As filed with the Securities and Exchange Commission on May 11, 2007.
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GENPACT LIMITED
(Exact name of registrant as specified in its charter)
Bermuda (State or other jurisdiction of incorporation or organization) |
541990 (Primary Standard Industrial Classification Code Number) |
98-0533350 (I.R.S. Employer Identification Number) |
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Canon's Court 22 Victoria Street Hamilton HM Bermuda (441) 295-2244 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) |
Victor Guaglianone, Esq.
1251 Avenue of the Americas
New York, NY 10020
(646) 624-5929
(Name and address, including zip code, and telephone number, including area code, of agent for service)
Copies to: |
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Timothy G. Massad, Esq. Cravath, Swaine & Moore LLP Worldwide Plaza 825 Eighth Avenue New York, New York 10019 (212) 474-1000 Fax: (212) 474-3700 |
Richard A. Drucker, Esq. Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 (212) 450-4000 Fax: (212) 450-3800 |
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. o
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered |
Proposed Maximum Aggregate Offering Price(1) |
Amount of Registration Fee(2) |
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Common Shares, $0.01 par value per share | $600,000,000 | $18,420 | ||
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. We and the selling shareholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and neither we nor the selling shareholders are soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
PROSPECTUS (Subject to Completion)
Issued May 11, 2007
Shares
COMMON SHARES
This is the initial public offering of our common shares. We are offering common shares and the selling shareholders identified in this prospectus are offering an additional common shares. We will not receive any of the proceeds from the common shares sold by the selling shareholders. The estimated initial public offering price is between $ and $ per share. Prior to this offering, there has been no public market for our common shares.
We will apply to have our common shares quoted on the New York Stock Exchange under the symbol "G."
Investing in our common shares involves risks. See "Risk Factors" beginning on page 10.
PRICE $ A SHARE
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Price to Public |
Underwriting Discounts and Commissions |
Proceeds to Genpact |
Proceeds to Selling Shareholders |
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Per share | $ | $ | $ | $ | ||||
Total | $ | $ | $ | $ |
We have granted to the underwriters an option to purchase up to an additional common shares to cover over-allotments at the initial public offering price, less underwriting discounts and commissions.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the common shares to purchasers on , 2007.
MORGAN STANLEY | CITI | JPMORGAN |
, 2007
You should rely only on the information contained in this prospectus. We and the selling shareholders have not authorized anyone to provide you with information that is different. We, the selling shareholders and the underwriters are not making an offer of our common shares in any jurisdiction or state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus.
We have not taken any action to permit a public offering of the common shares outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the common shares and the distribution of this prospectus outside of the United States.
We have been designated by the Bermuda Monetary Authority as a non-resident for Bermuda exchange control purposes. This designation allows us to engage in transactions in currencies other than the Bermuda dollar and there are no restrictions on our ability to transfer funds other than funds denominated in Bermuda dollars, in and out of Bermuda or to pay dividends to United States residents who are holders of our common shares.
The Bermuda Monetary Authority has given its consent for the issue and free transferability of all of the common shares that are the subject of this offering to and between non-residents of Bermuda for exchange control purposes.
Approvals or permissions given by the Bermuda Monetary Authority do not constitute a guarantee by the Bermuda Monetary Authority as to our performance or our creditworthiness. Accordingly, in giving such consent or permissions, the Bermuda Monetary Authority shall not be liable for the financial soundness, performance or default of our business or for the correctness of any opinions or statements expressed in this prospectus. In some cases, issuances and transfers of common shares involving persons deemed resident in Bermuda for exchange control purposes require the specific consent of the Bermuda Monetary Authority.
This prospectus will be filed with the Registrar of Companies in Bermuda pursuant to Part III of the Companies Act 1981 (Bermuda) as amended. In accepting this prospectus for filing, the Registrar of Companies in Bermuda shall not be liable for the financial soundness, performance or default of our business or for the correctness of any opinions or statements expressed in this prospectus.
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Page |
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Industry and Market Data | ii | |
Prospectus Summary | 1 | |
Summary Historical Financial and Operating Data | 8 | |
Risk Factors | 10 | |
Forward-Looking Statements | 27 | |
Dividend Policy | 30 | |
Capitalization | 31 | |
Dilution | 33 | |
Selected Financial and Operating Data | 34 | |
Management's Discussion and Analysis of Financial Condition and Results of Operations | 36 | |
Business | 57 | |
Management | 81 | |
Certain Relationships and Related Party Transactions | 104 | |
Principal and Selling Shareholders | 107 | |
Description of Share Capital | 110 | |
Common Shares Eligible for Future Sale | 118 | |
Certain Material Bermuda and United States Federal Tax Consequences | 120 | |
Underwriters | 124 | |
Legal Matters | 127 | |
Experts | 127 | |
Where You Can Find More Information | 127 | |
Index to Financial Statements | F-1 |
Industry and market data used throughout this prospectus were obtained through internal company research, surveys and studies conducted by third parties and industry and general publications. The information contained in the NASSCOM-McKinsey report referred to herein, published by the National Association of Software and Service Companies, or NASSCOM, and McKinsey & Company, or McKinsey, in 2005 is based on studies and analyses of surveys of business process outsourcing service providers and clients conducted by McKinsey. The NASSCOM-McKinsey report was the primary source for third-party industry and market data and forecasts referred to herein. In addition, we have included in this prospectus information from the International Data Corporation, or IDC, market analysis reports published in 2005. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information. We have not independently verified any of the data from third-party sources nor have we ascertained any underlying economic assumptions relied upon therein. While we are not aware of any misstatements regarding the industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the headings "Risk Factors" and "Forward-Looking Statements."
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The following is a summary of some of the information contained in this prospectus and it may not contain all the information that you should consider before investing in our common shares. You should read the entire prospectus carefully, especially the "Risk Factors" section and the financial statements and accompanying notes included in this prospectus before making an investment decision. Unless otherwise indicated, all information relating to the Company contained in this prospectus gives effect to the transactions described under "The Company2007 Reorganization" and "The Company2004 Reorganization"as if the same had been in effect for all periods discussed. We use the terms "Genpact," "our company," "we" and "us" to refer to our business as described under "The Company."
We manage business processes for companies around the world. We combine our process expertise, information technology expertise and analytical capabilities, together with operational insight derived from our experience in diverse industries, to provide a wide range of services using our global delivery platform. Our goal is to help our clients improve the ways in which they do business by continuously improving their business processes, including through the application of Six Sigma and Lean principles and by leveraging technology. We strive to be a seamless extension of our clients' operations.
We have a unique heritage. We built our business by meeting the demands of the leaders of the General Electric Company, or GE, to increase the productivity of their businesses. We began in 1997 as the India-based captive business process services operation for General Electric Capital Corporation, or GE Capital, GE's financial services business. As the value of offshore outsourcing was demonstrated to the management of GE, it became a widespread practice at GE and our business grew in size and scope. We took on a wide range of complex and critical processes and we became a significant provider to many of GE's businesses, including Consumer Finance (now GE Money), Commercial Finance, Insurance, Healthcare, Industrial, NBC Universal and GE's corporate offices.
Our leadership team, our methods and our culture have been deeply influenced by our eight years as a captive operation of GE. Many elements of GE's successthe rigorous use of metrics and analytics, the relentless focus on improvement, a strong emphasis on the client and innovative human resources practicesare the foundations of our business.
We became an independent company at the beginning of 2005 and since that time we have grown rapidly, continued to expand our range of services and diversified our client base. Since January 1, 2005, we have entered into contracts with more than 35 new clients in a variety of industries, including banking and finance, insurance, manufacturing, transportation and healthcare. We have the benefit of a multi-year contract with GE that provides us with committed revenues through 2013. In addition, we have opportunities for expansion with many new clients.
As of March 31, 2007, we have more than 28,000 employees, with operations in nine countries. In 2006, we had net revenues of $613.0 million, of which 25.8% was from clients other than GE, which we refer to as Global Clients.
Our Opportunity
Globalization of the world's economy remains the most powerful economic trend of our lifetime. It is driven by expanding technology capabilities, more efficient global telecommunications, the relaxation of local laws and regulations that previously impeded cross-border trade and the recognition by business leaders that a highly skilled global workforce can be a competitive business advantage. These dynamics are creating an entirely new set of competitive challenges for companies around the world.
Companies have been forced to focus on ways to improve productivity and manage costs more aggressively in order to maintain or enhance their competitive positions and increase shareholder value. As
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part of their response to these pressures, in recent years, business leaders began offshoring business processes to captive operations and outsourcing business processes to third parties, including sending such processes offshore to workers in countries where wage levels were lower than those in North America and Europe. Initially, India became the primary destination for offshore business process outsourcing. However, as demand and the range of services have grown, other destinations have become increasingly important.
Outsourcing initially focused on realizing immediate cost savings and involved labor-intensive processes such as call center services and data entry. The frequency with which these processes were outsourced increased as companies recognized that offshore service providers could run these processes more efficiently by recruiting and training skilled labor in larger numbers and at lower cost than was available in a company's home market.
The use of information technology has also been an important catalyst for the growth of outsourcing. Before outsourcing business processes, companies more frequently outsourced IT operations. As companies realized benefits from outsourcing IT services, they became more willing to outsource other types of processes. At the same time, growth in the use of IT contributed to greater efficiencies in business processes and other productivity enhancements. As a result, knowledge of IT platforms and technology became increasingly important to effective business process management.
According to International Data Corporation, or IDC, aggregate worldwide spending on IT and business process outsourcing, or BPO, services is estimated to be $934 billion for 2006. The NASSCOM-McKinsey report estimates the total addressable market for offshore IT and BPO services to be approximately $300 billion, of which only about 10% has been penetrated. The NASSCOM-McKinsey report projects that spending on offshore IT and BPO services will grow from $30 billion in 2005 to $110 billion in 2010, representing a compound annual growth rate, or CAGR, of 30%.
This growth is a function of the increasing acceptance of outsourcing and the constantly expanding notions of what can be outsourced and the benefits that can be achieved. The services that are being outsourced today are much broader, and involve much higher valued functionality than originally outsourced, and include engineering, design, software programming, accounting, healthcare services, legal services, financial analysis, consulting activities and other services, and cut across all industries. Companies also look to achieve a wider range of objectives from outsourcing, and to generate business impact such as increased revenue, expanded margins, improved working capital management, increased customer satisfaction and enhancement of their competitive positions.
Today, the willingness to outsource a broader array of business processes, from the relatively simple to the more critical and complex, and the fact that many business processes can be enhanced through the application of IT, has created an opportunity for service providers that have broad and deep capabilities, as well as expertise in both process operation and IT platforms. Companies that are ready to embrace the outsourcing of complex business processes are seeking service providers with a broad range of capabilities with which they can establish a strategic relationship that will grow over time. Many senior, or C-level, executives today consider the following factors when looking to collaborate with a service provider:
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Our Solution
We manage a wide range of business processes that address the transactional, managerial, reporting and planning needs of our clients. We seek to build long-term client relationships with companies that wish to improve the ways in which they do business and to which we can offer a wide range of services. With our broad and deep capabilities and our global delivery platform, our goal is to deliver comprehensive solutions and continuous process improvement to clients around the world and across multiple industries.
Our Broad Expertise
Our services include finance and accounting, collections and customer services, insurance, supply chain and procurement, analytics, enterprise application and IT infrastructure. Significant business impact can often best be achieved by redesigning and operating a combination of processes, as well as providing multiple services that combine elements of several of our service offerings. In offering our services, we draw on three core capabilitiesprocess expertise, analytical ability and technology expertiseas well as the operational insight we have acquired from our experience managing thousands of processes in diverse industries.
