| SYNTEL INC ITEM 1A RISK FACTORS ITEM 1A RISK FACTORS The following factors should be considered carefully when evaluating our business |
| RECRUITMENT AND RETENTION OF IT PROFESSIONALS The Companyapstas business of delivering professional IT services is labor intensive, and, accordingly, its success depends upon its ability to attract, develop, motivate, retain and effectively utilize highly-skilled IT professionals |
| The Company believes that both in the United States and in India there is a growing shortage of, and significant competition for, IT professionals who possess the technical skills and experience necessary to deliver the Companyapstas services, and that such IT professionals are likely to remain a limited resource for the foreseeable future |
| The Company believes that, as a result of these factors, it operates within an industry that experiences a significant rate of annual turnover of IT personnel |
| The Companyapstas business plans are based on hiring and training a significant number of additional IT professionals each year to meet anticipated turnover and increased staffing needs |
| The Companyapstas ability to maintain and renew existing engagements and to obtain new business depends, in large part, on its ability to hire and retain qualified IT professionals |
| The Company performs a significant portion of its employee recruiting in foreign countries, particularly in India |
| Any perception among the Companyapstas recruits or foreign IT professionals, whether or not well-founded, that the Companyapstas ability to assist them in obtaining permanent residency status in the United States has been diminished could result in increased recruiting and personnel costs or lead to significant employee attrition or both |
| 23 There can be no assurance that the Company will be able to recruit and train a sufficient number of qualified IT professionals or that the Company will be successful in retaining current or future employees |
| Failure to hire and train or retain qualified IT professionals in sufficient numbers could have a material adverse effect on the Companyapstas business, results of operations and financial condition |
| GOVERNMENT REGULATION OF IMMIGRATION The Company recruits its IT professionals on a global basis and, therefore, must comply with the immigration laws of the countries in which it operates, particularly the United States |
| As of December 31, 2005, approximately 53prca of Syntelapstas US workforce (12prca of Syntelapstas worldwide workforce) worked under H-1B visas (permitting temporary residence while employed in the US) and another 16prca of the Companyapstas US workforce (4prca of the Companyapstas worldwide workforce) worked under L-1 visas (permitting inter-company transfers of employees that have been employed with a foreign subsidiary for at least 6 months) |
| Pursuant to US federal law, the US Citizenship and Immigration and Services (CIN) limits the number of new H-1B visas to be approved in any government fiscal year |
| In years in which this limit is reached, the Company may be unable to obtain enough H-1B visas to bring a sufficient number of foreign employees to the US If the Company were unable to obtain sufficient H-1B employees, the Companyapstas business, results of operations and financial condition could be materially and adversely affected |
| Furthermore, Congress and administrative agencies have periodically expressed concerns over the levels of legal immigration into the US These concerns have often resulted in proposed legislation, rules and regulations aimed at reducing the number of work visas, including L-1 and H-1B visas that may be issued |
| In addition to immigration restrictions in the US, the Company is subject to various immigration and work permit restrictions globally and in particular in the European community |
| These restrictions restrain the Companyapstas ability to add skilled professionals as needed for global operations and could have an adverse impact on the Companyapstas global strategy |
| Adverse changes to these immigration and work permit regulations could have a material adverse effect on the companyapstas business, results of operations and financial condition |
| VARIABILITY OF QUARTERLY OPERATING RESULTS The Company has experienced and expects to continue to experience fluctuations in revenues and operating results from quarter to quarter due to a number of factors, including: the timing, number and scope of customer engagements commenced and completed during the quarter; progress on fixed-price engagements; timing and cost associated with expansion of the Companyapstas facilities; changes in IT professional wage rates; the accuracy of estimates of resources and time frames required to complete pending assignments; the number of working days in a quarter; employee hiring, attrition and utilization rates; the mix of services performed on-site, off-site and offshore; termination of engagements; start-up expenses for new engagements; longer sales cycles for Applications Outsourcing engagements; customers &apos budget cycles; and investment time for training |
| Because a significant percentage of the Companyapstas selling, general and administrative expenses are relatively fixed, variations in revenues may cause significant variations in operating results |
