |||||||||
|
8.1 | $ | 24,600 | $ | 6,352 | $ | 18,248 | ||||||
The amortization expense was $2,556, $2,718 and $3,031 for the fiscal years ended March 31, 2013, 2012 and 2011, respectively. The components included in the gross carrying amounts reflect the Company's acquisition of all the outstanding stock of Insource Holdings, Inc. and its subsidiaries on November 4, 2009, the Company's purchase of substantially all of the assets of ConVista Consulting LLC, on February 1, 2010 and the ALaS acquisition on July 1, 2011. The intangible assets are being amortized on a straight-line basis over their estimated useful lives.
The estimated amortization expense for the following fiscal years related to the purchased intangible assets at March 31, 2013 are as follows:
| |
Amount | |||
|---|---|---|---|---|
2014 |
$ | 2,556 | ||
2015 |
2,556 | |||
2016 |
2,543 | |||
2017 |
2,399 | |||
2018 |
2,095 | |||
Thereafter |
3,543 | |||
Total |
$ | 15,692 | ||
85
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(6) Investment Securities
At March 31, 2013 and 2012, all of the Company's investment securities were classified as available-for-sale and were carried on its balance sheet at their fair market value. A fair market value hierarchy based on three levels of inputs was used to measure each security (see note 7).
The following is a summary of investment securities at March 31, 2013:
| |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Available-for-sale securities: |
|||||||||||||
Corporate bonds: |
|||||||||||||
Current |
$ | 6,846 | $ | 4 | $ | (2 | ) | $ | 6,848 | ||||
Non-current |
6,246 | 3 | (7 | ) | 6,242 | ||||||||
Auction-rate securities: |
|||||||||||||
Non-current |
900 | — | (7 | ) | 893 | ||||||||
Agency and short- term notes: |
|||||||||||||
Non-current |
1,184 | — | — | 1,184 | |||||||||
Time deposits: |
|||||||||||||
Current |
22,604 | — | — | 22,604 | |||||||||
Total available-for-sale securities |
$ | 37,780 | $ | 7 | $ | (16 | ) | $ | 37,771 | ||||
The following is a summary of investment securities at March 31, 2012:
| |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Available-for-sale securities: |
|||||||||||||
Corporate bonds: |
|||||||||||||
Current |
$ | 5,999 | $ | 8 | $ | (2 | ) | $ | 6,005 | ||||
Non-current |
2,388 | 3 | (3 | ) | 2,388 | ||||||||
Auction-rate securities: |
|||||||||||||
Non-current |
900 | — | (20 | ) | 880 | ||||||||
Agency and short-term notes: |
|||||||||||||
Non-current |
1,001 | — | — | 1,001 | |||||||||
Time deposits: |
|||||||||||||
Current |
17,050 | — | — | 17,050 | |||||||||
Total available-for-sale securities |
$ | 27,338 | $ | 11 | $ | (25 | ) | $ | 27,324 | ||||
The Company evaluates investments with unrealized losses to determine if the losses are other than temporary. The Company has determined that the gross unrealized losses on its available-for-sale securities at March 31, 2013 are temporary. The Company conducts a periodic review and evaluation of its investment securities to determine if the decline in fair value of any security is deemed to be other-than-temporary. Other-than-temporary losses are reflected in earnings as a charge against gain on sale of investments to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income.
86
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(6) Investment Securities (Continued)
The Company determines realized gains or losses on the sale of marketable securities on a specific identification method. The Company did not have any realized gains for the fiscal years ended March 31, 2013 and 2011. The Company recognized gross realized gains of $29 for the fiscal year ended March 31, 2012. The Company did not have any realized losses for the fiscal years ended March 31, 2013 and 2012. The Company recognized gross realized losses of $10 for the year ended March 31, 2011.
The following tables show the gross unrealized losses and fair value of the Company's investment securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2013 and March 31, 2012:
| |
Fair Value | Gross Unrealized Loss |
|||||
|---|---|---|---|---|---|---|---|
Available-for-sale securities at March 31, 2013: |
|||||||
Corporate bonds |
$ | 8,241 | $ | (8 | ) | ||
Agency bonds |
615 | (1 | ) | ||||
Total |
$ | 8,856 | $ | (9 | ) | ||
Available-for-sale securities at March 31, 2012: |
|||||||
Corporate bonds |
$ | 4,045 | $ | (3 | ) | ||
| |
Fair Value | Gross Unrealized Loss |
|||||
|---|---|---|---|---|---|---|---|
Available-for-sale securities at March 31, 2013: |
|||||||
Auction-rate securities |
893 | (7 | ) | ||||
Total |
$ | 893 | $ | (7 | ) | ||
Available-for-sale securities at March 31, 2012: |
|||||||
Corporate bonds |
$ | 1,003 | $ | (2 | ) | ||
Auction-rate securities |
880 | (20 | ) | ||||
Total |
$ | 1,883 | $ | (22 | ) | ||
At March 31, 2013, there were no investment securities owned by the Company for which the fair value was less than the carrying value for a period greater than 12 months.
87
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(6) Investment Securities (Continued)
Available-for-sale securities by contractual maturity were as follows:
| |
March 31, 2013 |
|||
|---|---|---|---|---|
Due in one year or less |
$ | 29,452 | ||
Due after 1 year through 5 years |
7,426 | |||
Due after 5 years |
893 | |||
Total |
$ | 37,771 | ||
The Company previously invested in auction-rate securities whose underlying assets are generally student loans which are substantially backed by the U.S. federal government. At March 31, 2013 the company had $900 remaining in auction rate securities. In April 2013, the Company redeemed $600 in auction rate securities leaving $300 remaining.
During the fiscal year ended March 31, 2013, the Company did not have any net realized gains or losses on investments. During the fiscal year ended March 31, 2012, the Company recorded net realized gains on investments of $29 on sales of marketable securities.
(7) Fair Value of Financial Instruments
The Company uses a framework for measuring fair value under U.S. generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The Company's financial assets and liabilities reflected in the consolidated financial statements at carrying value include marketable securities and other financial instruments which approximate fair value. Fair value for marketable securities is determined using a market approach based on quoted market prices at period end in active markets. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
An entity is allowed to elect to record financial assets and financial liabilities at fair value upon their initial recognition on a contract-by-contract basis.
88
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(7) Fair Value of Financial Instruments (Continued)
The following table summarizes the Company's financial assets and liabilities measured at fair value on a recurring basis at March 31, 2013:
| |
Level 1 | Level 2 | Level 3 | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets: |
|||||||||||||
Investments: |
|||||||||||||
Available-for-sales securities—current |
$ | — | $ | 29,452 | $ | — | $ | 29,452 | |||||
Available-for-sales securities—non-current |
— | 7,426 | 893 | 8,319 | |||||||||
Foreign currency derivative contracts |
— | 1,299 | — | 1,299 | |||||||||
Total assets |
$ | — | $ | 38,177 | $ | 893 | $ | 39,070 | |||||
Liabilities: |
|||||||||||||
Foreign currency derivative contracts |
$ | — | $ | 3,088 | $ | — | $ | 3,088 | |||||
Total liabilities |
$ | — | $ | 3,088 | $ | — | $ | 3,088 | |||||
The Company's investments in auction-rate securities are classified within Level 3 because there are currently no active markets or observable market prices. Therefore, the auction-rate securities were valued primarily based on an income approach using an estimate of future cash flows. The Company has estimated the fair value using a discounted cash flow analysis which considered the following key inputs:
Level 3 assets as listed in the table above include auction-rate securities whose underlying assets are generally student loans which are substantially backed by the U.S. federal government.
The following table provides a summary of changes in fair value of the Company's Level 3 financial assets at March 31, 2013:
| |
Level 3 Assets |
|||
|---|---|---|---|---|
Balance at April 1, 2012 |
$ | 880 | ||
Total unrealized gains: |
||||
Included in accumulated other comprehensive income |
13 | |||
Balance at March 31, 2013 |
$ | 893 | ||
89
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(8) Property and Equipment
Property and equipment and their estimated useful lives in years consist of the following:
| |
|
March 31, | |||||||
|---|---|---|---|---|---|---|---|---|---|
| |
Estimated Useful Life (Years) |
||||||||
| |
2013 | 2012 | |||||||
Computer and other equipment |
3 - 5 | $ | 23,475 | $ | 20,293 | ||||
Furniture and fixtures |
7 | 8,212 | 6,144 | ||||||
Vehicles |
4 | 714 | 558 | ||||||
Software |
3 - 6 | 11,921 | 8,365 | ||||||
Leasehold improvements |
Lesser of estimated useful life or lease term | 3,840 | 3,595 | ||||||
Buildings |
15 - 30 | 12,705 | 12,848 | ||||||
Land |
366 | 389 | |||||||
Capital work-in-progress |
2,160 | 4,454 | |||||||
|
63,393 | 56,646 | |||||||
Less—accumulated depreciation and amortization |
26,618 | 23,803 | |||||||
Property and equipment, net |
$ | 36,775 | $ | 32,843 | |||||
Depreciation and amortization expense for the fiscal years ended March 31, 2013, 2012 and 2011 was $6,484, $5,586 and $5,367, respectively. Capital work-in-progress represents advances paid towards the acquisition of property and equipment, and the cost of property and equipment including internally developed software not put to use before the balance sheet date. The cost and accumulated amortization of assets under capital leases at March 31, 2013 were $37 and $6, respectively. The cost and accumulated amortization of assets under capital leases at March 31, 2012 were $3,132 and $1,061 respectively.
(9) Accrued Expenses and Other
Accrued expenses and other consists of the following:
| |
March 31, 2013 |
March 31, 2012 |
|||||
|---|---|---|---|---|---|---|---|
Accrued other taxes |
$ | 2,714 | $ | 2,528 | |||
Accrued professional fees |
6,110 | 4,041 | |||||
Acquisition related liabilities |
— | 2,775 | |||||
Capital lease liability, short term |
8 | 1,017 | |||||
Hedge liability |
2,419 | 5,418 | |||||
Accrued discounts |
3,558 | 2,328 | |||||
Accrued other |
3,002 | 3,904 | |||||
Total |
$ | 17,811 | $ | 22,011 | |||
90
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(10) Debt
On July 30, 2010, the Company entered into a $3,000 credit agreement with J.P. Morgan Chase Bank, N.A. ("JPMC") which expires on July 31, 2013. The primary purpose of this credit agreement is to support the Company's foreign currency hedging programs. The agreement contains financial and reporting covenants and limitations. The Company is currently in compliance with all covenants contained in its credit facility and believes that the credit facility provides sufficient flexibility so that it will remain in compliance with its terms. Advances under this credit facility accrue interest at an annual rate equal to LIBOR plus 2.5% or Prime Rate plus 2.5%, at the option of the Company. In connection with the execution of this credit facility, the Company terminated its prior $3,000 amended and restated line of credit agreement. At March 31, 2013 and 2012, there were no outstanding borrowings under this credit facility.
Beginning in fiscal 2009, the Company's U.K. subsidiary entered into an agreement with an unrelated financial institution to sell, without recourse or continuing involvement, certain of its European-based accounts receivable balances from one client to such third party financial institution. During the course of the fiscal year ended March 31, 2013, $9,823 of receivables was sold under the terms of the financing agreement. Fees paid pursuant to this agreement were immaterial during the fiscal year ended March 31, 2013. No amounts were due as of March 31, 2013, but the Company may elect to utilize this program again in future periods. However, the Company cannot provide any assurances that this or any other financing facilities will be available or utilized in the future. The Company has no letter of credit outstanding at March 31, 2013 or 2012.
(11) Treasury Stock
In May 2012, the Company's board of directors authorized a share repurchase program of up to $15,000 of the Company's common stock over 12 months from the approval date, subject to certain price and other trading restrictions as established by the Company. During the fiscal year ended March 31, 2013, the Company purchased 97,315 shares of its common stock for an aggregate purchase price of approximately $1,406 (excluding commissions), representing an average purchase price per share of $14.45. Repurchased shares have been recorded as treasury shares and will be held until the Company's board of directors designates that these shares be retired or used for other purposes. (See "Part II—Item 5—Market for Our Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.") As of October 15, 2012, the Company's board of directors suspended the share repurchase program and the program has now expired.
(12) Stock Options, Restricted Stock Awards and Stock Appreciation Rights
The Company's Amended and Restated 2000 Stock Option Plan (the "2000 Plan"), was adopted in the fiscal year ended March 31, 2001. Under the 2000 Plan, shares were reserved for issuance to the Company's employees, directors, and consultants. The 2000 Plan was amended over the years to reduce the number of shares reserved for issuance to a total of 262,770 as of March 31, 2013. Options granted under the 2000 Plan may be incentive stock options, nonqualified stock options or restricted stock. Incentive stock options may only be granted to employees. Options granted have a term of ten years and generally vest over four years. The Company settles employee stock option exercises with newly issued shares. The compensation committee of the board of directors determines (upon board of director approval) the term of awards on an individual case basis. The exercise price of incentive stock options shall be no less than 100% of the fair market value per share of the Company's common stock on the grant date.
91
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(12) Stock Options, Restricted Stock Awards and Stock Appreciation Rights (Continued)
If an individual owns stock representing more than 10% of the outstanding shares, the price of each share shall be at least 110% of fair market value.
In July 2005, the Company adopted the Virtusa Corporation 2005 Stock Appreciation Rights Plan (the "SAR Plan"). Under the SAR Plan, the Company may grant up to 479,233 SARs to employees and consultants of Virtusa and its foreign subsidiaries, and settles the SARs in cash or common stock, as set forth in the SAR Plan. Prior to the Company's IPO, the SARs could only be settled in cash. After the Company's IPO, the cash settlement feature of the SARs ceased and exercises may only be settled in shares of the Company's common stock. In May 2007, the Company's board of directors determined that no further grants would be made under the SAR Plan.
The Company's board of directors and its stockholders approved the Company's 2007 Stock Option and Incentive Plan (the "2007 Plan"), in May 2007, and the stockholders of the Company again approved the 2007 Plan in September 2008. The 2007 Plan permits the Company to make grants of incentive stock options, non-qualified stock options, SARs, deferred stock awards, restricted stock awards, unrestricted stock awards, and dividend equivalent rights. The Company reserved 830,670 shares of its common stock for the issuance of awards under the 2007 Plan. The 2007 Plan provides that the number of shares reserved and available for issuance under the plan will be automatically increased each April 1, beginning in 2008, by 2.9% of the outstanding number of shares of common stock on the immediately preceding March 31 or such lower number of shares of common stock as determined by the board of directors. This number is subject to adjustment in the event of a stock split, stock dividend or other change in the Company's capitalization. Generally, shares that are forfeited, canceled or withheld to settle tax liabilities from awards under the 2007 Plan also will be available for future awards. In addition, available shares under the 2000 Plan and the SAR Plan, as a result of the forfeiture, expiration, cancellation, termination or net issuances of awards, are automatically made available for issuance under the 2007 Plan. At March 31, 2013, the number of shares reserved for issuance under the 2007 Plan is 2,526,929. In May 2007, the Company's board of directors determined that no further grants would be made under the 2000 Plan or the SAR Plan.
The Company has 70,333 stock options outstanding at a weighted average exercise price of $6.89 and a weighted average contractual term of 1.48 years under equity compensation plans not approved by security
92
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(12) Stock Options, Restricted Stock Awards and Stock Appreciation Rights (Continued)
holders. The following tables summarize stock option and restricted stock activity under the 2000 Plan and the 2007 Plan for the fiscal years ended March 31, 2013, 2012 and 2011:
| |
Number of Options to Purchase Common Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Life (in years) |
Aggregate Intrinsic Value |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at March 31, 2010 |
2,487,321 | $ | 7.48 | ||||||||||
Granted |
110,408 | 12.12 | |||||||||||
Exercised |
(795,189 | ) | 5.86 | ||||||||||
Forfeited or cancelled |
(139,827 | ) | 10.15 | ||||||||||
Outstanding at March 31, 2011 |
1,662,713 | 8.34 | |||||||||||
Granted |
287,150 | 15.93 | |||||||||||
Exercised |
(295,253 | ) | 6.73 | ||||||||||
Forfeited or cancelled |
(67,286 | ) | 9.18 | ||||||||||
Outstanding at March 31, 2012 |
1,587,324 | 9.97 | |||||||||||
Granted |
93,153 | 15.61 | |||||||||||
Exercised |
(267,575 | ) | 8.22 | ||||||||||
Forfeited or cancelled |
(43,560 | ) | 14.28 | ||||||||||
Outstanding at March 31, 2013 |
1,369,342 | 10.56 | 5.78 | $ | 18,703 | ||||||||
Exercisable at March 31, 2013 |
1,014,149 | $ | 9.03 | 4.78 | $ | 14,943 | |||||||
| |
Restricted Stock Award Activity | ||||||
|---|---|---|---|---|---|---|---|
| |
Number of Restricted Stock Awards |
Weighted Average Grant date Fair Value |
|||||
Unvested at March 31, 2010 |
408,889 | $ | 7.56 | ||||
Awarded |
282,079 | 10.01 | |||||
Vested |
(115,243 | ) | 8.56 | ||||
Forfeited |
(79,965 | ) | 8.10 | ||||
Unvested at March 31, 2011 |
495,760 | 8.63 | |||||
Awarded |
652,826 | 18.75 | |||||
Vested |
(222,017 | ) | 10.59 | ||||
Forfeited |
(94,913 | ) | 14.02 | ||||
Unvested at March 31, 2012 |
831,656 | 15.43 | |||||
Awarded |
465,733 | 15.04 | |||||
Vested |
(284,833 | ) | 14.27 | ||||
Forfeited |
(43,157 | ) | 16.34 | ||||
Unvested at March 31, 2013 |
969,399 | $ | 15.55 | ||||
93
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(12) Stock Options, Restricted Stock Awards and Stock Appreciation Rights (Continued)
| |
Restricted Stock Unit Activity | ||||||
|---|---|---|---|---|---|---|---|
| |
Number of Restricted Stock Units |
Weighted Average Grant Date Fair Value |
|||||
Unvested at March 31, 2011 |
— | $ | — | ||||
Awarded |
49,416 | 16.59 | |||||
Vested |
— | — | |||||
Forfeited |
— | — | |||||
Unvested at March 31, 2012 |
49,416 | 16.59 | |||||
Awarded |
— | — | |||||
Vested |
(12,354 | ) | 16.59 | ||||
Forfeited |
— | — | |||||
Unvested at March 31, 2013 |
37,062 | $ | 16.59 | ||||
Shares available for future grant under the 2000 Plan and 2007 Plan at March 31, 2013 were 1,383,295.
The aggregate intrinsic value of options exercised during the fiscal years ended March 31, 2013, 2012 and 2011 was $2,873, $3,447 and $6,191, respectively. The weighted average fair value of options granted during the fiscal year ended March 31, 2013, 2012 and 2011 was $8.96, $9.27 and $7.09, respectively. During the fiscal year ended March 31, 2013, the Company realized $759 of income tax benefit from the exercise of stock options as a windfall credit.
The tables below summarize information about the SAR Plan activity for the fiscal years ended March 31, 2013, 2012 and 2011 as follows:
| |
SAR Plan Activity | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Number of SARs |
Weighted Average Exercise Price |
Weighted Average Remaining Life (in years) |
Aggregate Intrinsic Value |
|||||||||
Outstanding at March 31, 2010 |
81,208 | 3.98 | |||||||||||
Granted |
— | — | |||||||||||
Exercised |
(26,378 | ) | 3.76 | ||||||||||
Forfeited or cancelled |
(6,469 | ) | 3.18 | ||||||||||
Outstanding at March 31, 2011 |
48,361 | 4.21 | |||||||||||
Granted |
— | — | |||||||||||
Exercised |
(14,689 | ) | 4.10 | ||||||||||
Forfeited or cancelled |
(2,526 | ) | 2.91 | ||||||||||
Outstanding at March 31, 2012 |
31,146 | 4.36 | |||||||||||
Granted |
— | — | |||||||||||
Exercised |
(8,378 | ) | 3.72 | ||||||||||
Forfeited or cancelled |
(399 | ) | 4.84 | ||||||||||
Outstanding and exercisable at March 31, 2013 |
22,369 | $ | 4.60 | 1.85 | $ | 429 | |||||||
The aggregate intrinsic value of SARs exercised during the fiscal years ended March 31, 2013. 2012 and 2011 was $113, $189 and $238, respectively.
94
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(12) Stock Options, Restricted Stock Awards and Stock Appreciation Rights (Continued)
There were no SARs available for future grant at March 31, 2013. There were no SARs granted during the fiscal years ended March 31, 2013, 2012 or 2011.
(13) Income Taxes
The income (loss) before income tax expense (benefit) shown below is based on the geographic location to which such income (loss) is attributed for each of the fiscal years ended March 31, 2013, 2012 and 2011:
| |
Year Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
United States |
$ | 7,471 | $ | 676 | $ | (5,130 | ) | |||
Foreign |
28,388 | 25,770 | 23,357 | |||||||
Total |
$ | 35,859 | $ | 26,446 | $ | 18,227 | ||||
The provision for income taxes for each of the fiscal years ended March 31, 2013, 2012 and 2011 consisted of the following:
| |
Year Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
Current provision: |
||||||||||
Federal |
$ | 3,390 | $ | 7,629 | $ | (64 | ) | |||
State |
1,002 | 607 | 149 | |||||||
Foreign |
4,905 | 4,730 | 2,930 | |||||||
Total current provision |
$ | 9,297 | $ | 12,966 | $ | 3,015 | ||||
Deferred (benefit) provision: |
||||||||||
Federal |
$ | (468 | ) | $ | (6,042 | ) | $ | (887 | ) | |
State |
(146 | ) | (194 | ) | (134 | ) | ||||
Foreign |
(1,222 | ) | (319 | ) | 33 | |||||
Total deferred (benefit) provision |
$ | (1,836 | ) | $ | (6,555 | ) | $ | (988 | ) | |
Total provision for income taxes |
$ | 7,461 | $ | 6,411 | $ | 2,027 | ||||
The items which gave rise to differences between the income taxes in the statements of income and the income taxes computed at the U.S. statutory rate are summarized as follows:
| |
Year Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
Statutory tax rate |
34.0 | % | 34.0 | % | 34.0 | % | ||||
U.S. state and local taxes, net of U.S federal income tax effects |
1.6 | 1.0 | (0.4 | ) | ||||||
Benefit from foreign subsidiaries' tax holidays |
(15.7 | ) | (19.2 | ) | (25.1 | ) | ||||
Foreign rate difference |
0.1 | 0.9 | — | |||||||
Permanent items |
2.4 | 3.8 | 2.0 | |||||||
Other adjustments |
(1.6 | ) | 3.7 | 0.6 | ||||||
Effective income tax rate |
20.8 | % | 24.2 | % | 11.1 | % | ||||
95
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(13) Income Taxes (Continued)
Deferred tax assets (liabilities) at March 31, 2013 and 2012 were as follows:
| |
March 31, | ||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
Deferred revenue |
$ | 261 | $ | 131 | |||
Bad debt reserve |
83 | 151 | |||||
Tax credit carry forwards |
5,003 | 3,830 | |||||
Accrued expenses and reserves |
8,187 | 7,238 | |||||
Share-based compensation expense |
3,214 | 2,905 | |||||
Intangibles |
2,232 | 1,887 | |||||
Unrealized losses |
781 | 2,286 | |||||
Total deferred tax assets |
$ | 19,761 | $ | 18,428 | |||
Depreciation |
(766 | ) | (482 | ) | |||
Goodwill |
(2,046 | ) | (1,128 | ) | |||
Total deferred tax liabilities |
(2,812 | ) | (1,610 | ) | |||
Net deferred tax assets/liabilities |
$ | 16,949 | $ | 16,818 | |||
At March 31, 2013 and 2012, all deferred tax liabilities are netted with the deferred tax assets by tax jurisdiction.
The Company has revised the March 31, 2012 comparative consolidated balance sheet, consolidated statement of cash flows and the income tax footnote for adjustments of errors that are considered immaterial. The adjustments have no effect on the consolidated statements of income, comprehensive income and changes in stockholders' equity for the fiscal year ended March 31, 2012. Current deferred tax assets as at March 31, 2012 were increased by $4.8 million, prepaid expenses were increased by $1.2 million and income tax payable was increased by $1.4 million. Other long term assets were reduced by $4.6 million.
The ultimate realization of deferred tax assets is dependent upon management's assessment of the Company's ability to generate sufficient taxable income to realize the deferred tax assets during the periods in which the temporary differences become deductible. Management considers the historical level of taxable income, projections for future taxable income, and tax planning strategies in making this assessment. At March 31, 2013, the Company has $375 of US foreign tax credits which begin to expire in March 2022 and $4,628 of Indian Minimum Alternative Tax ("MAT") credits which begin to expire at various dates through 2023. The Company has determined that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets.
During the fiscal year ended March 31, 2013, the Company recorded $1,718 of net income tax benefit directly in other comprehensive income related to the unrealized gain/loss on available for sale securities, the unrealized gain/loss on effective cash flow hedges and the foreign currency loss on certain long term intercompany balances. During the fiscal year ended March 31, 2013, the Company recognized $759 of net income tax benefit directly in additional paid in capital related to net excess tax benefits of share-based compensation. The Company's Indian subsidiaries are export-oriented companies under the Indian Income Tax Act of 1961 and are entitled to claim tax exemption for a period of ten consecutive years for export profits related to each Software Technology Park ("STP"), which they operate. The Indian subsidiaries currently operate two STPs, one in Chennai and one in Hyderabad. The STP holiday for the Hyderabad unit expired on March 31, 2010 and the STP tax holiday for the Chennai unit expired on
96
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(13) Income Taxes (Continued)
March 31, 2011. The taxable profit is taxed at the full statutory rate, currently at 32.45%. Further, the Company created a new unit in Bangalore (Export Oriented Unit) during the fiscal year ended March 31, 2011 and in Hyderabad (Special Economic Zone or "SEZ") during the fiscal year ended March 31, 2010 for which no income tax exemptions were availed. The Indian subsidiaries also operate two development centers in areas designated as a SEZ, under the SEZ Act of 2005. In particular, the Company was approved as an SEZ Co-developer and is building a campus on a 6.3 acre parcel of land in Hyderabad, India that has been designated as an SEZ. As an SEZ Co-developer, the Company is entitled to certain tax benefits for any consecutive period of 10 years during the 15 year period starting in fiscal year March 2008. The Company has elected to claim SEZ Co-developer income tax benefits starting in fiscal year ended March 2013. In addition, the Company has leased facilities in an SEZ designated locations in Hyderabad and Chennai, India. The Company's profits from the Hyderabad and Chennai SEZ operations are eligible for certain income tax exemptions for a period of up to 15 years beginning in fiscal March 2009. In fiscal year ended March 2013, the Company leased a facility in an SEZ designated location in Bangalore, India which is eligible for tax holiday for up to 15 years beginning in the fiscal year ended March 2013. Based on the latest changes in tax laws, book profits of SEZ units are subject to MAT, commencing April 1, 2011, which will continue to negatively impact the Company's cash flows.
In addition, the Company's Sri Lankan subsidiary, Virtusa (Private) Limited, is operating under a 12-year income tax holiday arrangement that is set to expire on March 31, 2019 and requires Virtusa (Private) Limited to meet certain job creation and investment criteria by March 31, 2013. During the fiscal year ended March 2013, the Company believes it has fulfilled its hiring and investment commitments and is eligible for tax holiday through March 2019. The current agreement provides income tax exemption for all export business income. As of March 31, 2013, we believe we met the job creation target. We have submitted the required support to the Board of Investment and are awaiting confirmation. At March 31, 2013, we believe the Company is eligible for the entire 12-year tax holiday.
The effect of the India and Sri Lanka income tax holidays was to reduce the overall tax provision and increase both net income and diluted net income per share in the fiscal years ended March 31, 2013, 2012 and 2011 by $5,647, $5,064 and $4,565, respectively, and by $0.22, $0.20 and $0.18, respectively. The India STP tax holiday, which expired on March 31, 2011 for the Chennai STP, and expired on March 31, 2010 for the Hyderabad STP, increased net income and diluted net income per share in the fiscal years ended March 31, 2011 and 2010 by $954 and $1,564 and by $0.04 and $0.07 respectively.
The Company intends to indefinitely reinvest all of its accumulated and future foreign earnings outside the United States. At March 31, 2013, the Company had $129 million of unremitted earnings from foreign subsidiaries and approximately $53 million of cash and short-term investments that would otherwise be available for potential distribution, if not indefinitely reinvested. Due to the various methods by which such earnings could be repatriated in the future, the amount of taxes attributable to the undistributed earnings are dependent on circumstances existing if and when remittance occurs and is not practically determinable.
97
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(13) Income Taxes (Continued)
Due to the geographical scope of the Company's operations, the Company is subject to tax examinations in various jurisdictions. The Company's ongoing assessments of the more-likely-than-not outcomes of these examinations and related tax positions require judgment and can increase or decrease the Company's effective tax rate, as well as impact the Company's operating results. The specific timing of when the resolution of each tax position will be reached is uncertain. The Company does not believe that the outcome of any ongoing examination will have a material effect on its consolidated financial statements within the next twelve months. The Company's major taxing jurisdictions include the United States, the United Kingdom, India and Sri Lanka. In the United States, the Company remains subject to examination for all tax years ended after March 31, 2011. In the foreign jurisdictions, the Company generally remains subject to examination for tax years ended after March 31, 2005.
Each fiscal year, unrecognized tax benefits may be adjusted upon the closing of the statute of limitations for income tax returns filed in various jurisdictions. The total amount of unrecognized tax benefits that would reduce income tax expense and the effective income tax rate, if recognized, is $512, $1,179 and $293 as of March 31, 2013, 2012 and 2011, respectively. Although, it would be difficult to anticipate the final outcome on timing of resolution of any particular uncertain tax position, the Company anticipates $4,364 of unrecognized tax benefits will reverse during the twelve month period ending March 31, 2014 due to settlement or expiration of statute of limitations on open tax years. Not all of these benefits are expected to have an impact on the effective tax rate as they are realized.
The following summarizes the activity related to the gross unrecognized tax benefits:
| |
Year Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
Balance as of beginning of the fiscal year |
$ | 5,957 | $ | 293 | $ | 1,015 | ||||
Foreign currency translation related to prior year tax positions |
— | 7 | 43 | |||||||
Decreases related to prior year tax positions |
(499 | ) | — | (827 | ) | |||||
Decreases related to prior year tax positions due to settlements or lapse in applicable statute of limitations |
(947 | ) | — | (66 | ) | |||||
Increases related to prior year tax positions |
312 | 5,657 | 128 | |||||||
Balance at end of the fiscal year |
$ | 4,823 | $ | 5,957 | $ | 293 | ||||
The Company continues to classify accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the fiscal year ended March 31, 2013 and March 2012, the Company expensed accrued interest and penalties of $145 and $711 respectively through income tax expense consistent with its prior positions, to reflect interest and penalties on certain unrecognized tax benefits as part of income tax. The amount of interest and penalties expensed in fiscal year 2011 was not material. The total accrued interest and penalties, including foreign currency translation relating to certain foreign and domestic tax matters at March 31, 2013 and March 31, 2012 were $341 and $817, respectively.
The Company has been under income tax examination in India. The Indian taxing authorities issued an assessment order with respect to their examination of the tax returns for the fiscal years ended March 31, 2004 to March 31, 2008 of the Company's Indian subsidiary, Virtusa (India) Private Ltd., or Virtusa India. At issue were several matters, the most significant of which was the redetermination of the arm's-length profit which should be recorded by Virtusa India on the intercompany transactions with its
98
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(13) Income Taxes (Continued)
affiliates. During the fiscal year ended March 31, 2011, the Company entered into a competent authority settlement and settled the uncertain tax position for the fiscal years ended March 31, 2004 and 2005. However, the redetermination of arm's-length profit on transactions with respect to the Company's subsidiaries and Virtusa UK Limited has not been resolved and remains under appeal for the fiscal year ended March 31, 2005. The Company is currently appealing assessments for fiscal years ended March 31, 2006 through 2008.
