| IGATE CORP ITEM 1A RISK FACTORS Our New Business Strategy is Unproven We have significantly reorganized our business to reflect our business strategy to increase the focus of our offshore delivery business in India and to expand our offshore business to BPO services, including non-IT related BPO services, and there is no guarantee that this reorganization will be successful |
| The success of our new business strategy depends in part on the ability of the iGATE companies to work collaboratively, share information and leverage their collective resources to optimize strategic opportunities and our ability to effectively identify non-IT related BPO services and deliver cost effective solutions |
| We cannot be certain that this strategy will improve our performance, and it is possible that the strategy will detract from our performance |
| If we cannot convince potential strategic partners of the value of our business model, our ability to acquire new companies and businesses may be adversely affected and our strategy for continued growth may not succeed |
| Recruitment and Retention of IT Professionals Our business involves the delivery of professional services and is labor-intensive |
| Our success depends upon our ability to attract, develop, motivate and retain highly skilled IT professionals and project managers who possess the technical skills and experience necessary to deliver our services |
| Qualified IT professionals are in demand worldwide and are likely to remain a limited resource for the foreseeable future |
| There can be no assurance that qualified IT professionals will continue to be available to us in sufficient numbers, or that we will be successful in retaining current or future employees |
| Failure to attract or retain qualified IT professionals in sufficient numbers may have a material adverse effect on our business, operating results and financial condition |
| Historically, we have done much of our recruiting outside of the countries where the client work is performed |
| Accordingly, any perception among our IT professionals, whether or not well founded, that our ability to assist them in obtaining temporary work visas and permanent residency status has been diminished, could lead to significant employee attrition |
| Government Regulation of Offshore Outsourcing Recently, some organizations have expressed concerns about a perceived association between offshore outsourcing and the loss of jobs in the United States |
| Within the last 12 months, some US states have enacted legislation restricting government agencies from outsourcing their back office processes and IT solutions work to 6 ______________________________________________________________________ [29]Table of Contents companies outside the United States |
| It is also possible that US private sector companies that work with these states may be restricted from outsourcing their work related to government contracts |
| We currently do not have significant contracts with US federal or state government entities, however, there can be no assurance that these restrictions will not extend to private companies, such as our clients |
| Any changes to existing laws or the enactment of new legislation restricting offshore outsourcing may adversely impact our ability to do business in the United States, particularly if these changes are widespread |
| Government Regulation of Immigration We recruit IT professionals on a global basis and, therefore, must comply with the immigration laws in the countries in which we operate, particularly the United States |
| As of December 31, 2005, approximately 33prca of our US workforce were working under H-1B temporary work permits in the United States |
| Statutory law limits the number of new H-1B petitions that may be approved in a fiscal year, and if we are unable to obtain H-1B visas for our employees in sufficient quantities or at a sufficient rate for a significant period of time, our business, operating results and financial condition could be adversely affected |
| On October 1, 2003, the H-1B visa annual quota reverted to 65cmam000 from 195cmam000 because the increase in the “American Competitiveness in the Twenty-First Century Act” was for a three-year period |
| As a result, the quota for fiscal year 2004 was exhausted in mid-February of 2004 |
| The quota for fiscal year 2005 was fully allocated in early October of 2004 |
| The quota for fiscal year 2006 was reached on October 1, 2005 |
| On December 8, 2004, the President signed the “H-1B Reform Act of 2004” |
| This legislation provides for up to an additional 20cmam000 H-1B visas per year provided that the H-1B worker possesses at least a Masters degree awarded by a US college or university |
| Historically, the iGATE operating companies have hired few H-1B workers with this educational profile |
| The “H-1B Reform Act of 2004” also reinstated the “H-1B Dependent” attestations and the penalties for their noncompliance |
| The legislation also reinstated the special H-1B training-filing fee and increased the amount to dlra1cmam500 and created a new dlra500 fraud detection and prevention fee |
| In recent years, approximately 98prca of our H-1B hires were not subject to the annual quota because they were already in the US in H-1B visa status with another employer |
| As a result, the negative impact on recruiting of the exhaustion of the fiscal years 2004—2006 H-1B quotas was not substantial |
| However, unless Congress substantially increases the annual H-1B quota, the pool of H-1B workers in the US who were charged against previous years’ quotas will decline |
| Such a development would make H-1B worker recruiting more difficult |
| Absent positive legislation, in the long-term the pool of available H-1B workers in the US that are not subject to the annual quota may eventually be depleted |
| Variability of Quarterly Operating Results The revenues and operating results of many of the iGATE companies are subject to significant variations from quarter to quarter depending on a number of factors, including the timing and number of client projects commenced and completed during the quarter, the number of working days in a quarter, employee hiring, attrition and utilization rates and the mix of time-and-materials projects versus proportional performance and maintenance projects during the quarter |