| It is possible that Companyapstas operating results could be below or above the expectations of market analysts and investors |
| In such event, the price of the Companyapstas common stock would likely be materially adversely affected |
| No assurance can be given that quarterly results will not fluctuate causing an adverse effect on the Companyapstas financial condition at the time |
| 24 CUSTOMER CONCENTRATION; RISK OF TERMINATION The Company has in the past derived, and believes it will continue to derive, a significant portion of its revenues from a limited number of large, corporate customers |
| The Companyapstas ten largest customers represented approximately 65prca, 61prca, and 64prca of the total revenues for the years ended December 31, 2005, 2004 and 2003, respectively |
| The Companyapstas largest customer for 2005, 2004 and 2003, was American Express accounting for approximately 16prca of the total revenues for each of the years ended December 31, 2005, 2004 and 2003, respectively |
| The volume of work performed for specific customers is likely to vary from year to year, and a significant customer in one year may not provide the same level of revenues in any subsequent year |
| Because many of its engagements involve functions that are critical to the operations of its customerapstas businesses, any failure by Syntel to meet a customerapstas expectations could result in cancellation or non-renewal of the engagement and could damage Syntelapstas reputation and adversely affect its ability to attract new business |
| Many of the Companyapstas contracts are terminable by the customer with limited notice and without compensation beyond the professional services rendered through the date of termination |
| An unanticipated termination of a significant engagement could result in the loss of substantial anticipated revenues and could require the Company to either maintain or terminate a significant number of unassigned IT professionals |
| The loss of any significant customer or engagement could have a material adverse effect on the Companyapstas business, results of operations and financial condition |
| EXPOSURE TO REGULATORY AND GENERAL ECONOMIC CONDITIONS IN INDIA A significant element of the Companyapstas business strategy is to continue to develop and expand offshore Global Development Centers in India |
| As of December 31, 2005, the Company had approximately 67prca of its billable workforce in India, and anticipates that this percentage will increase over time |
| While wage costs in India are significantly lower than in the US and other industrialized countries for comparably skilled IT professionals, wages in India are increasing at a faster rate than in the US, and could result in the Company incurring increased costs for IT professionals |
| In the past, India has experienced significant inflation and shortages of foreign exchange, and has been subject to civil unrest |
| No assurance can be given that the Company will not be adversely affected by changes in inflation, exchange rate fluctuations, interest rates, tax provisions, social stability or other political, economic or diplomatic developments in or affecting India in the future |
| In addition, the Indian government is significantly involved in and 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 benefited the Company included, among others, tax holidays, liberalized import and export duties and preferential rules on foreign investment |
| The Company treats any earnings from its operations in India and other foreign countries as permanently invested outside the United States |
| If the Company decides to repatriate any of such earnings, it will incur a Dividend distribution tax for distribution from India, currently 14dtta03prca under Indian tax law and be required to pay US corporate income taxes on such earnings |
| As of December 31, 2005, the estimated dividend distribution taxes and US corporate taxes that would be due upon repatriation of accumulated earnings are approximately dlra34dtta1 million |
| Changes in the business or regulatory climate of India could have a material adverse effect on the Companyapstas business, results of operations and financial condition |
| 25 In December 2004, FASB Staff Position Nodtta FAS 109-2, "e Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 "e ( "e FSP FAS 109-2 "e ) was issued, providing guidance under SFAS Nodtta 109, "e Accounting for Income Taxes "e for recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004, enacted on October 22, 2004 |
| FSP FAS 109-2 allows time beyond the financial reporting period of enactment to evaluate the effects of the Jobs Act before applying the requirements of FSP FAS 109-2 |
| The American Jobs Creation Act of 2004 provided a special one-time favorable effective federal tax rate for US-based organizations |
| The Company repatriated cash dividends of dlra61dtta0 million out of the retained earnings of its controlled foreign subsidiary, Syntel Limited, to the US in accordance with the Act |
| The Company recorded a tax charge of approximately dlra12dtta3 million, including US Federal and state taxes and the Indian dividend distribution tax under the Indian Income Tax laws, during the fourth quarter of 2005 |
