IGate 10Q 2003 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

	OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-21755

iGATE CORPORATION
(Exact name of registrant as specified in its charter)

PENNSYLVANIA		25-1802235
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1000 Commerce Drive Suite 500 Pittsburgh, PA		15275
(Address of principal executive offices)		(Zip Code)

(412) 506-1131
(Registrant’s Telephone Number, Including Area Code)

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 x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes x No o

The number of shares of the registrant’s Common Stock, par value $0.01 per share, outstanding as of July 31, 2003 was 51,621,797.

iGATE CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2003

TABLE OF CONTENTS


		Page
PART I	FINANCIAL INFORMATION	3

Item 1.	Unaudited Condensed Consolidated Financial Statements

	(a) Unaudited Condensed Consolidated Statements of Operations for the Three and Six Month Periods Ended June 30, 2003 and 2002	3

	(b) Condensed Consolidated Balance Sheets as of June 30, 2003 (Unaudited) and December 31, 2002	4

	(c) Unaudited Condensed Consolidated Statement of Shareholders’ Equity and Comprehensive Income (Loss) for the Six Month Periods Ended June 30, 2003 and 2002	5

	(d) Unaudited Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 2003 and 2002	6

	(e) Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	23

Item 4.	Controls and Procedures	24

PART II	OTHER INFORMATION

Item 6.	Exhibits and Reports on Form 8-K	24

	SIGNATURES	25

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(a)

iGATE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
Revenues	$	72,739		$	75,961		$	141,350		$	150,958
Cost of revenues		53,025			53,618			103,544			106,577

Gross margin		19,714			22,343			37,806			44,381
Selling, general and administrative		18,250			19,787			34,860			40,569

Income from operations		1,464			2,556			2,946			3,812
Other income, net		550			1,351			1,592			989
Minority interest		(196	)		(167	)		(516	)		(332	)
Gain on deconsolidation of subsidiary		—			—			—			7,086
Loss on venture investments		—			—			—			(215	)

Income before income taxes		1,818			3,740			4,022			11,340
Income tax provision		409			1,496			3,077			4,536

Net income	$	1,409		$	2,244		$	945		$	6,804

Net income per common share, basic	$	0.03		$	0.04		$	0.02		$	0.13

Net income per common share, diluted	$	0.03		$	0.04		$	0.02		$	0.13

Weighted Average Common Shares outstanding, Basic		51,560			51,280			51,538			51,241

Weighted Average Common Shares outstanding, Diluted		51,804			52,385			51,764			52,333

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

(b)

iGATE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)


	June 30, 2003			December 31, 2002*
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	55,314		$	56,793
Short-term investments		17,628			26,188
Restricted cash and investments		25,000			25,000
Accounts receivable and unbilled receivables, net		53,243			47,964
Prepaid and other current assets		9,554			7,690
Prepaid income taxes		1,848			3,334
Deferred income taxes		4,235			4,624

Total current assets		166,822			171,593

Goodwill, net		7,833			4,015
Land, building, equipment and leasehold improvements, net		14,085			10,710
Investments in unconsolidated affiliates		3,406			2,622

Total assets	$	192,146		$	188,940

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,097		$	8,706
Accrued payroll and related costs		18,388			19,421
Accrued income taxes		3,185			4,475
Other accrued liabilities		18,014			18,970
Deferred revenue		1,215			3,837

Total current liabilities		52,899			55,409
Other long-term liabilities		1,156			1,319
Deferred income taxes		9,488			8,839

Total liabilities		63,543			65,567

Minority interest		6,785			6,224
Shareholders’ equity:
Common Stock, par value $0.01 per share:
100,000,000 shares authorized, 52,575,365 and 52,406,893 issued shares, respectively		527			525
Additional paid-in capital		144,023			143,568
Accumulated deficit		(8,534	)		(9,479	)
Deferred compensation		(51	)		(102	)
Common Stock held in treasury, at cost, 964,443 shares		(14,714	)		(14,714	)
Accumulated other comprehensive income (loss)		567			(2,649	)

Total shareholders’ equity		121,818			117,149

Total liabilities and shareholders’ equity	$	192,146		$	188,940

^* Condensed from audited Consolidated Financial Statements.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

(c)

iGATE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
(Unaudited)


	Common Stock					Series A			Additional		Retained Earnings									Accumulated Other Compreh- ensive			Total Share-			Compreh- ensive
	Shares			Par Value		Preferred Shares			Paid-in Capital		(Accumulated Deficit)			Deferred Compensation			Treasury Shares			Income (Loss)			holders’ Equity			Income (Loss)
Balance, December 31, 2002		51,442,450		$	525		—		$	143,568	$	(9,479	)	$	(102	)	$	(14,714	)	$	(2,649	)	$	117,149
Exercise of stock options, including the effect of tax benefit recognized		60,436			1		—			147		—			—			—			—			148
Shares sold to employees		108,036			1		—			308		—			—			—			—			309
Amortization of deferred compensation		—			—		—			—		—			51			—			—			51
Comprehensive income:
Unrealized gain on investments, net of tax of $0.3 million		—			—		—			—		—			—			—			475			475		$	475
Reclassification adjustment for gains realized in net income		—			—		—			—		—			—			—			(464	)		(464	)		(464	)
Currency translation adjustment		—			—		—			—		—			—			—			3,205			3,205			3,205
Net income		—			—		—			—		945			—			—			—			945			945

																										$	4,161

Balance, June 30, 2003		51,610,922		$	527		—		$	144,023	$	(8,534	)	$	(51	)	$	(14,714	)	$	567		$	121,818

Balance, December 31, 2001		51,280,993	⁽¹⁾	$	524		1		$	142,985	$	18,012		$	(204	)	$	(14,714	)	$	(3,227	)	$	143,376
Exercise of stock options, including the effect of tax benefit recognized		122,270			1		—			493		—			—			—			—			494
Amortization of deferred compensation		—			—		—			—		—			51			—			—			51
Treasury stock transactions		—			—		(1	)		—		—			—			—			—			—
Comprehensive income:
Unrealized loss on investments, net of tax of $0.5 million		—			—		—			—		—			—			—			(796	)		(796	)	$	(796	)
Reclassification adjustment for losses realized in net income, net of tax $0.1 million		—			—		—			—		—			—			—			125			125			125
Currency translation adjustment		—			—		—			—		—			—			—			(477	)		(477	)		(477	)
Net income		—			—		—			—		6,804			—			—			—			6,804			6,804

							—																			$	5,656

Balance, June 30, 2002		51,403,263		$	525				$	143,478	$	24,816		$	(153	)	$	(14,714	)	$	(4,375	)	$	149,577


(1)	The Company has reclassed all stock held in Treasury to reflect only outstanding common stock.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

(d)

iGATE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)


	Six Months Ended June 30,
	2003			2002
Cash Flows From Operating Activities:
Net income	$	945		$	6,804
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		2,556			3,509
Net gain on deconsolidation of itiliti, net of cash		—			(7,086	)
Realized gain on investments		(735	)		—
Allowance for uncollectible accounts		(200	)		(60	)
Deferred income taxes, net		243			3,045
Loss on venture investments and affiliated companies		—			215
Minority interest		516			332
Deferred revenue		(2,622	)		(1,607	)
Amortization of deferred compensation		51			51
Amortization of bond premium		—			1,000
Working capital items:
Accounts receivable and unbilled receivables		(4,785	)		6,782
Prepaid and other current assets		189			8,840
Accounts payable		3,391			(489	)
Accrued and other current liabilities		(3,184	)		1,224

Net cash flows (used) provided by operating activities		(3,635	)		22,560

Cash Flows From Investing Activities:
Additions to equipment and leasehold improvements, net		(3,187	)		(665	)
Sales (purchases) of investments, net		8,755			(8,031	)
Acquisitions, net of cash acquired		(5,275	)		(850	)
Contingent consideration		—			(3,038	)
Proceeds from sale of investment in unconsolidated affiliate		—			35
Other		—			(872	)