In addition, we believe that one of the factors that differentiates us from our competitors is the operational insight we have developed from our experience managing thousands of processes.
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Our Strategic Client Model
We seek to create long-term relationships with our clients where they view us as an integral part of their organization and not just as a service provider. To achieve this goal, we developed the Genpact Virtual CaptiveSM model for service delivery, and we may implement all or some of its features in any given client relationship, depending on the client's needs. Under this approach, we strive to be a seamless extension of our client's operations which involves providing the client with dedicated leadership, infrastructure and employees who are trained in that client's culture. This helps us to provide more services to those clients, to integrate us further into their business and to establish us as a reliable and important strategic service provider.
Our Global Delivery Platform
Clients with global operations have global needs. We deliver services from a global network of more than 25 locations in nine countries. Our service delivery locations, which we refer to as Delivery Centers, are in India, China, Hungary, Mexico, the Philippines, the Netherlands, Romania, Spain and the United States. Our presence in locations other than India provides us with multi-lingual capabilities, access to a larger employee pool and "near-shoring" capabilities to take advantage of time zones. With this network, we can manage complex processes in multiple geographic regions.
Our People and Culture
We have an experienced and cohesive leadership team and a culture that emphasizes teamwork, constant improvement of our processes and, most importantly, dedication to the client. Many members of our leadership team developed their management skills working within GE and many of them were involved in the founding of our business. As of March 31, 2007, we have more than 28,000 employees including over 5,500 Six Sigma trained green-belts, 300 Six Sigma trained black-belts and 60 Six Sigma trained master black-belts, as well as more than 4,500 Lean trained employees.
A key determinant of our success, especially as we continue to increase the scale of our business, is our ability to attract, train and retain employees in highly competitive labor markets. We manage this challenge through innovative human resources practices. These include broadening the employee pool by opening Delivery Centers in diverse locations, using creative recruiting techniques to attract the best talent, emphasizing ongoing training, instilling a vibrant and distinctive culture and providing well-defined long term career paths. We monitor and manage our attrition rate very closely, and believe our attrition rate is one of the lowest in the industry.
Our Strategy For Growth
The specific elements of our strategy to grow our business include the following:
Expand Relationships with Existing Clients. We intend to deepen and expand relationships with our existing clients, including GE. Since our separation from GE, we have succeeded in forming more than 35 new Global Client relationships with major companies. Many of those relationships are at an early stage and we believe they offer significant opportunities for growth. As we demonstrate the value that we can provide, often with a discrete process, we are frequently able to expand the scope of our work in a variety of ways.
Develop New Client Relationships. In addition to expanding our existing client relationships, we plan to continue to develop new long-term client relationships, especially with those clients where we have an opportunity to deliver a wide range of our capabilities and have a meaningful impact on our clients' business.
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Continue To Promote Process Excellence. Our ability to deliver continuous process improvement is an important part of the value that we deliver to our clients. We have built a significant repository of process expertise across a wide range of processes such as finance and accounting, supply chain, analytics and client service. Our process expertise is complemented by our ability to work across multiple technology platforms in diverse industries.
Continue To Deepen Expertise and Global Capabilities. We will continue to expand our capabilities globally as well as across industries and service offerings. While we expect this will occur primarily through organic growth, we also plan to evaluate strategic partnerships, alliances and acquisitions to expand into new services offerings as well as into new industries.
Maintain Our Culture and Enhance Our Human Capital. Our ability to grow our business will depend on our ability to continue to attract, train and retain large numbers of talented individuals. We will continue to develop innovative recruiting techniques and to emphasize learning throughout the tenure of an employee's career. We also believe that maintaining our vibrant and distinctive culture, in which we emphasize teamwork, continuous process improvement and dedication to the client, is critical to growing our business.
The Company
The 2004 Reorganization
Prior to December 30, 2004, our business was conducted through various entities and divisions of GE. On December 30, 2004, in a series of transactions we refer to as the "2004 Reorganization," GE reorganized these operations by placing them all under Genpact Global Holdings SICAR S.à.r.l., or GGH, a newly formed Luxembourg entity. GE also sold an indirect 60% interest in GGH to Genpact Investment Co. (Lux) SICAR S.à.r.l., or GICo, an entity owned in equal portions by General Atlantic LLC, or General Atlantic, and Oak Hill Capital Partners, or Oak Hill. On December 16, 2005, GE sold a portion of its equity in us to a subsidiary of Wachovia Corporation. As of December 31, 2006, GE owned approximately 29% of our equity (after giving effect to the conversion of preferred stock but excluding shares issuable pursuant to outstanding options).
Following the 2004 Reorganization, we began operating as an independent company. We separated ourselves operationally from GE and began building the capabilities necessary to be successful as an independent company. Among other things, we expanded our management infrastructure and business development capabilities so that we could secure business from clients other than GE. We substantially expanded administrative functions for which we had previously relied primarily on GE, such as finance, legal, accounting and human resources. We created separate employee benefit and retirement plans, developed our own leadership training capability and enhanced our management information systems.
The 2007 Reorganization
On March 29, 2007, we formed Genpact Limited in Bermuda to be the new holding company for our business. Genpact Limited is presently a subsidiary of GGH with no operations and de minimis assets. Prior to this offering, we will effectuate a transaction that will result in Genpact Limited owning 100% of the capital stock of GGH. This transaction is referred to as the "2007 Reorganization."
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The chart below sets forth our beneficial ownership structure immediately following the consummation of this offering, assuming no exercise of the underwriters' overallotment option. See also "Principal and Selling Shareholders" for a discussion of certain relationships and arrangements among certain of our shareholders.
Our registered office is located at Canon's Court, 22 Victoria Street, Hamilton HM, Bermuda.
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Common shares offered by us | shares | |
Common shares offered by the selling shareholders | shares | |
Common shares to be outstanding after this offering | shares | |
Offering price | The initial public offering price is $ per share. | |
Selling shareholders | Entities owned by GE, General Atlantic and Oak Hill. | |
Over-allotment option | We have granted to the underwriters an option to purchase up to an additional common shares to cover over-allotments at the initial public offering price less underwriting discounts and commissions. | |
Use of proceeds | To repay indebtedness outstanding under our credit facilities and for working capital and general corporate purposes, including potential acquisitions. | |
We will not receive any proceeds from the sale of our common shares by the selling shareholders. | ||
Proposed New York Stock Exchange symbol | G | |
Dividend policy | We do not anticipate paying cash dividends for the foreseeable future. | |
Lock-up | We, the selling shareholders, our directors and our executive officers have agreed with the underwriters, subject to certain exceptions, not to sell, transfer or dispose of any of our common shares for a period of 180 days after the date of this prospectus. | |
Risk factors | See "Risk Factors" for a discussion of factors you should consider before investing in our common shares. |
The number of common shares to be outstanding after this offering is based on common shares outstanding as of , 2007, and, unless we indicate otherwise:
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SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
The table below provides a summary of our historical financial and certain operating data. Prior to December 30, 2004, our business was conducted through various entities and divisions that were wholly owned by GE. On December 30, 2004, in the 2004 Reorganization, GE transferred such operations to a newly-formed entity, GGH, and sold a 60% interest in GGH to General Atlantic and Oak Hill. Therefore, the financial data for these operations, or our predecessor, as of and for the years ended December 31, 2004, 2003 and 2002, which are the periods prior to the 2004 Reorganization, are presented on a combined basis. The financial data as of and for the years ended December 31, 2006 and 2005, which are the periods after the 2004 Reorganization, are presented on a new basis of accounting and are not directly comparable to the data for 2004, 2003 and 2002.
On March 29, 2007, we formed Genpact Limited in Bermuda to be the new holding company for our business. Genpact Limited is presently a subsidiary of GGH with no operations and de minimis assets. Prior to this offering, we will effectuate a transaction that will result in Genpact Limited owning 100% of the capital stock of GGH. This transaction is referred to as the "2007 Reorganization." The pro forma earnings per share information will give effect to the 2007 Reorganization as if it occured on January 1, 2006.
The financial data as of and for the years ended December 31, 2006, 2005 and 2004 are derived from our audited financial statements included in this prospectus (except for the December 31, 2004 balance sheet which is not included). The financial data as of and for the years ended December 31, 2003 and 2002 are derived from the unaudited combined financial statements of the predecessor which are not included in this prospectus. All such financial statements are prepared in accordance with U.S. GAAP.
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You should read this summary financial data together with the financial statements included herein as well as "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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Year Ended December 31, |
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2004 |
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Statement of income data: | |||||||||||||||||
Net revenuesGE | $ | 453.3 | $ | 449.7 | $ | 408.9 | $ | 371.5 | $ | 287.9 | |||||||
Net revenuesGlobal Clients | 158.3 | 42.2 | 20.3 | 10.2 | 7.1 | ||||||||||||
Other revenues | 1.5 | | | | | ||||||||||||
Total net revenues | 613.0 | 491.9 | 429.1 | 381.7 | 295.0 | ||||||||||||
Cost of revenue | 360.9 | 304.0 | 263.6 | 245.2 | 192.1 | ||||||||||||
Gross profit | 252.2 | 187.9 | 165.5 | 136.5 | 102.9 | ||||||||||||
Operating expenses: | |||||||||||||||||
Selling, general and administrative expenses | 159.2 | 117.5 | 76.3 | 69.2 | 40.6 | ||||||||||||
Amortization of acquired intangible assets | 41.7 | 47.0 | | | | ||||||||||||
Foreign exchange (gains) losses, net | 13.0 | 12.8 | 7.3 | (6.9 | ) | (2.0 | ) | ||||||||||
Other operating income | (4.9 | ) | (6.2 | ) | | | | ||||||||||
Income from operations | 43.2 | 16.9 | 81.9 | 74.2 | 64.3 | ||||||||||||
Other income (expense), net | (9.2 | ) | (6.1 | ) | 8.2 | 10.7 | 1.8 | ||||||||||
Income before income taxes | 33.9 | 10.7 | 90.2 | 84.9 | 66.1 | ||||||||||||
Income tax expense (benefit) | (5.9 | ) | (6.4 | ) | 6.7 | 6.6 | 5.1 | ||||||||||
Net income | $ | 39.8 | $ | 17.1 | $ | 83.4 | $ | 78.3 | $ | 61.0 | |||||||
Pro forma earnings per common share: | |||||||||||||||||
Basic | $ | ||||||||||||||||
Diluted | |||||||||||||||||
Pro forma weighted average common shares outstanding: | |||||||||||||||||
Basic | |||||||||||||||||
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Balance sheet data: | |||||||||||||||
Cash and cash equivalents | $ | 35.4 | $ | 44.7 | $ | 49.8 | $ | 15.0 | $ | 13.3 | |||||
Total assets | 1,081.3 | 970.2 | 941.9 | 394.9 | 330.6 | ||||||||||
Total liabilities | 456.6 | 378.2 | 318.9 | 121.6 | 137.7 | ||||||||||
Total stockholders' equity | 624.7 | 592.0 | 623.0 | 273.3 | 192.9 | ||||||||||
Operating data (unaudited): |
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Employees | 26,060 | 19,532 | 16,031 | 15,279 | 14,696 | ||||||||||
Delivery Centers | 23 | 17 | 11 | 11 | 10 |
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Investing in our common shares involves substantial risks. You should carefully consider the following risks and other information in this prospectus before deciding to invest in our common shares. Any of the risks described below could have a material adverse effect on our business, financial condition or results of operations, in which case the trading price of our common shares could decline and you could lose part or all of your investment in our common shares. The section below also contains forward-looking statements. See "Forward-Looking Statements."