(14) Post-retirement Benefits
The Company has noncontributory defined benefit plans (the "Benefit Plans") covering its employees in India and Sri Lanka as mandated by the Indian and Sri Lankan governments. Benefits are based on the employee's years of service and compensation at the time of termination. The Company uses March 31 as the measurement date for its plans.
Cost of pension plans
| |
Year Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
Components of net periodic pension expense |
||||||||||
Expected return on plan assets |
$ | (188 | ) | $ | (210 | ) | $ | (147 | ) | |
Service costs for benefits earned |
452 | 502 | 363 | |||||||
Interest cost on projected benefit obligation |
179 | 176 | 124 | |||||||
Amortization of prior service cost |
11 | — | — | |||||||
Recognized net actuarial loss |
92 | 105 | 52 | |||||||
Net periodic pension expense |
$ | 546 | $ | 573 | $ | 392 | ||||
Actuarial assumptions
| |
Year Ended March 31, | |||||
|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||
Discount rate |
8.00% - 12.25% | 8.50% - 11.00% | 8.00% - 10.50% | |||
Compensation increases (annual) |
7.00% - 7.50% | 7.00% - 7.50% | 7.00% - 7.50% | |||
Expected return on assets |
8.50% - 13.13% | 8.50% - 12.00% | 8.50% - 14.00% | |||
The discount rate is based upon high quality fixed income investments in India and Sri Lanka. The discount rates at March 31, 2013 were used to measure the year-end benefit obligations and the pension cost for the subsequent year.
To determine the expected long-term rate of return on pension plan assets, the Company considers the current and expected asset allocations, as well as historical and expected returns on various categories of plan assets. The Company amortizes unrecognized actuarial gains or losses over a period no longer than the average future service of employees.
The Company's benefit obligations are described in the following tables. Accumulated and projected benefit obligations ("ABO" and "PBO", respectively) represent the obligations of a pension plan for past
99
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(14) Post-retirement Benefits (Continued)
service as of the measurement date. ABO is the present value of benefits earned to date with benefits computed based on current compensation levels. PBO is ABO increased to reflect expected future compensation.
Accumulated benefit obligation and projected benefit obligation
| |
March 31, | ||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
Accumulated benefit obligation |
$ | 1,664 | $ | 1,404 | |||
Projected benefit obligation: |
|||||||
Balance at April 1, 2012 |
$ | 2,182 | $ | 2,178 | |||
Service cost |
452 | 502 | |||||
Interest cost |
179 | 176 | |||||
Actuarial (gain) loss |
216 | 70 | |||||
Benefits paid |
(405 | ) | (427 | ) | |||
Exchange rate adjustments |
(44 | ) | (317 | ) | |||
Balance at March 31, 2013 |
$ | 2,580 | $ | 2,182 | |||
Fair value of plan assets
| |
March 31, 2013 |
|||
|---|---|---|---|---|
Balance at April 1, 2012 |
$ | 2,010 | ||
Employer contributions |
378 | |||
Actual gain on plan assets |
229 | |||
Benefits paid |
(405 | ) | ||
Exchange rate adjustments |
(42 | ) | ||
Balance at March 31, 2013 |
$ | 2,170 | ||
The net projected benefit obligation is recorded in the consolidated balance sheets as "accrued employee compensation and benefits" at March 31, 2013 and March 31, 2012.
Plan asset allocation
| |
March 31, 2013 | ||||||
|---|---|---|---|---|---|---|---|
| |
Target Allocation |
Actual Allocation |
|||||
Government securities |
40 - 50 | % | 48 | % | |||
Corporate debt |
30 - 40 | % | 38 | % | |||
Other |
1 - 20 | % | 14 | % | |||
The Company's plan assets are being managed by insurance companies in India and Sri Lanka.
100
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(14) Post-retirement Benefits (Continued)
Plan Assets
The following table presents the fair values of the Company's pension plan assets.
| |
Fair Value Measurements | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
Asset Category
|
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Observable Inputs (Level 2) |
|||||||
At March 31, 2013 |
||||||||||
Government Bonds(1) |
$ | 1,040 | $ | — | $ | 1,040 | ||||
Corporate Bonds(2) |
835 | — | 835 | |||||||
Equity Shares and Others(3) |
295 | 139 | 156 | |||||||
|
$ | 2,170 | $ | 139 | $ | 2,031 | ||||
At March 31, 2012 |
||||||||||
Government Bonds(1) |
$ | 1,341 | $ | — | $ | 1,341 | ||||
Corporate Bonds(2) |
562 | — | 562 | |||||||
Equity Shares and Others(3) |
107 | 38 | 69 | |||||||
|
$ | 2,010 | $ | 38 | $ | 1,972 | ||||
The fair values of the government bonds are measured based on market quotes. Corporate bonds and other bonds are valued based on market quotes as of the balance sheet date. Equity share funds are valued at their market prices as of the balance sheet date. Money market funds are valued at their market price.
The Company's pension plan assets invested in India are guaranteed a minimum return of 6% per annum by the insurance company managing the Company's plan assets.
Pension liability
| |
March 31, | ||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
PBO |
$ | 2,580 | $ | 2,182 | |||
Fair value of plan assets |
2,170 | 2,010 | |||||
Funded status recognized |
$ | 410 | $ | 172 | |||
Amount recorded in accumulated other comprehensive income |
$ | 780 | $ | 702 | |||
101
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(14) Post-retirement Benefits (Continued)
The amount in accumulated other comprehensive income (loss) that is expected to be recognized as a component of net periodic benefit cost over the fiscal year ended March 31, 2014 is $100. The Company expects to contribute $411 to its gratuity plans during the fiscal year ending March 31, 2014.
The pretax amounts of prior service cost recognized in accumulated other comprehensive income consists of:
| |
March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
Prior service cost (credit) |
$ | (10 | ) | $ | — | $ | 101 | |||
Net amortization gain (loss) |
82 | — | — | |||||||
Total |
$ | 72 | $ | — | $ | 101 | ||||
Estimated future benefits payments
Fiscal year ending March 31:
|
|
|||
|---|---|---|---|---|
2014 |
$ | 505 | ||
2015 |
478 | |||
2016 |
569 | |||
2017 |
651 | |||
2018 |
741 | |||
2019 - 2022 |
$ | 4,908 | ||
(15) 401(k) Plan
The Company sponsors a defined contribution retirement savings plan, qualified under Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). Eligible employees may defer a portion of their compensation into the Company's 401(k) Plan on a pre-tax and/or Roth basis. The Company's 401(k) Plan currently offers a safe harbor match feature that provides Company matching contributions for certain employee contributions. For the fiscal periods ended March 31, 2013 and 2012, the Company recorded $627 and $614 for the employer match, respectively. The Company's 401(k) Plan may be amended at the direction of the Company's Board of Directors to discontinue the safe harbor match program at any time.
Effective January 1, 2011, the Company's subsidiary, InSource, froze its 401(k) Plan and all eligible employees can now participate in the Company's 401(k) Plan.
102
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(16) Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows:
| |
March 31, | ||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
Foreign currency translation adjustment |
$ | (16,846 | ) | $ | (13,037 | ) | |
Net unrealized gains (losses) on available-for-sale investments, net of taxes |
(3 | ) | (8 | ) | |||
Transfer pricing mark to market |
(72 | ) | (72 | ) | |||
Unrealized losses on cash flow hedges, net of taxes |
(1,013 | ) | (4,524 | ) | |||
Pension plan adjustment |
(780 | ) | (702 | ) | |||
Accumulated other comprehensive loss |
$ | (18,714 | ) | $ | (18,343 | ) | |
(17) Commitments, Contingencies and Guarantees
The Company leases office space under operating leases, which expire at various dates through the year 2022. Certain leases contain renewal provisions and generally require the Company to pay utilities, insurance, taxes, and other operating expenses.
Future minimum lease payments under non-cancelable leases for the five fiscal years following March 31, 2013 and thereafter are:
| |
Operating Leases |
Capital Lease |
|||||
|---|---|---|---|---|---|---|---|
Fiscal year ending March 31: |
|||||||
2014 |
4,876 | 13 | |||||
2015 |
4,740 | 13 | |||||
2016 |
4,854 | 11 | |||||
2017 |
4,553 | 4 | |||||
2018 |
2,637 | — | |||||
2019 and thereafter |
1,549 | — | |||||
Total minimum lease payments |
$ | 23,209 | $ | 41 | |||
Less: amount representing interest |
9 | ||||||
Present value of future lease payments |
$ | 32 | |||||
Less: current portion |
8 | ||||||
Long term capital lease obligation |
$ | 24 | |||||
Total rental expense for operating leases was approximately $5,367, $5,323 and $4,798 for the fiscal years ended March 31, 2013, 2012 and 2011, respectively. Total amortization expenses for the assets purchased under capital leases were $6 for the fiscal year ended March 31, 2013. Amortization expenses for assets purchased under capital leases for the fiscal years ended March 31, 2012, 2011 were $483 and $517, respectively.
103
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(17) Commitments, Contingencies and Guarantees (Continued)
The Company has deposits under lien of $49 against a bank guarantee issued by a bank in favor of Andhra Pradesh Industrial Infrastructure Corporation Limited which would be forfeited if the Company fails to meet certain hiring criteria with established timelines at its Hyderabad facility. This bank guarantee matured in March 2013 and subsequently renewed in April 2013.
The Company indemnifies its officers and directors for certain events or occurrences under its charter or by-laws and under indemnification agreements while the officer or director is, or was, serving at its request in a defined capacity. The term of the indemnification period is with respect to the period that such person was an officer or director of the Company. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is unlimited. The costs incurred to defend lawsuits or settle claims related to these indemnification obligations have not been material. As a result, the Company believes that its estimated exposure on these obligations is minimal. Accordingly, the Company had no liabilities recorded for these obligations as of March 31, 2013.
The Company is insured against any actual or alleged act, error, omission, neglect, misstatement or misleading statement or breach of duty by any current or former officer, director or employee while rendering information technology services. The Company believes that its financial exposure from such actual or alleged actions, should they arise, is minimal and no liability was recorded at March 31, 2013.
The Company is not a party to any pending litigation or other legal proceedings that are likely to have a material adverse effect on its consolidated financial statements.
(18) Derivative Financial Instruments and Trading Activities
The Company evaluates its foreign exchange policy on an ongoing basis to assess its ability to address foreign exchange exposures on its consolidated balance sheets, statements of income and consolidated statement of cash flows from all foreign currencies, including most significantly the U.K. pound sterling, Indian rupee and Sri Lankan rupee. The Company enters into hedging programs with highly rated financial institutions in accordance with its foreign exchange policy (as approved by the Company's audit committee and board of directors) which permits hedging of material, known foreign currency exposures. Currently, the Company maintains three hedging programs, each with varying contract types, duration and purposes. The Company's "Cash Flow Program" is designed to mitigate the impact of volatility in the U.S. dollar equivalent of the Company's Indian rupee denominated expenses over a rolling 36-month period. The Cash Flow Program transactions currently meet the criteria for hedge accounting as cash flow hedges. The Company's "Balance Sheet Program" involves the use of 30-day derivative instruments designed to mitigate the monthly impact of foreign exchange gains/losses on certain intercompany balances and payments. The Company's "U.K. Revenue and Cost Program" involves the purchase of derivative instruments with maturities of up to 92 days, and is designed to mitigate the impact of foreign exchange on U.K. pound sterling denominated revenue and costs with respect to the quarter for which such instruments are purchased. The Balance Sheet Program and the U.K. Revenue and Cost Program are treated as economic hedges as these programs do not meet the criteria for hedge accounting and all gains and losses are recognized in Consolidated Statement of Income under the same line item as the underlying exposure being hedged.
Changes in fair value of the designated cash flow hedges for our Cash Flow Program are recorded as a component of accumulated other comprehensive income (loss) ("AOCI"), net of tax until the forecasted hedged transactions occur and are then recognized in the consolidated statement of income in the same
104
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(18) Derivative Financial Instruments and Trading Activities (Continued)
line item as the item being hedged. The Company evaluates hedge effectiveness at the time a contract is entered into, as well as on an ongoing basis. If and when hedge relationships are discontinued, and should the forecasted transaction be deemed probable of not occurring by the end of the originally specified period or within an additional two-month period of time thereafter, any related derivative amounts recorded in equity are reclassified to earnings in other income (expense). There were no amounts reclassified to earnings as a result of hedge ineffectiveness for the fiscal years ended March 31, 2013 or 2012.
Changes in the fair value of the hedges for the Balance Sheet Program and the U.K. Revenue and Cost Program, if any, are recognized in the same line item as the underlying exposure being hedged and the ineffective portion of cash flow hedges, if any, is recognized as other income (expense). The Company values its derivatives based on market observable inputs including both forward and spot prices for currencies. Any significant change in the forward or spot prices for hedged currencies would have a significant impact on the value of the Company's derivatives.
The U.S. dollar equivalent market value, which consists of the notional value and net unrealized gain or loss, of all outstanding foreign currency derivative contracts was $96,630 and $95,950 at March 31, 2013 and March 31, 2012, respectively. Unrealized net losses related to these contracts which are expected to be reclassified from AOCI to earnings during the next 12 months are $1,258 at March 31, 2013. At March 31, 2013, the maximum outstanding term of any derivative instrument was 33 months.
The following tables set forth the fair value of derivative instruments included in the consolidated balance sheets at March 31, 2013 and March 31, 2012:
Derivatives designated as hedging instruments
| |
March 31, 2013 | March 31, 2012 | |||||
|---|---|---|---|---|---|---|---|
Foreign currency exchange contracts: |
|||||||
Other current assets |
$ | 884 | $ | 101 | |||
Other long-term assets |
$ | 415 | $ | 330 | |||
Accrued expenses and others |
$ | 2,142 | $ | 5,418 | |||
Long-term liabilities |
$ | 946 | $ | 1,819 | |||
The following tables set forth the effect of the Company's foreign currency exchange contracts on the consolidated financial statements of the Company for the fiscal years ended March 31, 2013 and 2012:
| |
Amount of Gain or (Loss) Recognized in AOCI on Derivatives (Effective Portion) |
||||||
|---|---|---|---|---|---|---|---|
Derivatives Designated as Cash Flow Hedging Relationships |
March 31, 2013 | March 31, 2012 | |||||
Foreign currency exchange contracts |
$ | (2,164 | ) | $ | (9,341 | ) | |
| |
Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion) |
||||||
|---|---|---|---|---|---|---|---|
Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion) |
March 31, 2013 | March 31, 2012 | |||||
Costs of revenue |
$ | (4,608 | ) | $ | (920 | ) | |
Operating expenses |
$ | (2,573 | ) | $ | (501 | ) | |
105
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(18) Derivative Financial Instruments and Trading Activities (Continued)
| |
|
Amount of Gain or (Loss) Recognized in Income on Derivatives |
|||||||
|---|---|---|---|---|---|---|---|---|---|
Derivatives not Designated as Hedging Instruments |
Location of Gain Or (Loss) Recognized in Income on Derivatives |
March 31, 2013 | March 31, 2012 | ||||||
Foreign currency exchange contracts |
Foreign currency transaction gains (losses) |
$ | (704 | ) | $ | (1,774 | ) | ||
|
Revenue |
$ | 222 | $ | (382 | ) | |||
|
Costs of revenue |
$ | (79 | ) | $ | 223 | |||
|
Selling, general and administrative expenses |
$ | (2 | ) | $ | 14 | |||
(19) Business Segment Information
Accounting pronouncements establish standards for the manner in which public companies report information about operating segments in annual and interim financial statements. Operating segments are component of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker ("CODM") on deciding on how to allocate resources and in assessing performance. The Company's CODM is considered to be the Company's chief executive officer ("CEO"). The CEO reviews financial information presented on an entity level basis for purposes of making operating decisions and assessing financial performance. Therefore, the Company has determined that it operates in a single operating and reportable segment.
Geographic information:
Total revenue is attributed to geographic areas based on location of the client. Geographic information is summarized as follows:
| |
Year Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||
Customer revenue: |
||||||||||
North America |
$ | 251,219 | $ | 215,723 | $ | 162,528 | ||||
Europe |
65,863 | 49,839 | 45,065 | |||||||
Other |
16,093 | 12,209 | 10,386 | |||||||
Consolidated revenue |
$ | 333,175 | $ | 277,771 | $ | 217,979 | ||||
| |
March 31, | ||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
Long-lived assets, net of accumulated depreciation and amortization: |
|||||||
North America |
$ | 53,228 | $ | 55,742 | |||
Asia |
34,367 | 30,722 | |||||
Europe |
344 | 99 | |||||
Consolidated long-lived assets, net |
$ | 87,939 | $ | 86,563 | |||
106
Virtusa Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(thousands, except share and per share amounts)
(20) Quarterly Results of Operations (unaudited)
| |
Three Months Ended | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
March 31, 2013 |
December 31, 2012 |
September 30, 2012 |
June 30, 2012 |
March 31, 2012 |
December 31, 2011 |
September 30, 2011 |
June 30, 2011 |
|||||||||||||||||
Revenue |
$ | 89,949 | $ | 86,474 | $ | 80,535 | $ | 76,217 | $ | 74,231 | $ | 72,184 | $ | 70,311 | $ | 61,045 | |||||||||
Costs of revenue |
57,672 | 55,698 | 52,902 | 49,594 | 47,786 | 46,271 | 45,395 | 37,982 | |||||||||||||||||
Gross profit |
32,277 | 30,776 | 27,633 | 26,623 | 26,445 | 25,913 | 24,916 | 23,063 | |||||||||||||||||
Operating expenses |
22,858 | 21,634 | 20,204 | 19,754 | 19,378 | 19,335 | 19,449 | 18,276 | |||||||||||||||||
Income from operations |
9,419 | 9,142 | 7,429 | 6,869 | 7,067 | 6,578 | 5,467 | 4,787 | |||||||||||||||||
Other income (expense) |
945 | 574 | 241 | 1,240 | 922 | 780 | 445 | 400 | |||||||||||||||||
Income before income tax expense (benefit) |
10,364 | 9,716 | 7,670 | 8,109 | 7,989 | 7,358 | 5,912 | 5,187 | |||||||||||||||||
Income tax expense (benefit) |
1,272 | 2,312 | 1,907 | 1,970 | 2,191 | 1,764 | 1,224 | 1,232 | |||||||||||||||||
Net income |
$ | 9,092 | $ | 7,404 | $ | 5,763 | $ | 6,139 | $ | 5,798 | $ | 5,594 | $ | 4,688 | $ | 3,955 | |||||||||
Net income per share—Basic |
$ | 0.36 | $ | 0.30 | $ | 0.23 | $ | 0.25 | $ | 0.23 | $ | 0.23 | $ | 0.19 | $ | 0.16 | |||||||||
Net income per share—Diluted |
$ | 0.35 | $ | 0.29 | $ | 0.23 | $ | 0.24 | $ | 0.23 | $ | 0.22 | $ | 0.18 | $ | 0.16 | |||||||||
(21) Subsequent Events
On April 18, 2013, the Company purchased multiple foreign currency forward contracts designed to hedge fluctuation in the U.K. pound sterling against the U.S. dollar. The contracts have an aggregate notional amount of approximately £2,317 (approximately $3,522) and will expire on various dates through June 28, 2013. The weighted average U.K. pound sterling settlement rate associated with these contracts is approximately $1.52.
On April 30, 2013, the Company purchased multiple foreign currency forward contracts designed to hedge fluctuation in the Indian rupee against the U.S. dollar and U.K. pound sterling. The U.S dollar contracts have an aggregate notional amount of approximately 689,331 Indian rupees (approximately $12,022) and have an average settlement rate of 57.61 Indian rupees. The U.K. pound sterling contracts have an aggregate notional amount of approximately 388,335 Indian rupees (approximately £4,354) and have an average settlement rate of 89.40 Indian rupees. These contracts will expire at various dates during the 36 month period ending on March 31, 2016. The Company will be obligated to settle these contracts based upon the Reserve Bank of India published Indian rupee exchange rates. Based on the U.S. dollar to U.K. pound sterling spot rate on April 30, 2013 of $1.5507, the blended weighted average Indian rupee rate associated with both the U.S. dollar and U.K. pound sterling contracts would be approximately 57.40 Indian rupees per U.S. dollar.
107
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(1) Evaluation of Disclosure Controls and Procedures
We have carried out an evaluation, under the supervision and the participation of our management of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Securities Exchange Act), as of March 31, 2013. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of that period, our disclosure controls and procedures are effective in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (b) such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
(2) Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act as a process designed by, or under the supervision of, the issuers principal executive and principal financial officers or other persons performing similar functions and effected by the issuers board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control—Integrated Framework.
108
Based on this assessment, our management has concluded that, as of March 31, 2013, our internal control over financial reporting was effective based on those criteria.
The effectiveness of our internal control over financial reporting as of March 31, 2013 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
(3) Changes in Internal Controls over Financial Reporting
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate annually the effectiveness of our internal controls over financial reporting as of the end of each fiscal year, and to include a management report assessing the effectiveness of our internal control over financial reporting in all annual reports. There were no changes in our internal control over financial reporting during the fiscal year ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
109
Item 10. Directors, Executive Officers and Corporate Governance.
The information required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement is expected to be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company's fiscal year ended March 31, 2013.
Item 11. Executive Compensation.
The information required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement is expected to be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company's fiscal year ended March 31, 2013.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement is expected to be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company's fiscal year ended March 31, 2013.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement is expected to be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company's fiscal year ended March 31, 2013.
Item 14. Principal Accountant Fees and Services.
The information required under this item is incorporated herein by reference to the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement is expected to be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company's fiscal year ended March 31, 2013.
110
Item 15. Exhibits and Financial Statement Schedules.
The following are filed as part of this Annual Report on Form 10-K:
1. Financial Statements
The following consolidated financial statements are included in Item 8:
2. Financial Statement Schedules
The financial statement schedule entitled "Schedule II—Valuation and Qualifying Accounts" is filed as part of this Annual Report on Form 10-K under this Item 15.
All other schedules have been omitted since the required information is not present, or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or the Notes thereto.
111
Virtusa Corporation and Subsidiaries
Schedule II—Valuation and Qualifying Accounts
For the years ended March 31, 2013, 2012, and 2011
Description
|
Balance at Beginning of Period |
Charged to Costs and Expenses |
Deductions/ Other |
Balance at End of Period |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(In thousands) |
||||||||||||
Accounts receivable allowance for doubtful accounts: |
|||||||||||||
Year ended March 31, 2011 |
$ | 700 | $ | 690 | $ | (230 | ) | $ | 1,160 | ||||
Year ended March 31, 2012 |
$ | 1,160 | $ | 602 | $ | (1,180 | ) | $ | 582 | ||||
Year ended March 31, 2013 |
$ | 582 | $ | 193 | $ | (35 | ) | $ | 740 | ||||
112
The following exhibits are filed as part of and incorporated by reference into this Annual Report:
| Exhibit No. | Exhibit Title | ||
|---|---|---|---|
| 2.1 | Asset Purchase Agreement by and among the Company, ConVista Consulting, LLC., a Virginia limited liability company, and the members thereof dated as of February 1, 2010 (previously filed as Exhibit 2.1 to Registrant's Current Report on Form 8-K, filed February 1, 2010, and incorporated herein by reference). | ||
| 2.2 | Asset Purchase Agreement by and among the Company, ALaS Consulting LLC, a New York limited liability company, and the members thereof, dated as of July 1, 2011 (previously filed as Exhibit 2.1 to Registrant's Current Report on Form 8-K, filed July 5, 2011, and incorporated herein by reference). | ||
| 3.1 | Amended and Restated By-laws of the Registrant (previously filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | ||
| 3.2 | Form of Seventh Amended and Restated Certificate of Incorporation of the Registrant (previously filed as Exhibit 3.3 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | ||
| 4.1 | Specimen certificate evidence shares of the Registrant's common stock (previously filed as Exhibit 4.1 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | ||
| 4.2 | Fourth Amended and Restated Registration Rights Agreement by and among the Registrant and the Investors named therein, dated as of March 29, 2007 (previously filed as Exhibit 4.2 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | ||
| 10.1 | Lease Agreement by and between the Registrant and W9/TIB Real Estate Limited Partnership, dated June 2000, as amended (previously filed as Exhibit 10.3 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | ||
| 10.2 | Third Amendment to Lease by and between the Registrant and Westborough Investors Limited Partnership dated as of March 31, 2010 (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed April 6, 2010, and incorporated herein by reference). | ||
| 10.3 | + | Amended and Restated 2000 Stock Option Plan and forms of agreements thereunder (previously filed as Exhibit 10.4 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | |
| 10.4 | + | 2005 Stock Appreciation Rights Plan and form of agreements thereunder (previously filed as Exhibit 10.5 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | |
| 10.5 | † | Master Service Provider Agreement by and between the Registrant and JPMorgan Chase Bank, N.A., dated as of December 6, 2004, as amended (previously filed as Exhibit 10.6 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | |
113
| Exhibit No. | Exhibit Title | ||
|---|---|---|---|
| 10.6 | Amendment No. 236169, dated as of March 1, 2008 to the Master Service Provider Agreement by and between the Registrant and JPMorgan Chase Bank, N.A. (previously filed as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K, filed May 29, 2009, and incorporated herein by reference). | ||
| 10.7 | † | Amendment No. 3, dated as of January 1, 2009 to the Master Service Provider Agreement by and between the Registrant and JPMorgan Chase Bank, N.A. (previously filed as Exhibit 10.7 to the Registrant's Annual Report on Form 10-K, filed May 29, 2009, and incorporated herein by reference). | |
| 10.8 | † | Amendment—CW483516, dated as of March 29, 2012 to the Master Service Provider Agreement by and between the Registrant and JPMorgan Chase Bank, N.A. (previously filed as Exhibit 10.11 to the Registrant's Annual Report on Form 10-K, filed May 25, 2012 and incorporated herein by reference). | |
| 10.9 | + | Form of Indemnification Agreement between the Registrant and each of its directors (previously filed as Exhibit 10.7 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | |
| 10.10 | † | BT Contract for the Provision of IT Services by and between Virtusa UK Limited and British Telecommunications plc, dated as of March 29, 2007, as amended by Amendment Nos. 1-4 (previously filed as Exhibit 10.7 to the Registrant's Annual Report on Form 10-K, filed June 3, 2008, and incorporated herein by reference). | |
| 10.11 | † | Amendment No. 5 to the BT Contract for the Provision of IT Services by and between Virtusa UK Limited and British Telecommunications plc, dated as of March 31, 2009 (previously filed as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K, filed May 29, 2009, and incorporated herein by reference). | |
| 10.12 | † | Amendment No. 6 to the BT Contract for the Provision of IT Services by and between Virtusa UK Limited and British Telecommunications plc, dated as of October 30, 2009 (previously filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q, filed February 3, 2010, and incorporated herein by reference) | |
| 10.13 | † | Global Frame Contract by and between Virtusa UK Limited and British Telecommunications plc, dated as of January 31, 2012 (previously filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K, filed May 25, 2012, and incorporated herein by reference). | |
| 10.14 | + | Executive Agreement between the Registrant and Kris Canekeratne, dated as of April 5, 2007 (previously filed as Exhibit 10.10 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | |
| 10.15 | + | Executive Agreement between the Registrant and Ranjan Kalia, dated as of July 15, 2009 (previously filed as Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed July 17, 2009 and incorporated herein by reference). | |
| 10.16 | + | Executive Agreement between the Registrant and Thomas R. Holler, dated as of April 5, 2007 (previously filed as Exhibit 10.12 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | |
| 10.17 | + | Executive Agreement between the Registrant and Roger Keith Modder, dated as of April 5, 2007 (previously filed as Exhibit 10.13 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | |
114
| Exhibit No. | Exhibit Title | ||
|---|---|---|---|
| 10.18 | + | Executive Agreement between the Registrant and Raj Rajgopal, dated as of July 15, 2009 (previously filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed July 17, 2009 and incorporated herein by reference). | |
| 10.19 | + | Executive Agreement between the Registrant and Samir Dhir dated as of May 16, 2011 (previously filed as Exhibit 10.33 to the Registrant's Annual Report on Form 10-K filed May 27, 2011 and incorporated herein by reference). | |
| 10.20 | Co-Developer Agreement and Lease Deed between the Registrant and APIICL, a state government agency in India, dated as of March 2007 (previously filed as Exhibit 10.15 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | ||
| 10.21 | + | 2007 Stock Option and Incentive Plan, including Form of Incentive Stock Option Agreement, Form of Non-Qualified Stock Option Agreement for Company Employees, Form of Non-Qualified Stock Option Agreement for Non-Employee Directors, and Form of Employee Restricted Stock Agreement (previously filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K, filed June 3, 2008, and incorporated herein by reference). | |
| 10.22 | + | Form of Deferred Stock Award Agreement under the 2007 Stock Option and Incentive Plan (previously filed as Exhibit 10.34 to the Registrant's Annual Report on Form 10-K filed May 27, 2011 and incorporated herein by reference). | |
| 10.23 | Fifth Amended and Restated Stockholders Agreement by and among the Registrant and the Stockholders named therein, dated as of March 29, 2007 (previously filed as Exhibit 10.17 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | ||
| 10.24 | Agreement for Civil and Structural Works, including the General Conditions of the Contract by and between Virtusa (India) Private Limited and Shapoorji Pallionji & Company Limited, dated as of July 2, 2007 (previously filed as Exhibit 10.18 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | ||
| 10.25 | + | Amended and Restated Non-Employee Director Compensation Policy (previously filed as Exhibit 10.28 to the Registrant's Annual Report on Form 10-K, filed May 27, 2010, and incorporated herein by reference). | |
| 10.26 | Lease Deed by and between DLF Assets Private Limited and Virtusa Software Services Pvt. Ltd. dated as of July 21, 2008 (previously filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q, filed August 1, 2008, and incorporated herein by reference). | ||
| 10.27 | LEASE DEED by and between Andhra Pradesh Industrial Infrastructure Corporation Limited and Virtusa (India) Private Limited dated as of August 22, 2007 (previously filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q, filed September 7, 2007, and incorporated herein by reference). | ||
| 10.28 | Lease Deed by and between DLF Assets Private Limited and Virtusa Software Services, Inc. dated as of May 26, 2011 (previously filed as Exhibit 10.35 to the Registrant's Annual Report on Form 10-K filed May 27, 2011 and incorporated herein by reference). | ||
| 10.29 | Stock Purchase Agreement by and among Registrant, InSource Holdings, Inc, David Shalaby and Michelle Shalaby, dated as of November 4, 2009 (previously filed as Exhibit 10.1 to Registrant's Current Report on Form 8-K, filed November 5, 2009, and incorporated herein by reference). | ||
115
| Exhibit No. | Exhibit Title | ||
|---|---|---|---|
| 10.30 | + | FY2011 Virtusa Corporation Executive Variable Cash Compensation Plan (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed May 11, 2010, and incorporated herein by reference). | |
| 10.31 | + | Virtusa Corporation Executive Variable Cash Compensation Plan (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed May 11, 2011, and incorporated herein by reference). | |
| 10.32 | Credit Agreement dated as of July 30, 2010 by and among Registrant as Borrower, InSource Holdings, Inc. and InSource, LLC, as Loan Parties, JPMORGAN CHASE BANK, N.A., and JPMORGAN CHASE BANK, N.A as Administrative Agent (previously filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q, filed July 30, 2010, and incorporated herein by reference). | ||
| 10.33 | Negative Pledge Agreement dated as of July 30, 2010 by Registrant in favor of JPMORGAN CHASE BANK, N.A, as administrative agent for itself and for the Lenders a party to the Credit Agreement (previously filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q, filed July 30, 2010, and incorporated herein by reference). | ||
| 10.34 | Pledge Agreement dated as of July 30, 2010 by and between Registrant and JPMORGAN CHASE BANK, N.A, as administrative agent for itself and for the Lenders which are parties to the Credit Agreement (previously filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q, filed July 30, 2010, and incorporated herein by reference). | ||
| 10.35 | Security Agreement dated as of July 30, 2010 by Registrant in favor of JPMORGAN CHASE BANK, N.A, as administrative agent for itself and for the Lenders a party to the Credit Agreement (previously filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q, filed July 30, 2010, and incorporated herein by reference). | ||
| 10.36 | Lease Deed by and between Virtusa India Private Limited and DLF Assets Private Limited dated as of September 29, 2012, (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed October 3, 2012, and incorporated herein by reference). | ||
| 10.37 | Lease Deed by and between Virtusa (Private) Limited and Orion Development (Private) Limited dated as of December 14, 2012, (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed January 9, 2013, and incorporated herein by reference). | ||
| 10.38 | †* | Professional Services Agreement by and between the Registrant and AIG Global Services, Inc., dated as of April 28, 2008. | |
| 21.1 | * | Subsidiaries of Registrant. | |
| 23.1 | * | Consent of KPMG LLP. | |
| 24.1 | * | Power of Attorney (included on signature page). | |
| 31.1 | * | Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | * | Certification of principal accounting and financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | ** | Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350. | |
| 32.2 | ** | Certification of principal accounting and financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350. | |
116
| Exhibit No. | Exhibit Title | ||
|---|---|---|---|
| 99.1 | Financial Statements of ALaS Consulting LLC as of June 30, 2011 and December 31, 2010 and for the three and six months ended June 30, 2011 and 2010 and for the year ended December 31, 2010 (previously filed as Exhibit 99.1 to Registrant's Current Report on Form 8-K, filed September 15, 2011, and incorporated herein by reference). | ||
| 99.2 | Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2011 and Unaudited Pro Forma Condensed Combined Statements of Income for the three months ended June 30, 2011 and for the year ended March 31, 2011 (previously filed as Exhibit 99.2 to Registrant's Current Report on Form 8-K, filed September 15, 2011, and incorporated herein by reference). | ||
| 101 | ** | The following materials from the Registrant's Annual Report on Form 10-K for the year ended March 31, 2013 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders' Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related notes to these financial statements. | |
117
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 29th day of May, 2013.
| VIRTUSA CORPORATION | ||||
By: |
/s/ KRIS CANEKERATNE Kris Canekeratne Chairman and Chief Executive Officer (Principal Executive Officer) |
|||
Date: May 29, 2013
POWER OF ATTORNEY AND SIGNATURES
We the undersigned officers and directors of Virtusa Corporation, hereby severally constitute and appoint Kris Canekeratne and Ranjan Kalia, and each of them singly, our true and lawful attorneys, with full power to them and each of them singly, to sign for us and in our names in the capacities indicated below, any amendments to this Annual Report on Form 10-K, and generally to do all things in our names and on our behalf in such capacities to enable Virtusa Corporation to comply with the provisions of the Securities Act of 1934, as amended, and all the requirements of the Securities Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 29th day of May, 2013.