Net cash flows provided (used) by investing activities		293			(13,421	)

Cash Flows From Financing Activities:
Net proceeds from exercise of stock options		117			493

Net cash flows provided by financing activities		117			493

Effect of currency translation		1,746			49

Net change in cash and cash equivalents		(1,479	)		9,681
Cash and cash equivalents, beginning of period		56,793			54,438

Cash and cash equivalents, end of period	$	55,314		$	64,119

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

(e) NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The Unaudited Condensed Consolidated Financial Statements included herein have been prepared by iGate Corporation (the “Company”) in accordance with generally accepted accounting principles for interim financial information and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as amended. Accordingly, the accompanying Unaudited Condensed Consolidated Financial Statements do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. The accompanying Unaudited Condensed Consolidated Financial Statements as of and for the three and six months ended June 30, 2003 and 2002 should be read in conjunction with the Company’s Consolidated Financial Statements (and notes thereto) included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2002. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation of the accompanying Unaudited Condensed Consolidated Financial Statements have been included, and all adjustments unless otherwise discussed in the Notes to the Unaudited Condensed Consolidated Financial Statements are of a normal and recurring nature. All significant intercompany accounts and transactions have been eliminated in consolidation. Operating results for the three and six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

The use of accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company has accounted for the costs associated with consultants not currently working on projects (“bench costs”) within cost of revenues. Bench costs for the three and six months ended June 30, 2002 of $2.2 million and $5.3 million, respectively were accounted for as part of selling, general and administrative expenses. These costs have been reclassified in 2002 to cost of revenues to conform with the current year presentation.

Recently Issued Accounting Pronouncements

Revenue Arrangement

In January 2003, the Emerging Issues Task Force released Issue No. 00-21 (“EITF 00-21”), Revenue Arrangements with Multiple Deliverables, which addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, EITF 00-21 addresses whether an arrangement contains more than one unit of accounting and the measurement and allocation to the separate units of accounting in the arrangement. EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after July 1, 2003. The Company has not yet determined what effect adoption of this standard will have on its Consolidated Financial Statements.

Variable Interest Entities

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. FIN 46 requires unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse the risk and rewards of ownership among their owners and other parties involved. The provisions of FIN 46 are effective immediately to all variable entities created after January 1, 2003 and variable interest entities in which an enterprise obtains an interest in after that date. For variable interest entities created before this date, the provisions are effective July 31, 2003. The Company does not expect the adoption of this standard will have a material impact on its Consolidated Financial Statements.

2. Guarantees

FASB Interpretation No. 45 (“FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 clarifies the requirements of FASB Statement No. 5, Accounting for Contingencies relating to a guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 also requires enhanced disclosures in company’s interim and annual filings. FIN 45 is effective for guarantees issued or modified after December 31, 2002. The disclosure requirements were effective for financial statements of both interim and fiscal years ending after December 15, 2002. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

3. Stock Based Compensation

Stock options granted under the Company’s stock incentive plans are generally granted at market prices on the date of grant. Stock options granted have a maximum life of ten years from date of grant. Options granted generally vest ratability over a four year period.

The Company accounts for its stock-based compensation in accordance with Accounting Principles Based Opinion No. 25, Accounting for Stock Issued for Employees, and related interpretations using the intrinsic value method, which resulted in no compensation costs for options granted.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock based employee compensation.


	Three Months Ended June 30,						Six Months Ended June 30,

	(in thousands, except per share data)
	2003			2002			2003			2002
Net income, as reported	$	1,409		$	2,244		$	945		$	6,804
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards		(423	)		(38	)		(847	)		216

Proforma net income	$	986		$	2,206		$	98		$	7,020

Earnings per share:
Basic – as reported	$	0.03		$	0.04		$	0.02		$	0.13

Basic – proforma	$	0.02		$	0.04		$	0.00		$	0.14

Diluted – as reported	$	0.03		$	0.04		$	0.02		$	0.13

Diluted – proforma	$	0.02		$	0.04		$	0.00		$	0.13

4. Acquisitions

On May 20, 2003, iGate Global Solutions acquired the contact center and facility management businesses of IT&T Technology Services Ltd. (“ITT”). ITT’s businesses are headquartered in Delhi, India. The purchase price for these businesses totaled $4.5 million in cash and included employees, customer contracts, working capital and fixed assets. The preliminary allocation of the purchase price resulted in goodwill of $2.4 million.

On April 1, 2003, iGate Global Solutions acquired the stock of Aqua Regia, Ltd. for $0.5 million in cash. Aqua Regia is headquartered in Hyderabad, India. The preliminary allocation of the purchase price resulted in goodwill of $0.2 million.

On February 26, 2003, the Company, through a newly formed subsidiary iGate Clinical Research International, formerly known as iGate Clinical Management, Inc. (“ICRI”), purchased the assets of Pittsburgh Clinical Research Network (“PCRN”), for $0.4 million. The Company retained 90% ownership of ICRI, with one minority shareholder owning a 10% minority interest in the entity.

5. Intangible Assets

The Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), effective the beginning of fiscal 2002. SFAS 142 requires goodwill to be tested for impairment on an annual basis and when certain triggering events occur, and written down when impaired, rather than being amortized as previous standards required. Furthermore, SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. The Company adopted the standard effective the beginning of fiscal 2002. In accordance with SFAS 142, the Company ceased amortizing goodwill as of the beginning of fiscal 2002.

Changes in the carrying value of goodwill by reportable segment are as follows, (in thousands):


	Three Months Ended June 30, 2003
	iGate Professional Services		iGate Solutions		iGate Corporate		Consolidated
Goodwill net, March 31, 2003	$	4,487	$	—	$	—	$	4,487
Acquisitions		—		2,603		—		2,603
Foreign currency translation effect		743		—		—		743

Goodwill, June 30, 2003	$	5,230	$	2,603	$	—	$	7,833


	Six Months Ended June 30, 2003
	iGate Professional Services		iGate Solutions		iGate Corporate		Consolidated
Goodwill net, December 31, 2002	$	4,015	$	—	$	—	$	4,015
Acquisitions		—		2,603		—		2,603
Foreign currency translation effect		1,215		—		—		1,215

Goodwill net, June 30, 2003	$	5,230	$	2,603	$	—	$	7,833

6. Investments and Restricted Investments

The Company accounts for its investments in marketable securities in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”). The Company has determined that certain of its investments in marketable securities are to be classified as available-for-sale and recorded at fair value. These investments are carried at market value, with the unrealized gains or losses, net of tax, reported as a component of comprehensive income in the Condensed Consolidated Statement of Shareholders’ Equity and Comprehensive Loss. Realized gains or losses on securities sold are calculated using the specific identification method.

The Company accounts for investments in businesses in which it owns between a 20% and 50% voting interest of equity or otherwise acquires management influence using the equity method of accounting as prescribed by Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. Investments in which the Company owns less than a 20% voting interest, or in which the Company does not acquire management influence are accounted for using the cost method of accounting, or, if publicly traded, as available-for-sale securities. The Company’s proportionate share of investment income or loss in affiliates accounted for under the equity method is recorded as part of equity in losses of affiliated companies on the Condensed Consolidated Statement of Operations.

Loss on Venture Investments

In February 2002, the Company sold its entire interest in Versata, Inc. (“Versata”) for cash, realizing a loss of $0.2 million.

Restricted Investments

The Company had short-term investments consisting of commercial paper, money market funds and corporate bonds that totaled $17.6 million and $26.2 million at June 30, 2003 and December 31, 2002. These funds are to be used exclusively for iGate Global Solutions’ purposes due to Indian governmental restrictions.