Risks Related to our Business
We have a limited operating history as an independent company for you to evaluate.
We ceased to be wholly-owned by GE on December 30, 2004. Accordingly, we have only a limited track record as an independent entity for you to evaluate. We may not be as successful in managing our operations on an independent basis as we were when we were part of GE. In addition, although we have begun to diversify our client base, our ability to develop and retain clients other than GE over an extended period of time has not been demonstrated.
We may be unable to manage our growth effectively and maintain effective internal controls, which could have a material adverse effect on our business, results of operations and financial condition.
Since we became an independent company, we have experienced rapid growth and significant expansion and diversification of our operations, which has placed significant demands on our leadership team's time and our operational resources. Since December 30, 2004, we have incurred, and we continue to incur, substantial expenses to create the management infrastructure and other capabilities necessary to operate as a stand-alone business. From January 1, 2005 to December 31, 2006 our net revenues have grown approximately 43% and our number of employees has grown approximately 63%. As our revenues grow there can be no assurance that our margins will also grow. In order to manage growth effectively, we must implement and improve operational systems, procedures and internal controls on a timely basis. If we fail to implement these systems, procedures and controls on a timely basis, we may not be able to retain clients or obtain new business, hire and retain new employees, complete future acquisitions or operate our business effectively.
GE accounts for a significant portion of our revenues and any loss of business from, or change in our relationship with, GE could have a material adverse effect on our business, results of operations and financial condition.
We have derived and are likely to continue to derive a significant portion of our revenues from GE. For 2005 and 2006, GE accounted for 91.4% and 73.9% of our revenues, respectively. In addition, our more mature client relationships, such as GE, typically generate higher margins than those from newer clients. The loss of business from GE could have a material adverse effect on our business, results of operations and financial condition.
Our master services agreement, or MSA, with GE commits GE to purchase, on an annual basis through 2013, a stipulated minimum dollar amount of services or pay us certain costs in lieu thereof. The costs which GE would be required to pay if it does not meet a minimum annual commitment are not necessarily equal to the amount by which GE's purchases fall short of that minimum annual commitment. While our revenues from GE in 2006 were $453.3 million, exceeding by $93.3 million the stipulated minimum annual amount for that year, there is no assurance that actual revenues from GE in future years will meet the minimum annual commitment or exceed it by as much as in 2006 or that GE will continue to be a client at all. Revenues in excess of the minimum annual commitment can be credited, subject to certain limitations, against shortfalls in subsequent years. In addition, the MSA provides that the minimum annual committed amount of $360 million will be reduced during the last three years of the term, to $270 million in 2011, $180 million in 2012 and $90 million in 2013. The MSA provides that the minimum annual committed amount is subject to reduction in certain circumstances, including as a result of the
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termination of any statements of work, or SOWs, by GE for cause, non-performance of services by us due to specified force majeure events or certain other reasons. The MSA also does not require GE to engage us exclusively in respect of business process services.
In addition, pricing terms and pricing levels under future SOWs may be lower than in the past. In particular, because of the size of GE and its importance to our business it is able to exert considerable leverage on us when negotiating the terms of SOWs.
Our business from GE comes from a variety of GE's businesses and decisions to use our services are currently, as a general matter, made by a number of people within GE. Therefore, although some decisions may be made centrally at GE, the total level of business we receive generally depends on the decisions of the various operating managers of such businesses. In addition, if GE sells or divests any of the businesses to which we provide services, the new management or new owners of such businesses may choose to discontinue our services. Furthermore, following December 31, 2009, GE will no longer be subject to a contractual restriction with us on its ability to set up a separate business unit to provide English-language business process services from low-wage countries. There can be no assurance that GE will not establish such a separate business unit or otherwise compete with us at such time. While we were a captive operation of GE, GE followed a practice of granting to the business units that purchased our services a credit for financial measurement purposes designed to approximate the profit realized by our business on such services. We have been advised that this practice remains in effect for SOWs entered into prior to January 1, 2006 and is not in effect for SOWs entered into after such time. We have entered into new SOWs with most of the divisions of GE since the practice was discontinued. The discontinuation of this practice could affect whether and on what terms a GE business unit may enter into new SOWs in the future.
To date, GE has been a significant shareholder of our company and it will beneficially own % of our common shares following this offering, assuming the over-allotment option of the underwriters is not exercised. It also has the right to nominate two directors to our board pursuant to a shareholders agreement with our other major shareholders. If GE's percentage of ownership of our common shares decreases in the future, there can be no assurance that GE will continue to contract for our services to the same extent or on the same terms.
We may fail to attract and retain enough qualified employees to support our operations.
Our industry relies on large numbers of skilled employees and our success depends on our ability to attract, train and retain a sufficient number of qualified employees. High employee attrition is common in our industry. See "BusinessOur People." In 2006, our attrition rate for all employees who were employed for a day or more was approximately 32%. We cannot assure you that we will be able to reduce our level of attrition or even maintain our attrition rate at the 2006 level. If our attrition rate increases, our operating efficiency and productivity may decrease.
Competition for qualified employees, particularly in India and China, has intensified significantly in recent years and we expect such competition to continue. We compete for employees not only with other companies in our industry but also with companies in other industries, such as software services, engineering services and financial services companies. In many locations in which we operate, there is a limited pool of employees who have the skills and training needed to do our work. If our business continues to grow, the number of people we will need to hire will increase. We will also need to increase our hiring if we are not able to maintain our attrition rate through innovative recruiting and retention policies. Increased competition for employees could have an adverse effect on our ability to expand our business and service our clients, as well as cause us to incur greater personnel expenses and training costs.
Over the next few years we will lose certain tax benefits provided by India to companies in our industry and it is not clear whether new tax policies will provide equivalent benefits and incentives.
Under the Indian Income Tax Act, 1961, our Delivery Centers in India, from which we derived 66% of our revenues in fiscal 2006, benefit from a ten-year holiday from Indian corporate income taxes in respect
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of their export income, as defined in the legislation. As a result of this tax holiday, we incurred minimal income tax expense with respect to our Indian operations in 2006 ($0.6 million) as well as in prior years. In the absence of this tax holiday, income derived from our Indian operations would be taxed up to the maximum tax rate generally applicable to Indian enterprises, which, as of December 31, 2006, was 33.66%. The tax holiday enjoyed by our Delivery Centers in India expires in stages, on March 31 in each of 2007 (in respect of approximately 35% of our Indian operations), 2008 (in respect of approximately 15% of our Indian operations) and 2009 (in respect of the balance of our Indian operations), depending in each case on when each Delivery Center commenced operations. When our Indian tax holiday expires, our Indian tax expense will materially increase and our after-tax profitability will be materially reduced, unless we can obtain comparable benefits under new legislation or otherwise reduce our tax liability.
The Special Economic Zones Act, 2005, or the SEZ legislation, introduced a new 15-year tax holiday scheme for operations established in designated "special economic zones" or SEZs. Under the SEZ legislation, qualifying operations are eligible for a deduction from taxable income equal to (i) 100% of their profits or gains derived for the first five years from the commencement of operations; (ii) 50% of those profits or gains for the next five years; and (iii) 50% of those profits or gains for a further five years, subject to satisfying certain capital investment requirements. The Finance Minister of India announced in the 2007-2008 budget on February 28, 2007 that the SEZ legislation will be amended to ensure that this holiday is available only for new business operations that are conducted at qualifying SEZ locations and would not be available to operations formed by splitting up or reconstructing existing operations or transferring existing technology infrastructure to new locations.
We are currently in the process of establishing new centers, subject to regulatory approvals, that we expect to be eligible for the SEZ benefits. It is not clear, however, what percentage of our operations or income in India, if any, will be eligible for SEZ benefits, as this will depend on how much of our business can be conducted at the qualifying locations and on how much of that business can be considered to be new business under the SEZ legislation. Also, because this is new legislation, there is continuing uncertainty as to the interpretation of the required governmental and regulatory approvals. This uncertainty may delay development of our proposed SEZ locations.
The SEZ legislation is currently a politically sensitive issue in India. The Ministry of Finance in India has expressed concern about potential tax revenues being lost as a result of the exemptions under the SEZ legislation. The SEZ legislation has been criticized on economic grounds by the International Monetary Fund and it has been suggested that the SEZ legislation may be challenged by the World Trade Organization. It is possible that, as a result of such political pressures, the procedure for obtaining the benefits of the SEZ legislation may become more onerous, that the types of land eligible for SEZ status will be further restricted or that the SEZ legislation will be amended or repealed.
Accordingly, we currently do not expect that the benefits, if any, that we may derive under the SEZ legislation will be equivalent to the benefits we will gradually lose under the existing tax holiday. Consequently, we expect that our tax rate in India will increase and, depending on the size of the increase, this could have a material adverse effect on our business, results of operations and financial condition. As a result, we currently expect our overall tax rate to increase over the next few years and such increase may be material.
If the transfer pricing arrangements we have among our subsidiaries are determined to be inappropriate, our tax liability may increase.
We have transfer pricing arrangements among our subsidiaries in relation to various aspects of our business, including operations, marketing, sales and delivery functions. U.S. and Indian transfer pricing regulations, as well as regulations applicable in other countries in which we operate, require that any international transaction involving associated enterprises be at arm's-length terms. We consider the transactions among our subsidiaries to be on arm's-length terms. If, however, a tax authority in any jurisdiction reviews any of our tax returns and determines that the transfer prices and terms we have applied are not appropriate, or that other income of our affiliates should be taxed in that jurisdiction, we
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may incur increased tax liability, including accrued interest and penalties, which would cause our tax expense to increase, possibly materially, thereby reducing our profitability and cash flows.
New tax legislation and the results of actions by taxing authorities may have an adverse effect on our operations and our overall tax rate.
The Government of India recently proposed levying a fringe benefit tax on the exercise of share options granted to employees based in India. As currently proposed, this tax would be payable by the issuers of the share options and recoverable at the option of company from the employees. We are analyzing the consequences of this proposed levy upon our Indian operations, including the applicability to existing outstanding options. If the legislation is enacted and this tax is imposed and is not recoverable from our employees, our business, results of operations and financial condition could be materially and adversely affected.
The Government of India may assert that certain of our clients have a "permanent establishment" in India by reason of the activities we perform on their behalf, particularly those clients that exercise control over or have substantial dependency on our services. Such an assertion could affect the size and scope of the services requested by such clients in the future.
The Government of China recently enacted amendments to the tax laws applicable to our operations that would increase the applicable tax rate from 15% to 25%, subject to certain grandfathering provisions. Depending upon the final application of these proposals and the growth of our business in China, the effect on our overall tax rate could be material.
Our ability to repatriate surplus earnings from our Delivery Centers in a tax-efficient manner is dependent upon interpretations of local laws, possible changes in such laws and the renegotiation of existing double tax avoidance treaties. Changes to any of these may adversely affect our overall tax rate, which would have a material adverse effect on our business, results of operations and financial condition.
Wage increases in the countries in which we have operations may prevent us from sustaining our competitive advantage and may reduce our profit margin.