| Proceeds from these extra ordinary dividends are required to be invested in the United State for specific purposes permitted under Act pursuant to an approved written domestic reinvestment plan |
| As of December 31, 2005 the Company has invested approximately dlra42dtta5 million towards permitted investments under the Act against this extra ordinary dividend pursuant to an approved Domestic reinvestment plan |
| The Company intends to use remaining accumulated and future earnings of foreign subsidiaries to expand operations outside the United States and accordingly undistributed earnings of foreign subsidiaries are considered to be indefinitely reinvested outside the United States and no provision for U S federal and state income tax or applicable dividend distribution tax has been provided thereon |
| If the company determines to repatriate all undistributed repatriable earnings of foreign subsidiaries as of December 31, 2005, the company would have accrued taxes of approximately dlra34dtta1million |
| INTENSE COMPETITION The IT services industry is intensely competitive, highly fragmented and subject to rapid change and evolving industry standards |
| The Company competes with a variety of other companies, depending on the IT services it offers |
| The Companyapstas primary competitors for professional IT staffing engagements include participants from a variety of market segments, systems consulting and implementation firms, applications software development and maintenance firms, service groups of computer equipment companies and temporary staffing firms |
| In Applications Outsourcing and e-Business services, the Company competes primarily with companies in the domestic and global arena |
| In the domestic IT arena, Syntel competes against firms such as IBM Global Solutions, Keane, EDS, Cognizant, and Accenture |
| In the global IT services arena, Syntel is increasingly competing against a number of India-based companies including TCS, Infosys, and Wipro |
| Many of the Companyapstas competitors have substantially greater financial, technical and marketing resources and greater name recognition than the Company |
| As a result, they may be able to compete more aggressively on pricing, respond more quickly to new or emerging technologies and changes in customer requirements, or devote greater resources to the development and promotion of IT services than the Company |
| India-based companies also present significant price competition due to their competitive cost structures and tax advantages |
| In addition, there are relatively few barriers to entry into the Companyapstas markets and the Company has faced, and expects to continue to face, additional competition from new IT service providers |
| Further, there is a risk that the Companyapstas customers may elect to increase their internal resources to satisfy their IT services needs as opposed to relying on a third-party vendor such as the Company |
| The IT services industry is also undergoing 26 consolidation which may result in increased competition in the Companyapstas target markets |
| Increased competition could result in price reductions, reduced operating margins and loss of market share, any of which could have a material adverse effect on the Company |
| The Company also faces significant competition in recruiting and retaining IT professionals which could result in higher labor costs or labor shortages |
| There can be no assurance that the Company will compete successfully with existing or new competitors or that competitive pressures faced by the Company will not materially adversely affect its business, results of operations or financial condition |
| ABILITY TO MANAGE GROWTH While the Company has experienced modest increase in revenues over the past few years, it has historically experienced rapid growth that has placed significant demands on the Companyapstas managerial, administrative and operational resources |
| Additionally, ongoing changes in the delivery mix from onsite to offshore staffing have also placed additional operational and structural demands on the Company |
| Revenues have increased from dlra45dtta3 million in 1993 to dlra226dtta2 million in 2005, and the number of worldwide billable employees has increased from 689 as of December 31, 1993 to 4cmam456 as of December 31, 2005 |
| The Company established sales offices in London, England in 1996 and in Hong Kong in 2001, opened sales and service offices in Singapore in May 1997 and in Munich, Germany in 2001 and has expanded its Global Development Centers in Mumbai, Chennai and Pune, India |
| The Companyapstas future growth depends on recruiting, hiring and training IT professionals, increasing its international operations, expanding its US and offshore capabilities, adding effective sales and management staff and adding service offerings |
| Effective management of these and other growth initiatives will require the Company to continue to improve its operational, financial and other management processes and systems |