In addition, the Company had compensating balances classified on the Condensed Consolidated Balance Sheets as short-term investments which consisted of money market funds that totaled $25.0 million at June 30, 2003 and December 31, 2002. These funds have been pledged to PNC Bank pursuant to terms of the PNC Bank Credit Facility. The compensating balances may be withdrawn, but the availability of short-term lines of credit is dependent upon maintenance of such compensating balances. As of June 30, 2003, the Company had no outstanding indebtedness to PNC under the Credit Facility.

As a condition of the February 28, 2001 sale of the Company’s 50% interest in Planning Technologies, Inc. (“PTI”) to RedHat, Inc. (“RedHat”), approximately 0.3 million shares of RedHat Common Stock are currently held in escrow. The escrow was established at the date of acquisition as a result of certain existing pre-acquisition claims and is the sole source for indemnification obligations, made against PTI, of which iGate would be liable. These outstanding claims have yet to be settled. The shares in escrow will be utilized to settle these claims with any residual shares reverting back to the Company.

7. Gain on Deconsolidation of itiliti

On March 15, 2002, through the combination of a sale of new shares by itiliti, Inc. (“itiliti”) to strategic investors and conversion of its bridge loan financing vehicle to voting equity securities, the Company’s ownership interest in itiliti was reduced from 90% to 49%. Subsequent to the transaction date, the Company accounted for its interest in itiliti under the equity method of accounting due to its lack of controlling interest in itiliti. In addition, the Company has no future obligation to fund additional operating or financing requirements of itiliti. For the six months ended June 30, 2002, the Company recorded a gain on deconsolidation of $7.1 million and a pretax loss for the period January 1, 2002 through the date of deconsolidation in the amount of $2.2 million.

8. Restructuring and Merger Charges

The following paragraphs discuss the Company’s restructurings of its business. All costs associated with these restructurings were accounted for in accordance with EITF 94-3, Liability Recognition for Costs to Exit an Activity.

During the fourth quarter of 2002, the Company incurred $4.2 million of costs associated with a restructuring of certain of its business units as well as departments within the iGate corporate structure. The Company consolidated its back office operations including its legal, accounting, marketing and human resource departments. As part of the restructuring, the Company has vacated all non-essential properties and all remaining employees were relocated to a centralized location. As part of the restructuring, the Company eliminated 96 U.S. positions. These employees were executive level, back office support and administrative positions that were no longer being utilized. These actions were necessary due to the streamlining of the Company’s back office operations and due to redundancies of effort. Of the total costs incurred as part of the restructuring, non-cash charges totaled $0.8 million, and were related to write-offs of leasehold improvements on abandoned leased property.

In the third quarter of 2001, the continued economic downturn caused the Company to do an extensive review of its operations and certain overhead costs associated with each reportable segment. In August 2001, the Company approved a restructuring plan (the “plan”). Based upon its revenue trends and the general economic environment, the Company decided to put a plan in place that would serve to cut excess costs in certain of the operating segments. As part of this plan, the Company recorded severance costs in the amount of $1.0 million. The Company reduced employee headcount by 84. These employees ranged from executive level through administrative assistants, and affected the iGate Professional Services, iGate Solutions and iGate Corporate segments. The Company also recorded a $2.4 million charge for a special bonus for one of its key executives. The Company also performed an extensive fixed asset inventory in each reportable segment, in order to identify any fixed assets, such as laptops and computer equipment that were deemed to be in excess due to the headcount reduction as well as the continued economic downturn. Based upon the fixed asset inventory, the Company recorded write-downs of $2.1 million. These write-downs of excess equipment were recorded in the iGate Professional Services, iGate Solutions and iGate Corporate segments. The Company also decided to exit its training function at the iGate level in favor of a more decentralized approach. Exit costs associated with the training department were $0.8 million, consisting of education-related licensing agreements entered into that will no longer be utilized. In the iGate Professional Services segment, the Company recorded a charge of $1.3 million for lease costs associated with the closure of its office in San Francisco. The Company’s total charge for the plan totaled $7.6 million. The Company believes these steps were necessary due to declines in demand and overall headcount.

In December 2001, the Company severed 3 employees of its wholly-owned subsidiary Global Financial Services of Nevada, ranging from executive level to general and administrative support, incurring a charge of $0.2 million. In December 2001, IRG, a majority-owned subsidiary of the Company, merged with and into eJiva. As part of the merger, eJiva incurred $1.4 million of merger related exit costs associated with a leased space in Pittsburgh. The merged eJiva entity relocated to IRG office space.

The following table details restructuring by year implemented. The Company implemented restructuring plans during 2002 and 2001, and incurred related restructuring costs. The components of the restructuring charges, merger and restructuring accrual at June 30, 2003 are as follows:


	Accrued December 31, 2002		Foreign Exchange Gain		Cash Expenditures			Accrued June 30, 2003
(in thousands)
2002 Severance and related items	$	282	$	—	$	(246	)	$	36
2002 Lease costs of office closure		2,195		—		(524	)		1,671
2001 Severance, bonus and related items		2,355		38		(216	)		2,177
2001 Lease costs of office closure		1,611		81		(332	)		1,360

Total	$	6,443	$	119	$	(1,318	)	$	5,244

9. PNC Credit Facility and Other Liabilities

The Company maintained a $50.0 million secured credit facility with PNC that was renewed and amended through October 31, 2003. The PNC Facility provided a maximum loan amount of $50.0 million, subject to the balance of the Company’s accounts receivable and certain other factors. As of the quarter ended June 30, 2003, the Company did not obtain the specified required level of “Minimum Consolidated Income from Operations”. As a condition of the Fourth Amendment, the Company’s ability to borrow funds is subject to: (a) its delivery within forty five days of certain supplemental schedules required by PNC and (b) PNC waiving certain events of default under the credit facility including but not limited to the Company’s failure to obtain the minimum required consolidated income from operations for the quarter ended June 30, 2003. The provisions of the PNC Facility requires the Company to maintain at least $30.0 million in cash and cash equivalents, which includes $25.0 million that the Company is required to pledge to PNC. On July 31, 2003, the credit facility expired and was amended, which is more fully discussed in Note 14.

As a condition of the sale of eJiva to iGate Global Solutions, Ltd., a subsidiary of the Company, formerly known as Mascot Systems, Ltd. (“IGS or iGate Global Solutions”) as discussed in Note 12, the Company has assumed the put option payment obligation related to the December 31, 2001 acquisition of Innovative Resources Group, Inc. (“IRG”) by eJiva. The put option entitles the former shareholders of IRG to a payment of $9.3 million and will fully vest on September 1, 2003 and can be exercised on or before December 31, 2003. The liability is recorded as part of “Other Accrued Liabilities”.

10. Income Taxes

The Company’s tax provision for the six months ended June 30, 2003, included a one-time charge of $1.5 million related to the sale of eJiva, a U.S. subsidiary, to iGate Global Solutions Limited, a controlled foreign corporation. The proceeds from the sale were treated as a distribution of iGate Global Solutions’ accumulated earnings and profits. For U.S. tax purposes, the taxable amount was equal to the gross distribution reduced by amounts previously included in the Company’s taxable income.

11. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):


	Three Months Ended June 30,				Six Months Ended June 30,
	2003		2002		2003		2002
Basic income per share:
Net income	$	1,409	$	2,244	$	945	$	6,804

Divided by:
Weighted average common shares		51,560		51,280		51,538		51,241

Basic income per share	$	0.03	$	0.04	$	0.02	$	0.13

Diluted income per share:
Net income	$	1,409	$	2,244	$	945	$	6,804
Convertible debt expense, net of tax (1)		—		94		—		189

Adjusted net income	$	1,409	$	2,338	$	945	$	6,993

Divided by:
Weighted average common shares		51,560		51,280		51,538		51,241
Dilutive effect of restricted and common stock equivalents		244		412		226		399
Dilutive effect of convertible securities		—		693		—		693

Diluted average common shares		51,804		52,385		51,764		52,333

Diluted income per share	$	0.03	$	0.04	$	0.02	$	0.13


	(1) Convertible debt expense relates to a Convertible Debenture Agreement with GE Capital Equity Investments, Inc.

