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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 MARCH 31, 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)

(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 April 30, 2003 was 51,575,710.

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iGATE CORPORATION

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003

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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)

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

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(b)

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

*

Condensed from audited Consolidated Financial Statements.

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

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(c)

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

(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.

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(d)

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

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

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(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 months ended March 31, 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 months ended March 31, 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 months ended March 31, 2002 of $3.1 million were accounted for as part of selling, general and administrative expenses. These costs have been reclassified to cost of revenues to conform with the current year presentation.

Revenue Arrangements

In January 2003, the EITF 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 June 15, 2003. The Company has not yet determined what effect the adoption of this standard will have on its Consolidated Financial Statements.

Variable Interest Entities

In January 2003, the 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

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.

As a condition of the sale of eJiva to Mascot as discussed in Note 11, the Company has assumed 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” current liabilities.

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. 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.

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.

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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 (loss) income and (loss) 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.

4.

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 has 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):

5.

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.

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The Company accounts for investments in businesses in which it owns between 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 $25.9 million and $26.2 million at March 31, 2003 and December 31, 2002. These funds are to be used exclusively for Mascot’s purposes due to Indian governmental restrictions.

In addition, the Company had compensating balances classified on the Condensed Consolidated Balance Sheet as short-term investments which consisted of money market funds, that totaled $25 million at March 31, 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 March 31, 2003, the Company had no outstanding indebtedness to PNC under the Credit Facility.

6.

Gain on Deconsolidation of itiliti

On March 15, 2002, through the combination of a sale of new shares by itiliti, Inc. 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 three months ended March 31, 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.

7.

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 have been 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 Global 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 Global Solutions and iGate Corporate segments. The Company also decided to exit its training function at the iGate level in favor of a more decentralized

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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 March 31, 2003 are as follows:

8.

PNC Credit Facility

The Company maintains a $50.0 million secured credit facility with PNC that was renewed and amended through July 2003. The PNC Facility provides 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 March 31, 2003, the Company did not obtain the specified required level of “Minimum Consolidated Income from Operations”. The Company obtained a waiver of the financial covenant violation of noncompliance from PNC. The waiver obtained from PNC covers all activity related to the PNC Facility, through the next measurement date of June 30, 2003. The provisions of the PNC Facility require 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. The Company currently has $31.3 million in borrowings available to it through the PNC Facility at May 8, 2003 and no amounts outstanding.

9.

Income Taxes

The Company’s income tax provision for the three month period ended March 31, 2003, included a one-time tax charge of $1.8 million related to the sale of eJiva, a U.S. subsidiary, to Mascot, a controlled foreign corporation. The proceeds from the sale were treated as a distribution of Mascot’s 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. This transaction had no effect on book income.

10.

Earnings Per Share

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