Salaries and related benefits of our employees are our most significant costs. Most of our employees are based in India and other countries in which wage levels have historically been significantly lower than wage levels in the United States and Western Europe for comparably skilled professionals, which has been one of our competitive advantages. However, wage levels for comparably skilled employees in most of the countries in which we operate have increased and further increases are expected at a faster rate than in the United States and Western Europe because of, among other reasons, faster economic growth, increased competition for skilled employees and increased demand for business process services. We will lose this competitive advantage to the extent that we are not able to control or share wage increases with our clients. Sharing wage increases may cause our clients to be less willing to utilize our services. In addition, wage increases may reduce our margins. We will attempt to control such costs by our efforts to add capacity in locations where we consider wage levels of skilled personnel to be satisfactory, but we may not be successful in doing so. We may need to increase our wage levels significantly and rapidly in order to attract the quantity and quality of employees that are necessary for us to remain competitive, which may have a material adverse effect on our business, results of operations and financial condition.
Restrictions on entry visas may affect our ability to compete for and provide services to clients, which could have a material adverse effect on our business and financial results.
Our business depends on the ability of our employees to obtain the necessary visas and entry permits to do business in the countries where our clients and, in some cases, our Delivery Centers, are located. In response to recent terrorist attacks and global unrest, immigration authorities generally, and those in the United States in particular, have increased the level of scrutiny in granting visas. If further terrorist attacks occur then obtaining visas for our personnel may become even more difficult. Local immigration laws may also require us to meet certain other legal requirements as a condition to obtaining or maintaining entry visas. In addition, immigration laws are subject to legislative change and varying standards of application
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and enforcement due to political forces, economic conditions or other events, including terrorist attacks. If we are unable to obtain the necessary visas for our personnel who need to travel internationally, if the issuance of such visas is delayed or if the length of such visas is shortened, we may not be able to provide services to our clients or to continue to provide services on a timely and cost-effective basis, receive revenues as early as expected or manage our Delivery Centers as efficiently as we otherwise could, any of which could have a material adverse effect on our business, results of operations and financial condition.
Our senior leadership team is critical to our continued success and the loss of such personnel could harm our business.
Our future success substantially depends on the continued service and performance of the members of our senior leadership team. These personnel possess business and technical capabilities that are difficult to replace. In particular, our Chief Executive Officer and other members of our senior leadership team have been involved in our business since its commencement under GE. Our employment agreement with our Chief Executive Officer does not obligate him to work for us for any specified period, but does contain a limited non-compete clause and a non-solicitation clause should his employment terminate. If we lose key members of our senior leadership team, we may not be able to effectively manage our current operations or meet ongoing and future business challenges, and this may have a material adverse effect on our business, results of operations and financial condition.
We derive a significant portion of our revenues from clients in the United States. If events or conditions occur which adversely affect our ability to do business in the United States, our business, results of operations and financial condition may be materially and adversely affected.
We currently derive, and are likely to continue to derive, a significant portion of our revenues from clients located in the United States. A number of factors could adversely affect our ability to do business in the United States, which could in turn have a material adverse effect on our business, results of operations and financial condition. These factors include changes in economic conditions in the United States, declines in the value of the U.S. dollar against the Indian rupee, in which we incur the majority of our costs, or other currencies in which we incur costs or enactment of laws in the United States that impose restrictions on, or taxation or other financial penalties with respect to, offshore outsourcing.
We typically face a long selling cycle to secure a new contract as well as long implementation periods that require significant resource commitments, which result in a long lead time before we receive revenues from new relationships.
We typically face a long selling cycle to secure a new contract. If we are successful in obtaining an engagement, that is generally followed by a long implementation period in which the services are planned in detail and we demonstrate to a client that we can successfully integrate our processes and resources with their operations. During this time a contract is also negotiated and agreed. There is then a long ramping up period in order to commence providing the services.
We typically incur significant business development expenses during the selling cycle. We may not succeed in winning a new client's business, in which case we receive no revenues and may receive no reimbursement for such expenses. Even if we succeed in developing a relationship with a potential new client and begin to plan the services in detail, a potential client may choose a competitor or decide to retain the work in-house prior to the time a final contract is signed. If we enter into a contract with a client, we will typically receive no revenues until implementation actually begins. Our clients may also experience delays in obtaining internal approvals or delays associated with technology or system implementations, thereby further lengthening the implementation cycle. We generally hire new employees to provide services to a new client once a contract is signed. We may face significant difficulties in hiring such employees and incur significant costs associated with these hires before we receive corresponding revenues. If we are not successful in obtaining contractual commitments after the selling cycle, in maintaining contractual commitments after the implementation cycle or in maintaining or reducing the duration of unprofitable initial periods in our contracts, it may have a material adverse effect on our business, results of operations and financial condition.
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Our profitability will suffer if we are not able to price appropriately and maintain asset utilization levels and control our costs.
Our profitability is largely a function of the efficiency with which we utilize our assets, and in particular our people and Delivery Centers, and the pricing that we are able to obtain for our services. Our utilization rates are affected by a number of factors, including our ability to transition employees from completed projects to new assignments, to hire and assimilate new employees, forecast demand for our services and thereby maintain an appropriate headcount in each of our geographies and workforces and manage attrition, and our need to devote time and resources to training, professional development and other typically non-chargeable activities. The prices we are able to charge for our services are affected by a number of factors, including our clients' perceptions of our ability to add value through our services, competition, introduction of new services or products by us or our competitors, our ability to accurately estimate, attain and sustain revenues from client engagements, margins and cash flows over increasingly longer contract periods and general economic and political conditions. Therefore, if we are unable to price appropriately or manage our asset utilization levels, there could be a material adverse effect on our business, results of operations and financial condition. Our profitability is also a function of our ability to control our costs and improve our efficiency. As we increase the number of our employees and grow our business, we may not be able to manage the significantly larger and more geographically diverse workforce that may result and our profitability may not improve.
Our long selling cycle and implementation period make it difficult for us to prepare accurate internal financial forecasts and respond in a timely manner to offset such fluctuations.
Our operating results may fluctuate significantly from period to period. The long selling cycle for our services as well as the time required to complete the implementation phases of new contracts makes it difficult to accurately predict the timing of revenues from new clients or new SOWs as well as our costs. Our period to period results may also fluctuate due to changes in our costs or other unforeseen events. In addition, our results may vary due to currency fluctuations and changes in other global or regional economic and political conditions. Due to these factors, we may be unable to prepare accurate internal financial forecasts or replace anticipated revenues that we do not receive as a result of delays arising from these factors, and our operating results in future reporting periods may be significantly below the expectations of the public market, securities analysts or investors.
Currency exchange rate fluctuations in various currencies in which we do business, especially the Indian rupee and the U.S. dollar, could have a material adverse effect on our business, results of operations and financial condition.
Most of our revenues are denominated in U.S. dollars, with the remaining amounts largely in euros, pounds sterling and Japanese yen. Most of our expenses are incurred and paid in Indian rupees, with the remaining amounts largely in U.S. dollars, Chinese renminbi, pounds sterling and euros. As we expand our operations to new countries, we will incur expenses in other currencies. We report our financial results in U.S. dollars. The exchange rates between the Indian rupee and other currencies in which we incur costs or receive revenues, on the one hand, and the U.S. dollar, on the other hand, have changed substantially in recent years and may fluctuate substantially in the future.
Our results of operations could be adversely affected by certain movements in exchange rates, particularly if the Indian rupee or other currencies in which we incur expenses or receive revenues, appreciate against the U.S. dollar. Although we take steps to hedge a substantial portion of our Indian rupee-U.S. dollar and our Chinese renminbi-Japanese yen foreign currency exposures, there is no assurance that our hedging strategy will be successful or that the hedging markets will have sufficient liquidity or depth for us to implement our strategy in a cost effective manner. In addition, in some countries such as India and China, we are subject to legal restrictions on hedging activities, as well as convertibility of currencies, which could limit our ability to use cash generated in one country in another country and could limit our ability to hedge our exposures. See also "Management's Discussion and Analysis of Financial Condition and Results of OperationsOverviewForeign exchange (gains) losses, net."
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We enter into long-term contracts and fixed price contracts with our clients. Our failure to correctly price these contracts may negatively affect our profitability and we have only limited experience as an independent company in pricing such contracts.
The pricing of our services is usually included in SOWs entered into with our clients, many of which are for terms of three to five years. In certain cases, we have committed to pricing over this period with only limited sharing of risk regarding inflation and currency exchange rates. In addition, we are obligated under some of our contracts to deliver productivity benefits to our clients. If we fail to estimate accurately future wage inflation rates, currency exchange rates or our costs, or if we fail to accurately estimate the productivity benefits we can achieve under a contract, it could have a material adverse effect on our business, results of operations and financial condition. We have only operated as an independent business since the beginning of 2005, and thus our experience in pricing our contracts is limited.
A small portion of our SOWs are currently billed on a fixed price basis rather than on a time and materials basis. We may increase the number of fixed price contracts we perform in the future. Any failure to accurately estimate the resources or time required to complete a fixed price engagement or to maintain the required quality levels or any unexpected increase in the cost to us of employees, office space or technology could expose us to risks associated with cost overruns and could have a material adverse effect on our business, results of operations and financial conditions.
Future legislation in the United States and other jurisdictions could significantly affect the ability of our clients to utilize our services.
The issue of companies outsourcing services to organizations operating in other countries has become a topic of political discussion in many countries. For example, many organizations and public figures in the United States have publicly expressed concern about a perceived association between offshore service providers and the loss of jobs in the United States. In addition, there has been recent publicity about negative experiences associated with offshore outsourcing, such as theft and misappropriation of sensitive client data, particularly involving service providers in India. Current or prospective clients may elect to perform such services themselves or may be discouraged from transferring these services from onshore to offshore providers to avoid negative perceptions that may be associated with using an offshore provider. Any slowdown or reversal of existing industry trends toward offshore outsourcing would seriously harm our ability to compete effectively with competitors that provide services from the United States. Measures aimed at limiting or restricting offshore outsourcing have been enacted in a few states and there is currently legislation pending in several states and at the federal level in the United States. The measures that have been enacted to date generally have restricted the ability of government entities to outsource work to offshore business process service providers and have not significantly adversely affected our business, primarily because we do not currently work for such governmental entities and they are not currently a focus of our sales strategy. However, there can be no assurance that pending or future legislation in the United States that would significantly adversely affect our business, results of operations and financial condition will not be enacted.
Legislation enacted in certain European jurisdictions and any future legislation in Europe, Japan or any other country in which we have clients restricting the performance of business process services from an offshore location could also have a material adverse effect on our business, results of operations and financial condition. For example, new legislation recently enacted in the United Kingdom, based on the 1977 EC Acquired Rights Directive which has been adopted in some form by many European Union, or EU, countries, provides that if a company outsources all or part of its business to a service provider or changes its current service provider, the affected employees of the company or of the previous service provider are entitled to become employees of the new service provider, generally on the same terms and conditions as their original employment. In addition, dismissals of employees who were employed by the company or the previous service provider immediately prior to that transfer are automatically considered unfair dismissals that entitle such employees to compensation. As a result, in order to avoid unfair dismissal claims we may have to offer, and become liable for, voluntary redundancy payments to the
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employees of our clients in the United Kingdom and other EU countries who have adopted similar laws who outsource business to us. We believe that this legislation may materially affect our ability to obtain new business from companies in the EU and, after including the cost of the potential compensation paid for unfair dismissal claims or redundancies, to provide outsourced services to our current and future clients in the EU in a cost-effective manner.
We could be liable to our clients for damages and subject to criminal liability and our reputation could be damaged if our information systems are breached or client data is compromised.