The number of outstanding options to purchase common shares for which the option exercise prices exceeded the average market price of the common shares aggregated 1.8 million and 1.9 million for the three month periods and 1.8 million and 2.0 million for the six month periods ended June 30, 2003 and 2002, respectively. These options were excluded from the computation of diluted earnings per share under the treasury stock method.

12. Restricted Stock

On January 1, 2003, iGate Global Solutions acquired the stock of eJiva for $9.5 million. Prior to the acquisition, eJiva was a wholly owned subsidiary of iGate Corporation. In connection with the January 2003 transfer of eJiva to iGate Global Solutions, the outstanding shares not owned by iGate were either converted into iGate shares, canceled or purchased in the manner as described below. Each share of common stock of eJiva which was originally issued to the Co-Founders of IRG in the form of restricted stock was converted (based upon the conversion ratio set forth in the merger agreement) into shares of restricted common stock of iGate with the identical terms and vesting schedule as the eJiva restricted stock. Subject to continued employment of the Co-Founders with iGate Global Solutions, the restricted stock vests as follows: 20% vested on July 1, 2002, 55% vested on March 31, 2003 and the remaining 25% will vest on March 1, 2004.

Effective January 1, 2003, the Company issued 108,036 shares of restricted stock to the Co-Founders of IRG (“Co-Founders”). The restricted stock was issued to replace the restricted stock in eJiva in connection with the acquisition of eJiva by iGate Global Solutions.

The restricted stock was valued at iGate’s market value at date of issuance. The Co-Founders executed full recourse Promissory Notes in order to purchase the shares.

13. Segment Information

In accordance with Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, management has reevaluated the way the Company is to being managed and monitored, beginning in the first quarter of 2003. As a result, the existing operating units of the Company were recast into three reportable operating segments, which have been defined by management, based primarily on the Company’s strategy and business focus for the future. Accordingly, the segment information for the three and six months ended June 30, 2002 has been recast for comparative purposes.

The Company’s newly recast segments are iGate Solutions, iGate Professional Services and iGate Corporate.

iGate Solutions

The iGate Solutions segment’s services offerings include offshore outsourcing of IT services and IT systems maintenance. Other offerings include enterprise applications implementation and related custom development of applications such as Oracle, SAP and PeopleSoft. The Segment also offers application maintenance outsourcing, business intelligence services and data management and application re-engineering through its offshore development centers (“ODCs”).

iGate Solutions has ODCs located in Bangalore, Hydrabad, Chennai, Delhi, and Pune, India and Wuxi, China. iGate Global Solutions has global development centers (“GDCs”) located in Canada and the U.S. The GDCs can deliver both near shore and offshore services, dependent upon customer location and expectations. iGate Solutions operates in India, Canada, the U.S., Europe, Singapore, Malaysia, Japan, China and Australia.

iGate Professional Services (“IPS”)

The IPS segment’s service offerings include a variety of client-managed and supervised IT staffing service offerings which include enterprise resource package implementation and integration, application support services and client directed software design and customization. The IPS segment also offers training as a service to its customers.

The IPS segment services the U.S., Canada, Australia and portions of the European market.

iGate Corporate (“iGate Corporate”)

In 2003, iGate Corporate includes the operations of jobcurry Systems Private Ltd., iGate Clinical Research International acquired February 26, 2003 and corporate and other unallocated costs. In 2002, iGate Corporate included itiliti, (which was deconsolidated in March 2002), and MobileHelix, (which ceased operations in February 2002).

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate segment performance based upon profit or loss from operations. We do not allocate income taxes, other income or expense and non-recurring charges to segments. In addition, we account for inter-segment sales and transfers at current market prices. All inter-segment sales have been eliminated in consolidation.


	Three Months Ended June 30, 2003 (Dollars in thousands)
	iGate Professional Services		iGate Solutions		iGate Corporate			Total
External revenues	$	34,746	$	37,611	$	382		$	72,739
Cost of revenues		27,020		25,801		204			53,025

Gross margin		7,726		11,810		178			19,714
Selling, general and administrative		4,834		10,093		3,323			18,250

Income (loss) from operations	$	2,892	$	1,717		(3,145	)		1,464

Other income, net						550			550
Minority interest						(196	)		(196	)

(Loss) income before income taxes					$	(2,791	)	$	1,818


	Three Months Ended June 30, 2002 (Dollars in thousands)
	iGate Professional Services		iGate Solutions		iGate Corporate			Total
External revenues	$	37,080	$	38,853	$	28		$	75,961
Cost of revenues		28,271		25,335		12			53,618

Gross margin		8,809		13,518		16			22,343
Selling, general and administrative		6,122		10,940		2,725			19,787

Income (loss) from operations	$	2,687	$	2,578		(2,709	)		2,556

Other income, net						1,351			1,351
Minority interest						(167	)		(167	)

(Loss) income before income taxes					$	(1,525	)	$	3,740


	Six Months Ended June 30, 2003 (Dollars in thousands)
	iGate Professional Services		iGate Solutions		iGate Corporate			Total
External revenues	$	66,772	$	73,999	$	579		$	141,350
Cost of revenues		52,250		50,981		313			103,544

Gross margin		14,522		23,018		266			37,806
Selling, general and administrative		9,447		20,153		5,260			34,860

Income (loss) from operations	$	5,075	$	2,865		(4,994	)		2,946

Other income, net						1,592			1,592
Minority interest						(516	)		(516	)

(Loss) income before income taxes					$	(3,918	)	$	4,022


	Six Months Ended June 30, 2002 (Dollars in thousands)
	iGate Professional Services		iGate Solutions		iGate Corporate			Total
External revenues	$	74,544	$	75,969	$	445		$	150,958
Cost of revenues		56,439		49,621		517			106,577

Gross margin		18,105		26,348		(72	)		44,381
Selling, general and administrative		12,558		22,102		5,909			40,569

Income (loss) from operations	$	5,547	$	4,246		(5,981	)		3,812

Other income, net						989			989
Minority interest						(332	)		(332	)
Gain on deconsolidation of subsidiary						7,086			7,086
Loss on venture investments and affiliated companies						(215	)		(215	)

Income before income taxes					$	1,547		$	11,340

Assets by segment were as follows:


	June 30, 2003		December 31, 2002
	(Dollars in thousands)
iGate Solutions	$	78,943	$	86,388
iGate Professional Services		27,691		23,023
iGate Corporate (1)		85,512		79,529

Total assets	$	192,146	$	188,940

(1) Goodwill is recorded at the iGate Corporate level.

Revenue and assets by geographic area consisted of the following:


	Three Months Ended June 30,				Six Months Ended June 30,
	2003		2002		2003		2002
	(Dollars in thousands)
Revenues:
United States	$	38,411	$	45,148	$	76,036	$	91,201
Canada		7,761		5,257		14,122		10,235
Europe and Africa		6,915		6,383		13,932		13,242
Pacific Rim		19,652		19,173		37,260		36,280

Total revenues	$	72,739	$	75,961	$	141,350	$	150,958


	June 30, 2003		December 31, 2002
	(Dollars in thousands)
Assets:
United States	$	107,203	$	110,157
Canada		7,640		4,911
Europe and Africa		9,878		6,306
Pacific Rim		67,425		67,566

Total assets	$	192,146	$	188,940

The following is a concentration of revenues greater than 10% for the periods shown:


	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
	(Dollars in thousands)
General Electric Company
iGate Solutions		33	%		29	%		34	%		30	%
iGate Consolidated		17	%		15	%		18	%		15	%
International Business Machines Corp.
iGate Professional Services		11	%		—			—			—

14. Subsequent Events

In July 2003, IGS agreed to enter into an India-based joint venture with CIBER, Inc. (NYSE:CBR). The joint venture, 49% owned by IGS, named CIBER India Pvt. Ltd., offers software services, including applications development, enterprise application support and IT outsourcing services. iGate will account for its share of the joint venture profit and loss using the equity-method of accounting.