| Certain of the iGATE companies recognize revenues on time-and-materials projects as the services are performed, while revenues on proportional performance projects are recognized using the proportional performance method |
| Certain contracts with no stated deliverables, with a designated workforce assigned, recognize revenues on a straight-line basis over the life of the contract |
| Although proportional performance projects have not contributed significantly to revenues and profitability to date, operating results may be adversely affected in the future by cost overruns on proportional performance projects |
| Because a high percentage of the expenses of many of the iGATE companies are relatively fixed, variations in revenues may cause significant variations in operating results |
| Additionally, the iGATE companies periodically incur cost increases due to both the hiring of new employees and strategic investments in infrastructure in anticipation of future opportunities for revenue growth |
| 7 ______________________________________________________________________ [30]Table of Contents Increasing Significance of Non-US Operations and Risks of International Operations Our international consulting and offshore software development depend greatly upon business immigration and technology transfer laws in those countries, and upon the continued development of technology infrastructure |
| There can be no assurance that our international operations will be profitable or support our growth strategy |
| The risks inherent in our international business activities include: • unexpected changes in regulatory environments; • foreign currency fluctuations; • tariffs and other trade barriers; • difficulties in managing international operations; and • the burden of complying with a wide variety of foreign laws and regulations |
| Our failure to manage growth, attract and retain personnel, manage major development efforts, profitably deliver services, or a significant interruption of our ability to transmit data via satellite, could have a material adverse impact on our ability to successfully maintain and develop our international operations and could have a material adverse effect on our business, operating results and financial condition |
| Exposure to Regulatory and General Economic Conditions in India Our subsidiary iGS utilizes offshore software development centers based in Bangalore, Chennai, Hyderabad, Pune and Noida, India |
| iGS also operates recruiting and training centers in India |
| The Indian government exerts significant influence over its economy |
| In the recent past, the Indian government has provided significant tax incentives and relaxed certain regulatory restrictions in order to encourage foreign investment in certain sectors of the economy, including the technology industry |
| Certain of these benefits that directly affect us include, among others, tax holidays (temporary exemptions from taxation on operating income), liberalized import and export duties and preferential rules on foreign investment and repatriation |
| To be eligible for certain of these tax benefits, we must continue to meet certain conditions |
| A failure to meet such conditions in the future could result in the cancellation of the benefits |
| There can be no assurance that such tax benefits will be continued in the future at their current levels |
| Changes in the business or regulatory climate of India could have a material adverse effect on our business, operating results and financial condition |
| Our wage costs in India have historically been significantly lower than wage costs in the United States and Europe for comparably skilled professionals, and this has been one of our competitive advantages |
| However, wage increases in India may prevent us from sustaining this competitive advantage and may negatively affect our profit margins |
| We may need to increase the levels of our employee compensation more rapidly than in the past to retain talent |
| Unless we are able to continue to increase the efficiency and productivity of our employees, wage increases in the long term may reduce our profit margins |
| Risks Associated with Covenants in Certain Financing Instruments In September 2005 we renewed our dlra25dtta0 million secured credit facility (“the PNC Facility”) with PNC Bank, NA (“PNC”) for 365 days |
| The PNC Facility contains restrictive covenants that require us to meet certain financial criteria on a quarterly basis |
| We may not be able to continue to satisfy the financial covenants in these documents |
| If we cannot satisfy such covenants and we are not able to renegotiate the terms and conditions thereof, we may not have access to funds under the PNC Facility |
| Currently, the most restrictive covenant is the obtainment of Tangible Net Worth of at least dlra88 million |
| In addition, the PNC Facility requires that we maintain an aggregate of dlra30 million in cash and cash equivalents at all times during the term of the PNC Facility, of which cash and cash equivalents in the amount of dlra25 million have been pledged to PNC for the term of the PNC Facility |
| These restrictions on our cash and cash equivalents may restrict our ability to make investments in new and existing businesses |
| iGS cannot borrow funds under the PNC Facility |
| 8 ______________________________________________________________________ [31]Table of Contents Intense Competition in the IT and Offshore Outsourcing Services Industries The IT and offshore outsourcing services industries are highly competitive and served by numerous global, national, regional and local firms |
| Primary competitors include participants from a variety of market segments, including the major consulting firms, systems consulting and implementation firms, India based offshore outsourcing services, applications software firms, service groups of computer equipment companies, specialized interest consulting firms, programming companies and temporary staffing firms |
| Many of these competitors have substantially greater financial, technical and marketing resources and greater name recognition than we have |
| There are relatively few barriers to entry into our markets and we may face additional competition from new entrants into our markets |
| In addition, there is a risk that clients may elect to increase their internal resources to satisfy their applications solutions needs |
