| KANBAY INTERNATIONAL INC Item 1A Risk Factors Our business, financial condition or operating results may suffer if any of the following risks is realized |
| Additional risks and uncertainties not currently known to us may also adversely affect our business, financial condition or operating results |
| RISKS RELATED TO OUR BUSINESS Our revenues are highly dependent on a small number of clients, including a single client from whom we receive more than 50prca of our revenues and which is also our largest stockholder, and the loss of any one of our major clients could significantly impact our business |
| HSBC, which is our largest client and our largest stockholder, accounted for 53dtta1prca, 55dtta6prca and 53dtta2prca of our total revenues in the years ended December 31, 2005, 2004 and 2003 |
| Morgan Stanley, which is our second largest client, accounted for 11dtta6prca, 10dtta3prca and 13dtta0prca of our total revenues in the years ended December 31, 2005, 2004 and 2003 |
| Our five largest clients together accounted for 75dtta6prca, 80dtta4prca and 80dtta7prca of our total revenues in the years ended December 31, 2005, 2004 and 2003 |
| A significant or prolonged economic downturn in, increased regulation of and restrictions imposed on the financial services industry may result in our clients reducing or postponing spending on the services we offer |
| A significant portion of our revenues is derived from North American clients in the financial services industry, who have historically operated in a cyclical business environment |
| For the years ended December 31, 2005, 2004 and 2003, approximately 89prca, 86prca and 82prca of our revenues were derived from North America |
| If economic conditions weaken, particularly in the US financial services industry, our clients may reduce or postpone their IT spending significantly, which may in turn lower the demand for our services and negatively affect our revenues and profitability |
| Our failure to anticipate rapid changes in technology may negatively impact 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 |
| Also, products and technologies developed by our competitors may make our solutions noncompetitive or obsolete |
| The IT services market is highly competitive, and our competitors may have advantages that could allow them to better use economic incentives to secure contracts with our existing and prospective clients and attract skilled IT professionals |
| Our primary competitors include: · large consulting and other professional service firms, including Accenture, BearingPoint, Cap Gemini and Deloitte & Touche; and 10 ______________________________________________________________________ · offshore IT service providers, including Cognizant Technology Solutions, Infosys Technologies, Tata Consultancy Services and Wipro |
| Some of our competitors are large consulting firms or offshore IT service providers which have significant resources and financial capabilities combined with much larger numbers of IT professionals |
| Our competitors may be better positioned to use significant economic incentives to secure contracts with our existing and prospective clients |
| These competitors may also be better able to compete for skilled professionals by offering them more attractive compensation or other incentives |
| In addition, one or more of our competitors may develop and implement methodologies that yield price reductions, superior productivity or enhanced quality that we are not able to match |
| We also expect additional competition from offshore IT service providers with current operations in other countries, such as China and the Philippines, where we do not have operations other than our regional service center in Hong Kong |
| Our executive officers and directors and their respective affiliates, including HSBC, which own a large percentage of our common stock, have substantial voting control over Kanbay and their interests may differ from other stockholders |
| Our executive officers and directors and their affiliates, including HSBC, beneficially own, in the aggregate, a large percentage of our outstanding common stock |
| As a result, these stockholders exercise significant control over all matters requiring stockholder approval, including the election of directors, any amendments to our certificate of incorporation and approval of significant corporate transactions |
| These stockholders may exercise this control even if they are opposed by our other stockholders |
| If we do not effectively manage our anticipated rapid growth, we may not be able to develop or implement new systems, procedures and controls that are required to support our operations, market our services and manage our relationships with our clients |
| In recent years, the number of our employees has grown rapidly |
| To manage this anticipated rapid growth, we must implement and maintain proper operational and financial controls and systems in order to expand our services and employee base |
| Further, we will need to manage our relationships with various clients, vendors and other third parties |
| If we are unable to manage our growth, our business, operating results and financial condition would be adversely affected |
| 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 the services that we offer to our clients do not infringe on the intellectual property rights of third parties, and we may have infringement claims asserted against us or our clients |
| Historically, we have generally agreed to indemnify our clients for all expenses and liabilities resulting from claimed infringements of the intellectual property rights of third parties based on the services that we have performed |
| Any claims or litigation in this area, whether we ultimately win or lose, could be time-consuming and costly and/or injure our reputation |
| We have a limited ability to protect our intellectual property rights, and unauthorized use of our intellectual property could result in the loss of clients |
| Our success depends, in part, upon our ability to protect our proprietary methodologies and other intellectual property |
| We rely upon a combination of trade secrets, confidentiality policies, nondisclosure and other contractual arrangements and copyright and trademark laws to protect our intellectual property rights |
| 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, and we may not be able to detect unauthorized use or take appropriate and timely steps to enforce our intellectual property rights |
| 11 ______________________________________________________________________ Our engagements with clients may not be profitable |
| Unexpected costs or delays could make our contracts unprofitable |
| The profitability of our engagements, and in particular our fixed-price contracts, is affected by increased or unexpected costs or unanticipated delays in connection with the performance of these engagements, including delays caused by factors outside our control, which could make these contracts less profitable or unprofitable |
| Our clients may terminate our contracts on short notice |
| Our clients typically retain us on a non-exclusive, engagement-by-engagement basis, rather than under exclusive long-term contracts |
| Many of our consulting engagements are less than 12 months in duration, and our clients may terminate most of our engagements on short notice |
| If contracts are terminated, we lose the associated revenues, and we may not be able to eliminate associated costs in a timely manner or transition employees to new engagements in an efficient manner |
| Our clients unexpected financial insolvency |
| Although a due diligence review is performed by us prior to taking on a new customer and periodically throughout the customer’s life cycle, we have no assurance that our customers will be able to pay for our services if they experience a significant, unfavorable future event which affects their future paying ability |