Signature
|
Title
|
|
|---|---|---|
| /s/ KRIS CANEKERATNE Kris Canekeratne |
Chairman and Chief Executive Officer (Principal Executive Officer) | |
/s/ RANJAN KALIA Ranjan Kalia |
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
|
/s/ ROBERT E. DAVOLI Robert E. Davoli |
Director |
|
/s/ IZHAR ARMONY Izhar Armony |
Director |
|
/s/ RONALD T. MAHEU Ronald T. Maheu |
Director |
118
Signature
|
Title
|
|
|---|---|---|
| /s/ MARTIN TRUST Martin Trust |
Director | |
/s/ ROWLAND MORIARTY Rowland Moriarty |
Director |
|
/s/ WILLIAM K. O'BRIEN William K. O'Brien |
Director |
|
/s/ AL-NOOR RAMJI Al-Noor Ramji |
Director |
119
| Exhibit No. | Exhibit Title | ||
|---|---|---|---|
| 2.1 | Asset Purchase Agreement by and among the Company, ConVista Consulting, LLC., a Virginia limited liability company, and the members thereof dated as of February 1, 2010 (previously filed as Exhibit 2.1 to Registrant's Current Report on Form 8-K, filed February 1, 2010, and incorporated herein by reference). | ||
| 2.2 | Asset Purchase Agreement by and among the Company, ALaS Consulting LLC, a New York limited liability company, and the members thereof, dated as of July 1, 2011 (previously filed as Exhibit 2.1 to Registrant's Current Report on Form 8-K, filed July 5, 2011, and incorporated herein by reference). | ||
| 3.1 | Amended and Restated By-laws of the Registrant (previously filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | ||
| 3.2 | Form of Seventh Amended and Restated Certificate of Incorporation of the Registrant (previously filed as Exhibit 3.3 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | ||
| 4.1 | Specimen certificate evidence shares of the Registrant's common stock (previously filed as Exhibit 4.1 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | ||
| 4.2 | Fourth Amended and Restated Registration Rights Agreement by and among the Registrant and the Investors named therein, dated as of March 29, 2007 (previously filed as Exhibit 4.2 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | ||
| 10.1 | Lease Agreement by and between the Registrant and W9/TIB Real Estate Limited Partnership, dated June 2000, as amended (previously filed as Exhibit 10.3 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | ||
| 10.2 | Third Amendment to Lease by and between the Registrant and Westborough Investors Limited Partnership dated as of March 31, 2010 (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed April 6, 2010, and incorporated herein by reference). | ||
| 10.3 | + | Amended and Restated 2000 Stock Option Plan and forms of agreements thereunder (previously filed as Exhibit 10.4 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | |
| 10.4 | + | 2005 Stock Appreciation Rights Plan and form of agreements thereunder (previously filed as Exhibit 10.5 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | |
| 10.5 | † | Master Service Provider Agreement by and between the Registrant and JPMorgan Chase Bank, N.A., dated as of December 6, 2004, as amended (previously filed as Exhibit 10.6 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | |
120
| Exhibit No. | Exhibit Title | ||
|---|---|---|---|
| 10.6 | Amendment No. 236169, dated as of March 1, 2008 to the Master Service Provider Agreement by and between the Registrant and JPMorgan Chase Bank, N.A. (previously filed as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K, filed May 29, 2009, and incorporated herein by reference). | ||
| 10.7 | † | Amendment No. 3, dated as of January 1, 2009 to the Master Service Provider Agreement by and between the Registrant and JPMorgan Chase Bank, N.A. (previously filed as Exhibit 10.7 to the Registrant's Annual Report on Form 10-K, filed May 29, 2009, and incorporated herein by reference). | |
| 10.8 | † | Amendment—CW483516, dated as of March 29, 2012 to the Master Service Provider Agreement by and between the Registrant and JPMorgan Chase Bank, N.A. (previously filed as Exhibit 10.11 to the Registrant's Annual Report on Form 10-K, filed May 25, 2012 and incorporated herein by reference). | |
| 10.9 | + | Form of Indemnification Agreement between the Registrant and each of its directors (previously filed as Exhibit 10.7 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | |
| 10.10 | † | BT Contract for the Provision of IT Services by and between Virtusa UK Limited and British Telecommunications plc, dated as of March 29, 2007, as amended by Amendment Nos. 1-4 (previously filed as Exhibit 10.7 to the Registrant's Annual Report on Form 10-K, filed June 3, 2008, and incorporated herein by reference). | |
| 10.11 | † | Amendment No. 5 to the BT Contract for the Provision of IT Services by and between Virtusa UK Limited and British Telecommunications plc, dated as of March 31, 2009 (previously filed as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K, filed May 29, 2009, and incorporated herein by reference). | |
| 10.12 | † | Amendment No. 6 to the BT Contract for the Provision of IT Services by and between Virtusa UK Limited and British Telecommunications plc, dated as of October 30, 2009 (previously filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q, filed February 3, 2010, and incorporated herein by reference) | |
| 10.13 | † | Global Frame Contract by and between Virtusa UK Limited and British Telecommunications plc, dated as of January 31, 2012 (previously filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K, filed May 25, 2012, and incorporated herein by reference). | |
| 10.14 | + | Executive Agreement between the Registrant and Kris Canekeratne, dated as of April 5, 2007 (previously filed as Exhibit 10.10 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | |
| 10.15 | + | Executive Agreement between the Registrant and Ranjan Kalia, dated as of July 15, 2009 (previously filed as Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed July 17, 2009 and incorporated herein by reference). | |
| 10.16 | + | Executive Agreement between the Registrant and Thomas R. Holler, dated as of April 5, 2007 (previously filed as Exhibit 10.12 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | |
| 10.17 | + | Executive Agreement between the Registrant and Roger Keith Modder, dated as of April 5, 2007 (previously filed as Exhibit 10.13 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | |
121
| Exhibit No. | Exhibit Title | ||
|---|---|---|---|
| 10.18 | + | Executive Agreement between the Registrant and Raj Rajgopal, dated as of July 15, 2009 (previously filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed July 17, 2009 and incorporated herein by reference). | |
| 10.19 | + | Executive Agreement between the Registrant and Samir Dhir dated as of May 16, 2011 (previously filed as Exhibit 10.33 to the Registrant's Annual Report on Form 10-K filed May 27, 2011 and incorporated herein by reference). | |
| 10.20 | Co-Developer Agreement and Lease Deed between the Registrant and APIICL, a state government agency in India, dated as of March 2007 (previously filed as Exhibit 10.15 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | ||
| 10.21 | + | 2007 Stock Option and Incentive Plan, including Form of Incentive Stock Option Agreement, Form of Non-Qualified Stock Option Agreement for Company Employees, Form of Non-Qualified Stock Option Agreement for Non-Employee Directors, and Form of Employee Restricted Stock Agreement (previously filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K, filed June 3, 2008, and incorporated herein by reference). | |
| 10.22 | + | Form of Deferred Stock Award Agreement under the 2007 Stock Option and Incentive Plan (previously filed as Exhibit 10.34 to the Registrant's Annual Report on Form 10-K filed May 27, 2011 and incorporated herein by reference). | |
| 10.23 | Fifth Amended and Restated Stockholders Agreement by and among the Registrant and the Stockholders named therein, dated as of March 29, 2007 (previously filed as Exhibit 10.17 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | ||
| 10.24 | Agreement for Civil and Structural Works, including the General Conditions of the Contract by and between Virtusa (India) Private Limited and Shapoorji Pallionji & Company Limited, dated as of July 2, 2007 (previously filed as Exhibit 10.18 to the Registrant's Registration Statement on Form S-1, as amended (Registration No. 333-141952) and incorporated herein by reference). | ||
| 10.25 | + | Amended and Restated Non-Employee Director Compensation Policy (previously filed as Exhibit 10.28 to the Registrant's Annual Report on Form 10-K, filed May 27, 2010, and incorporated herein by reference). | |
| 10.26 | Lease Deed by and between DLF Assets Private Limited and Virtusa Software Services Pvt. Ltd. dated as of July 21, 2008 (previously filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q, filed August 1, 2008, and incorporated herein by reference). | ||
| 10.27 | LEASE DEED by and between Andhra Pradesh Industrial Infrastructure Corporation Limited and Virtusa (India) Private Limited dated as of August 22, 2007 (previously filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q, filed September 7, 2007, and incorporated herein by reference). | ||
| 10.28 | Lease Deed by and between DLF Assets Private Limited and Virtusa Software Services, Inc. dated as of May 26, 2011 (previously filed as Exhibit 10.35 to the Registrant's Annual Report on Form 10-K filed May 27, 2011 and incorporated herein by reference). | ||
| 10.29 | Stock Purchase Agreement by and among Registrant, InSource Holdings, Inc, David Shalaby and Michelle Shalaby, dated as of November 4, 2009 (previously filed as Exhibit 10.1 to Registrant's Current Report on Form 8-K, filed November 5, 2009, and incorporated herein by reference). | ||
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| Exhibit No. | Exhibit Title | ||
|---|---|---|---|
| 10.30 | + | FY2011 Virtusa Corporation Executive Variable Cash Compensation Plan (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed May 11, 2010, and incorporated herein by reference). | |
| 10.31 | + | Virtusa Corporation Executive Variable Cash Compensation Plan (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed May 11, 2011, and incorporated herein by reference). | |
| 10.32 | Credit Agreement dated as of July 30, 2010 by and among Registrant as Borrower, InSource Holdings, Inc. and InSource, LLC, as Loan Parties, JPMORGAN CHASE BANK, N.A., and JPMORGAN CHASE BANK, N.A as Administrative Agent (previously filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q, filed July 30, 2010, and incorporated herein by reference). | ||
| 10.33 | Negative Pledge Agreement dated as of July 30, 2010 by Registrant in favor of JPMORGAN CHASE BANK, N.A, as administrative agent for itself and for the Lenders a party to the Credit Agreement (previously filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q, filed July 30, 2010, and incorporated herein by reference). | ||
| 10.34 | Pledge Agreement dated as of July 30, 2010 by and between Registrant and JPMORGAN CHASE BANK, N.A, as administrative agent for itself and for the Lenders which are parties to the Credit Agreement (previously filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q, filed July 30, 2010, and incorporated herein by reference). | ||
| 10.35 | Security Agreement dated as of July 30, 2010 by Registrant in favor of JPMORGAN CHASE BANK, N.A, as administrative agent for itself and for the Lenders a party to the Credit Agreement (previously filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q, filed July 30, 2010, and incorporated herein by reference). | ||
| 10.36 | Lease Deed by and between Virtusa India Private Limited and DLF Assets Private Limited dated as of September 29, 2012, (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed October 3, 2012, and incorporated herein by reference). | ||
| 10.37 | Lease Deed by and between Virtusa (Private) Limited and Orion Development (Private) Limited dated as of December 14, 2012, (previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed January 9, 2013, and incorporated herein by reference). | ||
| 10.38 | †* | Professional Services Agreement by and between the Registrant and AIG Global Services, Inc., dated as of April 28, 2008. | |
| 21.1 | * | Subsidiaries of Registrant. | |
| 23.1 | * | Consent of KPMG LLP. | |
| 24.1 | * | Power of Attorney (included on signature page). | |
| 31.1 | * | Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | * | Certification of principal accounting and financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | ** | Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350. | |
| 32.2 | ** | Certification of principal accounting and financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350. | |
123
| Exhibit No. | Exhibit Title | ||
|---|---|---|---|
| 99.1 | Financial Statements of ALaS Consulting LLC as of June 30, 2011 and December 31, 2010 and for the three and six months ended June 30, 2011 and 2010 and for the year ended December 31, 2010 (previously filed as Exhibit 99.1 to Registrant's Current Report on Form 8-K, filed September 15, 2011, and incorporated herein by reference). | ||
| 99.2 | Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2011 and Unaudited Pro Forma Condensed Combined Statements of Income for the three months ended June 30, 2011 and for the year ended March 31, 2011 (previously filed as Exhibit 99.2 to Registrant's Current Report on Form 8-K, filed September 15, 2011, and incorporated herein by reference). | ||
| 101 | ** | The following materials from the Registrant's Annual Report on Form 10-K for the year ended March 31, 2013 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders' Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related notes to these financial statements. | |
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Exhibit 10.38
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
PROFESSIONAL SERVICES AGREEMENT
This Professional Services Agreement (this “Agreement’) is dated as of April 25, 2008 (the “Effective Date”) between AIG Global Services, Inc., a New Hampshire corporation located at 2 Peach Tree Hill Road, Livingston, New Jersey 07039 (“AIGGS”) and Virtusa Corporation, a Delaware corporation with offices at 2000 West Park Drive, Westborough, MA 01581(“Vendor”). “Customer” shall mean AIGGS or any Affiliate on whose behalf Services are performed pursuant to a Work Order (or Change Order).
In consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which the parties hereby acknowledge AIGGS and Vendor agree as follows:
1. DEFINITIONS.
1.1 “Acceptance Criteria” shall have the meaning set forth in Section 5 (Acceptance).
1.2 “Acceptance Testing” shall mean the testing by Customer or its designee(s) of particular Deliverables provided to Customer hereunder in order to ascertain if such Deliverables meet the Acceptance Criteria. Acceptance Testing shall be carried out on the terms and conditions set forth in Section 5 (Acceptance).
1.3 “Affiliate” shall mean any corporation, partnership, venture, or other business entity that directly or indirectly, controls, is controlled by, or is under common control with AIGGS. For purposes of the foregoing definition, “control” (including “control by” and “under common control with”) shall mean: (a) ownership of or the right to acquire: (i) not less than thirty percent (30%) of the voting stock of a corporation, (ii) the right to vote not less than thirty percent (30%) of the voting stock of a corporation (or, in the case of a non-corporate entity, equivalent rights), or (iii) not less than thirty percent (30%) ownership interest in a partnership, limited liability company, joint venture or other entity; and/or (b) with respect to any entity, the ability of AIGGS, or any entity that otherwise qualifies under the foregoing definition, to direct the management of such entity. An entity that otherwise qualifies under the foregoing definition shall be deemed included within the meaning of “Affiliate” even though it qualifies as such after the Effective Date. At AIGGS’s option, the purchaser of all or substantially all of the assets of any line of business of AIGGS or any Affiliate (including the assets of the business in a specific geographic area or set of geographic areas) shall be deemed an Affiliate of AIGGS for twelve (12) months after the date of such purchase, with respect to the business acquired.
1.4 “Application Parts” shall have the meaning as set forth in Section 2.2 (Knowledge Transfer).
1.5 “Assignment” shall have the meaning set forth in Section 11.1 (Assignment).
1.6 “Background Technology” shall mean any creations (including any technology, inventions, discoveries, works of authorship or other prior creations) that were conceived, created or reduced to practice by or for Vendor (alone or with others) prior to commencement of Vendor’s contractor arrangement with Customer, as are set forth in a Work Order.
1.7 “Change Order” shall mean any change order executed by a duly authorized representative of each of Vendor and Customer in accordance with Section 2.6 (Change Orders), a form of which is attached to this Agreement as Exhibit A attached hereto.
1.8 “Claim” shall have the meaning set forth in Section 14.2 (Notice; Cooperation; Settlement).
1.9 “Code” shall mean computer programming code (including microcode, as applicable) and, unless otherwise expressly stated in a Work Order, includes both object code and source code.
1.10 “Confidential Information” shall have the meaning given in Section 9 (Confidentiality and Security).
1.11 “Client Data” shall have the meaning given in Section 9 (Confidentiality and Security).
1.12 “Data Center” shall mean AIGGS or such other data center as may be designated by Customer (in its sole discretion) from time to time.
1.13 “Deliverables” shall mean, collectively, any and all software (including Code), documents, information and other materials delivered or to be delivered by Vendor hereunder, as may be more fully detailed in each
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
Work Order.
1.14 “Disabling Code” shall mean any Code that is intended to disrupt, modify, delete, damage, deactivate, disable, shut down, harm or otherwise impede in any manner, in whole or in part, the operation of any software, firm ware, hardware, computer system or network, including any device, method or token that permits any person to circumvent the normal security of the software containing such Code.
1.15 “Disaster” shall mean any acts of war, terrorism, riots, civil disorders, rebellions or revolutions or any other act that could reasonable be expected to pose a threat to the safety, security, integrity or functionality of any Facility, Personnel or Customer Confidential Information.
1.16 “Disaster Recovery Plan” shall mean Vendor’s disaster recovery plan in such form as has been approved by Customer in accordance with Section 2.4 (Disaster Recovery Requirements). Any such Disaster Recovery Plan shall be incorporated hereto as Exhibit E.
1.17 “Facilities” shall mean those facilities owned, operated or leased by Customer, Vendor or a third party, at which Personnel provide any Services hereunder (including any Secondary Site).
1.18 “Fixed Price Period” shall have the meaning set forth in Section 4.3 (Payment; Expenses).
1.19 “Fixed Price Services” shall mean those Services provided by Vendor on a fixed price basis.
1.20 “Force Majeure” shall have the meaning set forth in Section 19 (Force Majeure).
1.21 “Governmental Authority” shall mean any applicable (a) federation, country, nation, state, sovereign, or government; (b) federal, supranational, regional, state, local, or municipal political subdivision; (c) governmental or administrative body, instrumentality, department, or agency; (d) court, administrative hearing body, arbitrator, commission, or other similar dispute resolving panel or body; or (e) any other entity exercising executive, legislative, judicial, regulatory, taxing, or administrative functions of a government with jurisdiction over the applicable matter.
1.22 “Indemnified Party” shall have the meaning set forth in Section 14.1 (General Indemnity).
1.23 “Knowledge Transfer Plan” shall have the meaning set forth in Section 2.2(a) (Knowledge Transfer).
1.24 “Laws” shall mean any laws, statutes, ordinances, codes, rules, regulations, published standards, permits, judgments, decrees, writs, injunctions, rulings, orders, administrative guidance, and/or other requirements of any Governmental Authority.
1.25 “Maintenance Period” shall have the meaning set forth in Section 4.3 (Payment; Expenses).
1.26 “Maximum Dollar Amount” shall have the meaning set forth in Section 2.1(a) (Work Orders).
1.27 “Milestone Period” shall have the meaning set forth in Section 4.3 (Payment; Expenses).
1.28 “Performance Requirements” shall mean that list of service levels, performance metrics and reporting requirements, if applicable, as may be set forth in Exhibit D attached hereto, which may be revised by written agreement of the parties hereto.
1.29 “Personnel” shall mean those Vendor employees and Vendor Subcontractors who perform Services or who have access to Customer’s Confidential Information.
1.30 “Personnel Non-Disclosure & Assignment of Invention Agreement” shall mean the form agreement attached hereto as Exhibit F attached hereto.
1.31 “Privacy Laws” shall mean any laws, rules or regulations of any country relating to nonpublic personal information, including the Health Insurance Portability and Accountability Act of 1996, the Gramm-Leach-Bliley Act of 1999, CA SB 1386 regarding privacy and other federal, state and local laws and regulations of any jurisdiction relating to nonpublic personal information.
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
1.32 “Professional Day” shall have the meaning set forth in Section 4.1 (Fees).
1.33 “Project Manager” shall mean the key contact person designated by each of Vendor and Customer with respect to Services provided under a specific Work Order.
1.34 “Proprietary Rights” shall have the meaning set forth in Section 11.1 (Assignment).
1.35 “Records” shall have the meaning set forth in Section 18.1 (Record Retention).
1.36 “Relationship Manager” shall have the meaning set forth in Section 8.1 (Relationship and Project Managers).
1.37 “Secondary Site” shall have the meaning set forth in Section 2.4(b) (Disaster Recovery Requirements).
1.38 “Security Requirements” shall mean that list of security requirements set forth in Exhibit C attached hereto, which may be revised by Customer (in its sole discretion) from time to time.
1.39 “Services” shall mean (a) any services described in any Work Order(s), Change Order(s) and Knowledge Transfer Plan(s), (b) the Training Services, (c) any Termination Assistance.
1.40 “T&M Services” shall mean those Services provided by Vendor on a time and materials basis.
1.41 “Term” shall have the meaning set forth in Section 12.1 (Term).
1.42 “Termination Assistance” shall have the meaning set forth in Section 12.7(a) (Termination Assistance).
1.43 “Termination Assistance Period” shall mean that period of time commencing upon the earliest to occur of (a) notice by a party of termination of this Agreement (in whole or in part), (b) notice by Customer of its need for Termination Assistance, or (c) ninety (90) days prior to expiration of this Agreement, and ending no later than 90 days after termination of the Agreement or Work Order, as the case may be.
1.44 “Third Party Technology” shall mean any software, materials or other technology that are owned or controlled by a third party, as identified on a Work Order. Use of any such Third Party Technology shall be in accordance with American International Group’s Office of the Chief Information Officer standards and guidelines, which shall be provided to Vendor from time to time.
1.45 “Training Services” shall have the meaning set forth in Section 6 (Training Services).
1.46 “Turnover Plan” shall have the meaning set forth in Section 12.7 (c) (Termination Assistance).
1.47 “Vendor Affiliate” shall mean any entity controlling, controlled by or under common control with Vendor whether by ownership or control of voting securities, by contract or otherwise, director, manager or executive officer of such entity. Vendor Affiliates shall include, without limitation, the following entities: Virtusa UK Limited, Virtusa (India) Private Limited and Virtusa (Sri Lanka) Private Limited. Vendor may update this list on written notice to Customer.
1.48 “Vendor Proprietary Information” shall have the meaning set forth in Section 11.3 (Background Technology, Third Party Technology and Vendor Proprietary Information).
1.49 “Vendor Provided Hardware” shall mean that written list of hardware and equipment, including servers, back-up devices, routers, switches, modems, which list Vendor shall provide to Customer in connection with its performance of the Services.
1.50 “Vendor Subcontract” shall have the meaning set forth in Section 3.1 (Approval Process; Approval of Subcontractors).
1.51 “Vendor Subcontractor” shall have the meaning set forth in Section 3.1 (Approval Process; Approval of Subcontractors).
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
1.52 “Virus” shall mean: (a) Code intentionally constructed to, or that has the ability to, damage, interfere with, or otherwise adversely affect other Code, computer programs, data files or operations, including disabling Code; or (b) any other Code typically designated to be a virus, including any Trojan horse, worm, or other harmful or disruptive component.
1.53 “Work Order” shall mean any work order executed by a duly authorized representative of each of Vendor and Customer for the provision of Services, a form of which is attached to this Agreement as Exhibit B attached hereto, as may be amended by a Change Order.
2. SERVICES.
2.1 Work Orders. Customer may from time to time issue Work Orders. Each Work Order shall, upon execution by the parties, constitute a separate agreement and, except for any provisions of this Agreement that are specifically excluded or modified in such Work Order, shall incorporate therein the terms and conditions of this Agreement. Unless otherwise expressly stated in a Work Order, in the event of any conflict between the terms of this Agreement and the terms of such Work Order, the terms of this Agreement shall govern
(a) Any Work Order providing for T&M Services shall include with reasonable specificity, if applicable: (i) a description of the Services to be performed; (ii) the Deliverables, if any, to be produced by Vendor; (iii) appropriate testing and acceptance procedures; (iv) the schedule for completion of each of the foregoing; (v) the daily rate to be charged; (vi) estimated expenses (travel-related or otherwise) to be incurred by Vendor in connection with the project; (vii) the maximum dollar amount billable (including expenses) in connection with such Services (“Maximum Dollar Amount”), if any; (viii) the parties’ respective Project Managers; (ix) any reports (in additional to those set forth in Section 7 (Reporting; Certifications) to be provided by Vendor to Customer; and (x) such additional information as the parties may wish to include. Notwithstanding anything to the contrary contained herein, Customer shall not be liable for any charges and/or expenses for any T&M Services in excess of the Maximum Dollar Amount specified on the applicable Work Order. In the event that Vendor reasonably believes its fees and/or billable expenses for any T&M Services may exceed the applicable Maximum Dollar Amount, Vendor shall promptly notify Customer of such fact in writing, and if the parties execute a Change Order in accordance with Section 2.6 (Change Orders), a new Maximum Dollar Amount shall be applicable to such T &M Services.
(b) Any Work Order providing for Fixed Price Services shall include with reasonable specificity, if applicable: (i) a description of the Services to be performed; (ii) the Deliverables, if any, to be produced by Vendor; (iii) appropriate testing and acceptance procedures; (iv) the schedule for completion of each of the foregoing (including milestone dates); (v) estimated expenses (travel-related or otherwise) to be incurred by Vendor in connection with the project; (vi) total fees and a schedule of payments; (vii) the parties’ respective Project Managers; (viii) any reports (in additional to those set forth in Section 7 (Reporting; Certifications) to be provided by Vendor to Customer; and (ix) such additional information as the parties may wish to include.
2.2 Knowledge Transfer.
(a) Preparation of Knowledge Transfer Plan. In connection with each Work Order for Fixed Price maintenance and enhancement Services that are being transitioned from either Customer’s third party vendors or from Customer directly, Vendor shall, pursuant to the terms of the Work Order, prepare a draft knowledge transfer plan with respect to knowledge transfer activities to be undertaken by Vendor and Customer and/or its designee(s) with respect to the software applications, or any part(s) thereof (including any modules, components, elements or functional units) (the “Application Part(s)”), covered by such Work Order. The draft knowledge transfer plan, which may or may not be a part of a larger project plan, shall (i) identify Application Parts covered by the plan; (ii) set forth in detail steps and procedures to be undertaken by Vendor and Customer and/or its designee(s) to facilitate the transfer of knowledge to Vendor in order to enable Vendor to provide the Services set forth in the Work Order in accordance with the terms and conditions of this Agreement (e.g., documents to be reviewed, tests to be conducted); (iii) identify Personnel responsible for undertaking such steps and procedures; (iv) set forth milestones to be achieved pursuant to the plan; and (v) set forth schedules for achieving such milestones. Customer shall have the right to review and require revisions to any draft knowledge transfer plan until such time as the parties agree to such plan in writing (each such agreed to knowledge transfer plan herein referred to as a “Knowledge Transfer Plan”).
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
(b) Execution of Knowledge Transfer Plan. Vendor shall be responsible for undertaking the activities set forth in each Knowledge Transfer Plan subject to its terms and conditions and those set forth herein and in the applicable Work Order. Customer shall reasonably cooperate with Vendor in connection with such activities, and shall, as and when milestones are achieved in all respects with the Knowledge Transfer Plan, certify in writing to Vendor that such milestones have been achieved.
2.3 Performance of Services. Vendor shall, subject to the terms and conditions in the Work Order and the terms hereunder, render the Services in a timely and professional manner consistent with industry standards by the completion dates, if any, set forth in the applicable Work Order.
(a) In performing Fixed Price Services, Vendor agrees to provide, all its sole expense, all Vendor Provided Hardware and Third Party Technology, Background Technology set forth in the Work Order and identified as a responsibility of Vendor therein.
(b) In performing T&M Services, Vendor agrees to provide, at its sole expense Vendor Provided Hardware and Background Technology as set forth in the Work Order and identified as a responsibility of Vendor therein.
(c) For any Services performed at Vendor’s or third-party Facilities or any other “off site” location, Vendor shall use all reasonable efforts to ensure that (i) Vendor’s hardware and software environment comply with Customer’s technical standards, which may be updated from time to time; and (ii) at all times Vendor maintains and adheres to a Disaster Recovery Plan.
(d) Unless otherwise specified in a Work Order, all Deliverables shall be written in the English language and shall be delivered in a format and on media acceptable to Customer. The medium of delivery (e.g., download, tape, e-mail or diskette) will be agreed to by the parties in writing.
(e) Vendor shall observe and comply with all Customer security procedures, rules, regulations, policies, working hours and holiday schedules and will not disrupt Customer’s normal business operations. Vendor shall comply with all Customer information security policies, standards and guidelines while using Customer’s systems, networks and applications, and when communicating with Customer via email and/or over the Internet in the course of performing Services, including, without limitation, the security requirements set forth in Exhibit C (Security Requirements) hereto, and shall notify Customer of any situation that will or is reasonably likely to put Customer systems, networks or applications at risk. Throughout the Term, Vendor shall comply with the AIG Vendor Certification Program, details of which can be found at http://www.aigscreen.com and all background checks of Vendor Personnel shall be completed prior to the start of such Vendor Personnel’s assignment hereunder and shall be in accordance with the AIG Vendor Certification Program. If Customer determines that the results of any background check do not to meet its requirements, Vendor may not assign such Vendor Personnel to perform Services hereunder. Vendor represents, warrants and covenants that Vendor has and will secure the prior written consent of each of its Vendor Personnel to disclose information regarding each such Vendor Personnel to Customer’s designated background check provider. Customer is in the process of implementing a supplier diversity program and Vendor will provide any information reasonably requested by Customer regarding Vendor’s demographics and diversity policies and the demographics and diversity policies of its subcontractors.
(f) Vendor guarantees to Customer the full performance of any and all responsibilities, obligations, and liabilities of each Vendor Affiliate arising under or in connection with this Agreement and each Work Order, including, without limitation, all indemnity obligations. No extension, modification, alteration or assignment of this Agreement or any Work Order will in any manner release or discharge Vendor from the obligations set forth in this Section 2.3(f). Customer may, at its option, institute legal proceedings against Vendor without having commenced any action or having obtained a judgment against a Vendor Affiliate. This Section 2.3(f) shall survive any termination or expiration of this Agreement for a period of three (3) years from the effective date of termination or expiration of this Agreement.