We may be liable to our clients for damages caused by disclosure of confidential information or system failures. We are often required to collect and store sensitive or confidential client data to perform the services we provide under our contracts. Many of our contracts do not limit our potential liability for breaches of confidentiality. If any person, including any of our current or former employees, penetrates our network security or misappropriates sensitive data or if we do not adapt to changes in data protection legislation, we could be subject to significant liabilities to our clients or to our clients' customers for breaching contractual confidentiality provisions or privacy laws. Unauthorized disclosure of sensitive or confidential client data, whether through breach of our computer systems, systems failure or otherwise, could also damage our reputation and cause us to lose existing and potential clients. We may also be subject to civil actions and criminal prosecution by government or government agencies for breaches relating to such data. Our insurance coverage for breaches or mismanagement of such data may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims against us and our insurers may disclaim coverage as to any future claims.
We may be subject to claims for substantial damages by our clients arising out of disruptions to their businesses or inadequate service, and our insurance coverage may be inadequate.
Most of our service contracts with clients contain service level and performance requirements, including requirements relating to the quality of our services. Failure to consistently meet service requirements of a client or errors made by our employees in the course of delivering services to our clients could disrupt the client's business and result in a reduction in revenues or a claim for damages against us. Additionally, we could incur liability if a process we manage for a client were to result in internal control failures or impair our client's ability to comply with its own internal control requirements.
Under our MSAs with our clients, our liability for breach of our obligations is generally limited to actual damages suffered by the client and is typically capped at the greater of an agreed amount or the fees paid or payable to us under the relevant agreement. These limitations and caps on liability may be unenforceable or otherwise may not protect us from liability for damages. In addition, certain liabilities, such as claims of third parties for which we may be required to indemnify our clients or liability for breaches of confidentiality, are generally not limited under those agreements. Our MSAs are governed by laws of multiple jurisdictions, therefore the interpretation of such provisions, and the availability of defenses to us, may vary, which may contribute to the uncertainty as to the scope of our potential liability. Although we have commercial general liability insurance coverage, the coverage may not continue to be available on acceptable terms or in sufficient amounts to cover one or more large claims and our insurers may disclaim coverage as to any future claims. The successful assertion of one or more large claims against us that exceed available insurance coverage, or changes in our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have a material adverse effect on our business, results of operations and financial condition.
Any failures to adhere to the regulations that govern our business could result in our being unable effectively to perform our services. Failure to adhere to regulations that govern our clients' businesses could result in breaches of contract under our MSAs.
Our clients' business operations are often subject to regulation, and our clients may require that we perform our services in a manner that will enable them to comply with applicable regulations. Our clients are located around the world, and the laws and regulations that apply include, among others, United States federal laws such as the Gramm-Leach-Bliley Act and the Health Insurance Portability and Accountability
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Act, state laws on debt collection in the United States and the Financial Services Act in the United Kingdom as well as similar consumer protection laws in other countries in which our clients' customers are based. Failure to perform our services in a manner that complies with any such requirement could result in breaches of contracts with our clients. In addition, we are required under various laws to obtain and maintain permits and licenses for the conduct of our business in all jurisdictions in which we have operations, including India, and, in some cases, where our clients receive our services, including the United States and Europe. If we do not maintain our licenses or other qualifications to provide our services or if we do not adapt to changes in legislation or regulation, we may have to cease operations in the relevant jurisdictions and may not be able to provide services to existing clients or be able to attract new clients. In addition, we may be required to expend significant resources in order to comply with laws and regulations in the jurisdictions mentioned above. Any failure to abide by regulations relating either to our business or our clients' businesses may also, in some limited circumstances, result in civil fines and criminal penalties for us. Any such ceasing of operations or civil or criminal actions may have a material adverse effect on our business, results of operations and financial condition.
Some of our contracts contain provisions which, if triggered, could result in lower future revenues and have a material adverse effect on our business, results of operation and financial condition.
Many of our contracts allow a client, in certain limited circumstances, to request a benchmark study comparing our pricing and performance with that of an agreed list of other service providers for comparable services. Based on the results of the study and depending on the reasons for any unfavorable variance, we may be required to make improvements in the services we provide or to reduce the pricing for services to be performed under the remaining term of the contract, which could have an adverse effect on our business, results of operations and financial condition.
Many of our contracts, including our contract with GE, contain provisions that would require us to pay penalties to our clients and/or provide our clients with the right to terminate the contract if we do not meet pre-agreed service level requirements. Failure to meet these requirements could result in the payment of significant penalties by us to our clients which in turn could have a material adverse effect on our business, results of operations and financial condition.
A few of our MSAs provide that during the term of the MSA and under specified circumstances, we may not provide similar services to their competitors. Some of our contracts also provide that, during the term of the contract and for a certain period thereafter ranging from six to 12 months, we may not provide similar services to certain or any of their competitors using the same personnel. These restrictions may hamper our ability to compete for and provide services to other clients in the same industry, which may inhibit growth and result in lower future revenues and profitability.
Many of our contracts with clients specify that if a change of control of our company occurs during the term of the contract, the client has the right to terminate the contract. These provisions may result in our contracts being terminated if there is such a change in control, resulting in a potential loss of revenues. In addition, these provisions may act as a deterrent to any attempt by a third party to acquire our company. Upon the consummation of this offering, GE loses its right to terminate our MSA upon a change of control of our company.
Many of our contracts with clients require that we bear the cost of any sales or withholding taxes or unreimbursed value-added taxes imposed on payments made under those contracts. While we have arranged our contracts to minimize the imposition of these taxes, changes in law or the interpretation thereof and changes in our internal structure may result in the imposition of these taxes and a reduction in our net revenues.
Our industry is highly competitive, and we may not be able to compete effectively.
Our industry is highly competitive, highly fragmented and subject to rapid change. We believe that the principal competitive factors in our markets are breadth and depth of process and technology expertise, service quality, the ability to attract, train and retain qualified people, compliance rigor, global delivery capabilities, price, knowledge of industries served and marketing and sales capabilities. We compete for
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business with a variety of companies, including large multinational firms that provide consulting, technology and/or business process services, off-shore business process service providers in low-cost locations like India, in-house captives of potential clients, software services companies that also provide business process services and accounting firms that also provide consulting or outsourcing services.
Some of our competitors have greater financial, marketing, technological or other resources and larger client bases than we do, and may expand their service offerings and compete more effectively for clients and employees than we do. Some of our competitors have more established reputations and client relationships in our markets than we do. In addition, some of our competitors who do not have global delivery capabilities may expand their delivery centers to the countries in which we are located which could result in increased competition for employees and could reduce our competitive advantage. The trend toward outsourcing and technological changes may result in new and different competitors entering our markets. There could also be newer competitors that are more powerful as a result of strategic consolidation of smaller competitors or of companies that each provide different services or service different industries.
We expect competition to intensify in the future as more companies enter our markets. Increased competition may result in lower prices and volumes, higher costs for resources, especially people, and lower profitability. We may not be able to supply clients with services that they deem superior and at competitive prices and we may lose business to our competitors. Any inability to compete effectively would adversely affect our business, results of operations and financial condition.
Our business could be materially and adversely affected if we do not protect our intellectual property or if our services are found to infringe on the intellectual property of others.
Our success depends in part on certain methodologies, practices, tools and technical expertise we utilize in designing, developing, implementing and maintaining applications and other proprietary intellectual property rights. In order to protect our rights in these various intellectual properties, we rely upon a combination of nondisclosure and other contractual arrangements as well as trade secret, copyright and trademark laws. We also generally enter into confidentiality agreements with our employees, consultants, clients and potential clients and limit access to and distribution of our proprietary information. We also have submitted United States federal and foreign trademark applications for the names of additional service offerings. We may not be successful in maintaining or obtaining trademarks for these trade names. India is a member of the Berne Convention, an international intellectual property treaty, and has agreed to recognize protections on intellectual property rights conferred under the laws of other foreign countries, including the laws of the United States. There can be no assurance that the laws, rules, regulations and treaties in effect in the United States, India and the other jurisdictions in which we operate and the contractual and other protective measures we take, are adequate to protect us from misappropriation or unauthorized use of our intellectual property, or that such laws will not change. We may not be able to detect unauthorized use and take appropriate steps to enforce our rights, and any such steps may not be successful. Infringement by others of our intellectual property, including the costs of enforcing our intellectual property rights, may have a material adverse effect on our business, results of operations and financial condition.
Although we believe that we are not infringing on the intellectual property rights of others, claims may nonetheless be successfully asserted against us in the future. The costs of defending any such claims could be significant, and any successful claim may require us to modify, discontinue or rename any of our services. Any such changes may have a material adverse effect on our business, results of operations and financial condition.
A substantial portion of our assets and operations are located in India and we are subject to regulatory, economic, social and political uncertainties in India.
We are subject to several risks associated with having a substantial portion of our assets and operations located in India.
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In recent years, we have benefited from many policies of the Government of India and the Indian state governments in the states in which we operate, which are designed to promote foreign investment generally and the business process services industry in particular, including significant tax incentives, relaxation of regulatory restrictions, liberalized import and export duties and preferential rules on foreign investment and repatriation. There is no assurance that such policies will continue. Various factors, such as changes in the current federal government, could trigger significant changes in India's economic liberalization and deregulation policies and disrupt business and economic conditions in India generally and our business in particular.
In addition, our financial performance and the market price of our common shares may be adversely affected by general economic conditions and economic and fiscal policy in India, including changes in exchange rates and controls, interest rates and taxation policies, as well as social stability and political, economic or diplomatic developments affecting India in the future. In particular, India has experienced significant economic growth over the last several years, but faces major challenges in sustaining that growth in the years ahead. These challenges include the need for substantial infrastructure development and improving access to healthcare and education. Our ability to recruit, train and retain qualified employees, develop and operate our Delivery Centers, and attract and retain clients could be adversely affected if India does not successfully meet these challenges.
Our Delivery Centers are at risk of damage from natural disasters and other disruptions.
Our Delivery Centers or our data and voice communications may be damaged or disrupted as a result of natural disasters such as earthquakes, floods, heavy rains, epidemics, tsunamis and cyclones, technical disruptions such as electricity or infrastructure breakdowns, computer glitches and electronic viruses or man-made events such as protests, riots and labor unrest. Such events may lead to the disruption of information systems and telecommunication services for sustained periods. They also may make it difficult or impossible for employees to reach our business locations. Damage or destruction that interrupts our provision of services could adversely affect our reputation, our relationships with our clients, our leadership team's ability to administer and supervise our business or it may cause us to incur substantial additional expenditure to repair or replace damaged equipment or Delivery Centers. We may also be liable to our clients for disruption in service resulting from such damage or destruction. While we currently have commercial liability insurance, our insurance coverage may not be sufficient. Furthermore, we may be unable to secure such insurance coverage at premiums acceptable to us in the future or at all. Prolonged disruption of our services would also entitle our clients to terminate their contracts with us. Any of the above factors may adversely affect our business, results of operations and financial condition.
We may face difficulties as we expand our operations into countries in which we have no prior operating experience.
We intend to continue to expand our global footprint in order to maintain an appropriate cost structure and meet our clients' delivery needs. This may involve expanding into countries other than those in which we currently operate. It may involve expanding into less developed countries, which may have less political, social or economic stability and less developed infrastructure and legal systems. As we expand our business into new countries we may encounter regulatory, personnel, technological and other difficulties that increase our expenses or delay our ability to start up our operations or become profitable in such countries. This may affect our relationships with our clients and could have an adverse affect on our business, results of operations and financial condition.
We will incur increased costs as a result of being a public company subject to the Sarbanes-Oxley Act of 2002 and our leadership team faces challenges in implementing those requirements.