On July 31, 2003, IGS entered into a definitive agreement to acquire a 51% majority interest in Quintant, an India-based business services provider for $19.0 million in cash and will acquire 9% for $0.7 million. As part of the same agreement iGate acquired an approximate 13% interest in Quintant for $0.9 million in cash. iGate intends to acquire the remaining 27% of Quintant in March 2004, with an issuance of approximately 2.7 million shares of iGate stock, whose value will be determined at the date of acquisition. Quintant is considered to be a “development stage” company with operating costs but no revenue streams.

On July 31, 2003, the $50.0 million secured facility with PNC Bank expired. The Company has amended (“Fourth Amendment”), the credit facility agreement to extend the expiration date to October 31, 2003, and in addition, has decreased the amount of available borrowings to $25.0 million. As a condition of the Fourth Amendment, the Company’s ability to borrow funds is subject to: (a) its delivery within forty five days of certain supplemental schedules required by PNC and (b) PNC waiving certain events of default under the credit facility including but not limited to the Company’s failure to obtain the minimum required consolidated income from operations for the quarter ended June 30, 2003.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Some of the Statements in this Form 10-Q (“Form 10-Q”) that are not historical facts constitute “forward-looking statements” within the meaning of such term under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include our financial growth and liquidity projections as well as statements concerning our plans, strategies, intentions and beliefs concerning our business, cash flows, costs and the markets in which we operate. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify certain forward-looking statements. These forward-looking statements are based on information currently available to us, and we assume no obligation to update these statements as circumstances change. There are risks and uncertainties that could cause actual events to differ materially from these forward-looking statements. While we cannot predict all of the risks and uncertainties, they include, but are not limited to, our ability to predict our financial performance, the level of market demand for our services, the highly-competitive market for the types of services that we offer, the impact of competitive factors on profit margins, market conditions that could cause our customers to reduce their spending for our services, our ability to create, acquire and build new businesses and to grow our existing businesses, our ability to attract and retain qualified personnel, our ability to reduce costs and conserve cash, currency fluctuations and market conditions in India and elsewhere around the world, political and military tensions in India and South Asia, changes in generally accepted accounting principles and/or their interpretation and other risks. While we cannot predict all of these risks and uncertainties, we refer you to the important risk factors that could cause actual results to differ materially from our current beliefs and expectations, which are, discussed under the heading “Risk Factors” in Part I of the 2002 Form 10-K.

Unless otherwise indicated or the context otherwise requires, all references in this report to “iGate”, the “Company”, “us”, “our”, or “we” are to iGate Corporation a Pennsylvania corporation, and its consolidated subsidiaries. iGate Corporation, formerly named iGate Capital Corporation, through its operating subsidiaries, is a worldwide provider of information technology (“IT”) and Offshore Outsourcing services (“worked performed primarily in India”) to large and medium-sized organizations. These services include offshore outsourcing, enterprise resource planning (“ERP”) package implementation and integration services, software development and applications maintenance outsourcing services, client/server design and development and conversion/migration services.

Overview

iGate Corporation, through its operating subsidiaries, is a worldwide provider of IT and Offshore Outsourcing services to large and medium-sized organizations.

2002 was another difficult year for the IT industry. The IT industry did not rebound from 2001 as we had expected. Our revenues for 2002 decreased from 2001 as demand for our services declined as a result of the general economic slowdown related to uncertainties in the economy both here in the U.S. as well as globally. These factors caused a reduction in capital spending and decreases in the number of new software projects initiated by our customers. During the fourth quarter of 2002, the continued economic slowdown caused us to examine the operations within each of our reportable segments, as well as to re-examine our business strategy for 2003.

During 2003, we decided to increase our focus on our offshore delivery business located in India as well as to pursue opportunities in the Business Process Outsourcing (“BPO”) market. We also decided to continue to reduce costs and stabilize our professional services business. In the fourth quarter of 2002, we implemented a restructuring plan to cut costs within each of our operating segments.

We have also recently announced our intention to offer business services provisioning (“BSP”) services through the acquisition of Quintant. A BSP provider offers business process outsourcing as well as “front-end” consulting services to optimize business processes and technologies prior to outsourcing clients business processes.

Implementation of our strategy to offer offshore-based BPO services to our clients in various industries extends to non-IT related services and may include service offerings as diverse as billing and accounts receivable collections, claims processing, or any other services which may be outsourced and handled from offshore. The range of our BPO services offered will be primarily driven by the companies we may acquire, partner with or build on our own. We believe that more services can be or are being performed offshore by talented individuals, at savings as high as 50% over US or European costs.

To enhance our offshore capabilities and to become more visible in the offshore services market, iGate Global Solutions Ltd., formerly known as Mascot Systems, Ltd. (“IGS or iGate Global Solutions”), our majority owned Indian subsidiary, acquired the stock of eJiva, Inc. (“eJiva”), our wholly-owned U.S. subsidiary, and effective April 1, 2003, Aqua Regia, an India-based offshore company which has had an exclusive relationship with eJiva. All revenues of Aqua Regia are eliminated in consolidation. The

purchase consideration of eJiva was $9.5 million and also included iGate’s Toronto Development Center, acquired by eJiva prior to its combination of eJiva with IGS. The acquisition of eJiva’s stock was effective January 1, 2003. In conjunction with IGS’s purchase of eJiva and Aqua Regia, our increased focus on our offshore development centers (“ODCs”) and the pursuit of BPO opportunities, we began to manage our business in a different way.

We believe that these acquisitions will enable IGS to become more visible in the industry thereby, becoming more competitive with the larger offshore market leaders. In the offshore industry, revenue size and company size are critical success factors. Further, eJiva brings certain significant client relationships to enable IGS to expand its offshore business and to combine its service offerings with eJiva’s service offerings.

As a result of our change in strategy consisting of greatly expanding our offshore outsourcing services while leveraging our professional services and the change in the way we monitor and mange our business, we decided to recast our segments, beginning in the first quarter of 2003. Beginning in the first quarter of 2003, our recast segments are iGate Solutions, iGate Professional Services and iGate Corporate.

In 2002, our reporting segments were Offshore Outsourcing, Enterprise Applications, IT Staffing and iGate Corporate. Prior periods have been reclassified to conform to the current segment reporting.

New Developments

On July 31, 2003, IGS entered into a definitive agreement to acquire a 51% majority interest in Quintant, an India-based business services provider for $19.0 million in cash and will acquire 9% for $0.7 million in cash. As part of the same agreement iGate acquired an approximate 13% interest in Quintant for $0.9 million in cash. iGate intends to acquire the remaining 27% of Quintant in March 2004, with an issuance of approximately 2.7 million shares of iGate stock, whose value will be determined at the date of acquisition. Quintant is considered to be a “development stage” company with operating costs but no revenue streams.

In July 2003, IGS has agreed to enter into an India-based joint venture with CIBER, Inc. (NYSE:CBR). The joint venture, 49% owned by IGS, named CIBER India Pvt. Ltd., offers software services, including applications development, enterprise application support and IT outsourcing services. iGate will account for its share of the joint ventures profit and loss, using the equity-method of accounting.

On May 20, 2003, IGS acquired the contact center and facility management business of IT&T Technology Services Ltd. (“ITT”) for $4.5 million in cash. ITT’s businesses are headquartered in Delhi, India. This acquisition will both expand and compliment our service offerings and is aligned with our strategy to grow our offshore-based BPO services.

On April 1, 2003, iGate Global Solutions acquired the stock of Aqua Regia, Ltd. for $0.5 million in cash. Aqua Regia is headquartered in Hyderabad, India.

iGate Solutions

iGate Solutions has ODCs located in Bangalore, Hyderabad, Chennai, Delhi, and Pune, India and Wuxi, China. iGate Solutions has global development centers (“GDCs”) located in Canada and the U.S. The GDCs can deliver both near shore and offshore services, dependent upon customer location and expectations. iGate Solutions operates in India, Canada, the U.S., Europe, Singapore, Malaysia, Japan and Australia.