(g) For each and every Work Order issued by an Affiliate domiciled and/or existing in a jurisdiction outside of the United States (a “Foreign Jurisdiction”), if there is a Vendor Affiliate domiciled and/or existing in the same country, such Work Order shall be issued to the Vendor Affiliate; provided that Vendor hereby guarantees the obligations of such Vendor Affiliate under this Agreement and such Work Order. As far as such Work Order is concerned, Vendor Affiliate shall be the party that executes the Work Order and is responsible for performance thereunder. However, Vendor hereby guarantees to Customer the full performance
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of any and all responsibilities, obligations, and liabilities of such Vendor Affiliate under such Work Order and this Agreement. Where there is no Vendor Affiliate domiciled and/or existing in the same Foreign Jurisdiction as the Affiliate issuing the Work Order, the Affiliate shall execute such Work Order and remain responsible for its performance thereunder. However, Vendor hereby guarantees to Customer the full performance of any and all responsibilities, obligations, and liabilities of such Affiliate under such Work Order and this Agreement.
2.4 Disaster Recovery Requirements.
(a) Prior to the commencement of any offsite Services hereunder, Vendor shall develop and Customer shall agree (in writing) on a Disaster Recovery Plan(s) for the Services. During the Term, Vendor shall comply in all respects with and perform the obligations set forth in a Disaster Recovery Plan. Vendor shall, at least annually, (i) review, test, and update each Disaster Recovery Plan to validate whether the Disaster Recovery Plan addresses material changes in Customer’s operating environments, software and hardware enhancements, and changes in the scope or nature of the Services; and (ii) provide Customer with a written report of such test results and proposed changes to the Disaster Recovery Plan, that if adopted, would have a material diminution in service levels or material adverse impact on the operations of the Customer projects on which Vendor has been engaged. Any material proposed changes to any Disaster Recover Plan (the materiality of which shall be mutually agreed upon between the parties) shall not require approval by Customer unless such changes substantially and materially reduce or degrade then existing procedures. Any non-material proposed changes to any Disaster Recovery Plan may be incorporated into the revised Disaster Recovery Plan without Customer’s prior written approval.
(b) Notwithstanding anything to the contrary in any Disaster Recovery Plan (“DRP”), Vendor hereby agrees to perform the following:
(i) Vendor shall create and maintain daily back-up files and off-site storage for all data, software programs and documentation provided hereunder. Any off-site storage provider shall be deemed to be a Vendor Subcontractor.
(ii) Vendor will run a full disaster recovery tests under its DRP Site at least once a year to validate Vendor’s procedures and demonstrate their ability to recover the development environment within the recovery time(s) as specified in any Disaster Recovery Plan, which recovery times shall in no event be designed to exceed twenty-four (24) hours or such other time periods in the DRP (depending on the nature of the disaster).
(iv) Vendor shall (A) identify to Customer each Disaster affecting any Services promptly upon identification by Vendor thereof and consult with Customer prior to declaration of a disaster; (B) notify Customer as soon as possible of any situation that in Vendor’s reasonable judgment may escalate to a Disaster; (C) develop and maintain a list of Customer personnel to contact in the event of a Disaster and comply with Customer’s reasonable notification procedures; and (D) maintain communications with Customer as to the status of the Disaster and the progress of the implementation of the Disaster Recovery Plan procedures and the Services restoration process.
(v) Notwithstanding the foregoing, in the event of an outage affecting the operation of the Vendor’s development environment being used for Services, which outage exceeds six (6) hours and for which recovery time is unknown or expected to exceed twenty-four (24) hours, Vendor shall declare a Disaster.
(vi) If there is a Disaster, Vendor shall implement fully the agreed upon Disaster Recovery Plan and provide Services, without material interruption and at the service levels set forth in this Agreement or such other alternate location with comparable communication links, security, hardware and software environment as well as duplicate data, software programs and documentation, subject in each case to the terms of the Disaster Recovery Plan.
(c) Customer shall not be responsible for any fees associated with time or Services Personnel were unable to perform as a result of any Disaster.
2.5 Facilities. The following terms and conditions shall apply to the Facilities, any Personnel performing the Services or other Vendor obligations at or with respect to the Facilities, and any services provided in or from the
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Facilities:
(a) Customer shall make its Facilities available to Vendor as reasonably necessary in connection with the Services, provided that Vendor and its Personnel fully comply with the terms of Section 2 .4(e)
(b) Vendor shall ensure that neither Vendor, nor any Personnel, commits in (or with respect to) the Facilities any violation or breach of: (i) any Laws; (ii) Vendor’s insurance policies; (iii) any Customer access or physical security policies or procedures, including the Security Requirements; or (iv) Customer’s obligations under any real estate leases or other agreements applicable to the Facilities. Vendor shall, and shall cause all Personnel to, immediately inform Customer of any actual, alleged, or potential breaches in security at Facilities. Vendor shall be fully responsible and liable to Customer for any and all violations of the foregoing and any loss or damage arising therefrom or related thereto.
(c) Vendor shall only use, and shall only permit Personnel to use, the Customer’s Facilities for the purpose of providing the Services.
(d) Vendor shall, and shall cause Vendor’s Personnel to, keep the Facilities in good order and not commit or permit waste or damage thereto. Vendor shall use reasonable care and shall use reasonable efforts to cause Vendor’s Personnel to use, the Facilities in a reasonably efficient manner. Vendor shall be solely responsible and liable for any tangible physical damage to the Facilities resulting from the abuse, misuse, neglect, or gross negligence of Vendor, or any Vendor’s Personnel or from any other failure to comply with Vendor’s obligations in regards to the Facilities.
(e) Vendor shall remain fully responsible and liable for the acts and omissions of all Personnel in or in connection with any Facilities.
2.6 Change Orders. Customer may, upon written notice to Vendor, request additions, reductions, or other changes to the scope of any or all Services to be provided pursuant hereto or under a particular Work Order, including the addition of new services to supplement such Services only pursuant to a change request (such request, a “Change Request”). Within three (3) business days of Vendor’s receipt of a Change Request from Customer, Vendor shall provide Customer with a written response (a “Change Order”) detailing the tasks to be performed to accomplish the proposed changes in scope and/or services set forth in such Change Request, as well as any changes in the Charges that may arise therefrom. Each Change Order shall be in a format substantially similar to that of the Sample Change Order attached hereto as Exhibit B (Sample Change Order). Vendor shall use reasonable efforts to accommodate each Change Request, at rates no greater than the applicable rates, if any, set forth in the Work Order to which such Change Request applies. Customer, in its sole discretion, reserves the right to accept, modify, or reject any or all Change Orders received from Vendor. No Change Order shall bind either party unless and until both parties have accepted the terms and conditions of such Change Order in writing, in which event, upon execution by both parties of such Change Order, the terms and conditions of such Change Order shall be deemed an amendment to the applicable Work Order. Vendor may not increase the fees under any Work Order, nor may any amendment or modification to a Work Order be effective, except through a Change Order executed by both parties pursuant to this Section 2.6 (Change Orders).
2.7 Delays. Subject to the terms of a Work Order, Vendor shall be responsible for meeting the project milestones, development methodologies, quality of the developed products, Deliverables, acceptance and documentation as further described in the applicable Work Order. Vendor may be required to adopt flexible hours or work in shifts to accommodate United States time zones. Vendor understands that failure to meet any scheduled milestones due to Vendor’s conduct (after reasonable attempts to cure any alleged failures occur) will result in immediate review by Customer and possible termination of the applicable Work Order under the terms of this Agreement.
3. PERFORMANCE OF SERVICES BY SUBCONTRACTORS.
3.1 Approval Process; Approval of Subcontractors. Prior to entering into discussions with any third party to subcontract or otherwise to delegate any Services or any other Vendor obligations hereunder, Vendor shall notify Customer of the proposed subcontractor, which notice shall include in addition to any other information requested by Customer: (a) the specific obligations that Vendor proposes to subcontract; (b) the scope of the proposed subcontract; (c) the identity, qualifications, and financial resources of the proposed subcontractor. Vendor shall not enter into any such discussions with such proposed subcontractor unless and until Customer approves such discussions in writing. If Customer approves such discussions, Vendor shall require the proposed subcontractor to execute those documents as required and described in Section 3.3 (Vendor Subcontracts).
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Notwithstanding the foregoing, Vendor shall not enter into any agreement or other arrangement with any third party to subcontract or otherwise delegate any Services or any of Customer’s other obligations under this Agreement without Customer’s prior written. A proposed Vendor subcontractor that is approved by Customer in accordance with the foregoing shall be deemed a “Vendor Subcontractor,” and such Vendor Subcontractor’s subcontract with Vendor shall be deemed a “Vendor Subcontract,” for purposes of this Agreement.
3.2 Replacement of Vendor Subcontractors. Without limiting any other provision of this Agreement, upon Customer’s request, Vendor shall replace any Vendor Subcontractor with a different third-party subcontractor (or shall perform the applicable subcontracted services or obligations itself) if Customer determines in its sole discretion that the continued use of such Vendor Subcontractor is not in Customer’s best interests.
3.3 Vendor Subcontracts. Without limiting any other provision of this Agreement, Vendor shall ensure that: (a) each Vendor Subcontract to include (i) as flow-down provisions, terms and conditions substantially similar to the provisions of Section 5 (Acceptance), Section 8 (Staffing), Section 9 (Confidentiality and Security), Section 11 (Intellectual Property Rights), Section 12.4 (Effect of Termination), Section 13 (Warranties), Section 14 (Indemnification), Section 15 (Limitation of Liability), Section 16 (Non-Solicitation), Section 18 (Record Retention and Audit) and Section 20 (Insurance) of this Agreement and any other provisions as necessary for Vendor to fulfill its obligations hereunder.
3.4 Responsibility. Vendor shall remain fully responsible and liable for all obligations, services, and functions performed by any Vendor Subcontractor to the same extent as if such obligations, services, and functions were performed by Vendor employees, and for purposes of this Agreement, such work shall be deemed work performed by Vendor.
4. PRICING AND PAYMENT.
4.1 Fees. All fees payable and that Vendor may charge under this Agreement (the “Charges”) for any Services, Deliverables, and any licenses or other rights hereunder, including any applicable fixed price and/or time and materials charges, are set forth in the applicable Work Order(s) hereto; provided, however that time and materials rates for staff augmentation Services shall be in accordance with Exhibit C (Rate and Discount Schedule) hereto. In the event that any Work Order contains an estimate of the Charges payable thereunder, the total Charges payable under such Work Order shall in no event exceed such estimate, unless otherwise agreed to in writing by the parties. For any T&M Services that are billed at a daily rate, Vendor’s daily billing rate shall be based on [***************] (including a lunch break not to exceed one hour) (a “Professional Day”). For Services performed on a time and materials basis that are billed a daily rate, any hours worked in excess of a Professional Day in any one day or on Saturdays, Sundays or holidays, shall be at no additional cost to Customer unless specifically authorized in advance in writing by Customer. Vendor may not include in Charges any fee associated with or cost or expense incurred by Vendor in preparing a bid to perform Services under this Agreement. Any time and materials Services billed on an hourly basis and performed on Saturdays, Sundays or holidays and/or after business hours shall be billed at the same rates provided in the applicable Work Order for Services performed during business hours. Vendor may not include in Charges any fee associated with or cost or expense incurred by Vendor in preparing a bid to perform Services under this Agreement.
4.2 Currency, Payment Details. All invoices and payments hereunder shall be in United States Dollars or such other local currency as the Parties may mutually agree in writing.
4.3 Payment; Expenses.
(a) As full compensation for any Services performed by Vendor pursuant to any Work Order, Customer shall pay Vendor fees and expenses for such Services rendered under the terms of such Work Order. Vendor shall invoice Customer monthly in arrears (or as otherwise mutually agreed to by the parties in writing) for fees and expenses incurred as a result of performing Services under the terms of the applicable Work Order. If expressly agreed to by the parties in a given Work Order, Customer shall pay for reasonable out-of-pocket expenses required and actually incurred by Vendor while performing Services (including air transportation (coach-economy only) and hotel/overnight accommodations, as applicable), provided that: (a) such expenses are in accordance with Customer’s expense policies, as may be modified from time to time; (b) Customer has approved such expenses in advance in writing; and (c) Vendor has described such expenses in writing in detail to Customer, and has submitted supporting documentation satisfactory to Customer. Notwithstanding the foregoing, the parties agree that (a) Customer shall not reimburse Vendor for normal commutation expenses or for travel and living expenses incurred by Vendor in performing Services at a Customer facility located in the same metropolitan area as that of Vendor’s address; and (b) any entertainment by or on behalf of Vendor shall be at no cost to Customer.
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(b) Upon any termination of this Agreement or any Work Order in accordance with Section 12.3 (Termination for Cause):
(i) With respect to T&M Services, Vendor shall be paid fees on a time and materials basis at the applicable rate set forth in Exhibit F for Vendor Application Development resources or, in the event Vendor is providing T&M Services unrelated to development on Vendor’s proprietary commercially available software applications, under the applicable Work Order for Services actually performed up to and including the effective date of such termination.
(ii) With respect to Work Orders’ for Fixed Price Services, other than for maintenance services, as to which there are not any interim milestones, Vendor shall be paid the lesser of: (A) time and materials fees (using the daily “rates set forth in the applicable Work Order for the days spent performing Services up to and including the effective date of such termination; or (B) the total fixed fee identified in the applicable Work Order divided by the Fixed Price Period, as defined below. The “Fixed Price Period” shall mean the total number of days (calendar days or business days, as specified in the applicable Work Order) for provision at such Services as initially estimated in the Work Order divided by the number of such days that Vendor actually performed Services under the Work Order.
The following example, which is given for illustrative purposes only, demonstrates how the above formula shall be used: Customer has engaged Vendor for development Services with a fixed fee of ninety thousand dollars ($90,0000.00) in which the estimated end date is ninety (90) calendar days from the start date. Customer then terminates the Work Order for convenience effective on the thirtieth (30th) day after the start date. As of the effective date of termination, Vendor has expended thirty (30) days using eight (8) programmers at a rate of one hundred and fifty dollars ($150.00) per day each. Thus, Vendor has expended thirty-six thousand dollars ($36,000.00) on the Work Order. However, upon termination, Customer will owe Vendor no more than thirty thousand dollars ($30,000.00) because the Fixed Price Period of thirty thousand dollars ($30,000.00) is lower than the amount\Vendor has expended on a time and materials basis, which in this example is thirty-six thousand dollars ($36,000.00).
(iii) With respect to Work Orders for Fixed Price Services as to which there are interim payments based on milestones, Vendor shall be paid: (A) any milestone payments associated with any Deliverables which have been accepted by Customer in accordance with Section 5 (Acceptance) prior to the effective date of termination; and (B) the lesser of: (1) time and materials fees (using the daily rates set forth in the Fee Schedule) for the time spent performing Services after the last milestone has been reached up to and including the effective date of termination; or (2) the result of the next milestone payment due divided by the Milestone.
Period (as defined below) which result shall be multiplied by the number of days (calendar or business days, as specified in the applicable Work Order) Vendor actually spent performing Services during the Milestone Period. The “Milestone Period” shall mean the total number of days (calendar or business days, as specified in the applicable Work Order) from the date the last milestone was reached to the date the next milestone was initially estimated to be reached (as set forth in the Work Order). The “Milestone Cap” shall mean a cap on fees calculated as follows: (amount of the next milestone payment otherwise due to Vendor divided by the Milestone Period) multiplied by the number of calendar or business days, as applicable, that Vendor actually performed Services during such Milestone Period.
The following example, which is given for illustrative purposes only, demonstrates how the above formula shall be used: Customer has engaged Vendor for development Services with a fixed fee of one hundred thousand dollars ($100,000.00) in which the estimated end date is forty (40) calendar days from the start date. There are four (4) Deliverables with associated milestone payments of twenty-five dollars ($25,000.00) each. The first Deliverable is due on the tenth (10th) day after the start date, the second Deliverable is due on the twentieth (20th) day after the start date, the third Deliverable is due on the thirtieth (30th) day after the start date and the fourth Deliverable is due on the fortieth (40th) day after the start date. Customer terminates the Work Order for convenience effective on the twenty-fifth (25th) date after the start date. As of the effective date of termination, Customer has accepted the first two (2) Deliverables. During the period in between the milestone date for the second Deliverable and the effective date of termination, Vendor expended five (5) calendar days using two (2) programmers at a
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rate of one hundred and fifty dollars ($150.00) each per day. Therefore, Vendor expended one thousand five hundred dollars ($1,500.00) on the Services after the first two (2) Deliverables were completed and accepted by Customer. Upon termination, Customer will owe Vendor fifty-one thousand, five hundred dollars ($51,500.00) for the Services performed under the Work Order, which is equal to payment for the two (2) Deliverables accepted plus time and materials fees based on the remainder of the time Vendor worked on the project. In this example, the amount actually expended by Vendor on a time and materials basis after the second Deliverable was accepted (one thousand five hundred dollars ($1,500.00)) is lower than the Milestone Cap (twelve thousand five hundred dollars ($12,500.00)). The Milestone Cap in this example is reached by dividing the next milestone payment due, which is twenty-five thousand dollars ($25,000.00), by ten (10) days and multiplying the result by five (5), which is the number of days that Vendor spent performing the Services after the first two (2) Deliverables were accepted.
(iv) With respect to Work Orders for maintenance Fixed Price Services (including enhancement Services that are bundled into maintenance Services), Vendor shall be paid for an amount equal to the total fixed price fee divided by the Maintenance Period (as defined below) multiplied by the number of calendar days between the first day of the term of the Work Order and the effective date of termination. The “Maintenance Period” shall mean the total number of calendar days contained in the term of the applicable Work Order.
The following example, which is given for illustrative purposes only, demonstrates how the above formula shall be used: Customer has engaged Vendor for maintenance Services with a fixed fee of one hundred thousand dollars ($100,000.00). The term of the Work Order is one (1) year. Therefore, the Maintenance Period for the Work Order is three hundred and sixty-five (365) calendar days. Customer then terminates the Work Order for convenience effective on the ninetieth (90th) day after the first day of the term. The amount that Customer will owe Vendor is equal to twenty-four thousand six hundred and fifty seven dollars and fifty-three cents ($24,657.53). This number was calculated by dividing the fixed price fee of one hundred thousand dollars ($100,000.00) by the Maintenance Period of three hundred and sixty-five (365) calendar days and multiplying the result by ninety (90), which is the number of calendar days between the first day of the term of the Work Order and the effective date of termination.
(c) In the event of termination by Customer of this. Agreement or any Work Order in accordance with Section 12.3 (Termination for Cause), Customer shall not be obligated to pay Vendor such amounts as set forth in Section 4.3(b) above.
4.4 Volume Discounts. For purposes of determining volume discounts and other pricing incentives, if any, made available by Vendor to Customer: (a) all Work Orders will be consolidated and the total amount of purchases under those Work Orders will be used for determining volume discounts and other pricing incentives except that all reimbursable expenses, applicable taxes and any expenses that the parties agree are “pass through” costs or purchases shall be excluded from the total amount of purchases used for the calculation; and (b) any software, hardware or other goods or services purchased by Customer and/or any Affiliate from Vendor pursuant to a separate agreement as of, or prior to, the Effective Date will also be consolidated and the total amount of such purchases will also be used for determining volume discounts and other incentives, except that all reimbursable expenses, applicable taxes and agreed to “pass through” costs or purchases shall be excluded from the total amount of purchases used for the calculation.
4.5 Taxes. Unless Customer provides Vendor with a valid and applicable exemption certificate within a commercially reasonable time, Customer will pay or reimburse the Vendor for sales, use, excise, services, consumption and other taxes or duties and analogous taxes (collectively, “Taxes”) that the Vendor is permitted or required to collect from Customer and which are assessed on the purchase, license and/or supply of Services and for which Vendor invoices Customer before the expiration of the later of the applicable Customer’s or Vendor’s statutory period for assessment of the relevant Taxes. Taxes shall not include any personal property taxes on property Vendor owns or leases, franchise and privilege taxes on its business and/or taxes based on its net income or gross receipts. Customer will not be responsible for any penalties related to the tax obligations of Vendor unless (i) such penalties accrue solely based on the actions or inactions of Customer and (ii) Customer had received reasonable prior written notice from the Vendor that the actions or inactions of Customer will be the sole basis for such. Vendor will be responsible for remitting applicable taxes. If Customer pays any tax to Vendor and if it is later held that that tax was not due, Vendor will refund the amount paid to Customer, together with all related interest paid by the applicable taxing authority. Any additional sales/use taxes assessed on Vendor’s provision of Services or Deliverables resulting from Vendor’s change in location from the location originally contemplated pursuant to the Work Order on which results from the relocation or redirection of the
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delivery, including temporary storage, of such Services or Deliverables, either of which is made for the Vendor’s convenience, will be paid by Vendor.
4.6 Requisition Invoice System. Customer may use a web-enabled system to automate the requisition and invoicing procedures in connection with the Services (the “Requisition Invoice System”). As of the Effective Date, the Requisition Invoice System is known as “Fieldglass InSite”. Vendor hereby agrees that any expenses incurred by Vendor in connection with Vendor’s access and use of the Requisition Invoice System shall be borne by Vendor. Further, Vendor shall be solely responsible for a transaction fee of one percent (1%) of all gross Charges processed through the Requisition Invoice System (the “Transaction Fee”). Vendor hereby agrees that Customer shall deduct such Transaction Fee from each invoice total prior to rendering payment to Vendor. Customer reserves the right to increase the Transaction Fee by providing written notice to Vendor.
5. ACCEPTANCE.
Unless otherwise stated in a Work Order, Customer shall have [***********] days from its receipt of any Deliverable under any Work Order (the “Acceptance Period”) to review and evaluate such Deliverable to determine whether the Deliverable conforms in all material respects to the acceptance requirements specific to the particular Deliverable set forth in such Work Order or other acceptance criteria otherwise provided by Vendor to Customer, and agreed to by the parties in writing (“Acceptance Criteria”) pursuant to an acceptance plan. The Deliverables shall be deemed accepted by Customer upon the earlier of: (a) Customer’s written notification to Vendor of such acceptance; or (b) Customer’s use of the Deliverable in a production environment, unless the SOW indicates that the Deliverable will be used in production prior to acceptance by Customer. If Customer rejects a particular Deliverable within the Acceptance Period, Customer shall, at Vendor’s request, provide Vendor within the Acceptance Period, with a list or description of the inadequacies, defects, deficiencies or other problems that led to the Deliverable’s non-conformance to the Acceptance Criteria and the rejection. Vendor shall have 20 days following Customer’s written notice of rejection in which to provide a corrected Deliverable to Customer. In the event that Deliverable again does not comply in all material respects with the Acceptance Criteria and Customer does not accept such corrected Deliverable on such basis, Customer may, in its sole discretion and in addition to any other available remedies, either (a) grant Vendor a further five (5) days (or such longer period as Customer may, in its sole discretion, decide) in which to correct any problems; or (b) deem Vendor’s failure to provide to Customer an acceptable Deliverable to be a default, and immediately terminate this Agreement or the applicable Work Order in part or in whole without further opportunity to cure.
6. TRAINING SERVICES.
Upon Customer’s request, Vendor shall train those individual Customer employees and agents designated in writing by Customer on all technical and operational features of the Deliverables, including any features required to operate the Deliverables on a day-to-day basis (collectively, the “Training Services”). Vendor shall provide sufficient supporting Documentation to enable such Training Services and for an effective knowledge transfer between Vendor and such designated individuals. The Training Services shall be conducted at any Facility selected by Customer, pursuant to the terms of the Work Order and shall be deemed to be Services for purposes of this Agreement.
7. REPORTING; CERTIFICATIONS.
7.1 Reporting. Vendor shall participate in status review meetings as set forth in each Work Order or as requested by Customer. Vendor shall also supply Customer with any other reports specifically set forth in any Work Order. Vendor agrees to provide all such reports and participate in all such meetings at no additional cost to Customer.
8. STAFFING.
8.1 Relationship and Project Managers. During the Term, Vendor will provide (at no additional cost to Customer) a qualified Vendor employee to serve as a relationship manager (“Relationship Manager”). The Relationship Manager will (a) be the point person in charge of the overall business relationship between Vendor and AIGGS (b) operate as the main interface between AIGGS and Vendor on a national level, and (c) be responsible for all project and metrics performance, company-wide reporting, pricing negotiation and resolution of all related issues. Customer and Vendor shall also each designate an appropriate representative to function as their respective Project Managers for each Work Order. Vendor’s Project Manager will have responsibility to coordinate and interface its Personnel with Customer and its personnel in a manner reasonable to Customer. Customer’s Project Manager will be charged with the responsibility of acting as Vendor’s principal point of
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interface with Customer for the Services covered by such Work Order.
8.2 Continuity and Replacement of Personnel. Vendor agrees to use its best efforts to maintain the continuity of Personnel assigned to perform Services. In the event that any Vendor Personnel performing Services hereunder is found to be unacceptable to Customer (including demonstration that he or she is not qualified to perform based on the tier level and experience requested, or has provided false information on his or her resume), Customer shall have the right to notify Vendor of such fact (without waiving any other rights or remedies it may have hereunder) and Vendor shall promptly remove such Vendor Personnel from performing Services under the applicable Work Order and, if requested by Customer, provide a replacement with similar experience, suitable ability and suitable qualifications who is reasonably acceptable to Customer, at no additional cost to Customer. In the event that any anticipated or actual delays in meeting Customer’s deadlines or scheduled completion dates for work being performed under any Work Order are caused solely by the unacceptable performance of any Vendor Personnel and no other reason such as failure of Customer to perform its obligations under a Work Order in a timely and reasonable manner, Vendor may provide additional temporary Vendor Personnel and at no additional cost to Customer, in order to complete the applicable Services in a timely manner. For any Services performed on a time and materials basis, Vendor will provide immediate written notice to Customer when any Vendor Personnel leaves his or her assignment and will not reinstate such Vendor Personnel in such assignment without Customer’s prior written consent.
8.3 Personnel Requirements. Prior to any Personnel providing any Services or having any access to Customer’s Confidential Information, all such Personnel shall execute (a) a Personnel Non-Disclosure & Assignment of Invention Agreement with Vendor, and (b). Customer shall be provided with a copy of such Personnel’s individual resumes. Any changes to the Personnel Non-Disclosure & Assignment of Invention Agreement shall be approved in writing by Customer. Vendor further understands that (a) proficient verbal and written English language skills are a requirement for provision of the Services and (b) Personnel may be asked to provide Services at facilities owned, operated or used by or on behalf of competitors of Vendor.
8.4 Competitors. For a period [*************] after any individual Personnel ceases performing Services under an applicable Work Order, Vendor shall not, without Customer’s prior written permission, assign such Personnel to a third party who is in direct competition with both the Customer identified under a specific Work Order and the products and technology of Customer without Customer’s prior written consent (“Competing Company”) if such Personnel was (i) substantively exposed to Customer’s Confidential Information at any time during the performance of the Services; and (b) if such personnel will be assigned to a competitor project that is similar in Business Scope to the Services performed by the Personnel for Customer. “Business Scope” shall mean a competitor project with competing technologies and products of Customer related to insurance products and services which supports the same line of business as the Customer’s line of business for which the Services were performed by Vendor pursuant to a Work Order. Prior to Customer granting or denying consent, Vendor shall identify in writing the name of the Personnel, the name of the Competing Company such Personnel is being considered for, and the type of service such Personnel would perform for the Competing Company (“Competing Company Notice”). Customer shall provide Vendor with its notification of consent or rejection (in writing) within one (1) week of Customer’s receipt of the Competing Company Notice.
8.5 Communications.
(a) Vendor and Customer shall agree in the Work Order with respect to terms and conditions regarding provisions related to communications, network, hardware, infrastructure, availability, accessibility and related requirements.
(b) Vendor will provide 256 kbps Internet bandwidth on a shared Internet link to set up a site to site VPN or a Customer initiated VPN.
(c) Dedicated data or Internet bandwidth, including associated hardware may also be provided subject to the terms of a Work Order.
8.6 Relationship of the Parties. Vendor’s relationship with Customer shall be that of an independent contractor and nothing in this Agreement should be construed to create a partnership, joint venture, agency or employer-employee relationship between the parties. Vendor is not the agent of Customer and is not authorized and shall not have any authority to make any representation, contract or commitment on behalf of Customer, or otherwise bind Customer in any respect whatsoever. Further, it is not the intention of this Agreement or of the parties hereto to confer a third party beneficiary right of action upon any third party or entity whatsoever, and
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nothing in this Agreement shall be construed to confer upon any third party other than the parties hereto a right of action under this Agreement or in any manner whatsoever. Neither Vendor, Vendor Personnel nor any Vendor agent shall be entitled to any of the benefits Customer may make available to its employees, such as group insurance, profit-sharing or retirement benefits. Vendor shall be solely responsible for all tax returns (and all costs related thereto) required to be filed with or made to any federal, state or local tax authority with respect to Vendor’s performance of services and receipt of fees under this Agreement. Customer may regularly report amounts paid to Vendor with the Internal Revenue Service as required by law. Because Vendor is an independent contractor, Customer shall not withhold or make payments for social security, make unemployment insurance or disability insurance contributions, or obtain worker’s compensation insurance on Vendor’s, nor Vendor Personnel’s and/or Vendor agents’ behalf. Vendor shall comply with, and shall accept exclusive liability for non-compliance with, all applicable federal, state and local laws, rules and regulations, including obligations such as payment of all taxes, social security, disability and other contributions based on fees paid to Vendor, its agents or employees under this Agreement. Vendor shall indemnify, hold harmless and defend Customer against any and all such liability, taxes or contributions, including penalties and interest, subject to Customer’s obligations with respect to indemnification set forth in Section 14.2 (Notice; Cooperation; Settlement) below.
9. CONFIDENTIALITY AND SECURITY.
9.1 Each party, in performing its obligations under this Agreement, may have access to or be exposed to, directly or indirectly, confidential and/or proprietary materials of the other party (“Confidential Information”). In the case of Customer, Confidential Information shall include all Work Product (excluding Vendor Proprietary Information); all information concerning the operations, affairs, products, marketing, systems, technology, customers, end-users, and businesses, including financial affairs, of Customer and/or any Affiliate, and their respective relations with their customers, employees, agents, and service providers (including customer lists, customer data, transaction information, completed insurance forms, supplier data, know-how, third party software and/or products provided by Customer to Vendor for use by Vendor and information regarding consumer markets); all Client Data (as defined below); and any other proprietary and trade secret information of Customer and/or any Affiliate, whether in oral, graphic, written, electronic or machine-readable form. In the case of Vendor, Confidential Information shall include the Vendor Proprietary Information and other Vendor information designated in writing by Vendor as Confidential Information. For purposes of this Agreement, “Client Data” shall mean (a) any information from which an individual may be identified; (b) any information concerning an individual that would be considered “nonpublic personal information” within the meaning of Title V of the Gramm-Leach Bliley Act of 1999 (Public Law 106-102, 113 Stat. 1338) and its implementing regulations, as the same may be amended from time to time; (c) any information regarding Customer’s (and/or its Affiliates’) clients or prospective clients received by Vendor in connection with the performance of its obligations under the Agreement, including (i) an individual’s name, address, e-mail address, IP address, telephone number and/or social security number, (ii) the fact that an individual has a relationship with Customer and/or its parent, affiliated or subsidiary companies, (iii) an individual’s account information; (iv) any information regarding an individual’s medical history or treatment; and (v) any other information of or relating to an individual that is protected from disclosure by applicable Privacy Laws. For purposes of this Agreement, “Privacy Laws” shall mean any national, federal, state or local laws, rules or regulations of any jurisdiction relating to the nonpublic personal information, including the Health Insurance Portability and Accountability Act of 1996 and its implementing regulations and CA SB 1386 regarding privacy, as the same may be amended from time to time. To the extent that there is a conflict between this Section 9 and Section 10 regarding the scope of Vendor’s confidentiality obligations and/or any applicable confidentiality exclusions with respect to Client Data, the terms and conditions of Section 10 shall govern.