As a public company, we will incur additional legal, accounting and other expenses that we do not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the Securities and Exchange Commission and the New York Stock Exchange, have imposed increased regulation and disclosure and required enhanced corporate governance practices of public companies. We are committed to maintaining high standards of corporate governance and public
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disclosure, and our efforts to comply with evolving laws, regulations and standards in this regard are likely to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If we do not implement the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission. Any such action could harm our reputation and the confidence of investors and clients in our company and could adversely affect our business and cause our share price to fall. We will also incur additional costs associated with our reporting requirements as a public company. We expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified candidates to serve on our board of directors or as executive officers.
Terrorist attacks and other acts of violence involving any of the countries in which we or our clients have operations could adversely affect our operations and client confidence.
Terrorist attacks and other acts of violence or war, such as the attacks in recent years in the United States, Spain, England and India may adversely affect worldwide financial markets and could potentially lead to economic recession, which could adversely affect our business, results of operations, financial condition and cash flows. These events could adversely affect our clients' levels of business activity and precipitate sudden significant changes in regional and global economic conditions and cycles. These events also pose significant risks to our people and to our Delivery Centers and operations around the world.
Southern Asia has, from time to time, experienced instances of civil unrest and hostilities among neighboring countries, including India and Pakistan. In recent years, military confrontations between India and Pakistan have occurred in the region of Kashmir and along the India/Pakistan border. There have also been incidents in and near India such as terrorist attacks on the Indian Parliament and in the city of Mumbai, troop mobilizations along the India/Pakistan border and an aggravated geopolitical situation in the region. Such military activity or terrorist attacks in the future could influence the Indian economy by disrupting communications and making travel more difficult. Resulting political tensions could create a greater perception that investments in companies with Indian operations involve a high degree of risk, and that there is a risk of disruption of services provided by companies with Indian operations, which could have a material adverse effect on our share price and/or the market for our services. Furthermore, if India were to become engaged in armed hostilities, particularly hostilities that were protracted or involved the threat or use of nuclear weapons, we might not be able to continue our operations. We generally do not have insurance for losses and interruptions caused by terrorist attacks, military conflicts and wars.
If more stringent labor laws become applicable to us or if our employees unionize, our profitability may be adversely affected.
India has stringent labor legislation that protects employee interests, including legislation that sets forth detailed procedures for dispute resolution and employee removal and legislation that imposes financial obligations on employers upon retrenchment. Though we are exempt from some of these labor laws at present under exceptions in some states for providers of IT-enabled services, there can be no assurance that such laws will not become applicable to us in the future. If these labor laws become applicable to our employees, it may become difficult for us to maintain flexible human resource policies and attract and employ the numbers of sufficiently qualified candidates that we need or discharge employees, and our compensation expenses may increase significantly.
In addition, our employees may in the future form unions. If employees at any of our Delivery Centers become eligible for union membership, we may be required to raise wage levels or grant other benefits that could result in an increase in our compensation expenses, in which case our profitability may be adversely affected.
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We may not succeed in identifying suitable acquisition targets or integrating any acquired business into our operations, which could have a material adverse effect on our business and financial results.
Our growth strategy includes expanding our service offerings, both organically and through strategic acquisitions in order to augment our capabilities to service our existing clients. For example, we acquired ICE Enterprise Solutions B.V. in 2007 (now called Genpact Netherlands B.V.), MoneyLine Lending Services Inc. in 2006 (now called Genpact Mortgage Services) and Creditek Corporation in 2005.
We may not be able to identify suitable acquisition targets or negotiate attractive terms, which may adversely affect our competitiveness and our ability to grow our business. We may not be able to integrate effectively any existing or future acquisitions into our operations and may not obtain the expected profitability or other benefits in the short or long term from such acquisitions. Our leadership team's attention may also be diverted by any historical or potential acquisitions. Any of the above factors may have a material adverse effect on our business, results of operations and financial condition.
Our principal shareholders will continue to exercise significant influence over us, and their interests in our business may be different from yours.
Almost all of our issued and outstanding common shares are currently beneficially owned by General Atlantic, Oak Hill, GE and Wachovia Corporation, or Wachovia. Following the consummation of this offering and assuming that the underwriters do not exercise their over-allotment option to purchase additional common shares and there is no exercise of any of our outstanding share options:
Prior to the commencement of this offering these shareholders will enter into a shareholders agreement which will provide that they will agree to exercise their shareholder votes to ensure that GE is able to nominate two directors to our board and General Atlantic and Oak Hill, together, are able to nominate four directors to our board, so long as they maintain certain minimum shareholding thresholds. Accordingly, the principal shareholders can exercise significant influence over our business policies and affairs and all matters requiring a shareholders' vote, including the composition of our board of directors, the adoption of amendments to our certificate of incorporation and the approval of mergers or sales of substantially all of our assets, our dividend policy and our capital structure and financing. This concentration of ownership also may delay, defer or even prevent a change in control of our company and may make some transactions more difficult or impossible without the support of these shareholders, even if such transactions are beneficial to other shareholders. The interests of these shareholders may conflict with your interests. In particular, GE and Wachovia are our clients. General Atlantic and Oak Hill are significant shareholders and currently hold interests in companies that could, from time to time, compete with us and they may, from to time, make significant investments in companies that could compete with us.
We may become subject to taxation in Bermuda, which would have a material adverse effect on our business, results of operations and financial condition.
We have received a written assurance from the Bermuda Minister of Finance under The Exempted Undertaking Tax Protection Act 1966 of Bermuda to the effect that if there is enacted in Bermuda any legislation imposing tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax shall not be applicable to us or to any of our operations or common shares, debentures or other obligations until March 28, 2016, except in so far as such tax applies to persons ordinarily resident in Bermuda or is payable by us in respect of real property owned or leased by us in Bermuda. We cannot assure you that a future Minister would honor that assurance, which is not legally binding, or that after such date we would
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not be subject to any such tax. If we were to become subject to taxation in Bermuda, it could have a material adverse effect on our business, results of operations and financial condition.
Risks Related to this Offering
Sales of common shares eligible for future sale may cause the market price of our common shares to decline significantly, even if our business is doing well.
The market price of our common shares could decline as a result of sales of a large number of common shares in the market after this offering or the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. Upon consummation of this offering, we will have common shares outstanding (approximately if the underwriters exercise their option to purchase additional common shares in full). Of these shares, the common shares offered hereby will be freely tradable without restriction in the public market, unless purchased by our affiliates.
Following this offering, General Atlantic, Oak Hill, GE and Wachovia will beneficially own in the aggregate approximately common shares, representing approximately % of our outstanding common shares. Such shareholders will be able to sell their common shares in the public market from time to time without registering them, subject to the lock-up period described below, and subject to certain limitations on the timing, amount and method of those sales imposed by Rule 144 under the Securities Act of 1933, as amended. If any of these shareholders were to sell a large number of their common shares, the market price of our common shares could decline significantly. In addition, the perception in the public markets that sales by them might occur could also adversely affect the market price of our common shares.
In connection with this offering, the aforementioned shareholders, our directors and our executive officers have each agreed to enter into a lock-up agreement and thereby be subject to a lock-up period, meaning that they and their permitted transferees will not be permitted to sell any of their common shares without the prior consent of the underwriters for 180 days after the date of this prospectus. Although we have been advised that there is no present intention to do so, the underwriters may, in their sole discretion and without notice, release all or any portion of the common shares from the restrictions in any of the lock-up agreements described above.
Pursuant to these agreements, these holders will have the right, subject to certain conditions, to require us to file registration statements covering common shares (including restricted shares and common shares issuable upon the exercise of currently outstanding options) which they will own upon consummation of this offering or to include those common shares and additional common shares in registration statements that we may file for ourselves or other shareholders. Following their registration and sale under the applicable registration statement, those shares will become freely tradable. By exercising their registration rights and selling a large number of common shares, these holders could cause the price of our common shares to decline. In addition, options to purchase common shares will be outstanding upon consummation of this offering. Moreover, following this offering, we intend to file a registration statement under the Securities Act registering common shares reserved for issuance under our equity incentive plans and common shares held for resale by our existing shareholders that were previously issued under our equity incentive plans. Such further issuance and resale of our common shares could cause the price of our common shares to decline.
Also, in the future, we may issue our securities in connection with investments and acquisitions. The amount of our common shares issued in connection with an investment or acquisition could constitute a material portion of our then outstanding common shares.
We do not intend to pay dividends in the foreseeable future.
We have never declared or paid any cash dividends on our common shares, other than dividends paid by the predecessor to GE in the 2004 Reorganization. For the foreseeable future, we intend to retain any
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earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common shares. Our ability to pay dividends is also subject to restrictive covenants contained in our credit facility agreement governing indebtedness we and our subsidiaries have incurred or may incur in the future.
Any dividends paid to U.S. shareholders could be subject to tax at ordinary income rates.
The maximum U.S. tax rate on certain dividends paid to individuals is 15 percent through 2010. Legislation has been recently introduced that, if enacted in its present form, would deny to individuals the 15 percent tax rate on dividends received from a corporation located in a jurisdiction, like Bermuda, that lacks a comprehensive tax system. If this bill becomes law, dividends paid to U.S. shareholders, if any, could be subject to tax at ordinary income rates.
We are organized under the laws of Bermuda, and Bermuda law differs from the laws in effect in the United States and may afford less protection to shareholders.
Our shareholders may have more difficulty protecting their interests than would shareholders of a corporation incorporated in a state of the United States. As a Bermuda company, we are governed by the Companies Act 1981 Bermuda, as amended, or the Companies Act. The Companies Act differs in some material respects from laws generally applicable to U.S. corporations and shareholders, including the provisions relating to interested directors, mergers, amalgamations and acquisitions, takeovers, shareholder lawsuits and indemnification of directors. See "Description of Share Capital."
Generally, the duties of directors and officers of a Bermuda company are owed to the company only. Shareholders of Bermuda companies generally do not have rights to take action against directors or officers of the company and may only do so in limited circumstances. Officers of a Bermuda company must, in exercising their powers and performing their duties, act honestly and in good faith with a view to the best interests of the company and must exercise the care and skill that a reasonably prudent person would exercise in comparable circumstances. Directors have a duty not to put themselves in a position in which their duties to the company and their personal interests may conflict and also are under a duty to disclose any personal interest in any contract or arrangement with the company or any of its subsidiaries. If a director or officer of a Bermuda company is found to have breached his or her duties to that company, he may be held personally liable to the company in respect of that breach of duty. A director may be liable jointly and severally with other directors if it is shown that the director knowingly engaged in fraud or dishonesty. In cases not involving fraud or dishonesty, the liability of the director will be determined by the Bermuda courts on the basis of their estimation of the percentage of responsibility of the director for the matter in question, in light of the nature of the conduct of the director and the extent of the causal relationship between his or her conduct and the loss suffered.
In addition, our bye-laws contain a broad waiver by our shareholders of any claim or right of action, both individually and on our behalf, against any of our officers or directors. The waiver applies to any action taken by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty on the part of the officer or director or to recover any gain, personal profit or advantage to which such officer or director is not legally entitled. This waiver limits the right of shareholders to assert claims against our officers and directors unless the act or failure to act involves fraud or dishonesty. For a description of these restrictions, see "Description of Share Capital." In addition, the rights of our shareholders and the fiduciary responsibilities of our directors under Bermuda law are not as clearly established as under statutes or judicial precedent in existence in jurisdictions in the United States, particularly the State of Delaware. Therefore, our shareholders may have more difficulty protecting their interests than would shareholders of a corporation incorporated in a state within the United States.
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There is no prior public market for our common shares and therefore we cannot assure you that an active trading market or any specific price for our common shares will be established.