The majority of our revenues in the iGate Solutions segments are derived through iGate Global Solutions, our publicly held Indian subsidiary. In addition, our iGate Solutions segment has operations in Canada, the U.S., Europe, Singapore, Malaysia, Japan, China and Australia with employee headcount of approximately 3,365.

The majority of our clients in the iGate Solutions segment have headquarters in the U.S. and operations throughout the world. We believe our ODCs and GDCs are strategically located in order to service any client regardless of size, scale or geographic location.

The iGate Solutions segment markets its service offerings to large and medium-sized organizations. Certain contracts are based upon a fixed price with payment based upon deliverables and/or project milestones reached. Certain contracts are time-and-materials based where contract payments are based on the number of consultant hours worked on the project. Customers typically have the right to cancel contracts with minimal notice. Contracts with deliverables or project milestones can provide for certain penalties if the deliverables or project milestones are not met within contract timelines.

The iGate Solutions segment services customers in a wide range of industries. The segment’s largest customer is General Electric Company (“GE”). IGS is a Global Preferred Partner of GE. During the three and six months ended June 30, 2003, GE contributed 33% and 34%, respectively of iGate Solutions segment revenues, as compared to 29% and 30% for the comparable three and six months ended June 30, 2002, respectively.

iGate Professional Services (“IPS”)

Our IPS segment provides a variety of client-managed and supervised IT staffing service offerings which include enterprise resource package implementation and integration, application support services and client directed software design and customization. The IPS segment also offers training as a service to its customers.

The IPS segment markets it services to application development managers and information technology directors within prospective customers companies. The IPS segment also responds to requests for proposals in order to obtain preferred vendor status to secure long-term engagement relationships. IPS contracts provide for payments on a time-and-materials basis, based on the number of consultant hours worked on the project. Clients typically have the right to cancel contracts with minimal notice.

The IPS segment services the U.S., Canada, Australia and portions of the European markets. The segment has approximately 1,430 employees. Almost 47% of the revenues of the segment are U.S. based. IPS serves a wide variety of customers in numerous industries.

The segment’s largest customer is IBM. During, the three and six months ended June 30, 2003; IBM contributed 11% and 8% respectively of IPS segment revenues. IPS segment did not have a customer that accounted for greater than 10% of its revenues in 2002.

iGate Corporate (“iGate”)

Our iGate Corporate segment includes the operations of jobcurry Systems Private Ltd. (“jobcurry”), iGate Clinical Research International, Inc. (“ICRI”) and corporate and other unallocated costs. In 2002, iGate Corporate also included itiliti, which was deconsolidated in March 2002, and MobileHelix, which ceased operations in February 2002. jobcurry continues to provide recruiting and placement services for iGate and outside customers. ICRI contracts with pharmaceutical companies to conduct clinical trials on their behalf. These entities are excluded from the above segments due largely to their dissimilar service offerings and certain economic characteristics. The segment has approximately 160 employees.

Significant Accounting Policies

See Note 1 to the Consolidated Financial Statements set forth on pages 39-45 of our 2002 Form 10-K for a complete description of our significant accounting policies.

Recently Issued Accounting Pronouncements

Revenue Arrangement

effective for revenue arrangements entered into in fiscal periods beginning after July 1, 2003. The Company has not yet determined what effect adoption of this standard will have on its Consolidated Financial Statements.

Variable Interest Entities

Results of Operations of Our Operating Segments: iGate Solutions, IPS and iGate for the Three Months Ended June 30, 2003 as Compared to Three Months Ended June 30, 2002:

As we discussed earlier, we began to manage and monitor our business with an increased focus on our offshore delivery model. As a result, we have recast our operating segments effective January 1, 2003. Further, we now classify costs for consultants not being utilized (i.e. “bench costs”) as direct costs. In prior years, these costs were classified as selling, general and administrative (“SG&A”) costs. The prior reporting period has been reclassified to reflect this change. Bench costs for the three months ended June 30, 2002 were $2.2 million.

iGate Solutions

Revenues for our iGate Solutions segment for the three months ended June 30, 2003 were $37.6 million, a decrease of $1.2 million or 3.2%, as compared to $38.8 million, for the three months ended June 30, 2002. For the three months ended June 30, 2003, ITT contributed $0.5 million to revenues. Our iGate Solutions segment is still experiencing continued weakness in IT spending. Our non-GE revenues have not grown as rapidly as anticipated. Sales cycles for projects are much longer as clients delay the decision-making process due to their uncertainty in the economy. We continue to experience pricing pressures from our customers.

The gross margin for our iGate Solutions was 31.4% for the three months ended June 30, 2003, as compared to 34.8% for the three months ended June 30, 2002. The contributing factors to the decline in gross margins were a combination of pricing pressures from customers, wage and bench costs increases, and the impact of blended rate contracts, which contributed approximately 18% of our iGate Solutions revenues. These contracts have fixed rates regardless of where the work is performed: onsite/near shore (“services provided primarily in North America”) or offshore (“services provided primarily in India”). These contracts continue to have lower margin levels.

SG&A expenses include all costs that are not directly associated with our iGate Solutions segments revenue generating consultants. SG&A expenses include non-consultant salaries and employee benefits, recruiting and training costs, rent, depreciation and amortization, as well as communications and facilities costs. SG&A costs for the three months ended June 30, 2003 were $10.1 million or 26.8% of revenues, as compared to $10.9 million or 28.2% of revenues for the comparable three months ended June 30, 2002. Cost savings were due to reduction in employee headcount as a result of our December 2002 restructuring plan, as well as improvements in our management of operating costs.

Operating margin for the iGate Solutions segment for the three months ended June 30, 2003 was 4.6% as compared to 6.6% for the three months ended June 30, 2002. The decrease was attributed to a decline in overall revenue volume, an unfavorable mix of salaried consultants to subcontract labor, which directly affects our gross margins that were partially offset by decreases in SG&A costs.

iGate Professional Services (“IPS”)

Revenues for our IPS segment for the three months ended June 30, 2003, were $34.7 million a decrease of $2.3 million or 6.3%, as compared to $37.1 million for the three months ended June 30, 2002. Our IPS segment is still experiencing continued weakness in IT spending and as a result declining overall billable consultant headcount. Because of competitive pricing pressures, billing rates for consultants for comparable periods have had a negative impact on revenues.

The gross margin for our IPS segment was 22.2% for the three months ended June 30, 2003, as compared to 23.8% for the three months ended June 30, 2002. The contributing factors to the decline in gross margins were a combination of pricing pressures from customers, increases in employee related costs as well as increased usage of subcontractor labor.

SG&A expenses include all costs that are not directly associated with our revenue generating consultants. SG&A expenses include non-consultant salaries and employee benefits, recruiting and training costs, rent, depreciation and amortization, as well as communications and facilities costs. SG&A costs for the three months ended June 30, 2003 were $4.8 million, or 13.9% of revenues, as compared to $6.1 million, or 16.5% of revenues, for the comparable three months ended June 30, 2002. Cost savings were due to decreases in employee headcount as a result of our December 2002 restructuring plan, as well as improvements in our management of operating costs.

Operating margin for the IPS segment for the three months ended June 30, 2003 was 8.3% as compared to 7.2% for the three months ended June 30, 2002. Operating margin as a percentage of revenue increased due to decreases in SG&A spending.

iGate

Revenues for the iGate segment, for the three months ended June 30, 2003, were $0.4 million, an increase of $0.4 million from revenues of $0.0 million for the comparable three months ended June 30, 2002, due to the addition of $0.2 million revenues from our acquisition, iGate Clinical Research International and increased revenue from jobcurry.