9.2 Exclusions. Except with respect to Client Data, Confidential Information shall not include information which can be demonstrated: (a) to have been rightfully in the possession of the receiving party from a source other than the disclosing party prior to the time of disclosure of said information to the receiving party hereunder (“Time of Receipt”); (b) to have been in the public domain prior to the Time of Receipt; (c) to have become part of the public domain after the Time of Receipt by a publication or by any other means except an unauthorized act or omission by, or breach of this Agreement on the part of, the receiving party or its employees or agents; or (d) to have been supplied to the receiving party after the Time of Receipt without restriction by a third party who is under no obligation to the disclosing party to maintain such information in confidence. In addition, a recipient may use or disclose Confidential Information to the extent such recipient is legally compelled to disclose such Confidential Information, provided that the recipient shall use reasonable efforts to give advance notice of such compelled disclosure to the disclosing party, and shall cooperate with the disclosing party in connection with any efforts to prevent or limit the scope of such disclosure and/or use of such Confidential Information.
9.3 Restrictions on Use and Disclosure. Each party agrees to hold all Confidential Information of the
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other party in strict confidence and shall not, without the express prior written permission of a member of the disclosing party authorized by the disclosing party to make such decisions, (a) disclose such Confidential Information to third parties other than a regulatory authority having jurisdiction over the receiving party; or (b) use such Confidential Information for any purposes whatsoever, other than the exercise of its rights or performance of its obligations hereunder. Each party shall disclose the other party’s Confidential Information only: (i) to those of its employees and agents who have a need to know such Confidential Information in order to exercise such receiving party’s rights or perform such receiving party’s obligations pursuant to this Agreement and (ii) to any regulatory authority having jurisdiction over the receiving party. Each party shall use reasonable efforts to assist the other party in identifying and preventing any unauthorized use or disclosure of any Confidential Information. Without limiting the foregoing, each party shall immediately advise the other party in the event that it learns or has reason to believe that any person who has had access to the Confidential Information of such party has violated or intends to violate the terms of this Agreement, and shall cooperate in seeking injunctive relief against any such person.
9.4 Vendor Personnel. Vendor shall ensure that any Vendor Personnel performing Services hereunder or Vendor agents comply with the provisions of this Section 9 and Section 10 below. Without limiting the foregoing, Vendor shall cause any Vendor Personnel performing Services hereunder or Vendor agents to enter into a written agreement binding such Vendor Personnel and Vendor agents to the provisions of this Section 9 and Section 10 below.
9.5 No Implied Rights. Nothing contained in this Section 9 shall be construed as obligating either party to disclose its Confidential Information to the other party, or as granting to or conferring on either party, whether expressly or by implication, any ownership interest in or any right or license to any Confidential Information of the other party.
9.6 Survival. This Section 9 shall survive termination or expiration of this Agreement for any reason for a period of three (3) years, except with respect to Client Data and trade secrets, as to which the obligations set forth in this Section 9 shall survive indefinitely.
10. CLIENT DATA
Without limitation of the terms and conditions set forth in Section 9, the following terms and conditions shall apply with respect to all Client Data:
10.1 Generally. The parties acknowledge that the Privacy Laws govern disclosures of nonpublic personal information about consumers. Vendor acknowledges that pursuant to the Privacy Laws, Customer is required to obtain certain undertakings from Vendor with regard to the privacy, use and protection of Client Data. Vendor shall protect and keep strictly confidential all Client Data. At any time, upon Customer’s request, Vendor shall return to Customer all Client Data in its possession. Customer shall be under no obligation to take any action that, within Customer’s judgment, would constitute a violation of the Privacy Laws or its internal privacy policies.
10.2 Vendor Covenants With Respect to Client Data. Notwithstanding any other provision of this Agreement, Vendor covenants that, with respect to any Client Data, Vendor shall: (a) comply with all applicable laws, regulations and best practices regarding data security and privacy in performing the Services and its other obligations hereunder; (b) inform itself regarding, and comply with, Customer’s privacy policies and all applicable privacy laws, including the Privacy Laws; (c) keep all Client Data strictly confidential, and not disclose any Client Data to third parties other than a regulatory authority having jurisdiction over the receiving party or use any Client Data except to the extent necessary to perform the Services and in accordance with Customer’s privacy policies and all applicable privacy laws, including the Privacy Laws; (d) not disclose any Client Data to any other entity (including Vendor’s third party service providers), other than a regulatory authority having jurisdiction over the receiving party, without the prior written consent of Customer and an agreement in writing from such other entity to use or disclose such Client Data only to the extent necessary to carry out Vendor’s obligations under this Agreement and for no other purposes; (e) maintain (and require entities approved in accordance with foregoing subsection (d) to maintain) reasonable administrative, technical, and physical safeguards designed to ensure the security and confidentiality of Client Data, protect against any anticipated threats or hazards to the security or integrity of Client Data, and protect against unauthorized access to or use of Client Data that could result in substantial damage to an individual; (f) not make any changes to its security measures that would materially reduce its present coverages ; (g) notify Customer immediately in writing when Vendor becomes aware of any material breach of its security safeguards or has reason to believe that Client Data may have been subject to
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unauthorized disclosure, access, or use, which notification shall include the following information: (i) the nature of the unauthorized disclosure or use; (ii) the Client Data disclosed or used; (iii) the identity of the person(s) or entity(ies) who received the unauthorized disclosure or made the unauthorized use; (iv) what corrective action Vendor took or will take to prevent further unauthorized disclosures or uses; (v) what Vendor did or will do to mitigate any deleterious effect of such unauthorized disclosure or use; and (vi) such other information as Customer may reasonably request; and (h) take all reasonable and appropriate steps, at Vendor’s expense, including the provision of notice to affected individuals, to protect Client Data in the event of a failure of Vendor’s security safeguards or unauthorized access to Client Data from or through Vendor.
10.3 Unauthorized Use or Disclosure of Client Data. Vendor acknowledges and agrees that any unauthorized use or disclosure of Client Data would cause immediate and irreparable harm to Customer for which money damages would not constitute an adequate remedy, and that in the event of any unauthorized use or disclosure of Client Data, Customer will be entitled to immediate injunctive relief. Notwithstanding any other terms or conditions of this Agreement, in the event that Vendor intentionally and willfully, or due to Vendor’s gross negligence, breaches any of its representations, warranties, or obligations under this Section 10, Customer shall be entitled to recover money damages, including special, incidental, punitive or consequential damages, whether based on breach of contract, tort (including negligence), or otherwise; and, if Vendor is found liable for such breach by court of competent jurisdiction or as a result of a settlement, Vendor shall be required to bear all costs of notifying Customer’s customers or employees of any unauthorized access to their Client Data. Any breach of this Section 10 shall be deemed a material breach of this Agreement.
10.4 Security. Without limiting any other provisions of this Agreement (including Exhibit C), Vendor shall take reasonable measures intended to protect Customer’s Confidential Information, including those set forth in the Security Requirements and Vendor shall provide the following throughout the Term:
(a) if set forth in the applicable Work Order as agreed to by the parties, Customer’s Confidential Information shall be logically and physically segregated from Vendor’s Confidential Information and from third-party information and materials (including the information and materials of all other clients of Vendor), and that any such separation shall at least be achieved by means of maintaining separate computers and servers for storing, using and accessing Customer’s Confidential Information;
(b) The Facilities and any other building(s) in which Vendor keeps any Customer’s Confidential Information shall have restricted access twenty (24) hours a day, with detailed and complete access logs maintained and provided to Customer upon written request;
(c) Electronic and physical access to Customer’s Confidential Information shall be restricted to persons authorized in writing by Customer to access and use such Confidential Information, and detailed and complete access logs shall be maintained and provided to Customer upon written request; and :
(d) If agreed upon in a Work Order, the network connections between Customer and Vendor shall be separated by a firewall such that the firewall precludes unauthorized access to Customer’s network, and Vendor access will be limited to systems and data that Vendor requires for the completion of the applicable Services.
11. INTELLECTUAL PROPERTY RIGHTS.
11.1 Assignment. Vendor agrees that any and all Deliverables shall, upon creation and payment, be considered “work made for hire” within the meaning of the Copyright Act of 1976, as amended (“Act”), of which Customer is the author within the meaning of such Act. To the extent that any Deliverables may not be considered “work made for hire,” Vendor, upon payment for such Deliverable, hereby irrevocably assigns and agrees to assign to Customer all right, title and interest worldwide in and to the Deliverables in perpetuity (whether currently existing or conceived, created or otherwise developed later), including all copyrights, trademarks, trade secrets, patents, industrial rights and all other intellectual and proprietary rights related thereto (the “Proprietary Rights”), effective immediately upon the inception, conception, creation or development thereof and for no further consideration (“Assignment”). The Proprietary Rights shall include all rights, whether existing now or in the future, whether statutory or common law, in any jurisdiction in the world, related to the Deliverables, together with all national, foreign and state registrations, applications for registration and all renewals and extensions thereof (including any continuations, continuations-in-part, divisionals, reissues, substitutions and reexaminations); all goodwill associated therewith; and all benefits, privileges, causes of action
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and remedies relating to any of the foregoing, whether before or hereafter accrued (including the exclusive rights to apply for and maintain all such registrations, renewals and extensions; to sue for all past, present and future infringements or other violations of any rights relating thereto; and to settle and retain proceeds from any such actions). Except as may be set forth in the applicable Work Order or otherwise agreed to in writing by the parties, Vendor retains no rights to use the Deliverables and agrees not to challenge the validity of Customer’s ownership in the Deliverables. The Assignment shall not lapse under any circumstances, including any failure of Customer to exercise any of its rights under the Assignment for any period, which includes Customer not making use of the Deliverables for any period.
11.2 License; Waiver of Rights. To the extent, if any, that any Deliverables or Proprietary Rights are not assignable or that Vendor retains any right, title or interest in and to any Deliverables or any Proprietary Rights, Vendor (a) unconditionally and irrevocably waives the enforcement of such rights, and all claims and causes of action of any kind against Customer with respect to such rights; (b) agrees, at Customer’s request and expense, to consent to and join in any action to enforce such rights; and (c) hereby grants to Customer a perpetual, irrevocable, fully paid-up, royalty-free, transferable, sublicensable (through multiple levels of sublicenses), exclusive, worldwide right and license to use, reproduce, distribute, display and perform (whether publicly or. otherwise), prepare derivative works of and otherwise modify, make, have made, sell, offer to sell, import and otherwise use and exploit (and have others exercise such rights on behalf of Customer) all or any portion of such Deliverables in any form or media (now known or later developed). The foregoing license includes the right to make any modifications to such Deliverables regardless of the effect of such modifications on the integrity of such Deliverables, and to identify Vendor, or not to identify Vendor, as one or more authors of or contributors to such Deliverables or any portion thereof, whether or not such Deliverables or any portion thereof have been modified. Vendor further irrevocably waives any “moral rights” or other rights with respect to attribution of authorship or integrity of such Deliverables that Vendor may have under any applicable law under any legal theory. Vendor hereby waives and quitclaims to Customer any and all claims, of any nature whatsoever, which Vendor now or may hereafter have for infringement of any Deliverables or Proprietary Rights assigned and/or licensed hereunder to Customer.
11.3 Background Technology, Third Party Technology and Vendor Proprietary Information.
(a) The assignment obligations in Section 11.1 (Assignment) above shall not apply to: (i) any Background Technology; or (ii) any Third Party Technology.
(b) Vendor represents and warrants that each applicable Work Order contains a complete list of all Background Technology and Third Party Technology (if any) that Vendor intends to use in connection with the provision of the Services thereunder, or that are or shall be incorporated into, or that are necessary or desirable for the use and exploitation of, any Deliverables provided thereunder.
(c) To the extent that the provision of the Services, or the use or exploitation of any Deliverables, requires the use or incorporation of any Background Technology, Third Party Technology or any other confidential or proprietary information or materials of Vendor or any third party (“Vendor Proprietary Information”), Vendor shall (i) obtain the prior written authorization of Customer for the use or incorporation thereof, and (ii) at Customer’s request, provide Customer with copies of any such Background Technology, Third Party Technology and/or Vendor Proprietary Information.
(d) All Vendor Proprietary Information shall be marked “confidential” or “proprietary,” or, if disclosed orally or in any other intangible form, shall be summarized in writing within fifteen (15) days after such disclosure. Vendor shall notify Customer in writing before Vendor uses or incorporates, or makes any disclosure to or performs any work on behalf of Customer that appears to conflict with proprietary rights which Vendor or any third party claims in, any Background Technology, Third Party Technology or Vendor Proprietary Information. If Vendor fails to obtain such authorization or give such notice, Vendor agrees that it shall make no claim against Customer with respect to any such Background Technology, Third Party Technology or Vendor Proprietary Information and shall indemnify, defend and hold harmless Customer from any third party claim relating to any such Background Technology, Third Party Technology or Vendor Proprietary Information.
(e) Unless otherwise expressly set forth in a Work Order or otherwise agreed to by the parties in writing, to the extent any Background Technology, Third Party Technology and/or Vendor Proprietary Information is incorporated into or otherwise included in, or is necessary or desirable for the use or exploitation of, any Deliverables, Vendor hereby grants to Customer a perpetual, irrevocable, fully paid-up, royalty-free, transferable, sub licensable (through multiple levels of sublicensees), exclusive, worldwide right and license to
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use, reproduce, distribute, display and perform (whether publicly or otherwise), prepare derivative works of and otherwise modify, make, have made, sell, offer to sell, import and otherwise use and exploit (and have others exercise such rights on behalf of Customer) all or any portion of such Background Technology, Third Party Technology and/or Vendor Proprietary Information in connection with developing, enhancing, marketing, distributing or providing, maintaining or supporting, or otherwise using or exploiting Customer products and services in any form or media (now known or later developed), without any obligation to account to Vendor or any third party.
11.4 Assistance.
(a) Vendor agrees to cooperate with Customer or its designee(s), at Customer’s expense, both during and after the Term, in applying for, obtaining, perfecting, evidencing, sustaining and enforcing Customer’s Proprietary Rights in the Deliverables, including executing such written instruments as may be prepared by Customer and doing such other acts as may be necessary in the opinion of Customer to obtain a patent, register a copyright, or otherwise enforce Customer’s rights in such Deliverables.
(b) For the purpose described in Section 10.4(a) above, Vendor hereby irrevocably appoints Customer and any of its officers and agents as its attorney-in-fact to act for and on Vendor’s behalf and instead of Vendor, with the same legal force and effect as if such acts were executed by Vendor.
12. TERM; TERMINATION.
12.1 Term. This Agreement shall commence on the Effective Date and continue until the earlier of (a) the end of the term, if any, set forth in the last Work Order, or (b) termination by either party in accordance with this Agreement (the “Term”).
12.2 Termination for Convenience. Customer may terminate this Agreement and/or any Work Order, in whole or in part, for convenience, with or without cause, at any time upon ten (10) days written notice to Vendor, and agrees to pay Vendor (in accordance with Section 4.3 (Payment; Expenses) for the Services actually received by Customer prior to the effective date of termination.
12.3 Termination for Cause.
(a) If either party materially defaults in any of its obligations under this Agreement, the non-defaulting party, at its option shall have the right to terminate this Agreement by written notice unless the defaulting party remedies the default within thirty (30) days after receipt of written notice of such default.
(b) In the event that Vendor does not meet or exceed the performance standards set forth in the Performance Requirements, or as otherwise established from time to time by Customer, in any four (4) months in any one year period, Customer shall also have the right to terminate this Agreement immediately without any right to cure.
(c) In addition, Customer may terminate this Agreement immediately (without any right to cure) for any breach by Vendor of Section 9 (Confidentiality and Security), Section 10 (Client Data) or the Security Requirements.
12.4 Effect of Termination. Upon the effective date of any termination or expiration of this Agreement or any Work Order for any reason:
(a) Vendor shall immediately cease performing any Services under this Agreement;
(b) Customer agrees to pay Vendor, in accordance with Section 4 (Pricing and Payment), all fees and expenses with respect to Services actually rendered prior to the effective date of termination.
(c) Vendor shall (i) upon full payment to Vendor of all fees and expenses due prior to termination, deliver to Customer a copy of all Deliverables, whether complete or incomplete as of such date; (ii) destroy or erase, and cause all Vendor Subcontractors to destroy or erase, all copies of Customer Confidential Information in Vendor’s or Vendor Subcontractors’ care, custody or control; (iii) provide Customer with a certification, by an officer of Vendor, of such destruction or erasure; and (iv) provide Customer with hard copies and electronic copies of all plans, manuals, procedures and policies used by Vendor or Vendor Subcontractors in connection with providing the Deliverables and Services hereunder; and
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(d) Customer shall not be required to make or be liable for any payments to Vendor that would have otherwise accrued after effective date of termination or expiration of this Agreement and/or any Work Order.
12.5 Survival. This Section 12.5 (Survival) and Sections 1 (Definitions), 3.4 (Responsibility), 4 (Pricing and Payment), 8.4 (Competitors), 9 (Confidentiality and Security), 11 (Intellectual Property Rights), 12.4 (Effect of Termination), 12.6 (Rights on Termination), 12.7 (Termination Assistance), 13 (Warranties), 14 (Indemnification), 15 (Limitation of Liability), 16 (Non-Solicitation), 18 (Record Retention and Audit), 20 (Insurance) and 21 (General Provisions) shall survive any termination or expiration of this Agreement. Termination of this Agreement by either party shall not act as a waiver of any breach of this Agreement and shall not act as a release of either party from any liability for breach of such party’s obligations under this Agreement.
12.6 Rights on Termination. Neither party shall be liable to the other for damages of any kind solely as a result of terminating this Agreement in accordance with its terms, and termination of this Agreement by a party shall be without prejudice to any rights, remedies or liabilities (including the right to claim damages) of such party under this Agreement or applicable law.
12.7 Termination Assistance. As part of the Services, Termination Assistance shall be provided to Customer at the then prevailing rates (as adjusted pursuant to any terms in the applicable Work Order or this Agreement, as the case may be), in accordance with the following terms and conditions:
(a) Generally. At Customer’s request, during Termination Assistance Period, Vendor shall provide Customer and its designee(s) with reasonable termination assistance requested by Customer to allow the services provided pursuant to this Agreement (including the Services) to continue without material interruption or material adverse effect on the business operations of AIGGS or any Affiliate following any expiration or termination of this Agreement, and to facilitate the transfer of such services (and any Deliverables being created in connection with such services) to Customer or its designee(s) (such assistance, the “Termination Assistance”). Vendor shall provide such Termination Assistance in accordance with this Section 12.7(a), even in the event Vendor has terminated this Agreement for cause provided that Customer is current with respect to any outstanding payments, fees and expenses due or owing hereunder.
(b) Charges. All Termination Assistance shall be billed to Customer at the rates set forth in the applicable Work Order at the time of termination (as adjusted pursuant to any terms in the applicable Work Order).
(c) Termination Assistance Services. All Termination Assistance shall be provided subject to the terms and conditions generally governing Vendor’s provision of the Services hereunder. Vendor shall perform all Termination Assistance with at least the same degree of performance, timeliness, accuracy, quality, completeness, responsiveness, and resource efficiency with which Vendor provided and was required to provide the Services. After the expiration of the Termination Assistance Period, Vendor shall answer questions from and reasonably cooperate with Customer regarding the Services on an “as needed” basis, at the rates set forth in applicable Work Order. Without limiting the generality of the foregoing, Termination Assistance shall include the following:
(i) Within fifteen (15) days after the commencement of the Termination Assistance Period, Vendor shall provide Customer with (a) a detailed written description of all Services provided pursuant to this Agreement, including: (i) a description of staffing levels and Vendor’s structure/organization used to provide such Services; (ii) a detailed list of all support and development software and tools used in performing such Services; and (iii) a complete plan for know-how and knowledge transfer that enables a smooth transition of the functions performed by Vendor, including development of Deliverables, and all other Services hereunder, to Customer and its designee(s) (such plan, the “Turnover Plan”). The Turnover Plan shall be deemed Customer’s Confidential Information and sole property. Upon Customer’s approval of the Turnover Plan, Vendor shall provide all further Termination Assistance in accordance with such Turnover Plan. No provision of Termination Assistance shall be deemed complete hereunder until the Customer Project Manager confirms in writing that all tasks and Deliverables set forth in the applicable Turnover Plan have been completed and delivered.
(ii) Vendor shall provide sufficient Personnel with current knowledge of the Deliverables, the Services, and this Agreement, to work with the appropriate staff of Customer and, if
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applicable, its designee(s), to provide any Termination Assistance and to define the specifications for turnover in a manner consistent with the applicable Turnover Plan. Vendor shall cooperate with Customer and its designees in transitioning any functions performed by Vendor or any Vendor Subcontractor under this Agreement in the same manner as described in Section 3 (Performance of Services by Subcontractors) for third parties performing any of the Services.
(iii) Vendor shall promptly cooperate with Customer and its designees, and provide Customer and its designees, with any information necessary to effectuate a smooth transfer of the functions performed under this Agreement.
(iv) Vendor shall use its best efforts to obtain any rights necessary to make available to Customer and its designees and shall make available to Customer and its designees pursuant to reasonable terms and conditions, any third party materials or services then being used by Vendor or Vendor Subcontractors in performing Services (including services being provided through third party service or maintenance contracts).
13. WARRANTIES.
13.1 Vendor Representations and Warranties. Vendor represents, warrants and covenants to AIGGS that:
Vendor represents, warrants and covenants to Customer that: (a) Vendor has the full power and authority to enter into this Agreement and to perform its obligations hereunder, without the need for any consents, approvals or immunities not yet obtained; (b) Vendor’s execution of and performance under this Agreement shall not breach any oral or written agreement with any third party or any obligation owed by Vendor to any third party to keep any information or materials in confidence or in trust; (c the Services and Deliverables shall be free from material errors, bugs, or other material defects and shall substantially conform to any written specifications for such Services and/or Deliverables as agreed upon by the parties in writing as part of a Work Order or as set forth or referenced in any applicable Work Order for [*************] (or such other period as agreed to the parties in writing) following acceptance of such Services or Deliverables in accordance with Section 5 (Acceptance) (“Warranty Period”); (d) the Services shall be performed in a professional and timely manner consistent with the generally accepted industry standards; (e) any Vendor Personnel performing Services shall be qualified to perform such Services, have appropriate experience, education and training to perform such Services and be familiar with the technology, processes and procedures used to provide such Services; (f) subject to the IP Exceptions (as defined below) and Section 14 below, including Section 14.3, the Work Product (excluding any third party software) shall be the original work of Vendor, and each Vendor Personnel or other person involved in the development of Work Product has executed (or prior to any such involvement, shall have executed) a written agreement with Vendor in which such person (i) assigns to Vendor all right, title and interest in and to the Work Product in order that Vendor may fully grant the rights and assignments to Customer as provided herein and (ii) agrees to be bound by confidentiality and non-disclosure obligations no less restrictive than those set forth in this Agreement; (g) subject to the IP Exceptions (as defined below) and Section 14 below, Vendor has the right to grant the rights and assignments granted herein, without the need for any assignments, releases, consents, approvals, immunities or other rights not yet obtained; (h) subject to the IP Exceptions (as defined below) and Section 14 below, the Services and Deliverables (excluding any third party software) (and the exercise of the rights granted herein with respect thereto) do not and shall not infringe, misappropriate or violate any patent, copyright, trademark, trade secret, publicity, privacy or other intellectual property or other rights of any third party, and are not and shall not be defamatory or obscene; (i) the Services and Deliverables shall be free from any viruses, worms, Trojan horses or other harmful or malicious code or components, and free from any “self-help” code or other disabling code; (j) subject to the IP Exceptions (as defined below) and Section 14 below, neither the Deliverables nor any element thereof shall be subject to any restrictions or to any mortgages, liens, pledges, security interests, encumbrances or encroachments; (k) Vendor shall comply with all applicable laws and regulations; (l) if a Deliverable will contain any open source code, Vendor will identify such open source code in the applicable Work Order or Change Order and will attach a copy of the license to such open source code to the Work Order or Change Order, as the case may be; and (m) Vendor shall comply with Section 13 (Client Data) below.
Notwithstanding anything to the contrary, If Customer notifies Vendor in writing of a breach of the warranty in Section 13.1(c) within the Warranty Period, Vendor shall promptly correct and repair (at
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no cost to Customer) any such non-compliance that prevents such Service from conforming and performing as warranted immediately above. Notwithstanding the foregoing, Vendor’s obligations under this Section 13.1 (c) shall not apply to the extent that the defect, Error or Bug or non-conformance with the specifications or warranty , is caused by (i) modifications or customization of the Deliverables which are not created, authorized in writing, or directed in writing by Vendor, but only to the extent that such modifications, customization caused the non-compliance; (ii) Customer’s hardware malfunction, but only to the extent that such hardware malfunction caused the non-compliance, (iii) third party software not licensed through Vendor and/or incorporated by Vendor into the Deliverable, but only to the extent that such third party software caused the non-compliance,, or (iv) the installation of the Deliverable in a hardware or operating environment expressly prohibited by the applicable Work Order. For purposes of this Section, “Error” or “Bug” shall mean any error or defect in the Services (or Deliverables) in which the Services (or Deliverables) fail to operate in conformity with the Specifications which were tested as part of, and as a condition to, Acceptance testing and Acceptance.
13.2 Disclaimer. EXCEPT AS SET FORTH IN THIS SECTION 13 OR AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES, AND EACH PARTY HEREBY DISCLAIMS, ANY OTHER REPRESENTATIONS OR WARRANTIES OF ANY KIND, WHETHER EXPRESS, IMPLIED (EITHER IN FACT OR BY OPERATION OF LAW), OR STATUTORY, WITH RESPECT TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
13.3 Customer Representations and Warranties. Customer hereby represents and warrants to Vendor that (a) Customer is a corporation duly organized, validly existing and in good standing under the laws of the its state of incorporation; and (b) Customer has full power and authority to enter into and perform this Agreement and to perform its obligations hereunder, without the need for any consents, approvals or immunities not yet obtained, including, without limitation, the right to license or sublicense any intellectual property (i.e., software and software licenses) which is provided by Customer to Vendor for its use in connection with the performance of Vendor’s obligations under this Agreement or any Work Order hereunder.
13.4 Foreign Corrupt Practices Act. Intentionally Deleted.
14. INDEMNIFICATION.
14.1 General Indemnity. Vendor shall indemnify, hold harmless, and defend AIGGS, its Affiliates, and its and their officers, directors, employees, agents, successors, assigns, and subcontractors (each, an “Indemnified Party”) from and against any and all third party claims, losses, liabilities, damages, settlements, expenses and costs (including attorneys’ fees and court costs) (“Losses”) and any and all threatened third party claims, Losses proximately caused by any of the following:
(a) any breach (or claim or threat thereof that, if true, would be a breach) of Section 13 (a), (b), (f), (g), (h), (i), (k) in this Agreement by Vendor;
(b) Subject to Section 14.3, the Deliverables excluding any modifications made to the Code of any Deliverables which are not created, authorized, by Vendor and excluding any third party software for which Customer has purchased, or is obligated to purchase, a license for inclusion in any such Deliverable under the terms of a Work Order) or any Use thereof, constituting an infringement of any intellectual property rights or other rights of any third party (excluding, however, any claim of infringement based solely on the combination of the Deliverables with software or equipment not provided by Vendor or not specified by Vendor for use with the Deliverables and those exceptions to infringement in Section 14.3);
(c) the gross negligence or willful misconduct of Vendor or any Vendor agent (including any Vendor Subcontractor) related to the performance of the Services hereunder ;
(d) any breach of Section 9 (Confidentiality and Security) or Exhibit C hereof or any misuse or unauthorized disclosure of Customer Data or any violation of any Privacy Laws, in either event, arising from or related to the grossly negligent acts or gross negligent omissions of Vendor or any Vendor agent (including any Vendor Subcontractor);
(e) any benefits, taxes, or payments owed by Vendor to its Personnel or any third party;
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(f) any claim by the United States Internal Revenue Service or other domestic or foreign taxing authority that Vendor and/or its Personnel or agents are not independent contractors hereunder;
(g) any Security Incident, Remedial Action (as defined in Exhibit C) taken by Customer as the result of a Security Incident or Info-Sec Risk Increase; and any other costs incurred by Customer with respect to Customer’s rights in Exhibit C (each as defined in Exhibit C). Vendor shall be fully responsible for, and shall pay, all costs and expenses incurred by Vendor or Vendor Personnel with under this Agreement, including Exhibit C;
(h) any claims based on allegations of personal injury or property damage caused by the gross negligent acts or grossly negligent omissions of Vendor or its agents (including Vendor Subcontractors) in connection with the performance of this Agreement.
Vendor will pay any and Losses with respect to any claim or allegation covered under this Section 14 finally awarded against the indemnified party to such third party by a court of competent jurisdiction after all appeals have been exhausted or at the time of a final settlement of such claims or final award, if applicable
14.2 Notice; Cooperation; Settlement. Customer shall notify Vendor promptly of any claim or liability for which indemnification is sought (each a “Claim”), provided that the failure to give such notice shall not relieve Vendor of its obligations hereunder except to the extent that Vendor was actually and materially prejudiced by such failure. Vendor shall have sole control and defense of any such claim hereunder but Customer may, at its sole option and expense, participate in the defense of any Claim that is conducted and controlled by the Vendor as set forth herein. Customer shall provide reasonable cooperation, upon request of Vendor, with Vendor in the defense and settlement of any such claim and Vendor may not settle any Claim without the prior written approval of Customer.
14.3 Infringement. If any Deliverable becomes, or in Vendor’s reasonable opinion is likely to become, the subject of any claim or action for infringement, then Vendor shall have the right at its discretion and expense either to: (a) procure for Customer the right to continue to use and exploit such Deliverables in the manner as contemplated in this Agreement; or (b) modify such Deliverables to render them non-infringing, provided that such modification does not adversely affect Customer’s use or exploitation thereof, or any other Customer rights as contemplated hereunder. If neither of these remedies are reasonably available to Vendor, Vendor may require Customer to cease using the infringing Deliverable and Vendor will issue Customer a pro-rated refund based on a 5 year amortization schedule for the infringing Deliverable. Vendor shall have no liability for any infringement caused, to the extent caused by one or more of the following (each, an “IP Exception”): (i) any alteration or modification of any Deliverable not provided or authorized by Vendor in writing, if the infringement would not have occurred but for the alteration or modification by a party other than Vendor; (ii) use of the Deliverable in combination with other programs or data not reasonably intended or foreseeable by the parties to be used with the Deliverable(s), if the infringement would not have occurred but for the use in combination with such programs or data; (iii) use of the Deliverable in a way reasonably intended or foreseeable under the applicable documentation and/or Work Order, if the infringement would not have occurred but for such use; (iv) Vendor’s compliance with Customer’s designs, specifications or instructions, except in the case of copyright infringement or misappropriation or (v) any Customer-provided intellectual property if the infringement would not have occurred but for the Customer intellectual property.
The foregoing remedy shall be cumulative and in addition to, and not in lieu of, any other remedies available to Customer, whether pursuant to this Agreement or otherwise and whether at law, in equity, or otherwise.
15. LIMITATION OF LIABILITY.
15.1 EXCEPT AS SET FORTH IN SECTION 15.2 BELOW, TO THE EXTENT PERMITTED BY APPLICABLE LAW, UNDER NO CIRCUMSTANCES SHALL EITHER PARTY’S AGGREGATE LIABILITY TO THE OTHER PARTY OR ANY THIRD PARTY ARISING FROM OR OUT OF OR RELATING TO THIS AGREEMENT EXCEED [**************]. EXCEPT AS SET FORTH IN SECTION 15.2 BELOW, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY OR ANY THIRD PARTY FOR LOST PROFITS OR FOR ANY SPECIAL, INCIDENTAL, INDIRECT, CONSEQUENTIAL OR EXEMPLARY DAMAGES ARISING OUT OF OR IN ANY MANNER RELATED TO THIS AGREEMENT OR THE SUBJECT MATTER HEREOF, REGARDLESS OF THE FORM OF ACTION AND WHETHER OR NOT SUCH OTHER PARTY OR THIRD PARTY HAS BEEN INFORMED OF, OR OTHERWISE MIGHT HAVE ANTICIPATED, THE POSSIBILITY OF
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SUCH DAMAGES.