Currently, there is no public trading market for our common shares. We have applied for approval to list our common shares on the New York Stock Exchange under the symbol "G." The initial public offering price per share was determined by agreement among us, the selling shareholders and the representatives of the underwriters and may not be indicative of the market price of our common shares after our initial public offering. An active trading market for our common shares may not develop and continue upon the completion of this offering and the market price of our common shares may decline below the initial public offering price.
Because the initial public offering price per share is substantially higher than our book value per share, purchasers in this offering will immediately experience a substantial dilution in net tangible book value.
Purchasers of our common shares will experience immediate and substantial dilution in net tangible book value per share from the initial public offering price per share. After giving effect to the sale of common shares in this offering, after deducting underwriting discounts, commissions and estimated offering expenses payable by us, and the application of the net proceeds therefrom, our as adjusted net tangible book value as of December 31, 2006 would have been $ million, or $ per share. This represents an immediate dilution in net tangible book value of $ per share to new investors purchasing common shares in this offering. For a calculation of the dilution purchasers in this offering will incur, see "Dilution."
The market price for our common shares may be volatile.
The market price for our common shares is likely to be highly volatile and subject to wide fluctuations in response to factors including the following:
In addition, securities markets generally and from time to time experience significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may have a material adverse effect on the market price of our common shares.
You may be unable to effect service of process or enforce judgments obtained in the United States or Bermuda against us or our assets in the jurisdictions in which we or our executive officers operate.
We are organized under the laws of Bermuda, and a significant portion of our assets are located outside the United States. It may not be possible to enforce court judgments obtained in the United States against us in Bermuda or in countries, other than the United States, where we have assets based on the civil liability or penal provisions of the federal or state securities laws of the United States. In addition,
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there is some doubt as to whether the courts of Bermuda and other countries would recognize or enforce judgments of United States courts obtained against us or our directors or officers based on the civil liability or penal provisions of the federal or state securities laws of the United States or would hear actions against us or those persons based on those laws. We have been advised by Appleby, our Bermuda counsel, that the United States and Bermuda do not currently have a treaty providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not based solely on United States federal or state securities laws, would not automatically be enforceable in Bermuda. Similarly, those judgments may not be enforceable in countries, other than the United States, where we have assets.
We will have broad discretion in how we use the proceeds of this offering and we may not use these proceeds effectively. This could affect our profitability and cause our share price to decline.
Our leadership team will have considerable discretion in the application of the net proceeds of this offering, and you will not have the opportunity, as part of your investment decision, to assess whether we are using the proceeds appropriately. We currently intend to use the net proceeds to repay term loan indebtedness outstanding under our credit facilities and for working capital and general corporate purposes. From time to time we will consider acquisitions or investments if a suitable opportunity arises, in which case a portion of the proceeds may be used to fund such an acquisition or investment. We have no commitments or understandings to make any such acquisition or investment. We have not yet finalized the amount of net proceeds that we will use specifically for each of these purposes. We may use the net proceeds for corporate purposes that do not improve our profitability or increase our market value, which could cause our share price to decline.
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This prospectus contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about the industry in which we operate and our leadership team's beliefs and assumptions. Such statements include, in particular, statements about our plans, strategies and prospects under the headings "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate," "could," "may," "shall," "will," "would" and variations of such words and similar expressions, or the negative of such words or similar expressions, are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements, including as a result of risks discussed under the heading "Risk Factors." These forward-looking statements include, but are not limited to, statements relating to:
All forward-looking statements involve risks and uncertainties. The occurrence of the events described, and the achievement of the expected results, depend on many events, some or all of which are not predictable or within our control. Actual results may differ materially from expected results.
Factors that may cause actual results to differ from expected results include, among others:
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All future written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except as required under the federal securities laws and the rules and regulations of the SEC, we undertake no obligation, and specifically decline any obligation, to update publicly or revise any forward-looking statements after we distribute this prospectus, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this prospectus might not occur.
See the section titled "Risk Factors" for a more complete discussion of these risks and uncertainties and for other risks and uncertainties. These factors and the other risk factors described in this prospectus are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently, actual results or developments anticipated by us may not be realized or, even if substantially realized, may not have the expected consequences to, or effects on, us. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements.
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We estimate that we will receive approximately $ million in net proceeds from this offering, based on an assumed initial public offering price of $ per share, which is the mid-point of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters' option to purchase additional shares in this offering is exercised in full, we estimate that our net proceeds will be approximately $ million. We will not receive any proceeds from common shares sold by the selling shareholders.
A $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) the net proceeds to us from this offering by $ million, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and assuming no other change to the number of common shares offered by us as set forth on the cover page of this prospectus. If the underwriters' option to purchase additional common shares in this offering is exercised in full we estimate that our net proceeds will be approximately $ million. We will not receive any proceeds from common shares sold by the selling shareholders.
We intend to use approximately $ million of the net proceeds from this offering to repay term loan and revolving loan indebtedness outstanding under our credit facilities. We plan to use the remainder of the net proceeds for working capital and general corporate purposes. From time to time we will consider acquisitions or investments if a suitable opportunity arises in which case a portion of the proceeds may be used to fund such an acquisition or investment. We have no current commitments or understandings to make any such acquisition or investment. Pending such uses, we may invest the net proceeds from this offering in short-term investments.
As of March 31, 2007, we had a total of $133 million principal amount of term loan indebtedness outstanding under our credit facility, which was incurred in 2004 to finance in part the 2004 Reorganization. Such indebtedness has quarterly repayment dates with a final maturity date in 2011 and bears interest at a variable rate based upon LIBOR. As of March 31, 2007, we had a total of $103.4 million principal amount of short-term loan indebtedness outstanding under our revolving credit facility. At March 31, 2007, the weighted average interest rate on our indebtedness outstanding under our credit facility was 6.125%. Following the application of the net proceeds from this offering, we expect that our credit facility will consist of only an undrawn revolving credit facility.
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We have never declared or paid any dividends on our common shares, other than dividends paid by the predecessor to GE in 2004. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, our ability to declare and pay cash dividends is restricted by our credit facility. As a result, we do not anticipate declaring or paying any cash dividends on our common shares in the foreseeable future. Any future change in our dividend policy will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, cash flows, capital requirements, any contractual restrictions on the payment of dividends and other factors our board of directors deems relevant. Accordingly, you will need to sell your common shares to realize a return on your investment, and you may not be able to sell your common shares at or above the price you paid for them.
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The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2006:
This table should be read in conjunction with "Prospectus SummaryThe Company," "Use of Proceeds," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and accompanying notes included in this prospectus.
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Cash and cash equivalents | $ | 35.4 | $ | $ | |||||||||
Short-term borrowings | 83.0 | ||||||||||||
Long-term debt | 143.0 | ||||||||||||
Stockholders' equity: | |||||||||||||
Preferred shares, actual: $31.00 par value per share, 6,095,736 shares authorized and outstanding; pro forma and pro forma as adjusted: $ par value, shares authorized, no shares outstanding | 189.0 | ||||||||||||
Common shares, actual, $31.00 par value per share, 394,642 shares authorized and outstanding; pro forma and pro forma as adjusted: $ par value, shares authorized, shares outstanding pro forma and shares outstanding pro forma as adjusted(1) | 12.2 | (2 | ) | ||||||||||
Additional paid-in capital | 482.8 | ||||||||||||
Retained earnings | 6.0 | ||||||||||||
Accumulated other comprehensive income (losses) | (15.3 | ) | |||||||||||
Treasury stock, 20,056 common shares and 59,000 Cumulative Series A convertible preferred shares | (50.0 | ) | |||||||||||
Total stockholders' equity(3) | 624.7 | ||||||||||||
Total capitalization | $ | 886.2 | $ | $ | |||||||||
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If you invest in our common shares, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common shares and the net tangible book value per share of our common shares after this offering. Dilution results from the fact that the per share initial public offering price of our common shares is in excess of the book value per share attributable to the existing shareholders for the presently outstanding common shares.
Our pro forma net tangible book value as of December 31, 2006, was approximately $ million, or $ per share of common shares (on a pro forma basis for the 2007 Reorganization). We determined pro forma net tangible book value per share as of December 31, 2006, by dividing the net tangible book value (total book value of tangible assets less total liabilities) of GGH determined after giving effect to the completion of the 2007 Reorganization by , the pro forma number of common shares outstanding as of December 31, 2006 after giving effect to the 2007 Reorganization.
After giving effect to the sale of common shares at an assumed initial public offering price of $ per share, the mid-point of the price range set forth on the front cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering and giving effect to the use of the net proceeds of this offering as set forth in "Use of Proceeds," our pro forma net tangible book value as of December 31, 2006, would have been $ million, or $ per common share. This represents an immediate increase in net tangible book value per share of $ to existing shareholders and immediate dilution in net tangible book value per share of $ to new investors purchasing common shares in this offering. The following table illustrates this per share dilution:
Assumed initial public offering price per share | $ | ||||||
Pro forma net tangible book value per share as of December 31, 2006 | $ | ||||||
Increase in net tangible book value per share attributable to this offering | $ | ||||||
Pro forma net tangible book value per share after this offering | $ | ||||||
Dilution per share to new investors in this offering | $ | ||||||
The following table sets forth, as of December 31, 2006, on the pro forma basis described above, the number of common shares purchased from us, the total consideration paid to us and the average price per share paid to us by our existing shareholders and to be paid by new investors purchasing common shares in this offering, based on an assumed initial public offering price of $ per share, the mid-point of the price range set forth on the front cover of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:
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Total Consideration |
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Average Price Per Share |
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Amount |
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Existing shareholders | % | $ | % | $ | |||||||||
New investors | |||||||||||||
Total | 100.0 | % | $ | 100.0 | % | ||||||||
If the underwriters exercise their over-allotment option in full, (1) the number of common shares held by existing shareholders will decrease to approximately % of the total number of common shares outstanding after this offering, and (2) the number of common shares held by new investors will increase to approximately % of the total number of common shares outstanding after this offering.
The discussion and tables in this section assume no exercise of outstanding share options. As of March 31, 2007, there were options outstanding to purchase a total of common shares at a weighted average price of $ per share. To the extent that any of these options are exercised, there may be further dilution to new investors.
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SELECTED FINANCIAL AND OPERATING DATA
The table below presents our selected historical financial and certain operating data. Prior to December 30, 2004, our business was conducted through various entities and divisions that were wholly owned by GE. On December 30, 2004, in the 2004 Reorganization, GE transferred such operations to a newly formed entity, GGH, and sold a 60% interest in GGH to General Atlantic and Oak Hill. Therefore, the financial data for these operations, or our predecessor, as of and for the years ended December 31, 2004, 2003 and 2002, which are the periods prior to the 2004 Reorganization, are presented on a combined basis. The financial data as of and for the years ended December 31, 2006 and 2005, which are the periods after the 2004 Reorganization, are presented on a new basis of accounting and are not directly comparable to the data for 2004, 2003 and 2002.
On March 29, 2007, we formed Genpact Limited in Bermuda to be the new holding company for our business. Genpact Limited is presently a subsidiary of GGH with no operations and de minimis assets. Prior to this offering, we will effectuate a transaction that will result in Genpact Limited owning 100% of the capital stock of GGH. This transaction is referred to as the "2007 Reorganization." The pro forma earnings per share information will give effect to the 2007 Reorganization as if it occurred on January 1, 2006.
The financial data as of and for the years ended December 31, 2006, 2005 and 2004 are derived from our audited financial statements included in this prospectus (except for the December 31, 2004 balance sheet which is not included). The financial data as of and for the years ended December 31, 2003 and 2002 are derived from the unaudited combined financial statements of the predecessor which are not included in this prospectus. All such financial statements are prepared in accordance with U.S. GAAP.