Gross margins were 46.6% for the three months ended June 30, 2003 compared to 57.1% for the three months ended June 30, 2002.

iGate’s segment SG&A expenses increased $0.6 million, for the three months ended June 30, 2003, as compared to the three months ended June 30, 2002. This increase is attributable to acquisition related expenses and severance costs.

Components of other income, net, for the three months ended June 30, 2003 include interest income on short-term investments of $0.6 million, interest expense on certain discounted liabilities of $0.2 million, and foreign currency translation gains of $0.2 million. For the three months ended June 30, 2002, interest income totaled $0.7 million, interest expense totaled $0.3 million and favorable foreign currency translation gains totaled $1.0 million.

Minority interest reflects the share of the net income or loss of our majority-owned operating subsidiaries attributable to the minority owners. Minority interest amounted to expense of $0.2 million for the three months ended June 30, 2003, compared to expense of $0.2 million for the three months ended June 30, 2002. The minority interest expense in 2002 was the minority share of the net income of IGS. For the three months ended June 30, 2003, the minority interest expense was the minority share of the net income of IGS and the net loss of ICRI, which was acquired in February 2003.

Our income tax provision was $0.4 million at an effective rate of 23% for the three months ended June 30, 2003. The significant items comprising our effective tax rate include the tax on deemed distributions from iGate Global Solutions and the benefits derived from our Indian tax holiday. Our income tax provision for the three months ended June 30, 2002 was $1.5 million at an effective rate of 40%, and significant items comprising our effective rate included the benefits derived from our Indian tax holiday.

Results of Operations of Our Operating Segments: iGate Solutions, IPS and iGate for the Six Months Ended June 30, 2003 as Compared to Six Months Ended June 30, 2002:

iGate Solutions

Revenues for our iGate Solutions segment for the six months ended June 30, 2003 were $74.0 million, a decrease of $2.0 million or 2.6%, as compared to $76.0 million, for the six months ended June 30, 2002. For the six months ended June 30, 2003, ITT contributed $0.5 million to revenues. Our iGate Solutions segment is still experiencing continued weakness in IT spending. Our non-GE revenues have not grown as rapidly as anticipated. Sales cycles for projects are much longer as clients delay the decision-making process due to their uncertainty in the economy. We continue to experience pricing pressures from our customers.

The gross margin for our iGate Solutions was 31.1% for the six months ended June 30, 2003, as compared to 34.7% for the six months ended June 30, 2002. The contributing factors to the decline in gross margins were a combination of pricing pressures

from customers, wage and bench cost increases, and the impact of blended rate contracts, which contributed approximately 17% of our iGate Solutions revenues. These contracts have fixed rates regardless of where the work is performed: onsite/near shore (“services provided primarily in North America”) or offshore (“services provided primarily in India”). These contracts continue to have lower margin levels.

SG&A expenses include all costs that are not directly associated with our iGate Solutions segments revenue generating consultants. SG&A expenses include non-consultant salaries and employee benefits, recruiting and training costs, rent, depreciation and amortization, as well as communications and facilities costs. SG&A costs for the six months ended June 30, 2003 were $20.2 million or 27.2% of revenues, as compared to $22.1 million or 29.1% of revenues for the comparable six months ended June 30, 2002. Cost savings were due to reduction in employee headcount as a result of our December 2002 restructuring plan, as well as improvements in our management of operating costs.

Operating margin for the iGate Solutions segment for the six months ended June 30, 2003 was 3.9% as compared to 5.6% for the six months ended June 30, 2002. The decrease was attributed to a decline in overall revenue volume, an unfavorable mix of salaried consultants to subcontract labor, which directly affects our gross margins that were partially offset by decreases in SG&A costs.

iGate Professional Services (“IPS”)

Revenues for our IPS segment for the six months ended June 30, 2003, were $66.8 million a decrease of $7.8 million or 10.4%, as compared to $74.5 million for the six months ended June 30, 2002. Our IPS segment is still experiencing continued weakness in IT spending and as a result declining overall billable consultant headcount. Because of competitive pricing pressures, billing rates for consultants for comparable periods have had a negative impact on revenues.

The gross margin for our IPS segment was 21.7% for the six months ended June 30, 2003, as compared to 24.3% for the six months ended June 30, 2002. The contributing factors to the decline in gross margins were a combination of pricing pressures from customers, increases in employee related costs as well as increased usage of subcontractor labor.

SG&A expenses include all costs that are not directly associated with our revenue generating consultants. SG&A expenses include non-consultant salaries and employee benefits, recruiting and training costs, rent, depreciation and amortization, as well as communications and facilities costs. SG&A costs for the six months ended June 30, 2003 were $9.4 million, or 14.1% of revenues, as compared to $12.6 million, or 16.8% of revenues, for the comparable six months ended June 30, 2002. Cost savings were due to decreases in employee headcount as a result of our December 2002 restructuring plan, as well as improvements in our management of operating costs.

Operating margin for the IPS segment for the six months ended June 30, 2003 was 7.6% as compared to 7.4% for the six months ended June 30, 2002. Operating margin as a percentage of revenue increased due to decreases in SG&A spending.

iGate

Revenues for the iGate segment, for the six months ended June 30, 2003, were $0.6 million, an increase of $0.1 million from revenues of $0.5 million for the comparable six months ended June 30, 2002, due to the addition of $0.3 million revenues from the acquisition of iGate Clinical Research International. The six months ended June 30, 2002 included the March 2002 deconsolidation of itiliti and the February 2002 closure of MobileHelix.

Gross margins were 45.9% for the six months ended June 30, 2003 compared to (16.2%) for the six months ended June 30, 2002.

iGate’s segment SG&A expenses decreased $0.6 million, for the six months ended June 30, 2003, as compared to the six months ended June 30, 2002. This decrease is attributable to the consolidation of back-office operations located in Pittsburgh.

Components of other income, net, for the six months ended June 30, 2003 include interest income on short-term investments of $1.9 million, interest expense on certain discounted liabilities of $0.5 million, and foreign currency translation gains of $0.2 million. For the six months ended June 30, 2002, interest income totaled $1.6 million, interest expense totaled $1.9 million and favorable foreign currency translation gains totaled $1.3 million.

the net income of IGS. For the six months ended June 30, 2003, the minority interest expense was the minority share of the net income of IGS and the net loss of ICRI, which was acquired in February 2003.

We recorded a gain on deconsolidation of itiliti of $7.1 million for the six months ended June 30, 2002, that is more fully discussed in footnote 7 to the Condensed Consolidated Financial Statements.

In February 2002, we sold our entire interest in Versata, Inc. recognizing a realized loss in the amount of $0.2 million.

Our income tax provision was $3.1 million at an effective tax rate of 77% for the six months ended June 30, 2003. The significant items comprising our effective tax rate include the tax on the sale of eJiva to iGate Global Solutions, the tax on deemed distributions from iGate Global Solutions, and the benefits derived from our Indian tax holiday. Our income tax provisions for the six months ended June 30, 2002, was $4.5 million at an effective rate of 40% and significant items comprising our effective rate included the benefits derived from our Indian tax holiday.

Liquidity and Capital Resources

Our working capital decreased by $2.3 million from December 31, 2002 to June 30, 2003. Our accounts receivable increased by $5.3 million from December 31, 2002 and our number of days sales outstanding increased to 68 days at June 30, 2003 from 64 days at December 31, 2002. We used a combination of operating cash flows and cash reserves to fund our operations.

At June 30, 2003, we had cash and short-term investments of $55.3 million and $42.6 million, respectively, as compared to cash and short-term investments of $56.8 million and $51.2 million, respectively, at December 31, 2002. Short-term investments consisted mainly of highly liquid short-term investments for each of the periods presented. Our focus over the past two years has been liquidity along with the preservation of our principal holdings.