15.2 THE LIMITATIONS OF LIABILITY SET FORTH IN SECTION 15.1 ABOVE SHALL NOT APPLY TO OR COVER: (A) VENDOR’S OBLIGATIONS PURSUANT TO [**********]; (B) ANY BREACH BY VENDOR OF ITS OBLIGATIONS SET FORTH IN [********]; OR (C) ANY COSTS, DAMAGES, EXPENSES, INTEREST, PENALTIES, FINES, OR REASONABLE LOSSES OF REVENUE INCURRED AS A RESULT OF VENDOR’S OR VENDOR’S AGENTS’ (INCLUDING ANY VENDOR SUBCONTRACTOR’S) [********] OR [********] IN CONNECTION WITH THE [*********] WHICH ARE THE PROXIMATE CAUSE OF DAMAGE TO CUSTOMER.
16. NON-SOLICITATION.
Each party acknowledges that the other party’s employees and contractors are valuable business assets, and agrees not to (for itself or for any third party)offer employment to or otherwise hire, engage the services of, solicit or induce the termination of employment or services of, any employee or contractor of the other party (or any Affiliate thereof) engaged in providing services under this Agreement or otherwise introduced to the party as part of the engagement hereunder; and such obligations shall apply during the Term or for a period of one (1) year after such employee terminates his or her employment or service relationship with the other party, whichever occurs earlier, unless the other party gives its express consent thereto in writing. Nothing in this Section 16 shall or shall be construed to prohibit either party from hiring an employee of the other party or an affiliate of such other party who has responded to a general solicitation of employment not specifically directed at that employee, The restrictions hereunder apply to current employees of a party and those within the preceding year of such termination (as well as employees of or any subsidiary or affiliate of a party hereto).
17. INTENTIONALLY DELETED
18. RECORD RETENTION AND AUDIT.
18.1 Record Retention. Vendor shall be required to adhere to Customer’s record retention policy as it relates to this Agreement, as such policy may be adjusted from time to time in Customer’s discretion and provided to Vendor. Until the later of (a) seven (7) years after termination or expiration of this Agreement, (b) all pending matters relating to this Agreement (including disputes) have been fully resolved, or (c) receipt of written notice from Customer that Vendor is no longer required to adhere to Customer’s record retention policy, Vendor shall maintain and provide Customer with access upon request to all records, documents, and other information solely required to support Customer’s audit rights under this Agreement, including records documenting access to Customer’s Confidential Information, any fees paid or to be paid hereunder for Deliverables, Services, or otherwise, and any related credits or reimbursements (the foregoing, collectively, the “Records”).
18.2 Operational and Security Audits. Vendor, subject to confidentiality obligations, shall provide to such auditors (including third-party auditors and the internal audit staff of AIGGS and/or its Affiliates), as Customer may designate in writing, access at all times to any facility at which the Services are being performed, to Vendor and Personnel, and to the data and records maintained by Vendor with respect to the Services, for the purposes of: (a) performing audits and inspections of Vendor, Vendor Subcontractors, and their respective businesses as they relate to the Deliverables and Services (including any audits necessary to enable Customer to meet its applicable regulatory requirements); and (b) confirming that the Deliverables and Services are being provided in accordance with this Agreement, including any applicable service level agreements and security policies. To the extent applicable to the Deliverables or Services, the scope of such audits may include: (i) Vendor’s practices and procedures; (ii) the adequacy of general controls (e.g., organizational controls, input/output controls, system modification controls, processing controls, system design controls, and access controls) and security practices and procedures; (iii) the efficiency of and costs to Vendor in performing the Services; and (iv) the adequacy of disaster recovery and back-up procedures.
18.3 Financial Audits. Vendor shall provide to such auditors (including third-party auditors and Customer’s internal audit staff), as Customer may designate in writing, access at all times to the Records for purposes of confirming the accuracy and correct calculation of any fees to be paid by Customer hereunder and any other charges, credits, or fees related to this Agreement. In the event any such audit reveals an overcharge by Vendor, Vendor shall promptly pay to Customer the amount of such overcharge, together with interest from the date of Vendor’s receipt of such overcharge at the rate of one and one half percent (1.5%) per year or the highest rate permitted by applicable law. Any audits described in this Section 18.3 shall be conducted at Customer’s expense; provided that, if any such audit reveals an overcharge of more than five percent (5%) in any category of fees or
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other charges, Vendor shall promptly reimburse Customer for the actual cost of such audit.
18.4 Federal Regulatory Audits. Vendor acknowledges that under the Bank Service Corporation Act (12 U.S.C. § 1861 et seq.) and other Laws applicable to Customer, in performing the Services contemplated under this Agreement, Vendor may be subject to examination by Governmental Authorities including United States Federal supervisory agencies. Vendor shall submit to, and cooperate fully with, any such examination. Subject to Customer’s prior approval, Vendor shall promptly address and implement all recommendations for improvements resulting from such examinations.
18.5 Audit Follow-up. Following any audit or examination performed hereunder, Customer may conduct, or may request its external auditors or examiners to conduct, an exit conference with Vendor to obtain factual concurrence with issues identified in the review. Vendor shall promptly make available to Customer the results of any review or audit conducted by Vendor, its affiliates, or their respective contractors, agents, or representatives (including internal and external auditors), relating to Vendor’s operating practices and procedures to the extent relevant to the Deliverables, Services or Customer.
18.6 General Principles Regarding Audits. Vendor shall make available on a timely basis any information reasonably required to conduct an audit hereunder, subject to confidentiality or proprietary information considerations, and shall assist Customer and its auditors and other designees with such audits as necessary. Customer shall use reasonable efforts to require third-party auditors to enter into confidentiality and non-disclosure agreements and comply with reasonable security and confidentiality requirements that Vendor may reasonably request in connection with such audits.
19. FORCE MAJEURE.
Neither party will be liable for any delay or failure to perform due to causes beyond its reasonable control and without its fault or negligence, provided, however, that the party whose performance is affected shall provide prompt written notice of such cause to the other party, and further provided that if such cause continues to prevent or delay performance for more than sixty (60) days, the other party, in its discretion, may terminate the applicable Service, the applicable Work Order and/or this Agreement, effective immediately upon written notice to the non-performing party.
Notwithstanding anything to the contrary herein, the occurrence of a Force Majeure event does not excuse, limit or otherwise affect Vendor’s obligation to perform the disaster recovery services described in a Disaster Recovery Plan and Section 2.4 (Disaster Recovery Requirements) and/or Vendor’s own standard recovery and business continuity procedures.
20. INSURANCE.
20.1 Coverage. Vendor shall, throughout the Term and at its own expense, have and maintain in force at least the following insurance coverages:
20.2 Coverage. During the term of this Agreement Vendor and its sub-contractors of any tier shall at the minimum obtain and maintain, without interruption, the coverage’s stipulated hereunder.
(a) Automobile Liability
Form — Comprehensive Automobile Liability, including, all owned, non-owned, and hired autos.
Limit - $1,000,000 Combined Single Limit for bodily injury and property damage liability.
(b) General Liability
Form — Comprehensive Commercial Liability, including: Premises and Operations, Independent Contractors, C.G.L. Broad Form endorsement, Personal Injury, Contractual Liability, Products/Completed Operations.
Limit - $2,000,000 per occurrence Combined Single Limit for bodily injury and property damage liability.
(c) Worker’s Compensation
Form — Providing coverage to all employees in all states where operations will be performed.
Limit — As mandated under the Worker’s Compensation laws of the state or Federal body having jurisdiction over the location of the project or operation.
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Employer’s Liability - $100,000 limit.
(d) Professional Liability - $5,000,000 each occurrence and in the aggregate.
20.3 Insurance Companies. All insurance required shall be carried with responsible insurance companies of recognized standing, and licensed to do business in the subject state, and having a rating of at least A+ in Best’s Key Rating Guide.
20.4 Non-Limitation of Insurance. It is understood that the above may not be all the types of insurance normally carried by contractors in similar operation or size for their commercial activities. Therefore, compliance with any of the types and limits of insurance stipulated in this Section 20 will not in itself be construed to limit any liability of Vendor, any Vendor Personnel or any Vendor agents. . Vendor’s obligation to maintain the insurance coverages stipulated in this Section 20 shall be in addition to, and not in lieu of, Vendor’s other obligations hereunder, and Vendor’s liability to Customer shall not be limited to the amount of coverage required hereunder.
20.5 Contravention of Insurance. Vendor will not intentionally do any thing on or about Customer’s premises that will contravene or impair any policies of insurance that may be carried by Customer against loss, damage or destruction by fire, casualty, public liability, or otherwise.
20.6 Evidence of Insurance. Vendor shall deliver to Customer certificates of insurance as evidence of the insurance and limits stipulated above, with provisions for not less than thirty (30) days prior written notice to Customer in the event of cancellation of such insurance.
21. GENERAL PROVISIONS.
21.1 Assignment. Vendor acknowledges that AIGGS has entered into this Agreement on the basis of the particular abilities of Vendor. Accordingly, AIGGS shall be entitled to assign, sell, transfer, delegate or otherwise dispose of, whether voluntarily or involuntarily, by operation of law or otherwise, this Agreement and any of its rights or obligations of this Agreement, but Vendor shall not and shall not have the right to assign, sell, transfer, delegate or otherwise dispose of, whether voluntarily or involuntarily, by operation of law or otherwise, this Agreement or any of its rights or obligations under this Agreement without the prior written consent of AIGGS, which consent shall not be withheld unreasonably. Any purported assignment, transfer or delegation by Vendor shall be null and void. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of the parties and their respective successors and permitted assigns.
21.2 Compliance. Vendor hereby represents, warrants and covenants to Customer that Vendor shall comply with and be responsible, at its expense, for its compliance with all applicable laws, rules and regulations, including Privacy Laws and all United States laws, rules and regulations regarding licensing, import/export, data flows and technology transfers, and immigration matters required to provide the Services. Vendor will, at Customer’s written request, furnish reasonable documentation of compliance in the matters set forth above within a commercially reasonable period of time after such request.
21.3 Entire Agreement. This Agreement (which includes any Work Orders, Change Orders or Exhibits referred to herein and attached hereto, each of which is incorporated in this Agreement for all purposes) constitutes the agreement between the parties with respect to the subject matter of this Agreement and there are no representations, understandings or agreements (except for any confidentiality agreement executed by the parties) relating to this Agreement which are not fully expressed herein. No change or amendment hereof shall be valid unless in writing and signed by an authorized representative of the party against which such change or amendment is sought to be enforced. This Agreement specifically supersedes in its entirety the Professional Services Agreement entered into on June 11, 2007 by and between Vendor and American International Underwriters Corp., as assigned to AIGGS.
21.4 Dispute Resolution. . In the event of a dispute between the parties under or concerning this Agreement (a “Dispute”), either party may provide notice of such Dispute to the other party, and on receipt of such notice the parties will engage in the following informal dispute resolution procedure: (a) during the five (5) day period following receipt of such a notice by either party, the Project Managers of both parties will discuss and diligently endeavor to resolve the Dispute in good faith; (b) if the Project Managers of both parties are unable to resolve the Dispute to both parties’ satisfaction within such five (5) day period, the Dispute shall be referred immediately to the divisional Chief Information Officer or Chief Operation Officer of the Customer or the Customer Affiliate receiving the Services, as the case may be and, in the case of Vendor, the executive at a vice president level or higher responsible for Customer’s account (the Customer Chief Information Officer/Chief Operation
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Officer and the Vendor executive, collectively, the “Senior Executives”), for resolution, and during the immediately subsequent three (3) day period, the Senior Executives of both parties will discuss and diligently endeavor to resolve the Dispute in good faith; and (c) if the Senior Executives of both parties are unable to resolve the Dispute to both parties’ satisfaction within such three (3) day period, the Dispute may be litigated in accordance with to Section 19 (Governing Law; Venue) of this Agreement. Notwithstanding any other provision of this Section 21.4 (Dispute Resolution), at any time Customer may file suit in accordance with Section 21.5 (Governing Law) to have the Dispute adjudicated in a court of competent jurisdiction.
21.5 Governing Law. This Agreement is to be construed in accordance with and governed by the internal laws of the State of New York (as permitted by Section 5-1401 of the New York General Obligations Law or any similar successor provision), without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of New York to the rights and duties of the parties. Any legal suit, action or proceeding arising out of or relating to this Agreement shall be commenced in a federal court in the Southern District of New York or in state court in the County of New York, New York, and each party hereto irrevocably submits to the exclusive jurisdiction and venue of any such court in any
21.6 Publicity/Media Releases. Vendor shall not use the name, logos or trademarks of Customer and/or its Affiliates in promotional and marketing material or publicity releases, without the prior written consent of Customer’s Vice President, Global IT Procurement. In the event that Customer provides such written consent, all media releases, public announcements and public disclosures by Vendor or any Vendor Personnel relating to this Agreement, the subject matter hereof or the Services rendered hereunder, including promotional or marketing material (but not including any announcement intended solely for internal distribution at Vendor, as the case may be) shall be coordinated with and approved by Customer prior to the release thereof.
21.7 Legal Fees. If any legal action, including an action for arbitration or injunctive relief, is brought relating to this Agreement or the breach hereof, the prevailing party in any final judgment or arbitration award, or the non-dismissing party in the event of a voluntary dismissal by the party instituting the action, shall be entitled to the full amount of all reasonable expenses, including all court costs, arbitration fees, taxes and actual attorney fees paid or incurred in good faith. Furthermore, any costs, fees or taxes involved in enforcing the award shall be fully assessed against and paid by the party resisting enforcement of the award.
21.8 Notices. Any notice, request, demand, or other communication required or permitted hereunder shall be in writing, shall reference this Agreement and shall be deemed to be properly given: (a) when delivered personally; (b) when sent by facsimile, with written confirmation of receipt by the sending facsimile machine; (c) ten (10) business days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) five (5) business days after deposit with a private industry express courier, with written confirmation of receipt. All notices shall be sent to the addresses set forth below:
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Either party may from time to time specify as its address for purposes of this Agreement any other address upon giving five (5) days’ written notice thereof to the other party.
21.9 Severability. If the application of any provision of this Agreement to any particular facts or circumstances shall for any reason be held to be invalid, illegal or unenforceable by a court, arbitration panel or other tribunal of competent jurisdiction, then (a) the validity, legality and enforceability of such provision as applied to any other particular facts or circumstances, and the other provisions of this Agreement, shall not in any way be affected or impaired thereby; and (b) such provision shall be enforced to the maximum extent possible so as to effect the intent of the parties. If, moreover, any provision contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with applicable law.
21.10 Waiver. The waiver by either party of a breach of or a default under any provision of this Agreement shall not be effective unless in writing and shall not be construed as a waiver of any subsequent breach of or
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default under the same or any other provision of this Agreement, nor shall any delay or omission on the part of either party to exercise or avail itself of any right or remedy that it has or may have hereunder operate as a waiver of any right or remedy.
21.11 Further Assurances. At any time or from time to time on and after the Effective Date, Vendor at no cost to Customer unless expressly provided for in writing, shall at the request of Customer (a) deliver to Customer such records, data or other documents consistent with the provisions of this Agreement; (b) execute and deliver or cause to be delivered all such assignments, consents, documents or further instruments of transfer or license; and (c), within the scope, and subject to the terms of the applicable Work Order, take or cause to be taken all such other actions in the ordinary course as Customer may in good faith, reasonably deem necessary or desirable in order for Customer to obtain the full benefits of this Agreement and the transactions contemplated hereby, provided that such actions would not be deemed out of scope of any Work Order or impose a cost on Vendor (other than an immaterial cost) in addition to the costs of such Services (or fees charged) reasonably set forth in such Work Order.
21.12 Construction. This Agreement has been negotiated by the parties and shall be interpreted fairly in accordance with its terms and without any construction in favor of or against either party.
21.13 Interpretation. In this Agreement (a) all capitalized derivative forms of defined terms and phrases have meanings that correspond to the defined terms and phrases; (b) the words “include”, “includes” or “including” shall mean “include, without limitation,” “includes, without limitation,” and “including, without limitation,” respectively; (c) the division of the Agreement into separate Sections, subsections, Exhibits and Work Orders, the Agreement’s title and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of the Agreement; and (d) words or abbreviations that have well known or trade meanings are used herein in accordance with their recognized meanings.
21.14 Counterparts. This Agreement may be executed in several counterparts, all of which taken together shall constitute a single Agreement between the parties hereto.
21.15 Cumulative Remedies. The rights and remedies of either party as set forth in this Agreement are exclusive and not in addition to any other rights and remedies now or hereafter provided by law or at equity.
21.16 Nature of Rights. All rights and licenses granted under or pursuant to this Agreement by Vendor to Customer are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the United States Bankruptcy Code (the “Code”), licenses to rights to “intellectual property” as defined under the Code. Customer shall have the rights set forth herein with respect to the Work Product when and as developed or created. Vendor acknowledges that if it, as a debtor in possession or a trustee in bankruptcy in a case under the Code, rejects this Agreement, then Customer may elect to retain its rights under this Agreement as provided in Section 365(n) of the Code. The parties further agree that, in the event of the commencement of any bankruptcy proceeding by or against Vendor under the Code, Customer shall be entitled to retain all of its rights under this Agreement. Vendor agrees and acknowledges that enforcement by Customer of any rights under Section 365(n) of the Code in connection with this Agreement shall not violate the automatic stay of Section 362 of the Code and waives any right to object on such basis. Upon rejection of this Agreement by Vendor or the bankruptcy trustee in a bankruptcy case under the Code and written request of Customer to Vendor or the bankruptcy trustee pursuant to Section 365(n) of the Code, Vendor or such bankruptcy trustee shall: (a) provide Customer the Work Product and other materials that are the subject of the rights and licenses described in this Section (including any Vendor Proprietary Information or any other intellectual property necessary or desirable for Customer to use or exploit any Work Product or to exercise its rights hereunder), and any intellectual property otherwise required to be provided to Customer under this Agreement that is held by Vendor or such bankruptcy trustee; and (b) not interfere with the rights of Customer provided in this Agreement or any other agreement supplementary to this Agreement, to the materials that are the subject of the rights and licenses described in this Section, or any intellectual property provided under such agreements, including any right to obtain the materials that are the subject of the rights and licenses described in this Section and any such intellectual property from another entity. In addition to the foregoing, Vendor shall take all steps reasonably requested by Customer to perfect, exercise and enforce its rights hereunder, including filings in the U.S. Copyright Office and U.S. Patent and Trademark Office, and under the Uniform Commercial Code.
IN WITNESS WHEREOF, the parties hereto have each caused this Agreement to be signed and delivered by their duly authorized officers, all as of the date first set forth above.
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EXHIBIT A
SAMPLE STATEMENT OF WORK
This Statement of Work (“SOW”), effective as of , 200 [DATE MUST BE SAME DATE AS WHEN ENGAGEMENT FIRST BEGINS] by and between (“Vendor”) and [AIGGS OR APPLICABLE AFFILIATE NAME] (for purposes of this SOW, “Customer”) is executed pursuant to and as part of that certain Professional Services Agreement by and between AIG Global Services Inc. and Vendor, dated as of , 200 (the “Agreement”).
The parties have entered into the Agreement for the provision of certain rights, services, resources, and deliverables to Customer by Vendor. The Agreement contemplates that the parties may enter into specific SOWs describing detailed terms and conditions applicable to specific services, resources, and deliverables to be provided.
NOW, THEREFORE, for and in consideration of the foregoing premises, and the agreements of the parties set forth below, Customer and Vendor agree as follows:
1. Services.
[INSERT DESCRIPTION OF SERVICES TO BE PROVIDED, INCLUDING (1) APPLICABLE AIG ENTITY OR DIVISION FOR WHICH SERVICES WILL BE PERFORMED, (2) LENGTH OF PROJECT IF T&M SERVICES ARE TO BE PROVIDED, AND (3) ANY SPECIFIC MAINTENANCE SERVICES TO BE PROVIDED IN CONNECTION WITH DELIVERABLES, IF APPLICABLE]
2. Service Project Location.
[INSERT NAME OF APPLICABLE AIG ENTITY OR DIVISION AND PHYSICAL LOCATION WHERE SERVICES ARE TO BE PROVIDED]
3. Deliverables; Vendor Proprietary Information; Open Source.
[INSERT DESCRIPTION OF ANY DELIVERABLES TO BE PROVIDED. ALSO: (1) SPECIFICALLY DESCRIBE ANY BACKGROUND TECHNOLOGY AND/OR THIRD PARTY TECHNOLOGY (SUCH AS THIRD SOFTWARE OR REUSABLE TOOLS VENDOR IS PROVIDING) TO BE USED BY VENDOR (IF ANY), OR, IF DELIVERABLES WILL NOT INCORPORATE ANY VENDOR PROPRIETARY INFORMATION, STATE “No Vendor Proprietary Information”; and (2) IDENTIFY ANY OPEN SOURCE CODE TO BE INCORORATED INTO THE DELIVERABLES (IF ANY) AND ATTACH THE APPLICABLE OPEN SOURCE LICENSE(S) TO THIS SOW, OR, IF DELIVERABLES WILL NOT INCORPORATE ANY OPEN SOURCE CODE, STATE “No Open Source Code”.]
4. Vendor Personnel.
[INSERT NAME AND JOB TITLE OF SPECIFIC CONSULTANTS TO BE ENGAGED (IF ANY), OR STATE “Not Applicable”]
5. Schedule and Milestones (If Any).
Project Start Date:
Estimated Project Completion Date:
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
[ALSO INSERT DESCRIPTION OF TIMETABLE FOR COMPLETING SERVICES, MEETING MILESTONES AND/OR SUPPLYING DELIVERABLES, IF APPLICABLE]
6. Charges.
[INSERT: (1) EITHER (A) FOR T&M PROJECTS, APPLICABLE DAY RATES, ESTIMATED EXPENSES (IF ANY) AND MAXIMUM ESTIMATED COST FOR TOTAL PROJECT, OR (B) FOR FIXED FEE PROJECTS, FIXED FEE, ESTIMATED EXPENSES (IF ANY) AND TIMETABLE FOR PAYMENTS; AND (2) ANY APPLICABLE DISCOUNTS OR PERFORMANCE-RELATED INCENTIVES OR PENALTIES]
Vendor shall send all invoices under this SOW to the following address:
[INSERT: CUSTOMER ADDRESS AND CONTACT INFORMATION FOR RECEIPT OF INVOICE]
7. Project Managers.
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[INSERT NAME & AIG ENTITY OR DIVISION] |
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[INSERT NAME] |
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[INSERT E-MAIL ADDRESS] |
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8. Testing and Acceptance Procedures. (NOTE: if no testing/acceptance procedures are set forth in this Section, the testing and acceptance procedures set forth in the Agreement shall govern.)
[INSERT DESCRIPTION OF ANY NECESSARY TESTING AND ACCEPTANCE PROCEDURES, OR STATE “As per the Agreement”]
9. Individualized Reports; Status Meetings.
[INSERT DESCRIPTION OF ANY INDIVIDUALIZED/ SPECIAL REPORTS OR STATUS MEETINGS RELATED TO THIS PROJECT, OR STATE “As per the Agreement”]
10. Other Specifications.
[INSERT ANY OTHER SPECIFICATIONS APPLICABLE TO WORK TO BE PERFORMED UNDER THIS STATEMENT OF WORK, FOR EXAMPLE, SPECIFICATIONS FOR DELIVERABLES OR OTHER WORK PRODUCT TO BE PROVIDED HEREUNDER]
11. Flow-Down Provisions for Subcontractors.
[INSERT ANY PROVISIONS THAT SHOULD FLOW DOWN FROM THE AGREEMENT TO VENDOR’S AGREEMENTS WITH ITS SUBCONTRACTORS RELATED TO WORK TO BE PERFORMED UNDER THIS SOW.]
Except to the extent otherwise expressly set forth in this SOW, this SOW is governed by the terms and conditions of the Agreement. Any defined terms not otherwise defined herein shall have the meanings set forth in the Agreement. This SOW may be modified or amended only by a writing signed by both parties. The parties hereto acknowledge having read this SOW and agree to be bound by its terms.
IN WITNESS WHEREOF, the parties have each caused this SOW to be signed and delivered by their duly authorized officers, all as of the date first set forth above.
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
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PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
EXHIBIT B
SAMPLE CHANGE ORDER
This Change Order No. (“Change Order”), effective as of , 200 , is made pursuant to and a part of that certain Professional Services Agreement, dated as of , 200 , by and between AIG Global Services, Inc. and (the “Agreement”), and [Work Order] [Statement of Work], thereto, dated as of (the “Work Order”).
This Change Order is governed by the terms and conditions of the Agreement. Any defined terms not otherwise defined herein shall have the meanings set forth in the Agreement. Except to the extent otherwise expressly set forth in this Change Order, the terms of the Work Order shall remain in full force and effect. The parties hereto acknowledge having read this Change Order and agree to be bound by its terms.
The modification(s) set forth below will impact the following terms of the Work Order (please check all that apply):
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o Services |
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o Estimated completion date |
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o Fees |
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Please provide a detailed description of the proposed modification(s) and their impact on the Work Order:
[ADD DESCRIPTION OF CHANGES]
IN WITNESS WHEREOF, the parties hereto have each caused this Change Order to be signed and delivered by their duly authorized officers, all as of the date first set forth above.
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PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
EXHIBIT C
SECURITY REQUIREMENTS
I. Definitions
A. “Access & Use Controls” means policies, procedures and controls to prevent unauthorized access or use of information or systems, including without limitation: (1) a formal user registration, identification and authentication process, including without limitation functionality that tracks users’ access to Information and Customer System and includes strong passwords; (2) limiting access to Information based on Information classification; (3) requiring managerial authorization for changing Access & Use Rights and access or use policies, procedures and controls; (4) requiring the consistent treatment of access across Vendor’s organization and systems; (5) Physical Security Perimeters; (6) prohibiting persons from sharing access authentications or establishing or using generic identifications; and (7) automatic workstation locking mechanisms.
B. “Access & Use Rights” means those rights and limitations with respect to parties accessing and using Vendor Systems, Information or Customer Systems, including without limitation, such rights and limitations with respect to Vendor Personnel and end-users.
C. “Adverse Impact” means any material adverse impact to: (1) the purposes of this Agreement; (2) Vendor’s ability to perform its obligations under this Agreement; (3) the CIA of Information, including without limitation, the availability of Vendor Systems; or (4) Customer’s System.
D. “Business Continuity Controls” means policies, procedures and controls that ensure accurate and complete back-up copies of Information, uninterrupted storage, processing and transmission of Information, and the continuity of transactions with respect to the Agreement, including without limitation, in the event of any Security Incident.
E. “CIA” means confidentiality, integrity and availability.
F. “Customer System” means any computer network, desktop computer, servers, computer application, equipment, Storage Media or software operated by Customer or a third-party on behalf of Customer.
G. “Customer Info-Sec Contact” means the following person who shall be the contact person for Customer for any issue or notice related to this Schedule: Greg Gardner, AIU Divisional Security Officer/Director Network Planning, 9 Entin Road, F03, Parsippany, NJ, USA, 973-503-5129, greg.gardner@aig.com.
H. “Customer Facilities” means the facilities owned, operated or controlled by Customer or a third party retained by Customer, including without limitation, the facilities at which Customer’s System is housed or Information is stored, processed or transmitted by Customer.
I. “Information” means any information that is owned, licensed, transmitted by or to, or collected by, Customer, in any format or media, which Vendor has access to, stores, transmits, copies or otherwise uses pursuant to this Agreement, including but not limited to,
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
all full or partial copies thereof, databases, financial data, customer materials, intellectual property, corporate confidential information, trade secrets or PII.
J. “Info-Sec Controls” means Vendor’s hardware, software, firmware, Access & Use Controls, Physical Security Perimeter, Business Continuity Controls, controls and Info-Sec Policies, the function or purpose of which is to protect and ensure the CIA of information, including without limitation, access and use policy statements, employee background checks, firewalls, filters, DMZ’s, anti-virus software, locks, intrusion detection, identification cards, the electronic use of passwords or similar identification of authorized users.
K. “Info-Sec Law” means any regulation, law, ordinance, statute, administrative rule, court ruling or rule, consent decree or mandatory government standard, related to or regulating the CIA of information or Info-Sec Controls, including without limitation, any of the foregoing related to information security, privacy, information retention or destruction (including the preservation of evidence) or requiring notice to persons if their PII has been or is reasonably believed to have been, accessed or used by unauthorized persons.
L. “Info-Sec Risk Increase” means an increase in the likelihood, frequency, risk of, impact, severity or magnitude of a potential or actual Security Incident or violation of an Info-Sec Law, including without limitation, an increase because of or evidenced by: (1) the development, enactment, implementation or discovery of a new or modified Info-Sec Peril or an existing Info-Sec Peril that has not been adequately addressed by an Info-Sec Control, including without limitation, any Info-Sec Law or adverse finding with respect to any audit of Info-Sec Controls; (2) the discovery of any unauthorized access to or use of Information, Vendor System or Customer System; (3) a change in technology which renders Info-Sec Controls inadequate, obsolete or ineffective; (4) a failure of those parts of Vendor Systems dedicated to business continuity, including without limitation, back-up systems; (5) a change in the character, volume or use Information; or (6) inadequate system capacity.
M. “Info-Sec Peril” means any: (1) attack, exploit, Malicious Code, denial of service attack, hacking methods or other means of adversely affecting the CIA of information; or (2) vulnerability, hole or weakness with respect to the design, implementation, operation or management of Info-Sec Controls, Vendor System or Customer System, which might adversely affect the CIA of information; or (3) Info-Sec Law.
N. “Info-Sec Policies” means the policies, procedures and standards the function or purpose of which is to protect and ensure the CIA of information and prevent any Security Incident.
O. “Malicious Code” means software or computer code designed to perform an unauthorized function on, or permit unauthorized access to, an information system and cause harm to such system, including without limitation, computer viruses, trojan horses, worms, and time or logic bombs.
P. “PII” means personally identifiable information, including without limitation: (1) any information from which an individual may be identified, including without limitation, an individual’s name, address, telephone number, social security number, account relationships, account numbers, account balances, and account histories; (2) information concerning an individual that would be considered “nonpublic personal information” within the meaning of Title V of the Gramm-Leach Bliley Act of 1999 (Public Law 106-102, 113 Stat. 1338) and its implementing regulations, as the same may be amended from time to time; and (3)
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
information concerning an individual that is protected from disclosure by other applicable federal or state laws and regulations, including, without limitation, the Health Insurance Portability and Accountability Act of 1996 and its implementing regulations and CA SB 1386 regarding privacy (as the same may be amended from time to time).
Q. “Physical Security Perimeter” means physical barriers and controls that prevent or mitigate against unauthorized physical access and environmental hazards (including without limitation, fire, smoke, water, dust), with respect to Vendor Facilities, Vendor Systems or Information, including without limitation, locked doors, entry gates, manned reception areas and intrusion detection alarms.
R. “Remedial Action” means: (1) a reasonable investigation of an Info-Sec Risk Increase or Security Incident (as applicable), including without limitation, an investigation of the potential for any Adverse Impact caused by either; and (2) all necessary and adequate actions to: (a) prevent and mitigate any Adverse Impact; (b) maintain at least the same level of protection for the CIA of Information as was present at the inception of this Agreement, including without limitation modifying or upgrading Info-Sec Controls; (c) comply with or discontinue a violation of an Info-Sec Law; (d) prevent an Info-Sec Risk Increase from resulting in a Security Incident; (e) employ Business Continuity Controls; and (f) mitigate or reduce the likelihood, frequency, risk of, harm, severity, impact or magnitude of an actual or potential Security Incident or Info-Sec Risk Increase.