| Our profitability is dependent on our billing and utilization rates, and our ability to control these factors is only partially within our control |
| The rates we are able to charge for our services are affected by a number of factors, including: · our clients’ perception of our ability to add value through our services; · our ability to control our costs and improve our efficiency; · introduction of new services by us or our competitors; · pricing policies of our competitors; and · general economic conditions |
| Our utilization rates are affected by a number of factors, including: · seasonal trends, primarily our hiring cycle and holiday and summer vacations; · our ability to transition employees from completed and/or terminated projects to new engagements; · the amount of time spent by our employees on non-billable training activities; · our ability to forecast demand for our services and thereby maintain an appropriate headcount; and · our ability to manage employee attrition |
| We are investing substantial cash assets in new facilities, and our profitability could be reduced if our business does not grow proportionately |
| We spent approximately dlra32dtta7 million in 2004 and 2005 and have plans to spend an additional dlra38dtta0 in 2006 on the facility expansion program in India |
| Our facility expansion program is based on the assumption that our business will continue to grow at levels consistent with our business plan |
| If our business does not grow proportionately with our facility expansion program, or if we face cost overruns or project delays in connection with these facilities, our capital investment may affect the future profitability of our business |
| Our ability to raise capital in the future may be limited and our failure to raise capital when needed could prevent us from growing |
| We expect that our cash flow from operations and the amounts we are able to borrow under our credit facility will be adequate to meet our anticipated needs for at least the next two years |
| We may in the future 12 ______________________________________________________________________ be required to raise additional funds through public or private financing, strategic relationships or other arrangements |
| Such financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could seriously harm our business |
| RISKS RELATED TO OUR INDIAN AND INTERNATIONAL OPERATIONS Wage pressures in India may reduce our profit margins |
| Wages in India are increasing at a faster rate than in the North America, 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 employee compensation more rapidly than in the past to remain competitive |
| Terrorist attacks or a war or regional conflicts could adversely affect the Indian economy, disrupt our operations and cause our business to suffer |
| Terrorist attacks, such as the attacks of September 11, 2001 in the United States, and other acts of violence or war, such as a conflict between India and Pakistan, have the potential to directly impact our clients and the Indian economy by making travel more difficult, interrupting lines of communication and effectively curtailing our ability to deliver our services to our clients |
| Disruptions in telecommunications or severe weather conditions could harm our global delivery model, which could result in client dissatisfaction and a reduction of our revenues |
| A significant element of our business strategy is to continue to leverage and expand our delivery centers in Hyderabad, Pune, and Chennai, India |
| In particular, our delivery centers in India accounted for approximately 52dtta0prca and 51dtta7prca of our revenues for the years ended December 31, 2005 and 2004 |
| Any significant loss in our ability to communicate, or in our employees’ ability to travel to our delivery centers as a result of floods or other severe weather conditions, could result in a disruption in business, which could hinder our performance or our ability to complete client projects on time |
| Our net income would decrease if the Government of India reduces or withdraws tax benefits and other incentives it provides to us or adjusts the amount of our income taxable in India or if we repatriate our earnings from India |
| Currently, we benefit from the tax holidays the Government of India gives to the export of IT services from specially designated software technology parks in India |
| During 2005, a portion of our tax holiday expired which resulted in an increase in our effective tax rate |
| The remainder of the tax holidays will stay in place until March 31, 2009 |
| Recently, the Government of India has discontinued these tax exemptions for certain software companies and required the companies to pay additional taxes |
| As a result, we cannot be certain that the Government of India will not attempt to disallow our tax holidays or taxable income deduction or require us to pay additional taxes |
| The Government of India recently enacted new transfer pricing rules and began audits of companies, including us, that are subject to these new rules |
| We cannot be certain that the audits will not result in adjustments to our Indian taxable income given the limited precedents in applying the new requirements |
| Under Indian law if we repatriated our Indian earnings in the future or such earnings were no longer deemed to be indefinitely reinvested, we would accrue the applicable amount of taxes associated with such earnings |
| In addition to India, we are subject to transfer pricing rules in the United States and a number of other jurisdictions around the world |
| While we believe our transfer pricing policies are reasonable, the Internal Revenue Service or other taxing jurisdiction may challenge our transfer pricing |
| We do not believe that any potential adjustment would have a material effect on our financial statements |
| 13 ______________________________________________________________________ Restrictions on immigration may affect our ability to compete for and provide services to clients in the United States, which could adversely affect our ability to meet growth and revenue projections |
| The majority of our IT professionals are Indian nationals |
| The ability of our IT professionals to work in North America, Europe and in other countries depends on our ability to obtain the necessary work visas and work permits |
| Existing and proposed limitations on and eligibility restrictions for these visas could have a significant impact on our ability to transfer IT professionals to North America, Europe and other countries |
| New security procedures may delay the issuance of visas and affect our ability to staff projects in a timely way |
| Currency exchange rate fluctuations will affect our operating results |
| The exchange rate between the Indian rupee and the US dollar has changed substantially in recent years and may fluctuate substantially in the future |
| An appreciation of the Indian rupee against the US dollar may have a material adverse effect on our cost of revenues, gross profit margin and net income, which may in turn have a negative impact on our business, operating results and financial condition |
| Specifically, based on our current cost structure, a 1prca appreciation of the Indian rupee against the US dollar would cause our gross profit margin to decrease by 32 basis points and our operating profit margin to decline by 1dtta4prca |
| We make available free of charge on or through our Internet website this annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonable practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”) |
| Information contained on our website is not part of this report and shall not be deemed to be incorporated by reference into this report or any other public filing made by us with the SEC |