| Failure to manage growth effectively could have a material adverse effect on the quality of the Companyapstas services and engagements, its ability to attract and retain IT professionals, its business prospects, and its results of operations and financial condition |
| In recent years, the Company has realigned existing personnel and resources, and has invested incrementally in the development of its Applications Outsourcing business, with increased focus on outsourcing services for ongoing applications management, development, and maintenance |
| The Company has also invested in the development of its e-Business practice business process outsourcing (BPO) practice |
| A key factor in the Companyapstas growth strategy is to increase Applications Outsourcing, e-Business and BPO practices with new and existing customers |
| This strategy was evidenced by a shift in the revenue mix from TeamSourcing to Applications Outsourcing and e-Business in recent years, as well as the improvement in the Companyapstas direct margins |
| However, Applications Outsourcing services generally require a longer sales cycle (up to 12 months) and generally require approval by more senior levels of management within the customerapstas organization, as compared with traditional IT staffing services |
| Additionally, while the sales cycle for many e-Business engagements tend to be shorter (one to six months), many engagements are short in duration (three to six months), requiring increased sales and marketing |
| While the Company has strengthened its experience and strength in marketing, developing, and performing such services, there can be no assurance that the Companyapstas increased focus on Applications Outsourcing, e-Business and BPO will continue to be successful, and any failure of such strategy could have a material adverse effect on the Companyapstas business, results of operations, and financial condition |
| FIXED-PRICE ENGAGEMENTS The Company undertakes engagements, in the nature of development and maintenance, billed on a fixed-price basis, in addition to the engagements billed on time-and-materials basis and has a strategy 27 to increase its percentage of revenue from fixed-price engagement |
| The Companyapstas failure to estimate accurately the resources and time required for an engagement or its failure to complete fixed-price engagements within budget, on time and to the required quality levels would expose the Company to risks associated with cost overruns and, in certain cases, penalties, any of which could have a material adverse effect on the Companyapstas business, operating results and financial condition |
| Fixed-price revenues from development and maintenance activity represented approximately 50prca, 54prca and 52prca of total revenues for the years ended December 31, 2005, 2004, and 2003, respectively |
| POTENTIAL LIABILITY TO CUSTOMERS Many of the Companyapstas engagements involve IT services that are critical to the operations of its customers &apos businesses |
| The Companyapstas failure or inability to meet a customerapstas expectations in the performance of its services could result in a claim for substantial damages against the Company, regardless of the Companyapstas responsibility for such failure |
| Although the Company attempts to limit contractually its liability for damages arising from negligent acts, errors, mistakes or omissions in rendering its IT services, there can be no assurance that the limitations of liability set forth in its service contracts will be enforceable in all instances or would otherwise protect the Company from liability for damages |
| Although the Company maintains general liability insurance coverage, including coverage for errors and omissions, there can be no assurance that such coverage will continue to be available on reasonable terms, will be available in sufficient amounts 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 the Company that are uninsured, exceed available insurance coverage or result in changes to the Companyapstas insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could adversely affect the Companyapstas business, results of operations and financial condition |
| DEPENDENCE ON KEY PERSONNEL The success of the Company may be highly dependent on the efforts and abilities of Bharat Desai, the Companyapstas co-founder, Chairman, President, and Chief Executive Officer and other key personnel |
| The loss of the services of these key personnel for any reason could have a material adverse effect on the Companyapstas business, operating results and financial condition |
| The Company does not maintain key man life insurance on Mr |
| Desai or any other key personnel |
| RISKS RELATED TO POSSIBLE ACQUISITIONS The Company has expanded, and may continue to expand its operations through the acquisition of additional businesses |
| Financing of any future acquisition could require the incurrence of indebtedness, the issuance of equity (common or preferred) or a combination thereof |
| There can be no assurance that the Company will be able to identify, acquire or profitably manage additional businesses or successfully integrate any acquired businesses into the Company without substantial expense, delays or other operational or financial risks and problems |