S. “Security Incident” means any unauthorized use of or access to Vendor Systems, Customer Systems or Information, including without limitation, any such unauthorized use or access caused by or resulting from a failure, lack of, or inadequacy of Info-Sec Controls, any Info-Sec Peril, physical intrusion of facilities, or theft or loss of documents or Storage Media.
T. “Storage Media” means any device or media upon which Information is stored.
U. “Vendor Info-Sec Contact” means the following person who shall be the contact person for Vendor for any issue or notice related to this Schedule: Virtusa Corporation, Vikram Dhanda, Head of Global IT (virkamd@virtusa.com).
V. “Vendor Facilities” means the facilities owned, operated or controlled by Vendor or a third party retained by Vendor, including without limitation, the facilities at which Vendor’s System is housed or Information is stored, processed or transmitted by Vendor.
W. “Vendor Personnel” means any employee, independent contractor or other third party retained by the Vendor to work on Vendor’s behalf, including without limitation, any of the foregoing who have access to Information or Computer Systems.
X. “Vendor System” means any computer network, desktop computer, computer application, server, equipment, Storage Media or software controlled by Vendor or a third-party on behalf of Vendor.
II. Info-Sec Warranties
Vendor hereby represents, warrants and covenants to Customer that:
A. Vendor’s written or oral answers, statements and representations provided with respect to any AIG Security Assessment Questionnaire or Fundamental Assessment Security Test (FAST), or any security assessment or interview provided with this Agreement, and any
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
materials, statements or other information provided with the foregoing, are true and accurate;
B. during the time Vendor has access to Information or Customer Systems, Vendor shall implement, maintain, comply with, enforce, upgrade and modify its Info-Sec Controls to provide protection for the CIA of Information at the same level or greater than was present at the inception of this Agreement; and
C. Vendor shall comply with all applicable Info-Sec Laws, including without limitation, modifying and updating Info-Sec Controls as required by any applicable Info-Sec Laws.
III. Info-Sec Controls
A. Conflicts.
In the event of a conflict between the Vendor’s existing or contemplated Info-Sec Controls and those required by this Agreement, those required under this Agreement shall apply unless Vendor’s existing or contemplated Info-Sec Controls provide the same or greater protection to the CIA of Information.
B. Security Awareness
Prior to providing access to Information, Vendor shall train Vendor Personnel concerning the implementation of, compliance with and enforcement of, Vendor’s Info-Sec Controls and Info-Sec Policy. Vendor shall provide training and information to Vendor Personnel with respect to Vendor duties and limitations under this Schedule, including without limitation, Access & Use Rights, Vendor’s duties for protecting the CIA of Information maintaining and enforcing Info-Sec Controls and reporting Info-Sec Risk Increases and Security Incidents, and that Vendor Personnel shall have no expectation of privacy when accessing or using Information or Customer Systems. In addition, vendor shall train Vendor Personnel concerning the handling of Information in the form of corporate confidential information, trade secrets, intellectual property and any other sensitive information, and shall inform Vendor Personnel that they may not remove or send such Information from Vendor Systems, Vendor Facilities, Customer Systems, Customer Facilities or any other location or system unless they have received Customer’s prior written consent.
After providing the training in the paragraph set forth above, with respect to each Vendor Personnel, Vendor shall provide Customer with written confirmation that Vendor provided such training, including without limitation the date such training was completed by each Vendor Personnel.
C. Information Classification & Segregation
Vendor shall classify, label, handle, process, transmit and store the Information on the Vendor System consistent with Vendor’s most sensitive and critical information class. The classification of the Information shall be clearly and conspicuously communicated to Vendor Personnel prior to providing access to such Information or if the classification changes. Vendor shall segregate the Information from Vendor’s data and internal environment, and from the information and data of its other customers or users.
D. Personnel Security
Prior to providing any access to the Information or Customer System to any individual Vendor Personnel, for each individual, Vendor shall: (1) conduct its own adequate
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
background check; (2) complete certification checks in accordance with Customer’s “AIG’s Vendor Certification Program” details of which can be found at http://www.aigscreen.com; and (3) provide Customer with notice of any adverse findings with respect to an individual’s background check. Vendor represents, warrants and covenants that Vendor will secure the prior written consent of each of its Vendor Personnel prior to providing Customer with background check results.
E. Physical Security
Vendor shall maintain an adequate Physical Security Perimeter. Unless removal is specifically authorized by this Agreement or Customer, Vendor Personnel shall not remove any: (1) Information from any system or facility; or (2) part of the Vendor System or Customer System storing Information, from any facility. Vendor shall log any such removal and the return of any Information or part of Vendor System or Customer System.
F. System planning and acceptance
Vendor shall monitor its current Vendor System capacity limitations and project events or trends that may result in, and employ prior systems testing to ensure that implementation will not result in, an Info-Sec Risk Increase, Security Incident Adverse Impact or Info-Sec Law violation.
G. Protection against Malicious Code
(1) Vendor shall implement and maintain software for Vendor System that detects, prevents, removes and remedies Malicious Code (“Malicious Code Software”) and is at least consistent with commonly accepted industry standards. Vendor shall run its Malicious Code Software on at least a daily basis and update its Malicious Code Software on at least a daily basis, including without limitation, obtaining and implementing the most currently available virus signatures on a daily basis. Vendor shall run its Malicious Code Software with respect to any information, software or e-mail it intends to provide to Customer, and to ensure that such information, software or e-mail is not infected with Malicious Code prior to providing it to Customer.
(2) Any Info-Sec Risk Increase, Security Incident, breach of this Agreement, Adverse Impact or violation of any Info-Sec Law arising from Malicious Code shall not constitute a “force majeure event,” and addressing Malicious Code, including without limitation, the detection, prevention, removal and remedying of Malicious Code, shall be considered within Vendor’s control, unless Vendor has complied with the provisions of Section III (G)(I) above.
H. Network management
(1) Vendor shall only connect with or access Customer System through Customer’s extranet firewall or virtual private network systems, unless Vendor receives prior written consent from Customer to connect in another manner. Vendor shall not utilize wireless technology to transmit or process Information or access Customer System or Information unless: (a) such wireless technology is subject to Access and Use Controls, including without limitation, user authentication; and (b) prior to transmitting any data or Information wirelessly, such data or Information is encrypted utilizing at least 128-bit encryption technology.
(2) With respect to any instant messaging, video streaming and peer-to-peer file sharing, Vendor shall: (a) employ such applications for business purposes only; (b) segregate any network segments running such applications from any network segments upon which
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Information is stored, processed or transmitted; and (c) utilize automated measures on Vendor System to monitor use of such applications.
I. Information Removal, Destruction & Retention
(1) Vendor shall physically destroy or securely delete all Information on Vendor System and Storage Media prior to disposing, selling or relinquishing control of such Information (unless specifically authorized by this Agreement), or upon instructions of Customer. Vendor shall inventory all Information prior to such destruction or deletion and shall certify in writing that all Information has been so destroyed or deleted.
(2) Vendor shall retain the Information during the term of the Agreement. At the termination of the Agreement, Vendor return all Information to Customer unless otherwise instructed by Customer in writing.
(3) Notwithstanding anything to the contrary, Vendor shall not be required to delete, destroy or return Information if prohibited by law in the written opinion of a lawyer retained by Vendor. In addition, Vendor shall comply with all Info-Sec Laws related to deletion or retention of Information, including without limitation, FTC and OSHA regulations, rules of evidence and environmental laws.
(4) Vendor shall not remove or send Information from Vendor Systems, Vendor Facilities, Customer Systems, Customer Facilities or any other location or system unless they have received Customer’s prior written consent or such removal is specifically required under the Agreement.
J. Exchanges of Information and Software
(1) Exchange via Storage Media and Transfer of PII. Vendor shall not transport Storage Media via courier or mail without the prior consent of Customer. Vendor shall perform reasonable background checks on proposed courier companies prior to use, and shall not utilized any courier or mail if such use would result in an Info-Sec Risk Increase. Vendor shall utilize at least 128-bit encryption with respect to any Information containing PII prior to its transfer or transmittal, including without limitation, electronic transfer or physical transfer in Storage Media.
(2) E-mail Accounts. In the event Vendor Personnel is provided with use of a Customer e-mail account, prior to providing any Vendor Personnel with access and use of such e-mail account, Vendor shall advise such Vendor Personnel of any Customer policies, rules or regulations in place with respect to the use of such e-mail account, including any contained herein, Any such e-mail account may be used only for purposes of satisfying Vendor’s obligations under this Agreement, and shall not be used for personal purposes. With respect to any e-mail accessed by Vendor through Customer’s System, Vendor Personnel shall not open any attachments he or she receives unless they know the sender and is expecting the attachment. Vendor Personnel shall not share e-mail accounts.
K. Access Control
(1) Minimum Necessary Access & Use. Vendor shall identify those persons or classes of persons who must access and use the Information or Customer System to fulfill Vendor’s obligations under the Agreement, and shall grant Access & Use Rights only to those persons. With respect to each such person or classes of persons identified and their Access & Use Rights, Vendor shall limit: (a) access to only those parts of the Information and Customer Systems necessary to fulfill Vendor’s obligations under the Agreement; and (b) the use of such Information and Customer Systems to only those uses necessary to fulfill Vendor’s
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
obligations under the Agreement. Vendor shall segregate duties between Vendor Personnel with respect to Information to reduce the risk of fraud or the accidental unauthorized use of Customer Systems or Information. Vendor shall monitor and log any access to the Information or Customer Systems, and shall enforce violations of Access & Use Rights.
(2) Access & Use Policy Statements. Vendor shall create a written access and use policy statement with respect Information and Customer Systems that clearly states the Access & Use Rights for each person or class of persons, including without limitation, when Vendor has access to the internal environment of Customer Systems. Prior to providing access to, or allowing use of, Information or Customer Systems, Vendor shall provide a copy of the access and use policy statement to those people who will be provided Access & Use Rights, and require each such person to sign a written statement indicating that they agree not to exceed and to comply with such Access & Use Rights. Vendor shall promptly report to Customer any violation or failure to comply with Access & Use Rights, including without limitation, any access and use policy statement created pursuant to this sub-paragraph.
(3) Review and Termination of Access & Use Rights. At least once every six (6) months for standard access grants and once every three (3) months for non-standard or special privileged grants, Vendor shall review Access & Use Rights in order to reconfirm the identity of those persons with such rights, and to ensure that such rights are authorized, consistent with Information classification and still necessary for Vendor to fulfill its obligations under this Agreement. Notwithstanding the foregoing, Vendor shall immediately terminate Access & Use Rights of Vendor Personnel: (a) who have left Vendor’s organization, changed jobs, are no longer under contract or are suspected of fraud, theft or any other violation of law with respect to Information; (b) who have violated or exceeded Access & Use Rights; and (c) after termination of this Agreement (except with respect to those Vendor Personnel who must access Information that remains in Vendor’s possession, if any).
(4) Customer Control of Access & Use Rights. Customer shall have full control over decisions concerning access and use of Information or Computer Systems, including without limitation, vetoing Vendor’s grant of, authorizing, terminating, extending or reversing Access & Use Rights. Vendor shall promptly implement any decisions Customer makes with respect to Access & Use Rights.
(5) Security of Third Party Access. Vendor shall not provide any third party (including without limitation, any third party that Vendor wishes to work as Vender Personnel with respect to this Agreement) with access to any Information or Customer System unless it has received prior written consent from Customer or such access is specifically authorized by the Agreement. In all events, prior to providing a third party with such access Vendor shall contractually impose upon such third party the same or equivalent contractual duties imposed on Vendor, and rights provided to Customer, in this Schedule, including without limitation, timely notice of Security Incidents and Info-Sec Risk Increases, maintenance of equivalent Info-Sec Controls and compliance with Info-Sec Laws.
L. Business Continuity
Vendor shall: (a) maintain adequate Business Continuity Controls; (b) no less frequently than each quarter during the Agreement, test Business Continuity Controls to ensure effectiveness; (c) segregate Business Continuity Controls from those parts of Vendor System
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used during the normal course of business; and (d) no less frequently than weekly, back-up Information.
M. Information Security Infrastructure
Notwithstanding anything to the contrary, Vendor shall implement, maintain, comply with and enforce at least the following Info-Sec Policies and Info-Sec Controls:
(1) Security Policy
(a) Vendor shall maintain an Info-Sec Policy that applies across its organization and which addresses the following, without limitation: Info-Sec Controls, operating system management, authentication and use of passwords, database management, patch management, business continuity, change management/control, exchange of information through the use of voice, facsimile and video communications, policy development, e-mail and execution of e-mail attachments, auditing and monitoring, source code management and control, Malicious Code, software management, security awareness, use and protection of mobile computing equipment, privacy awareness, Info-Sec law compliance, management of Storage Media, Security Incident response, Info-Sec Risk Increases, system planning and acceptance, third party access, network and system configuration, processing and handling of the information, system recovery, information back-up, system hardening and maintenance. Any material changes to any Info-Sec Policy or Info-Sec Controls shall be formally approved by Vendor’s Chief Security Officer, Chief Information Officer, or equivalent officer.
(b) Each Vendor Personnel shall fully review Vendor’s Info-Sec Policy confirm in writing that they have read, understood, and will comply with Vendor’s Info-Sec Policy. Vendor at least annually shall review and update its training materials with respect to its Info-Sec Policy or Info-Sec Controls, and send written statements to Vendor Personnel informing them of material changes and reminding them of their obligations thereunder. Vendor shall establish a formal disciplinary process with respect to compliance with its Info-Sec Policy and Info-Sec Controls, and shall fully enforce any violation of thereof.
(2) Physical & Environmental Security
(a) Vendor’s operation centers, server rooms, wiring closets and other critical infrastructure areas shall have highly restricted access with logged authentication processes. Visitors to Vendor Facilities shall be clearly identified and their access limited only to areas they need access to in order to fulfill their functions.
(b) Vendor shall maintain an uninterrupted power supply and redundant back-up generators to supply power to the Vendor System for at least five (5) continuous business days in the event of a power failure or other electrical anomaly.
(c) Vendor shall implement, maintain, comply with and enforce a clear desk and clear screen policy, including without limitation, requiring the locking of Vendor System and measures to prevent unauthorized access to Information that is printed on documents.
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
(3) System Planning & Acceptance
Vendor shall implement, maintain, comply with and enforce Info-Sec Policies and Info-Sec Controls for accepting new information systems or applications and alterations or upgrades to Vendor System, including without limitation, policies requiring the identification of significant changes, assessment of the potential impact of such changes (including with respect to Info-Sec Controls and the CIA of Information), and formal managerial approval for changes.
(4) Network management
Vendor shall implement, maintain, comply with and enforce network Info-Sec Policies and Info-Sec Controls with respect to Vendor System, including without limitation: (a) demilitarized zones; (b) intrusion detection; (c) network and system segmentation, including without limitation, the utilization of packet inspecting firewalls to maintain zones segregating the following system components from each other: Internet connection, web servers, application servers, database servers, core network, external networks; (d) enforced path controls that prevent users from accessing portions of the network outside those portions typically accessed by each authorized user; (e) authentication controls for external network connections and automatic network connections; (f) controls to prevent unauthorized access and use of remote network diagnostic ports; (g) network access controls that restrict unauthorized access with respect to electronic mail, one- and two-way file transfer and interactive access; and (i) routing controls across interconnected networks.
(5) Authentication
(a) Vendor shall implement, maintain, comply with and enforce Info-Sec Policies and Info-Sec Controls with respect to any passwords used to authenticate and validate identity, including with out limitation: (a) requiring users to sign a statement agreeing to keep passwords confidential; (b) requiring that temporary passwords be given to users in a secure manner; (c) prohibiting the storage of passwords in an unprotected form; (c) requiring the changing of passwords at regular intervals or based on the number of user accesses; (d) prohibiting recording passwords as part of a paper record; (e) enforcing of the use of passwords to maintain accountability; (f) preventing the display of passwords on the screen when being entered; (g) storing password files separately from application and other system data; (h) altering default vendor passwords following installation of software; and (i) requiring the changing of passwords whenever there is an actual or potential password compromise.
(b) Vendor shall implement automatic terminal identification that authenticates connections to specific network areas and portable equipment. Vendor shall implement, maintain, comply with and enforce a secure log-on process for authorized users to access Vendor System, Information and Customer Systems, including without limitation: (a) a general warning that the computer should be accessed only by authorized users; (b) validation of log-on only upon completion of all input data, without indicating which part of the data is incorrect for failed log-on attempts; (c) limiting the number of unsuccessful log-on attempts to three and requiring specific authorization for log-on after failed attempts; and (d) upon log-on, displaying the date and time of previous successful log-ons and details of unsuccessful log-ons.
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
(6) Applications
Vendor shall implement, maintain, comply with and enforce Info-Sec Policies and Info-Sec Controls with respect to the use of application utility programs, including without limitation: (a) authentication and authorization procedures, including without limitation, defining and documenting authorization levels for system utilities; (b) segregation of system utilities from application software; (c) limiting the access and use of system utilities to the minimum practical number of trusted authorized users; (d) logging of all use of system utilities; and (e) removal of all unnecessary software based utilities and system software.
(7) Mobile Computing Equipment
Vendor shall implement, maintain, comply with and enforce Info-Sec Policies and Info-Sec Controls with respect to notebooks, palmtops, laptops, PDAs, mobile phones and any other device that provides access to Vendor’s System, Customer Systems or Information, including without limitation, requirements for physical protection, access controls, encryption of PII stored thereon and Malicious Code Software.
(8) Security Incident Response Policies and Controls
Vendor shall implement, maintain, comply with and enforce Info-Sec Policies and Info-Sec Controls with respect to Security Incident response, including without limitation, Info-Sec Policies and Info-Sec Controls that: (a) ensure a prompt, effective and orderly response to any Security Incident; (b) limits Security Incident management to only authorized Vendor Personnel; and (c) require documentation of Security Incident response actions taken in detail which shall meet reasonable expectations of forensic admissibility.
N. Implementation of Additional Info-Sec Controls
Vendor shall implement the Info-Sec Controls listed below no later than the applicable implementation date:
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Info-Sec Controls |
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Implementation |
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Upon implementation of each Info-Sec Control, Vendor shall provide a written confirmation to Customer no later than three (3) days after such implementation. In the event Vendor is unable to, or anticipates that it will be unable to, fully implement an Info-Sec Control outlined above, Vendor shall provide written notice to Customer no later than three (3) days after the applicable implementation date for such Info-Sec Control.
O. Info-Sec Risk Increase and Upgrading Info-Sec Controls
(1) Vendor shall regularly consult with reputable journals, Internet sites, software vendors, information security professionals, attorneys and other sources to discover: (a) Info-Sec Risk Increases; (b) methods to prevent loss by, address, neutralize, remedy and mitigate Info-Sec Risk Increases and Security Incidents; and (c) existing, new or
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modified Info-Sec Laws and how to comply with such laws. Vendor shall regularly and periodically determine whether Vendor needs to upgrade, add to or modify its Info-Sec Controls to prevent or mitigate against an Info-Sec Risk Increase or Security Incident.
(2) Info-Sec Risk Increase Response. In the event of a Level I, II or III Info-Sec Risk Increase as defined in the table below, Vendor shall undertake the applicable “Required Vendor Actions” set forth below:
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Info-Sec Risk Increase Level Definition |
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Required Vendor Actions |
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LEVEL I: An Info-Sec Risk Increase that is not reasonably likely to cause an Adverse Impact. |
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Vendor shall undertake Remedial Action. |
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LEVEL II: An Info-Sec Risk Increase that is reasonably likely to cause an Adverse Impact and such Adverse Impact is reasonably likely to manifest within thirty (30) days of Vendor’s discovery of such Info-Sec Risk Increase |
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Vendor shall promptly undertake Remedial Action and provide immediate notice to Customer Info-Sec Contact if Vendor cannot undertake such action or if such action was unsuccessful or inadequate after implementation. |
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LEVEL III: An Info-Sec Risk Increase that: (1) is reasonably likely to cause an Adverse Impact and such Adverse Impact reasonably likely to manifest within seven (7) days of Vendor’s discovery of such Info-Sec Risk Increase; or (2) has resulted in or is reasonably could result in a violation of any Info-Sec Law, or creates or triggers an obligation with respect to any Info-Sec Law. |
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Vendor shall: (1) immediately undertake Remedial Action; (2) provide immediate notice to Customer’s Security Hotline at 973-533-3635 and Customer Info-Sec Contact if Vendor cannot undertake such action or if such action was unsuccessful or inadequate after implementation, and coordinate a response with Customer; and (3) after undertaking Remedial Action, provide a report to Customer indicating the results of the Remedial Action, any Adverse Impact or violation of Info-Sec Law that occurred or could occur because of the InfoSec Risk Increase and any future Remedial Action to be taken. |
IV. Monitoring & Reporting
A. Maintain Information. Vendor shall collect and record information, and maintain logs, planning documents, audit trails, records and reports, with respect to Security Incidents, Info-Sec Risk Increases, Info-Sec Controls, the storage, processing and transmission of Information and the accessing and use of Customer Systems, including, without limitation, the following information: (1) the starting and finishing time of the operations Vendor performs for this Agreement; (2) system errors and corrective actions taken; (3) the existence, nature, and actual and potential impact, of actual or reasonably suspected Security Incidents and Info-Sec Risk Increases, and any post-incident actions taken; (4) the actual or potential impact on the CIA of Information with respect to updates or changes in Info-Sec Controls, Vendor Systems or Customer Systems; (5) Vendor’s changes to, testing of, implementation, maintenance, compliance with, enforcement of and auditing of Info-Sec Controls; and (6) dates and times for log-on and log-off, including without limitation successful and rejected log-on attempts with respect to Vendor Systems and Customer Systems. Upon request, Vendor shall provide Customer with access to all Information, and any information, logs, planning documents, audit trails, records and reports outlined above.
B. Change Reporting Requirements. Vendor shall provide Customer with at least thirty (30) days notice prior to making any updates or modifications to Info-Sec Controls, Vendor Systems or Customer Systems that may reasonably cause an Adverse Impact.
C. Security Incident & Info-Sec Risk Increase Reporting Requirements. Vendor shall provide the following information for any notice of any Security Incident or Info-Sec Risk Increase to Customer: (1) when the Security Incident or Info-Sec Risk Increase began, was discovered and is expected to end; (2) a description of the cause and nature of the
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Security Incident or Info-Sec Risk Increase; (3) the actual or potential impact of the Security Incident or Info-Sec Risk Increase; (4) the Remedial Actions taken, anticipated or recommended by Vendor; (5) the date the last back-up of Information occurred and the identity of any Information that was not backed-up; and (6) any other relevant information concerning the CIA of Information.
D. Vendor Internal Audit. Vendor shall perform regular and periodic internal vulnerability assessments and audits with respect to its Info-Sec Controls and Info-Sec Policies, and shall retain an independent third-party vulnerability assessment and audit with respect to the same on at least an annual basis. Such assessment and audit shall test Vendor’s compliance with its Info-Sec Policies and applicable Info-Sec Laws.
E. Customer Audit Rights. Upon the provision of reasonable notice to Vendor, Customer may, at its cost and expense, undertake a general audit of Vendor’s Info-Sec Controls and Vendor System once per year during the term of the Agreement. In addition to such yearly audits, Customer may audit Vendor’s Info-Sec Controls and Vendor System at any time after: (1) any Level II or III Security Incident or Info-Sec Risk Increase; (2) any adverse audit of Vendor’s Info-Sec Controls; (3) Vendor reports the implementation of additional Info-Sec Controls as required under this Schedule; or (4) Customer receives information indicating that Vendor may not be implementing, maintaining, complying with or enforcing its Info-Sec Controls. With respect to a Level II or III Security Incident or Info-Sec Risk Increase, Vendor shall use reasonable commercial efforts to provide access for an audit at a time that will allow Customer to analyze and address such Security Incident or Info-Sec Risk Increase prior to any Adverse Impact or violation of Info-Sec Law.
F. General Obligations and Principles Regarding Audits. As part of any audit by Customer, Vendor shall provide Customer with: (1) access to: (a) Vendor Facilities, including reasonable office space and clerical support to support audit activities, and (b) Vendor Personnel that work with or Info-Sec Controls or who have information concerning Security Incidents or Info-Sec Risk Increases, including without limitation, contact information for such persons and time allotted for interviews; and (2) use of Vendor’s Systems to the extent reasonably necessary to conduct the audit, including without limitation, access and use of Vendor Systems for the purposes of analyzing and testing Info-Sec Controls and the CIA of Information.
G. Customer Monitoring of Information and Customer Systems. Customer has the right to monitor or track the access and use of Information or Customer System, and Vendor agrees that Vendor Personnel shall not have any right of privacy with respect to such access or use.
V. Security Incident Response
In addition to any actions set forth in Vendor’s InfoSec Policies or otherwise, in the event of a Level I, II or III Security Incident as defined in the table below, Vendor shall undertake the applicable “Required Vendor Actions” set forth below:
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Security Incident Severity Level Definition |
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Required Vendor Actions |
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LEVEL I: A Security Incident or reasonably suspected Security Incident, which is not reasonably likely to cause an Adverse Impact. |
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Vendor shall undertake Remedial Action. |
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LEVEL II: A Security Incident that has caused an Adverse Impact, but is not reasonably likely to cause any additional or more severe Adverse Impact. |
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Vendor shall promptly undertake Remedial Action and provide notice of such Security Incident to Customer Info-Sec Contact as soon as practicable. |
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LEVEL III: A Security Incident or reasonably suspected Security Incident, which: (1) is reasonably likely to cause an Adverse Impact; (2) has caused an Adverse Impact, and is reasonably likely to cause an additional or more severe Adverse Impact; or (3) has resulted in or is reasonably could result in a violation of any Info-Sec Law, or creates or triggers an obligation with respect to any Info-Sec Law. |
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Vendor shall: (1) promptly undertake Remedial Action; (2) provide immediate notice of such Security Incident to Customer’s Security Hotline at 973-533-3635; (3) provide notice to Customer Info-Sec Contact as soon as practicable; and (4) coordinate a response with Customer. |
VI. Security Incidents and Info-Sec Risk Increases of Customer System Discovered by Vendor
Notwithstanding anything to the contrary in sub-paragraph III.O.(2) or Clause V., in the event Vendor discovers an Info-Sec Risk Increase or Security Incident with respect to Customer Systems: (a) Vendor may undertake Remedial Action with respect to Vendor Systems, but shall not undertake Remedial Action with respect to, modify or alter, Customer Systems without prior consent of the Customer; and (b)Vendor shall provide immediate notice of such Info-Sec Risk Increase or Security Incident to Customer Info-Sec Contact.
VII. Breach of InfoSec Schedule and Customer Remediation Rights
A. Breach of Info-Sec Schedule. Any material failure by Vendor to comply with the material obligations set forth in this Schedule shall be considered a material breach or material default of the Agreement (subject to cure as stated therein), including without limitation, the failure to comply with any access and use policy statement with respect to Information or Customer’s System or removal or sending of Information from Vendor Systems, Vendor Facilities, Customer Systems, Customer Facilities or any other location or system without Customer’s prior written consent or specific authorization under the Agreement. In addition, any Security Incident that results in an Adverse Impact, or Security Incident or Info-Sec Risk Increase that results in a violation of any Info-Sec Law, shall be considered a material breach or default of the Agreement (subject to cure as stated therein).
B. Customer Rights. In the event of an actual or reasonably suspected Security Incident or Info-Sec Risk Increase with respect to Vendor System or Customer System, Customer may, at its sole and absolute discretion, discontinue access or connectivity to Customer System or Information. Under no circumstances shall Customer’s discontinuance of access or connectivity, or request to discontinue access or connectivity pursuant to this Schedule, equal a breach or default of this Agreement by Customer. If requested by Customer after a Security Incident or Info-Sec Risk Increase, at Vendor’s own expense, Vendor shall undertake any and all Remedial Action reasonably demanded by Customer and agreed to by Vendor using good faith and mutual agreement of the parties.
VIII. Miscellaneous
See Section 14 of the Agreement.
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EXHIBIT D
PERFORMANCE REQUIREMENTS
I. General Requirements
These Performance Requirements apply to those engagements where the applicable Work Order states that Vendor is responsible for the Performance Requirements set forth in Exhibit D to the Agreement.
Customer reserves the right to modify the following performance data and reporting requirements at any time after discussion with Vendor. Such modifications will be within the normal operating capacities of any SEI-CMM organization and shall be confirmed in writing by Customer.
“Variable priced” Work Orders must comply with all requirements described herein. For ‘‘fixed priced” Work Orders, Vendors (1) are requested, but are not required, to provide any metrics associated with resource performance such as internal defects, effort and activities as these specifics are considered to be Vendor proprietary, and (2) shall comply with all other requirements described herein. For purposes of this Exhibit D only, “fixed priced” Work Orders are defined as Work Orders that (a) make no reference to specific staffing requirements other than management related personnel, (b) provide a predetermined charge, in the form of dollars or hours, for a specific scope of work and (c) are based solely on specific Deliverables or service levels. Work Orders that do not comply with this definition, regardless of how the Work Order describes the project, shall be considered a “variable priced” project.
In tracking the required information, Vendor shall be required to use Customer’s project and process management tool(s) unless an individual Work Order stipulates otherwise. These tool(s) may vary from Work Order to Work Order.
II. Service level Requirements
The parties in each Work Order shall describe SLs, and any specific plan for delivering them. SLs for new support engagements are typically established after a period of time to acquire the experience necessary to provide objective targets.
Vendor shall provide Root cause analyses for any missed service level target at the request of the individual Customer.
The SL metric definitions described herein establish a standard reporting requirement that cannot be overridden in a Work Order except that (1) support Severity level definitions may be modified to suit the needs of Customer and (2) additional SL metrics may be required.
The Service Level targets described herein shall establish a minimum target unless overridden in a Work Order.
III. Reporting Requirements
The reporting requirements described herein are meant to provide a general understanding of the type and summary levels of the reports and are illustrative only. They are not meant to be an exhaustive description of a given report’s content. The report formats and requirements shall vary depending on the needs of the individual Customer organizations receiving these reports. Such organizations include business groups, Customer management and Affiliate management. Vendors are encouraged to submit their ideas regarding the formatting and presentation of these reports.
The inclusion of a less comprehensive set of reporting requirements in anyone Work Order shall not override the requirements described herein.
The reports shall be considered by Customer to be an engagement deliverable that must be provided, by close of business on the 15th of each month, for the project’s SLs to be met.
D -1
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IV. Data Requirements
The data elements described herein are specific and are to be provided by Vendor to Customer each month, in a spreadsheet file(s), in Vendor’s format unless a specific format is provided by Customer. This data shall be the same data that was used by Vendor to create the above reports such that those reports can be duplicated from the provided data. These data elements shall be considered by Customer to be an engagement deliverable that must accompany the reports, by close of business on the 15th of each month, for the project’s SLs to be met.
V. Vendor Managed Projects (Fixed or Variable Price)
This section applies to one-time, non-staff augmentation Work Orders with a discrete timeframe (project start and end dates) including development, implementation, migration, assessment, or transition projects. Other (non-software development) project and sub-project categories shall track effort according to the higher activity phases described in their project plans.
VI. Project Service level Definitions and Targets
A. On-Time
Using the last approved completion date:
Item 1- The calculated Schedule Slippage in business days (actual completion date —last approved completion date)
Item 2- The calculated actual time to complete in business days (last approved completion date - actual start date)
The Schedule Slippage Percentage is computed as follows:
Schedule Slippage Percentage = item 1 * 100 / item 2
If the Schedule Slippage Percentage for a project less than or equal to 10%, Vendor schedule performance shall be deemed to be satisfactory for that project.
B. Application Quality
The number and type of defects, as discovered by Customer quality assurance (OA) and user acceptance test (UAT) groups, determine application quality.
A defect is described as any application logic created, Customer OA or UA T testing result that does not conform to any documented business or technical requirement.