| Further, the IT services industry is undergoing consolidation, which may result in increasing pressure on margins |
| These factors may limit our ability to increase prices commensurate with increases in compensation |
| There can be no assurance that we will compete successfully with existing or new competitors in the IT and offshore outsourcing services markets |
| iGATE Companies May Compete with Each Other iGATE Companies may compete with each other for customers, talented employees and strategic relationships and for acquisition opportunities in the IT and offshore outsourcing services industries |
| Such competition may make it more difficult or costly for iGATE Corporation or other iGATE companies to enter into strategic relationships, negotiate acquisitions or conduct business |
| Risks Related to Inability to Acquire Additional Businesses We plan to gradually continue to expand our operations through the acquisition of, or investment in, additional businesses and companies |
| We may be unable to identify businesses that complement our strategy for growth |
| If we do succeed in identifying a company with such a business, we may not be able to proceed to acquire the company, its relevant business or an interest in the company for many reasons, including: • a failure to agree on the terms of the acquisition or investment; • incompatibility between the Company and the management of the company which we wish to acquire or invest; • competition from other potential acquirors; • a lack of capital to make the acquisition or investment; and • the unwillingness of the company to partner with us |
| If we are unable to continue acquiring and investing in attractive businesses, our strategy for growth may not succeed |
| Risks Related to Completed Acquisitions There can be no assurance that we will be able to profitably manage additional businesses or successfully integrate any acquired businesses without substantial expenses, delays or other operational or financial problems |
| Further, acquisitions may involve a number of special risks, including diversion of management’s attention, failure to retain key acquired personnel, unanticipated events or circumstances and legal liabilities and amortization of acquired intangible assets, some or all of which could have a material adverse effect on our business, operating results and financial condition |
| Client satisfaction or performance problems at a single acquired firm could have a material adverse impact on our reputation as a whole |
| In addition, there can be no assurance that acquired businesses, if any, will achieve anticipated revenues and earnings |
| Our failure to manage our acquisition strategy successfully could have a material adverse effect on our business, operating results and financial condition |
| 9 ______________________________________________________________________ [32]Table of Contents Risks Associated with Capital Markets We currently hold interests in non wholly-owned companies |
| While we generally do not anticipate selling such interests, if we were to divest all or part of them, we might not receive maximum value for these interests |
| With respect to such entities with publicly traded stock, we may be unable to sell our interest at then quoted market prices |
| Furthermore, for those entities that do not have publicly traded stock, the realizable value of our interest may ultimately prove to be lower than the carrying value currently reflected in our Consolidated Financial Statements |
| Due to market conditions, it may be difficult for private companies in which we have invested to undertake public offerings |
| Impairment Analysis May Lead to Recognition of Losses The carrying amount of the goodwill on our balance sheet was dlra8dtta9 million as of December 31, 2005 |
| We periodically assess the potential impairment of our long-lived assets, such as goodwill, as appropriate |
| If, as a result of such an assessment, we were to determine that the carrying amount of this goodwill was not recoverable, we would reduce the carrying amount in the period in which the determination was made |
| Any reduction would result in the recognition of a one-time impairment loss, which would have an adverse effect on our financial results in the period in which the loss was recognized |
| The carrying amount of our investments in unconsolidated affiliates was dlra1dtta1 million as of December 31, 2005 |
| If we were to determine that the value of such investments had declines judged to be permanent or other than temporary, we would reduce the carrying amount of the investments |
| Any reduction would result in the recognition of a one-time impairment loss, which would have an adverse effect on our financial results in the period in which the loss was recognized |
| Concentration of Revenues; Risk of Termination Our revenues are highly dependent on clients primarily located in the United States, as well as clients concentrated in certain industries, and economic slowdowns, changes in US law and other restrictions or factors that affect the economic health of these industries may affect our business |
| In the year ended December 31, 2005, approximately 75prca of our revenues were derived from the United States |
| Consequently, if our clients reduce or postpone their IT spending significantly, this may lower the demand for our services and negatively affect our revenues and profitability |
| Further, any significant decrease in the growth of the financial services or other industry segments on which we focus may reduce the demand for our services and negatively affect our revenues and profitability |
| We have in the past derived, and may in the future derive, a significant portion of our revenues from a relatively limited number of clients |
| Our five largest clients represented approximately 42prca, 46prca and 38prca of revenues for the years ended December 31, 2005, 2004 and 2003, respectively |
| In the years ended December 31, 2005, 2004 and 2003, GE accounted for 18prca, 19prca and 22prca of our revenues, respectively |
| An unanticipated termination of a major project could result in the loss of substantial anticipated revenues and could require us to maintain or terminate a significant number of unassigned IT professionals, resulting in a higher number of unassigned IT professionals and/or significant termination expenses |