| Furthermore, acquisitions may involve a number of special risks, including diversion of managementapstas attention, failure to retain key acquired personnel, unanticipated events or legal liabilities and amortization of acquired intangible assets |
| Customer satisfaction or performance problems within an acquired firm could have a material adverse impact on the reputation of the Company as a whole |
| In addition, there can be no assurance that acquired businesses, if any, will achieve anticipated revenues and earnings |
| The failure of the Company to manage its acquisition strategy successfully could have a material adverse effect on the Companyapstas business, results of operations and financial condition |
| 28 LIMITED INTELLECTUAL PROPERTY PROTECTION The Companyapstas success depends in part upon certain methodologies, practices, tools and technical expertise it utilizes in designing, developing, implementing and maintaining applications and other proprietary intellectual property rights |
| In order to protect its proprietary rights in these various intellectual properties, the Company relies upon a combination of nondisclosure and other contractual arrangements as well as trade secret, copyright and trademark laws which afford only limited protection |
| The Company also generally enters into confidentiality agreements with its employees, consultants, customers and potential customers and limits access to and distribution of its proprietary information |
| India is a member of the Berne Convention, an international treaty, and has agreed to recognize protections on intellectual property rights conferred under the laws of foreign countries, including the laws of the US The Company believes that laws, rules, regulations and treaties in effect in the US and India are adequate to protect it from misappropriation or unauthorized use of its intellectual property |
| However, there can be no assurance that such laws will not change and, in particular, that the laws of India will not change in ways that may prevent or restrict the transfer of software components, libraries and toolsets from India to the US There can be no assurance that the steps taken by the Company will be adequate to deter misappropriation of its intellectual property, or that the Company will be able to detect unauthorized use and take appropriate steps to enforce its rights |
| Although the Company believes that its intellectual property rights do not infringe on the intellectual property rights of others, there can be no assurance that such a claim will not be asserted against the Company in the future or what impact any such claim, would have on the Companyapstas business, results of operation or financial condition |
| The Company presently holds no patents or registered copyrights |
| The Company holds the trademarks or servicemarks: Syntel(R), registered in the US and Germany; Consider IT Done(R), registered in the US and Germany; Identeon(TM); IntelliSourcing(R); IntelliTransfer(R); Skillbay(R); TeamSourcing(R); Total ERP Applications Methodology (TEAM)(R); Latest to Legacy(R); New2USAcom(R); and Digital Blueprinting-Build-Optimize(R) |
| The Company has submitted US federal and foreign trademark applications to register those names for its service offerings not already registered |
| However, there can be no assurance that the Company will be successful in obtaining trademarks for these trade names |
| POTENTIAL ANTI-OUTSOURCING LEGISLATION In the recent past, the issue of outsourcing of services abroad by companies has become a topic of political discussion in the United States and in other countries |
| Measures aimed at limiting or restricting outsourcing by companies are under discussion in U S Congress as well as in as many of the state legislatures in addition to other countries |
| While no substantive anti-outsourcing legislation has been enacted to date that significantly adversely affects the Company, given the continuing debate over this issue, the introduction and enactment of such legislation is possible |
| If introduced and enacted, such measures are likely to fall within two categories: (1) a broadening of restrictions on outsourcing by government agencies and on government contracts with firms that outsource services directly or indirectly, and/or (2) measures that impact private industry, such as tax disincentives, restriction on the transfer or maintenance of certain information abroad and/or intellectual property transfer restrictions |
| In the event that any such measures become law, our business, financial condition and results of operations could be adversely affected and our ability to service our customer could be impaired |
| ADVERSE ECONOMIC CONDITIONS If economic growth slows, our utilization and billing rates for our technology professionals could be adversely affected, which may result in lower gross and operating profits |
| 29 FAILURE TO SUCCESSFULLY DEVELOP AND MARKET NEW PRODUCTS AND SERVICES Over the past several years, we have been expanding the nature and scope of our engagements by extending the breadth of services we offer |
| The success of our service offerings depends, in part, upon continued demand for such services by our existing and new clients and our ability to meet this demand in a cost-competitive and effective manner |