The defect level classification is as follows:
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Defect level Descriptions for Reported UAT Defects | ||
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Level 1 |
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Testing cannot continue until the error is fixed |
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Level 2 |
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System cannot go live until it is fixed. |
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Level 3 |
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An adverse effect has been identified, however, Customer and Vendor agree that a temporary workaround can be implemented so the system can go live. |
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Level 4 |
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No major adverse effects to the business environment. Customer shall schedule a re-test upon notification by Vendor when the error has been corrected. |
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Defect Service Level |
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Target |
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Level 1 UAT defects/size* |
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Not greater than 2 per size volume** |
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Level 2 UAT defects/size* |
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Not greater than 3 per size volume** |
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Level 3 UAT defects/size* |
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Not greater than 5 per size volume** |
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Level 4 UAT defects/size* |
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Not greater than 10 per size volume** |
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
D -2
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
* Size may be determined by a standard Customer provided sizing method that all Vendors shall follow. If a standard Customer sizing method is not provided the Vendor shall determine size by either FTE hours or FPs, at the discretion of the Vendor.
** Vendor and Customer to jointly agree on size volume according to the sizing method utilized.
VII. Reporting
Using the data described herein, the following reports shall be provided by Vendor monthly to the applicable Customer groups for each project until project completion. Vendor shall provide non-development project reporting, as appropriate. Vendor may combine these requirements into common reports according to the needs of the various Customer groups involved.
· Service level performance
· On-time (schedule) (budget to actual- by deliverable)
· On-budget (effort hours) (budget to actual- by phase)
· On-expense (budgeted project costs outside of effort based costs such as agreed to hardware or software items to be procured and installed by Vendor as part of project)
· On-scope/requirements volatility (change ratio absolute size changes/original estimated size)
· Number of requirement changes (regardless of size impact)
· On-size (last approved estimated size to actual size)
· Earned value (size credit by phase based on estimated effort %)
· Quality control
o Defect analysis (where discovered vs. where created and type and severity)
o Defects/size by type and overall
o Rework hours/size by type and overall
o Rework cost/size by type and overall
o Rework hours/total programmer hours by type and overall
· Programmer (all) productivity (hours/size)
· Analyst/programmer ratio
· Project manager/programmer ratio
· Project manager/senior programmer ratio
· Ratio of non-programmer US hours/ non-programmer offshore hours
· Ratio of programmer US hours/ programmer offshore hours
· Size normalized 12 month trending by completed development projects for defects, effort, elapsed days, scope change, cost, etc.
· Scatter chart for the last 20 completed projects by size and productivity
Note - After the project is started, all project budgets and estimates shall be baselined and frozen. Changes to any project budget or estimate can only result from a Customer-approved Change Order. Vendor shall then use such changes for any “budget to actual” comparisons. The original baselined budgets and estimates shall be maintained.
VIII. Development Phases and Activities.
Not all activities apply to every engagement. Vendor should enter time against major (underlined) activities whether performing the activities or assisting another group in performing the activities. The activities are:
Pre-assignment
o Needs assessment
Proiect initiation
o Proposal (scope and high level plan/approach) o Analysis (build or buy)
o High level technical architecture
o High level application architecture
o Business case Justification)
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
Requirements/Specification
o Define business requirements
o Business requirements inspection
o Preliminary plan
D -3
Design
o Detailed technical design
o Detailed application design
o Design inspection
o Sizing & estimating
o Detailed plan (include product & process quality activities)
Construction
o Coding or Integration
o Code inspection
o Unit testing
Testing/Certification
o String/Integration testing
o Volume testing
o Quality control (IVV) testing
o UAT
o Production stress testing
o Pre-production rework
Implementation
o Prepare user documentation
o Prepare user training materials
o Cutover to production
o Post-production rework (Warranty Period)
Post implementation
o Finalize service level reports
o Project review (within 30 days of implementation)
o Product review (within 90 day~ of implementation)
IX. Required Data Elements
For each individual Customer and for each project:
· Start date
· Original scheduled completion date by Customer phase
· Final revised scheduled completion date by Customer phase
· Number of revisions to final completion date (due to scope changes only)
· Actual completion date (not set until all Deliverables have been completed and turned over)
· Original estimated effort hours by Customer phase and resource type (based on the titles provided in this agreement for both on and off shore)
· Final revised estimated effort hours by Customer phase and resource type (based on the titles provided in this agreement for both on and off shore)
· Actual effort hours by Customer phase and resource type (based on the titles provided in this agreement for both on and .off shore)
· Original size estimate
· Final revised size estimate
· Actual size at completion
· Inspection results (for requirements, code, test script) - Defect count and type, found vs.caused
· Testing defect count and type, found vs. caused
· UAT defect count and type, found vs. caused
· Warranty period defect count, type and caused
· Rework effort for each defect
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D - 4
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
EXHIBIT E
DISASTER RECOVERY PLANS
The following documents referenced below are incorporated herein by reference.
Virtusa Private Limited (Sri Lanka) BCP Document V 1.0, Colombo, Sri Lanka) December 2000, as amended
Virtusa (India) Private Limited Business Continuity Plan (Hyderabad, India) October 2006, as amended
Virtusa (India) Private Limited Business Continuity Plan (Chennai, India) V.1.3, October 2006, as amended
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EXHIBIT F
RATE CARD
Exhibit F to Professional Services Agreement
Volume Discounts. Subject to the assumptions set forth below, for each dollar of Spend (as defined below) based on the rate card set forth below, during the period of [***************] (the “Discount Period”), Vendor will provide Customer with the applicable discounts set forth in table below. Vendor shall make volume discount payments following the expiration of the Discount Period after all Spend for the Discount Period has been tabulated. Vendor shall make volume discount payments to Customer in the form of checks or credits, as directed by Customer and/or its Affiliates.
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“Slab Based” Volume Discount Table | ||
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Dollars of Spend |
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Discount Applicable to Each Such |
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[**] to [***] |
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[***] |
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[***] to [***] |
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[***] |
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[***] to [***] |
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[***] |
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[***] to [***] |
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[***] |
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[***] to [***] |
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[***] |
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[***] to [***] |
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[***] |
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[***] to [***] |
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[***] |
For example: If Spend for a Discount Period is [***] the discount due Customer following the Discount Period would be [****************************************************].
For purposes of this Agreement, “Spend” shall mean all fees charged and billed by Vendor to Customer (and any Affiliate thereof) for services provided during the Discount Period, and excludes all reimburseable expenses, any “pass-through” costs and taxes billed or incurred by Vendor during such Discount Period. No other fees from a prior or future period are included in the Spend. In addition, as a condition to each monthly amount of eligible fees invoiced by Vendor to Customer to be considered Spend under this Agreement, Customer must pay Vendor in a timely fashion, but in no event later than [***] days after the applicable due date as set forth in the Agreement of applicable Statement of Work (or by the Disputed Payment Period as set forth below). For the avoidance of doubt, any potential fees invoiced to Customer but not paid by Customer within the foregoing time periods shall be excluded from the calculation of Spend, and thus the eligible Discount calculations.
Early Pay Discount. Vendor will provide Customer with the following early pay discounts: (a) for each invoice related to Spend that Customer pays within [*******] of receiving such invoice, Vendor shall provide a discount to Customer equal to [**********] of the total amount of Spend due under such invoice, but if within [*********] of receiving such invoice, Vendor shall provide a discount to Customer equal to [*******] of the total amount of Spend due under such invoice; provided that with respect to any invoice (or portion thereof) disputed in good faith by Customer in writing within [********] of receipt by Customer, Customer shall pay Vendor the Disputed Amount within the earlier of (a) [*****] days following the date the written notice of dispute was given, or (b) [*********] after Virtusa’s fiscal year end (the “Dispute Payment Period”) in order for the Disputed Amount to be counted towards Spend hereunder.
PORTIONS OF THIS EXHIBIT WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECRETARY OF THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2 OF THE SECURITIES EXCHANGE ACT; [***] DENOTES OMISSIONS
For each invoice in which Customer has satisfied the early payment criteria as set forth above, Customer shall deduct the applicable early pay discount from its payment for the applicable invoice.
The rate card set forth below is valid for the Discount Period for all engagements with Customer (and any Affiliate thereof) with respect to Spend during the Discount Period:
[********]
Subsidiaries of Virtusa Corporation
Name of Subsidiary
|
Jurisdiction of Incorporation/Formation |
|
|---|---|---|
| InSource Holdings, Inc | Connecticut | |
InSource, L.L.C. |
Connecticut |
|
Virtusa Austria GmbH |
Austria |
|
Virtusa Consulting Services, Pvt. Ltd. |
India |
|
Virtusa Germany GmbH |
Germany |
|
Virtusa Hungary Kft. |
Hungary |
|
Virtusa (India) Private Limited |
India |
|
Virtusa International, B.V. |
Netherlands |
|
Virtusa Malaysia Private Limited |
Malaysia |
|
Virtusa (Private) Limited |
Sri Lanka |
|
Virtusa Securities Corporation |
Massachusetts |
|
Virtusa Singapore, Pvt. Ltd. |
Singapore |
|
Virtusa Software Services, Pvt. Ltd. |
India |
|
Virtusa UK Limited |
United Kingdom |
Consent of Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders
Virtusa Corporation and Subsidiaries:
We consent to the incorporation by reference in the registration statements (Nos. 333-179330, 333-170792, 333-160981, and 333-145636) on Form S-8 and (No. 333-184533) on Form S-3 of Virtusa Corporation and Subsidiaries of our reports dated May 29, 2013, with respect to the consolidated balance sheets of Virtusa Corporation and Subsidiaries as of March 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 2013, and the related financial statement schedule, and the effectiveness of internal control over financial reporting as of March 31, 2013, which reports appear in the March 31, 2013 annual report on Form 10-K of Virtusa Corporation and Subsidiaries.
| /s/ KPMG LLP |
Boston,
Massachusetts
May 29, 2013
I, Kris Canekeratne, certify that:
|
By: | /s/ KRIS CANEKERATNE |
||||
|
Name: | Kris Canekeratne | ||||
|
Title: | Chairman and Chief Executive Officer | ||||
Date: May 29, 2013
I, Ranjan Kalia, certify that:
|
By: | /s/ RANJAN KALIA |
||||
|
Name: | Ranjan Kalia | ||||
|
Title: | Executive Vice President and Chief Financial Officer | ||||
Date: May 29, 2013
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Virtusa Corporation (the "Company") on Form 10-K for the period ended March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kris Canekeratne, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
|
By: | /s/ KRIS CANEKERATNE |
||||
|
Name: | Kris Canekeratne | ||||
|
Title: | Chairman and Chief Executive Officer | ||||
Date: May 29, 2013
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Virtusa Corporation (the "Company") on Form 10-K for the period ended March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ranjan Kalia, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
|
By: | /s/ RANJAN KALIA |
||||
|
Name: | Ranjan Kalia | ||||
|
Title: | Executive Vice President and Chief Financial Officer | ||||
Date:
May 29, 2013
|
Stock Options, Restricted Stock Awards and Stock Appreciation Rights (Tables)
|
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2013
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| Summary of stock option activity under the 2000 Plan and the 2007 Plan |
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| Summary of SAR Plan activity |
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Restricted Stock Awards
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| Summary of restricted stock activity under the 2000 Plan and the 2007 Plan |
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Restricted stock units
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| Summary of restricted stock activity under the 2000 Plan and the 2007 Plan |
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Summary of Significant Accounting Policies (Details 2) (Gross accounts receivable, Credit concentration)
|
12 Months Ended | |
|---|---|---|
|
Mar. 31, 2013
|
Mar. 31, 2012
|
|
| Concentration of Credit Risk | ||
| Number of clients | 2 | 2 |
|
Client one
|
||
| Concentration of Credit Risk | ||
| Concentration risk percentage | 20.00% | 11.00% |
|
Client two
|
||
| Concentration of Credit Risk | ||
| Concentration risk percentage | 10.00% | 10.00% |
|
401(k) Plan (Details) (USD $)
In Thousands, unless otherwise specified |
12 Months Ended | |
|---|---|---|
|
Mar. 31, 2013
|
Mar. 31, 2012
|
|
| 401(k) Plan | ||
| Employer matching contribution recorded | $ 627 | $ 614 |
|
Investment Securities (Details) (USD $)
In Thousands, unless otherwise specified |
12 Months Ended | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Mar. 31, 2012
|
Mar. 31, 2011
|
Mar. 31, 2013
item
|
Mar. 31, 2013
Corporate bonds
|
Mar. 31, 2012
Corporate bonds
|
Mar. 31, 2013
Corporate bonds
Current
|
Mar. 31, 2012
Corporate bonds
Current
|
Mar. 31, 2013
Corporate bonds
Non-current
|
Mar. 31, 2012
Corporate bonds
Non-current
|
Mar. 31, 2013
Agency bonds
|
Apr. 30, 2013
Auction-rate securities
|
Mar. 31, 2013
Auction-rate securities
|
Mar. 31, 2012
Auction-rate securities
|
Mar. 31, 2013
Auction-rate securities
Non-current
|
Mar. 31, 2012
Auction-rate securities
Non-current
|
Mar. 31, 2013
Agency and short-term notes
Non-current
|
Mar. 31, 2012
Agency and short-term notes
Non-current
|
Mar. 31, 2013
Time deposits
Current
|
Mar. 31, 2012
Time deposits
Current
|
|
| Investment Securities | |||||||||||||||||||
| Amortized Cost | $ 27,338 | $ 37,780 | $ 6,846 | $ 5,999 | $ 6,246 | $ 2,388 | $ 900 | $ 900 | $ 1,184 | $ 1,001 | $ 22,604 | $ 17,050 | |||||||
| Gross Unrealized Gains | 11 | 7 | 4 | 8 | 3 | 3 | |||||||||||||
| Gross Unrealized Losses | (25) | (16) | (2) | (2) | (7) | (3) | (7) | (20) | |||||||||||
| Fair Value | 27,324 | 37,771 | 6,848 | 6,005 | 6,242 | 2,388 | 893 | 880 | 1,184 | 1,001 | 22,604 | 17,050 | |||||||
| Gross realized gains recognized | 29 | ||||||||||||||||||
| Gross realized losses recognized | 10 | ||||||||||||||||||
| Fair Value | |||||||||||||||||||
| Less Than 12 Months | 8,856 | 8,241 | 4,045 | 615 | |||||||||||||||
| Greater Than 12 Months | 1,883 | 893 | 1,003 | 893 | 880 | ||||||||||||||
| Gross Unrealized Loss | |||||||||||||||||||
| Less Than 12 Months | (9) | (8) | (3) | (1) | |||||||||||||||
| Greater Than 12 Months | (22) | (7) | (2) | (7) | (20) | ||||||||||||||
| Number of investment securities in unrealized loss positions for greater than 12 months | 0 | ||||||||||||||||||
| Available-for-sale securities by contractual maturity | |||||||||||||||||||
| Due in one year or less | 29,452 | ||||||||||||||||||
| Due after 1 year through 5 years | 7,426 | ||||||||||||||||||
| Due after 5 years | 893 | ||||||||||||||||||
| Total | 37,771 | ||||||||||||||||||
| Available-for-sale securities remaining amount | 300 | 900 | |||||||||||||||||
| Available-for-sale securities redeemed | 600 | ||||||||||||||||||
| Net realized gains (losses) on investments | $ 29 | ||||||||||||||||||
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Quarterly Results of Operations (unaudited) (Details) (USD $)
In Thousands, except Per Share data, unless otherwise specified |
3 Months Ended | 12 Months Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
|
Mar. 31, 2013
|
Dec. 31, 2012
|
Sep. 30, 2012
|
Jun. 30, 2012
|
Mar. 31, 2012
|
Dec. 31, 2011
|
Sep. 30, 2011
|
Jun. 30, 2011
|
Mar. 31, 2013
|
Mar. 31, 2012
|
Mar. 31, 2011
|
|
| Quarterly Results of Operations (unaudited) | |||||||||||
| Revenue | $ 89,949 | $ 86,474 | $ 80,535 | $ 76,217 | $ 74,231 | $ 72,184 | $ 70,311 | $ 61,045 | $ 333,175 | $ 277,771 | $ 217,979 |
| Costs of revenue | 57,672 | 55,698 | 52,902 | 49,594 | 47,786 | 46,271 | 45,395 | 37,982 | 215,866 | 177,434 | 134,496 |
| Gross profit | 32,277 | 30,776 | 27,633 | 26,623 | 26,445 | 25,913 | 24,916 | 23,063 | 117,309 | 100,337 | 83,483 |
| Operating expenses | 22,858 | 21,634 | 20,204 | 19,754 | 19,378 | 19,335 | 19,449 | 18,276 | 84,450 | 76,438 | 65,697 |
| Income from operations | 9,419 | 9,142 | 7,429 | 6,869 | 7,067 | 6,578 | 5,467 | 4,787 | 32,859 | 23,899 | 17,786 |
| Other income (expense) | 945 | 574 | 241 | 1,240 | 922 | 780 | 445 | 400 | 3,000 | 2,547 | 441 |
| Income before income tax expense | 10,364 | 9,716 | 7,670 | 8,109 | 7,989 | 7,358 | 5,912 | 5,187 | 35,859 | 26,446 | 18,227 |
| Income tax expense (benefit) | 1,272 | 2,312 | 1,907 | 1,970 | 2,191 | 1,764 | 1,224 | 1,232 | 7,461 | 6,411 | 2,027 |
| Net income | $ 9,092 | $ 7,404 | $ 5,763 | $ 6,139 | $ 5,798 | $ 5,594 | $ 4,688 | $ 3,955 | $ 28,398 | $ 20,035 | $ 16,200 |
| Net income per share - Basic (in dollars per share) | $ 0.36 | $ 0.30 | $ 0.23 | $ 0.25 | $ 0.23 | $ 0.23 | $ 0.19 | $ 0.16 | $ 1.14 | $ 0.81 | $ 0.68 |
| Net income per share - Diluted (in dollars per share) | $ 0.35 | $ 0.29 | $ 0.23 | $ 0.24 | $ 0.23 | $ 0.22 | $ 0.18 | $ 0.16 | $ 1.11 | $ 0.79 | $ 0.66 |
|
Quarterly Results of Operations (unaudited) (Tables)
|
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2013
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| Quarterly Results of Operations (unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of quarterly results of operations |
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Net Income per Share (Tables)
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12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2013
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| Net Income per Share | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of computation of basic and diluted net income per share |
|
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|
Subsequent Events (Details) (Subsequent event, Derivatives designated as hedging instruments, Foreign currency forward contracts)
In Thousands, unless otherwise specified |
0 Months Ended | |||||
|---|---|---|---|---|---|---|
|
Apr. 18, 2013
U.S. Dollar and U.K. Pound Sterling Forward Contract
USD ($)
|
Apr. 18, 2013
U.S. Dollar and U.K. Pound Sterling Forward Contract
GBP (£)
|
Apr. 30, 2013
U.S. Dollar and Indian Rupee Forward Contract
USD ($)
|
Apr. 30, 2013
U.S. Dollar and Indian Rupee Forward Contract
INR
|
Apr. 30, 2013
U.K. Pound Sterling and Indian Rupee Forward Contract
GBP (£)
|
Apr. 30, 2013
U.K. Pound Sterling and Indian Rupee Forward Contract
INR
|
|
| Subsequent Events | ||||||
| Aggregate notional amount of foreign currency forward contracts | $ 3,522 | £ 2,317 | $ 12,022 | 689,331 | £ 4,354 | 388,335 |
| Weighted average settlement rate | 1.52 | 1.52 | 57.61 | 57.61 | 89.40 | 89.40 |
| Foreign currency forward contracts expiration period | 36 months | 36 months | 36 months | 36 months | ||
| Spot rate | 1.5507 | 1.5507 | 1.5507 | 1.5507 | ||
| Weighted average blended rate | 57.40 | 57.40 | 57.40 | 57.40 | ||
|
Commitments, Contingencies and Guarantees (Details 2) (USD $)
In Thousands, unless otherwise specified |
12 Months Ended | ||
|---|---|---|---|
|
Mar. 31, 2013
|
Mar. 31, 2012
|
Mar. 31, 2011
|
|
| Commitments, Contingencies and Guarantees | |||
| Total rental expense for operating leases | $ 5,367 | $ 5,323 | $ 4,798 |
| Amortization expenses for assets purchased under capital leases | 6 | 483 | 517 |
| Deposits under lien against a bank guarantee | $ 49 | ||
|
Fair Value of Financial Instruments (Details 2) (Auction-rate securities, USD $)
In Thousands, unless otherwise specified |
12 Months Ended |
|---|---|
|
Mar. 31, 2013
|
|
|
Auction-rate securities
|
|
| Summary of changes in fair value of the Company's Level 3 financial assets | |
| Balance at the beginning of the period | $ 880 |
| Total unrealized gains: | |
| Included in accumulated other comprehensive income | 13 |
| Balance at the end of the period | $ 893 |
|
Derivative Financial Instruments and Trading Activities (Details 2) (USD $)
In Thousands, unless otherwise specified |
12 Months Ended | |
|---|---|---|
|
Mar. 31, 2013
|
Mar. 31, 2012
|
|
|
Costs of revenue
|
||
| Derivative Financial Instruments | ||
| Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion) | $ (4,608) | $ (920) |
|
Operating expenses
|
||
| Derivative Financial Instruments | ||
| Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion) | (2,573) | (501) |
|
Derivatives Designated as Cash Flow Hedging Relationships | Foreign currency exchange contracts
|
||
| Derivative Financial Instruments | ||
| Amount of Gain or (Loss) Recognized in AOCI on Derivatives (Effective Portion) | (2,164) | (9,341) |
|
Derivatives not Designated as Hedging Instrument | Foreign currency exchange contracts | Costs of revenue
|
||
| Derivative Financial Instruments | ||
| Amount of Gain or (Loss) Recognized in Income on Derivatives | (79) | 223 |
|
Derivatives not Designated as Hedging Instrument | Foreign currency exchange contracts | Foreign currency transaction gains (losses)
|
||
| Derivative Financial Instruments | ||
| Amount of Gain or (Loss) Recognized in Income on Derivatives | (704) | (1,774) |
|
Derivatives not Designated as Hedging Instrument | Foreign currency exchange contracts | Revenue
|
||
| Derivative Financial Instruments | ||
| Amount of Gain or (Loss) Recognized in Income on Derivatives | 222 | (382) |
|
Derivatives not Designated as Hedging Instrument | Foreign currency exchange contracts | Selling, general and administrative expenses
|
||
| Derivative Financial Instruments | ||
| Amount of Gain or (Loss) Recognized in Income on Derivatives | $ (2) | $ 14 |
|
Business Segment Information (Details) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 12 Months Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
|
Mar. 31, 2013
|
Dec. 31, 2012
|
Sep. 30, 2012
|
Jun. 30, 2012
|
Mar. 31, 2012
|
Dec. 31, 2011
|
Sep. 30, 2011
|
Jun. 30, 2011
|
Mar. 31, 2013
|
Mar. 31, 2012
|
Mar. 31, 2011
|
|
| SEGMENT INFORMATION | |||||||||||
| Consolidated revenue | $ 89,949 | $ 86,474 | $ 80,535 | $ 76,217 | $ 74,231 | $ 72,184 | $ 70,311 | $ 61,045 | $ 333,175 | $ 277,771 | $ 217,979 |
| Consolidated long-lived assets, net | 87,939 | 86,563 | 87,939 | 86,563 | |||||||
|
North America
|
|||||||||||
| SEGMENT INFORMATION | |||||||||||
| Consolidated revenue | 251,219 | 215,723 | 162,528 | ||||||||
| Consolidated long-lived assets, net | 53,228 | 55,742 | 53,228 | 55,742 | |||||||
|
Asia
|
|||||||||||
| SEGMENT INFORMATION | |||||||||||
| Consolidated long-lived assets, net | 34,367 | 30,722 | 34,367 | 30,722 | |||||||
|
Europe
|
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| SEGMENT INFORMATION | |||||||||||
| Consolidated revenue | 65,863 | 49,839 | 45,065 | ||||||||
| Consolidated long-lived assets, net | 344 | 99 | 344 | 99 | |||||||
|
Other
|
|||||||||||
| SEGMENT INFORMATION | |||||||||||
| Consolidated revenue | $ 16,093 | $ 12,209 | $ 10,386 | ||||||||
|
Accumulated Other Comprehensive Loss (Details) (USD $)
In Thousands, unless otherwise specified |
Mar. 31, 2013
|
Mar. 31, 2012
|
|---|---|---|
| Components of accumulated other comprehensive loss | ||
| Foreign currency translation adjustment | $ (16,846) | $ (13,037) |
| Net unrealized gains (losses) on available-for-sale investments, net of taxes | (3) | (8) |
| Transfer pricing mark to market | (72) | (72) |
| Unrealized losses on cash flow hedges, net of taxes | (1,013) | (4,524) |
| Pension plan adjustment | (780) | (702) |
| Accumulated other comprehensive loss | $ (18,714) | $ (18,343) |
|
Commitments, Contingencies and Guarantees
|
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Mar. 31, 2013
|
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| Commitments, Contingencies and Guarantees | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments, Contingencies and Guarantees | (17) Commitments, Contingencies and Guarantees The Company leases office space under operating leases, which expire at various dates through the year 2022. Certain leases contain renewal provisions and generally require the Company to pay utilities, insurance, taxes, and other operating expenses. Future minimum lease payments under non-cancelable leases for the five fiscal years following March 31, 2013 and thereafter are:
Total rental expense for operating leases was approximately $5,367, $5,323 and $4,798 for the fiscal years ended March 31, 2013, 2012 and 2011, respectively. Total amortization expenses for the assets purchased under capital leases were $6 for the fiscal year ended March 31, 2013. Amortization expenses for assets purchased under capital leases for the fiscal years ended March 31, 2012, 2011 were $483 and $517, respectively. The Company has deposits under lien of $49 against a bank guarantee issued by a bank in favor of Andhra Pradesh Industrial Infrastructure Corporation Limited which would be forfeited if the Company fails to meet certain hiring criteria with established timelines at its Hyderabad facility. This bank guarantee matured in March 2013 and subsequently renewed in April 2013. The Company indemnifies its officers and directors for certain events or occurrences under its charter or by-laws and under indemnification agreements while the officer or director is, or was, serving at its request in a defined capacity. The term of the indemnification period is with respect to the period that such person was an officer or director of the Company. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is unlimited. The costs incurred to defend lawsuits or settle claims related to these indemnification obligations have not been material. As a result, the Company believes that its estimated exposure on these obligations is minimal. Accordingly, the Company had no liabilities recorded for these obligations as of March 31, 2013. The Company is insured against any actual or alleged act, error, omission, neglect, misstatement or misleading statement or breach of duty by any current or former officer, director or employee while rendering information technology services. The Company believes that its financial exposure from such actual or alleged actions, should they arise, is minimal and no liability was recorded at March 31, 2013. The Company is not a party to any pending litigation or other legal proceedings that are likely to have a material adverse effect on its consolidated financial statements. |
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|
Summary of Significant Accounting Policies (Details 4) (USD $)
In Thousands, unless otherwise specified |
12 Months Ended | ||
|---|---|---|---|
|
Mar. 31, 2013
|
Mar. 31, 2012
|
Mar. 31, 2011
|
|
| Revenue Recognition | |||
| Reimbursements of travel and out-of-pocket expenses | $ 7,001 | $ 6,226 | $ 5,837 |
| Costs of Revenue and Operating Expenses | |||
| Advertising and promotional expenses | 204 | 253 | 243 |
|
Software
|
|||
| Internally-developed software | |||
| Capitalized software development costs | 4,854 | 3,198 | |
| Amortization of capitalized software development costs | $ 351 | $ 174 | $ 270 |
|
Software | Minimum
|
|||
| Internally-developed software | |||
| Estimated useful life | 3 years | ||
|
Software | Maximum
|
|||
| Internally-developed software | |||
| Estimated useful life | 6 years | ||
|
Accumulated Other Comprehensive Loss (Tables)
|
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Mar. 31, 2013
|
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| Accumulated Other Comprehensive Loss | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of components of accumulated other comprehensive loss |
|
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|
Property and Equipment (Tables)
|
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Mar. 31, 2013
|
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| Property and Equipment | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of property and equipment and their estimated useful lives in years |
|
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|
Net Income per Share (Details) (USD $)
In Thousands, except Share data, unless otherwise specified |
3 Months Ended | 12 Months Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
|
Mar. 31, 2013
|
Dec. 31, 2012
|
Sep. 30, 2012
|
Jun. 30, 2012
|
Mar. 31, 2012
|
Dec. 31, 2011
|
Sep. 30, 2011
|
Jun. 30, 2011
|
Mar. 31, 2013
|
Mar. 31, 2012
|
Mar. 31, 2011
|
|
| Numerators: | |||||||||||
| Net income available to common stockholders (in dollars) | $ 9,092 | $ 7,404 | $ 5,763 | $ 6,139 | $ 5,798 | $ 5,594 | $ 4,688 | $ 3,955 | $ 28,398 | $ 20,035 | $ 16,200 |
| Denominators: | |||||||||||
| Weighted average common shares outstanding | 24,937,162 | 24,643,063 | 23,783,457 | ||||||||
| Dilutive effect of employee stock options and unvested restricted stock awards (in shares) | 683,470 | 714,316 | 894,729 | ||||||||
| Dilutive effect of stock appreciation rights (in shares) | 18,207 | 26,271 | 36,622 | ||||||||
| Weighted average shares-diluted | 25,638,839 | 25,383,650 | 24,714,808 | ||||||||
| Net income per share-basic (in dollars per share) | $ 0.36 | $ 0.30 | $ 0.23 | $ 0.25 | $ 0.23 | $ 0.23 | $ 0.19 | $ 0.16 | $ 1.14 | $ 0.81 | $ 0.68 |
| Net income per share-diluted (in dollars per share) | $ 0.35 | $ 0.29 | $ 0.23 | $ 0.24 | $ 0.23 | $ 0.22 | $ 0.18 | $ 0.16 | $ 1.11 | $ 0.79 | $ 0.66 |
| Unvested restricted stock and options excluded from the calculations of diluted earnings per share (in shares) | 450,299 | 489,987 | 726,499 | ||||||||
|
Treasury Stock (Details) (USD $)
In Thousands, except Share data, unless otherwise specified |
1 Months Ended | 12 Months Ended |
|---|---|---|
|
May 31, 2012
|
Mar. 31, 2013
|
|
| Treasury Stock | ||
| Value of common stock authorized for repurchase | $ 15,000 | |
| Period over which common stock is authorized for repurchase | 12 months | |
| Common stock repurchased (in shares) | 97,315 | |
| Aggregate purchase price for common stock repurchased | $ 1,406 | |
| Average purchase price for common stock repurchased (in dollars per share) | $ 14.45 |
|
Summary of Significant Accounting Policies (Details) (USD $)
|
12 Months Ended | |
|---|---|---|
|
Mar. 31, 2013
item
|
Mar. 31, 2012
|
|
| Cash and cash equivalents and restricted cash | ||
| Restricted cash | $ 453,000 | $ 3,000,000 |
| Goodwill and Other Intangible Assets | ||
| Number of reporting units | 1 | |
| Impairment charge | 0 | |
| Percentage by which estimated fair value of goodwill exceeded its carrying book value | 73.00% | |
|
ALaS
|
||
| Cash and cash equivalents and restricted cash | ||
| Restricted cash | $ 2,775,000 |
|
Nature of the Business
|
12 Months Ended |
|---|---|
|
Mar. 31, 2013
|
|
| Nature of the Business | |
| Nature of the Business | (1) Nature of the Business Virtusa Corporation (the "Company" or "Virtusa") is a global information technology services company. The Company uses a global delivery model to provide a broad range of information technology, or IT, services, including IT consulting, technology implementation and application outsourcing. Using its enhanced global delivery model, innovative platforming approach and industry expertise, the Company provides cost-effective services that enable its clients to accelerate time to market, improve service and enhance productivity. Headquartered in Massachusetts, Virtusa has offices in the United States, the United Kingdom, Germany and Singapore and global delivery centers in Hyderabad, Bangalore and Chennai, India, Colombo, Sri Lanka and Budapest, Hungary. |