During the six months ended June 30, 2003, we used $0.4 million in cash revenues to acquire iGate Clinical Research International, $0.5 million cash reserves to acquire Aqua Regia and $4.5 million in cash reserves to acquire certain ITT businesses. We did not use our cash reserves for any other significant financing or investing activities, with the exception of operating cash being transferred from money market accounts or other short-term investments, and certain capital expenditures that were incurred during the ordinary course of business.

We restructured our businesses in 2002 and 2001. As a result of these restructurings, we will be required to make cash payments in future years. The nature of the payments and the reasons for the restructurings are discussed more fully in Note 8 to the Condensed Consolidated Financial Statements. The following table details the cash payments that we will be required to make in the future years:


(Dollars in thousands)	2003		2004		2005		2006		2007		Thereafter
Severance, bonus and related items	$	511	$	1,702	$	—	$	—	$	—	$	—
Lease costs of office closure		988		1,229		654		101		25		34

Total	$	1,499	$	2,931	$	654	$	101	$	25	$	34

We also have financial commitments related to future payouts and existing leases on our occupied space. Our commitments are as follows:


(Dollars in thousands)	2003		2004		2005		2006		2007		Thereafter
Put option (see below)	$	9,300	$	—	$	—	$	—	$	—	$	—
Leases		2,010		3,619		3,257		2,024		1,561		2,531

Total	$	11,310	$	3,619	$	3,257	$	2,024	$	1,561	$	2,531

In conjunction with the acquisition of eJiva by iGate Global Solutions on January 1, 2003, iGate assumed the obligation with respect to the put option payments. The put option was related to a prior acquisition.

Our $50.0 million secured credit facility with PNC expired on July 31, 2003. We have amended (“Fourth Amendment”) our current facility with PNC to extend the expiration date to October 31, 2003 and to decrease our availability under the amendment from $50.0 million to $25.0 million. As a condition to the Fourth Amendment, our ability to borrow funds is subject to: (a) our delivery within forty five days of certain supplemental schedules required by PNC and (b) PNC waiving certain events of default under the credit facility including but not limited to our failure to obtain the minimum required consolidated income from operations for the quarter ended June 30, 2003.

We do not anticipate the need to borrow funds under the facility prior to delivering the supplemental schedules.

In 2003, we may be required to pay a maximum of $1.7 million in contingent consideration related to a prior acquisition. Once these payments are made, we will have no further obligations under these agreements.

We have acquired two development stage companies, Quintant on July 31, 2003 for $19.7 million and iGate Clinical Research International on February 26, 2003. While both companies have their own cash reserves for operating purposes, iGate may be required to fund their operations, if cash reserves are not adequate.

We believe that we will be able to meet our liquidity and cash needs for the next twelve months through a combination of cash flows from operating activities, cash balances and unused borrowing capacities.

Inflation

We do not believe that inflation had a significant impact on our results of operations for the periods presented. On an ongoing basis, we attempt to minimize any effects of inflation on our operating results by controlling operating costs and whenever possible, seeking to insure that billing rates reflect increases in costs due to inflation.

For all significant foreign operations, the functional currency is the local currency. Assets and liabilities of these operations are translated at the exchange rate in effect at each period end. Statement of Operations accounts are translated at the average rate exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included as a component of other comprehensive income (loss). Realized gains and losses from foreign currency transactions are included in net income for the periods presented. Exchange rate translations did not have a significant impact on operations for the three and six month periods ended June 30, 2003.

Seasonality

Our operations are generally not affected by seasonal fluctuations. However, our consultants’ billable hours are affected by national holidays and vacation policies, which vary by country and by operating company.

Economic Trends

The economic downturn that we have experienced over the last eighteen months has resulted in a revenue decline of $3.2 million or 4.2% for the comparable quarters ended June 30 and $9.6 million, a 6.4% decrease from the comparable six months ended June 30, 2002. We attribute this revenue decline to several factors. First, lower demand for outside services. Our clients, concerned by their own cost structure, are accomplishing their IT needs with their own internal resources. Second, our clients tight IT budgets and focus on projects with high ROI (Return on Investment) resulted in fewer and smaller projects. Third, increased competition from both IT services and software companies drove pricing down. Pricing pressure was felt across all geographies and industry sectors.

Our solutions offerings are purchased as value added projects by customers and in times of economic slowdown, are the types of projects that are the first to be delayed or cancelled. Our ODCs are located in India and China, and as part of the sales process, we encourage potential customers to visit our ODCs.

RISK FACTORS

There are a number of risks and uncertainties that could cause actual results to differ materially from our current beliefs and expectations expressed or implied in this Form 10-Q. We cannot predict all of these risks and uncertainties. However, please refer to a list of important risk factors in the section entitled “Risk Factors” in Part I of our 2002 Form 10-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Short-term investments are invested in highly liquid securities such as money market funds and certain corporate bonds with maturities of one year or less, and marketable equity securities. These securities are generally classified as available for sale and consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of tax. Part of this portfolio includes minority equity investments in several publicly traded companies, the values of which are subject to market price volatility. We have also invested in one privately held company (Air2Web), which can still be considered in the startup or development stage. This type of investment is inherently risky as the market for the technologies or products they have under development are typically in the early stages and may never

materialize. We could lose our entire remaining investment in this company.
The following analysis presents the hypothetical changes in fair values of public equity investments that are sensitive to changes in the stock market (in millions):


	Valuation of securities given X% decrease in each stock price						Fair Value as of		Valuation of securities given X% increase in each stock price
	(75%)		(50%)		(25%)		June 30, 2003		25%		50%		75%
Corporate equities	$	0.8	$	1.5	$	2.3	$	3.1	$	3.9	$	4.6	$	5.4

These equity securities are held for purposes other than trading. The model technique used measures the hypothetical change in fair values arising from selected hypothetical changes in each stock’s price. Stock price fluctuations of plus or minus 25%, 50%, and 75% were selected based on the probability of their occurrence.

The Company’s cash flow and earnings are subject to fluctuations due to exchange rate variation. Foreign currency risk exists by nature of the Company’s global operations. The Company sells its services in a number of locations around the world, and hence foreign currency risk is diversified.

When appropriate, the Company may attempt to limit its exposure to changing foreign exchange rates through both operational and financial market actions. These actions may include entering into forward contracts to hedge existing exposures. The instrument is used to reduce risk by essentially creating offsetting currency exposure.

Substantially all of the Company’s foreign affiliates’ financial instruments are denominated in their respective functional currencies. Accordingly, exposure to exchange risk on foreign currency financial instruments is not material.

ITEM 4. CONTROLS AND PROCEDURES

The Corporation’s principal executive officer and principal financial officer have evaluated the effectiveness of the Corporation’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) as of June 30, 2003. Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Corporation’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Corporation in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by the Corporation in such reports is accumulated and communicated to the Corporation’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

There is no change in the Corporation’s “internal control over financial reporting” (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2003, that has materially affected, or is reasonably likely to materially affect the Corporation’s internal control over financial reporting.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits


	31.01	Rule 13a-14(a) Certificate of Chief Executive Officer.


	31.02	Rule 13a-14(a) Certificate of Chief Financial Officer.


	32.01	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	32.02	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

The Company filed a Form 8-K dated July 31, 2003 disclosing the Company’s operating results for the three and six months ended June 30, 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the under signed thereunto duly authorized.


	iGATE CORPORATION


August 13, 2003	By:	/s/ SUNIL WADHWANI

		Sunil Wadhwani
	Co-Chairman of the Board of Directors, Chief Executive Officer, and Director


August 13, 2003	By:	/s/ MICHAEL ZUGAY

		Michael Zugay
		Senior Vice President, Chief Financial Officer

EXHIBIT INDEX

Exhibit Number


	31.01	Rule 13a-14(a) Certificate of Chief Executive Officer.


	31.02	Rule 13a-14(a) Certificate of Chief Financial Officer.


	32.01	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	32.02	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the S Sarbanes-Oxley Act of 2002.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Good

IGate (IGTE) Inactive 10-Q2003 Q2 Quarterly report

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