| In addition, our ability to effectively offer a wider breadth of end-to-end business solutions depends on our ability to attract existing or new clients to these service offerings |
| To obtain engagements for our end-to-end solutions, we also are more likely to compete with large, well-established international consulting firms as well as other India-based technology services companies, resulting in increased competition and marketing costs |
| Accordingly, our new service offerings may not effectively meet client needs and we may be unable to attract existing and new clients to these service offerings |
| The increased breadth of our service offerings may result in larger and more complex client projects |
| This will require us to establish closer relationships with our clients and potentially with other technology service providers and vendors, and require a more thorough understanding of our clientapstas operations |
| Our ability to establish these relationships will depend on a number of factors including the proficiency of our technology professionals and our management personnel |
| Our business will suffer if we fail to anticipate and develop new services and enhance existing services in order to keep pace with rapid changes in technology and the industries on which we focus |
| The technology services market is characterized by rapid technological change, evolving industry standards, changing client preferences and new product and service introductions |
| Our future success will depend on our ability to anticipate these advances and develop new product and service offerings to meet client needs |
| We may fail to anticipate or respond to these advances in a timely basis, or, if we do respond, the services or technologies we develop may not be successful in the marketplace |
| Further, products, services or technologies that are developed by our competitors may render our services non-competitive or obsolete |
| BENCHMARKING PROVISIONS As the size and duration of our client engagements increases, clients may require benchmarking provisions |
| Benchmarking provisions allow a customer in certain circumstances to request a benchmark study prepared by an agreed upon third-party comparing our pricing, performance and efficiency gains for delivered contract services to that of an agreed upon list of other service providers for comparable services |
| Based on the results of the benchmark study and depending on the reasons for any unfavorable variance, we may be required to reduce the pricing for future services to be performed under the balance of the contract, which could have an adverse impact on our revenues and profitability |
| CORPORATE GOVERNANCE ISSUES Compliance with new and changing corporate governance and public disclosure requirements adds uncertainty to our compliance policies and increases our costs of compliance |
| Changing laws, regulations and standards relating to accounting, corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations, NASDAQ National Market rules, and Securities and Exchange Commission regulations are creating uncertainty for companies |
| These new or changed 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 governance standards |
| 30 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 new 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 or regulations and standards differ, our business and reputation may be harmed |
| TELECOM/INFRASTRUCTURE ISSUES Disruptions in telecommunications, system failures, or virus attacks could harm our ability to execute our Global Delivery Model, which could result in client dissatisfaction and a reduction of our revenues |
| A significant element of our Global Delivery Model is to continue to leverage and expand our global development centers |
| Our global development centers are linked with a redundant telecommunications network architecture that uses multiple service providers and various satellite and optical links with alternate routing |
| We may not be able to maintain active voice and data communications between our various global development centers and between our global development centers and our clients &apos sites at all times due to disruptions in these networks, system failures or virus attacks |
| Any significant failure in our ability to communicate could result in a disruption in business, which could hinder our performance or our ability to complete client projects on time |
| This, in turn, could lead to client dissatisfaction and a material adverse effect on our business, results of operations and financial condition |
| CONFIDENTIALITY ISSUES We may be liable to our clients for damages caused by disclosure of confidential information or system failures |
| We are often required to collect and store sensitive or confidential client and customer data |
| Many of our client agreements do not limit our potential liability for breaches of confidentiality |
| If any person, including any of our employees, penetrates our network security or misappropriates sensitive data, we could be subject to significant liability from our clients or from our clients &apos customers for breaching contractual confidentiality provisions or privacy laws |