| The loss of any significant client or project could have a material adverse effect on our business, operating results and financial condition |
| Rapid Technological Change; Dependence on New Solutions The IT and offshore outsourcing services industries are characterized by rapid technological change, evolving industry standards, changing client preferences and new product introductions |
| Our success will depend in part on our ability to develop IT solutions that keep pace with industry developments |
| There can be no assurance that we will be successful in addressing these developments on a timely basis or that, if these developments are addressed, we will be successful in the marketplace |
| In addition, there can be no assurance that 10 ______________________________________________________________________ [33]Table of Contents products or technologies developed by others will not render our services noncompetitive or obsolete |
| Our failure to address these developments could have a material adverse effect on our business, operating results and financial condition |
| A significant number of organizations are attempting to migrate business applications to advanced technologies |
| As a result, our ability to remain competitive will be dependent on several factors, including our ability to develop, train and hire employees with skills in advanced technologies |
| Our failure to hire, train and retain employees with such skills could have a material adverse impact on our business |
| Our ability to remain competitive will also be dependent on our ability to design and implement, in a timely and cost-effective manner, effective transition strategies for clients moving to advanced architectures |
| Our failure to design and implement such transition strategies in a timely and cost-effective manner could have a material adverse effect on our business, operating results and financial condition |
| Dependence on Principals Our success is highly dependent on the efforts and abilities of our executive management: Sunil Wadhwani and Ashok Trivedi, the Co-Chairman and Chief Executive Officer of iGATE Corporation and the Co-Chairman and President of iGATE Corporation, Phaneesh Murthy, Chief Executive Officer of iGS and Steve Shangold, Chief Executive Officer of iGATE Mastech, Inc |
| Although each executive has entered into employment agreements containing noncompetition, nondisclosure and nonsolicitation covenants, these contracts do not guarantee that they will continue their employment with us or that such covenants will be enforceable |
| The loss of the services of either of these key executives for any reason could have a material adverse effect on our business, operating results and financial condition |
| Risk of Preferred Vendor Contracts We are party to several “preferred vendor” contracts and we are seeking additional similar contracts in order to obtain new or additional business from large or medium-sized clients |
| Clients enter into these contracts to reduce the number of vendors and obtain better pricing in return for a potential increase in the volume of business to the preferred vendor |
| While these contracts are expected to generate higher volumes, they generally result in lower margins |
| Although we attempt to lower costs to maintain margins, there can be no assurance that we will be able to sustain margins on such contracts |
| In addition, the failure to be designated a preferred vendor, or the loss of such status, may preclude us from providing services to existing or potential clients, except as a subcontractor, which could have a material adverse effect on our business, operating results and financial condition |
| Risks Associated with Intellectual Property Rights Our success depends in part upon certain methodologies and tools we use in designing, developing and implementing applications systems and other proprietary intellectual property rights |
| We rely upon a combination of nondisclosure and other contractual arrangements and trade secrets, copyright and trademark laws to protect our proprietary rights and the proprietary rights of third parties from whom we license intellectual property |
| We enter into confidentiality agreements with our employees and limit distribution of proprietary information |
| There can be no assurance that the steps we take in this regard will be adequate to deter misappropriation of proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights |
| Although we believe that our services do not infringe on the intellectual property rights of others and that we have all rights necessary to utilize the intellectual property employed in our business, we are subject to the risk of litigation alleging infringement of third-party intellectual property rights |
| Any claims, whether or not meritorious, could: • be expensive and time-consuming to defend; • cause significant installation delays; 11 ______________________________________________________________________ [34]Table of Contents • divert management’s attention and resources; and/or • require us to enter into royalty or licensing arrangements, which may not be available on acceptable terms, or may not be available at all |
| A successful claim of product infringement against us or our failure or inability to license the infringed or similar technology could have a material adverse effect on our business, financial condition and results of operations |
| Fixed-Price Projects We undertake certain projects billed on a fixed-price basis |
| We recognize revenue from these contracts on a proportional performance basis, which is different from our principal method of billing, the time-and-materials basis |
| Potential Liability to Clients Many of our engagements involve projects that are critical to the operations of our clients’ businesses and provide benefits that may be difficult to quantify |
| Although we attempt to contractually limit our liability for damages arising from errors, mistakes, omissions or negligent acts in rendering our services, there can be no assurance that our attempts to limit liability will be successful |
| Our failure or inability to meet a client’s expectations in the performance of our services could result in a material adverse change to the client’s operations and therefore could give rise to claims against us or damage our reputation, adversely affecting our business, operating results and financial condition |