| Unauthorized disclosure of sensitive or confidential client and customer data, whether through breach of our computer systems, systems failure or otherwise, could damage our reputation and cause us to lose clients |
| Many of our contracts involve projects that are critical to the operations of our clients &apos businesses, and provide benefits, which may be difficult to quantify |
| Any failure in a clientapstas system or breaches of security could result in a claim for substantial damages against us, regardless of our responsibility for such failure |
| Although we attempt to limit our contractual liability for consequential damages in rendering our services, these limitations on liability may be unenforceable in some cases, or may be insufficient to protect us from liability for damages |
| We maintain general liability insurance coverage, including coverage for errors or omissions, however, this coverage may not continue to be available on reasonable terms and may be unavailable in sufficient amounts to cover one or more large claims |
| A successful assertion of one or more large claims against us that exceeds our available insurance coverage or changes in our insurance policies, including premium increases or the imposition of a large deductible or co-insurance requirement, could adversely affect our operating results |
| 31 NEW FACILITIES We are investing substantial cash assets in new facilities and physical infrastructure, and our profitability could be reduced if our business does not grow proportionately |
| STOCK OPTION ACCOUNTING Our earnings will be adversely affected once we change our accounting policies with respect to the expensing of stock options |
| We do not currently deduct the expense of employee stock option grants from our income based on the fair value method |
| We have adopted the pro forma disclosure provisions of SFAS Nodtta 123, Accounting for Stock-Based Compensation |
| Recently, the Financial Accounting Standards Board issued FASB Statement Nodtta 123 (revised 2004) "e Share-Based Payment "e ( "e SFAS Nodtta 123R "e ) requiring companies to change their accounting policies to record the fair value of stock options issued to employees as an expense |
| During December 2004, the Financial Accounting Standards Board issued SFAS Nodtta 123R, "e Share-Based Payment "e (SFAS 123R),which requires companies to measure and recognize compensation expense for all stock-based payments at fair value |
| Stock-based payments include stock option grants and other transactions under Company stock plans |
| The Company grants options to purchase common stock to some of its employees and directors under various plans at prices equal to the market value of the stock on the dates the options were granted |
| The Company is required to adopt SFAS 123R by the first quarter of fiscal 2006 |
| The Company will use the modified prospective application transition method and estimates that the adoption of SFAS Nodtta 123R for share-based awards issued to employees will not have a significant impact on its statement of income or financial position for 2006 |
| This estimate is based upon various assumptions, including an estimate of the number of share-based awards that will be granted, cancelled or expired during 2006, as well as the Companyapstas future stock prices |
| These assumptions are highly subjective and changes in these assumptions could significantly affect the Companyapstas estimate |
| TERRORIST ACTIVITY, WAR OR NATURAL DISASTERS Terrorist activity, war or natural disasters could adversely affect our business, results of operations and financial condition |
| Terrorist activity, other acts of violence or war, or natural disasters have the potential to have a direct impact on our clients |
| Such events may make travel more difficult, may make it more difficult to obtain work visas for many of our technology professionals and may effectively curtail our ability to deliver our services to our clients |
| Such obstacles to business may increase our expenses and negatively affect the results of our operations |
| Many of our clients visit several technology services firms prior to reaching a decision on vendor selection |
| Terrorist activity, war or natural disasters could make travel more difficult and delay, postpone or cancel decisions to use our services |
| INSTABILITY AND CURRENCY FLUCTUATIONS Historically, we have held a significant amount of our cash funds in Indian rupees |
| Accordingly, changes in exchange rates may have a material adverse effect on our revenues, other income, cost of services sold, gross margin and net income, which may in turn have a negative impact on our business, operating results and financial condition |
| The exchange rate between the Indian rupee and the dollar has changed substantially in recent years and may fluctuate substantially in the future |
| We expect that a majority of our revenues will continue to be generated in US dollars for the foreseeable future and that a significant portion of our expenses, including personnel costs, as well as capital and operating expenditures, will continue to be denominated in Indian rupees |
| Consequently, the results of our operations are adversely affected as the Indian rupee appreciates against the dollar |