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You should read the selected financial data together with the financial statements included herein as well as "Capitalization", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Prospectus SummaryThe Company".
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2004 |
2003 |
2002 |
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(unaudited) |
(unaudited) |
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(dollars in millions, except per share data) |
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Statement of income data: | ||||||||||||||||||
Net revenuesGE | $ | 453.3 | $ | 449.7 | $ | 408.9 | $ | 371.5 | $ | 287.9 | ||||||||
Net revenuesGlobal Clients | 158.3 | 42.2 | 20.3 | 10.2 | 7.1 | |||||||||||||
Other revenues | 1.5 | | | | | |||||||||||||
Total net revenues | 613.0 | 491.9 | 429.1 | 381.7 | 295.0 | |||||||||||||
Cost of revenue | 360.9 | 304.0 | 263.6 | 245.2 | 192.1 | |||||||||||||
Gross profit | 252.2 | 187.9 | 165.5 | 136.5 | 102.9 | |||||||||||||
Operating expenses: | ||||||||||||||||||
Selling, general and administrative expenses | 159.2 | 117.5 | 76.3 | 69.2 | 40.6 | |||||||||||||
Amortization of acquired intangibles | 41.7 | 47.0 | | | | |||||||||||||
Foreign exchange (gains) losses, net | 13.0 | 12.8 | 7.3 | (6.9 | ) | (2.0 | ) | |||||||||||
Other operating income | (4.9 | ) | (6.2 | ) | | | | |||||||||||
Income from operations | 43.2 | 16.9 | 81.9 | 74.2 | 64.3 | |||||||||||||
Other income (expense), net |
(9.2 |
) |
(6.1 |
) |
8.2 |
10.7 |
1.8 |
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Income before income taxes | 33.9 | 10.7 | 90.2 | 84.9 | 66.1 | |||||||||||||
Income tax expense (benefit) | (5.9 | ) | (6.4 | ) | 6.7 | 6.6 | 5.1 | |||||||||||
Net income | $ | 39.8 | $ | 17.1 | $ | 83.4 | $ | 78.3 | $ | 61.0 | ||||||||
Pro forma earnings per common share: | ||||||||||||||||||
Basic | $ | |||||||||||||||||
Diluted | $ | |||||||||||||||||
Pro forma weighted average common shares outstanding: | ||||||||||||||||||
Basic | ||||||||||||||||||
Diluted | ||||||||||||||||||
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Predecessor |
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As of December 31, |
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2006 |
2005 |
2004 |
2003 |
2002 |
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(unaudited) |
(unaudited) |
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(dollars in millions) |
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Balance sheet data: | |||||||||||||||
Cash and cash equivalents | $ | 35.4 | $ | 44.7 | $ | 49.8 | $ | 15.0 | $ | 13.3 | |||||
Total assets | 1,081.3 | 970.2 | 941.9 | 394.9 | 330.6 | ||||||||||
Long-term debt, including current portion | 143.0 | 157.9 | 175.8 | | 40.0 | ||||||||||
Total liabilities | 456.6 | 378.2 | 318.9 | 121.6 | 137.7 | ||||||||||
Retained earnings | 6.0 | 0.7 | | 196.4 | 133.2 | ||||||||||
Total stockholders' equity | 624.7 | 592.0 | 623.0 | 273.3 | 192.9 | ||||||||||
Total liabilities and stockholders' equity | 1,081.3 | 970.2 | 941.9 | 394.9 | 330.6 | ||||||||||
Operating data (unaudited): |
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Employees at period end | 26,060 | 19,532 | 16,031 | 15,279 | 14,696 | ||||||||||
Delivery Centers at period end | 23 | 17 | 11 | 11 | 10 |
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the audited and unaudited historical financial statements and the accompanying notes included in this prospectus, as well as the discussion under "Selected Financial Data." This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in or implied by any of the forward-looking statements as a result of various factors, including but not limited to those listed under "Risk Factors" and "Forward Looking Statements."
Overview
We manage business processes for companies around the world. We began in 1997 as the India-based captive business process services operation for General Electric Capital Corporation, or GE Capital, GE's financial services business. As the value of offshore outsourcing was demonstrated to the management of GE, it became a widespread practice at GE and our business grew in size and scope. We took on a wide range of complex and critical processes and we became a significant provider to many of GE's businesses, including Consumer Finance (GE Money), Commercial Finance, Insurance, Healthcare, Industrial, NBC Universal and GE's corporate offices.
Prior to December 30, 2004, the business of the Company was conducted through various entities and divisions of GE. On December 30, 2004, in a series of transactions we refer to as the "2004 Reorganization," GE reorganized these operations by placing them all under Genpact Global Holdings, a newly formed Luxembourg entity, and subsequently sold an indirect 60% interest in that entity to General Atlantic and Oak Hill. See "Prospectus SummaryThe CompanyThe 2004 Reorganization." Following the 2004 Reorganization, on December 16, 2005, GE sold a portion of its equity in us to a subsidiary of Wachovia Corporation. As of December 31, 2006, GE owned approximately 29% of our equity, after giving effect to the conversion of preferred stock but excluding shares issuable pursuant to outstanding options.
Following the 2004 Reorganization, we began operating as an independent company. We separated ourselves operationally from GE and began building the capabilities necessary to be successful as an independent company. Among other things, we expanded our management infrastructure and business development capabilities so that we could secure business from clients other than GE. We substantially expanded administrative functions for which we had previously relied primarily on GE, such as finance, legal, accounting and human resources. We created separate employee benefit and retirement plans, developed our own leadership training capability and enhanced our management information systems.
We began actively pursuing business from Global Clients as of January 1, 2005. Since that time, we have succeeded in increasing our business and diversifying our revenue sources. As a result, our net revenues from Global Clients have increased from $20.3 million in 2004, to $42.2 million in 2005 and $158.3 million in 2006, representing a compound annual growth rate, or CAGR, of approximately 180%. See "Classification of Certain Net Revenues" for an explanation of the classification of revenues related to businesses once owned by GE and subsequently sold.
During the same period, we increased our net revenues from GE. For the fiscal year 2004, our net revenues from GE were $408.9 million, which amount includes $23.8 million in revenues under a contract that was not assigned to us in connection with the 2004 Reorganization and from which we did not earn revenue after 2004, which we refer to as the Unassigned Revenues. See "Classification of Certain Net Revenues." Our net revenues from GE excluding the Unassigned Revenues were $385.1 million in 2004, $449.7 million in 2005 and $453.3 million in 2006, respectively, representing a CAGR of approximately 8.5%.
Since we became an independent company, we have increased our business from both GE and Global Clients such that total net revenues (excluding the Unassigned Revenue) have increased from $405.4 million in 2004 to $491.9 million in 2005 and $613.0 million in 2006 representing a CAGR of 23.0%.
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Our net revenues from Global Clients as a percentage of total net revenues (excluding the Unassigned Revenue) have increased from 5.0% in 2004 to 8.6% in 2005 and 25.8% in 2006.
Revenues. We earn revenues pursuant to contracts which generally take the form of a master service agreement, or MSA, which is a framework agreement that is then supplemented by statements of work, or SOWs. Our MSAs specify the general terms applicable to the services we will provide. They are typically for terms of five to seven years, although they may also have an indefinite term. In most cases they do not specify pricing terms or obligate the client to purchase a particular amount of services. We then enter into SOWs under an MSA, which specify particular services to be provided and the pricing terms. Most of our SOWs have terms of two to five years. We typically have multiple SOWs under any given MSA, and the terms of the SOWs vary depending on the nature of the services provided.
In connection with the 2004 Reorganization, we entered into an MSA with GE, which governs SOWs for the services we were then providing to GE as well as new SOWs entered into thereafter. Since January 1, 2005, we have entered into MSAs with more than 35 new Global Clients. Many of these relationships are at an early stage and we are just beginning to perform services for such clients. Therefore, while we believe we have significant opportunities under these contracts, we have only limited experience with which to judge the success of the terms we have established in such contracts.
We seek to develop long-term relationships with our clients. We believe that these relationships offer the greatest potential for benefits to our clients and to us as they create opportunities for us to provide a variety of services using the full range of our capabilities and to deliver continuous process improvement. We typically face a long selling cycle in securing a new client. It is not unusual for us to spend twelve months or more from the time we begin actively soliciting a new client until we begin to recognize revenues. Our sales efforts usually involve four phases. We may make an initial sales effort in response to an invitation by a client, a specific request for a proposal or at our own initiative. This may be followed by a second phase, during which we work with the client to determine the exact scope and nature of the required services, the proposed solutions and initial transition planning. It is typically only upon the completion of this second phase that a client would decide to retain us. A third phase follows which would involve negotiating the MSA, as well as the initial SOWs. This third phase would also involve detailed planning of the transition of the services as well as the transfer of the knowledge needed to implement the services under such SOWs. The final phase involves commencement of the work and ramping up to meet the agreed upon service levels.
We expend significant time and capital throughout all of these phases. We generally do not receive any revenues or reimbursement of costs until an MSA and one or more SOWs are signed, which as noted above usually occurs sometime in the third phase of the client development effort. We typically begin hiring employees specifically for the services to be provided to a client once the SOW for the services is signed. Because there is no certainty that a new client will retain us, and because the time involved in these initial phases is significant and unpredictable, we may incur expenses for a significant period of time without receiving any revenues.
All costs related to contract acquisition are expensed as incurred and classified as selling, general and administrative expenses. Once a contract is signed, we defer revenues from the transition of services to our Delivery Centers, as well as the related cost of revenue (to the extent of such deferred revenues). We recognize such deferred revenues and related cost of revenue over the period during which we expect to benefit from these costs, which is estimated to be three years.
We price our services under a variety of arrangements, including time and materials contracts and, to a lesser extent, fixed-price contracts. When services are priced on a time and materials basis, we charge the client based on full-time equivalent, or FTE, rates for the personnel who will directly perform the services. The FTE rates are determined on an annual basis, vary by category of service delivery personnel and are set at levels to reflect all our costs, including the cost of supervisory personnel and the allocable portion of other costs, and a margin. In some cases, time and materials contracts are based on hourly rates of the
37
personnel providing the services. Time and materials pricing does not require us to estimate the volume of transactions or other processes that the client expects us to operate.
A small portion of our revenues are derived from fixed-price contracts. Our profitability under a fixed-price contract, as compared to a time and materials contract, is more dependent on our ability to estimate the number of FTEs required to perform the services, the time required to complete the contract and the amount of travel and other expenses that will be incurred in performing that contract. Accordingly, while we may have an opportunity to realize a higher profit, our profitability under each of our fixed-price contracts could also be lower than we expect.
There are a variety of other aspects to our pricing of contracts, many of which represent options from which a client may choose, such as whether the client wants to provide for higher levels of business continuity planning or whether the client wants shared or dedicated support personnel and/or infrastructure. Under most of our MSAs, we are able to share a limited amount of inflation and currency exchange risk when services are priced on a time and materials basis. Many of our MSAs also provide that, under time and materials-based SOWs, we are entitled to retain a portion of certain productivity benefits we achieve, such as those resulting from being able to provide the same volume of services with fewer FTEs. However, some of our SOWs require certain minimum productivity benefits to be passed on entirely to our clients.
Once an MSA and related SOW are signed and production of services commences, our revenues and expenses increase as services are ramped up to the agreed upon level. In many cases, we may have opportunities to increase our margins over the life of an MSA and over the life of a particular SOW. This is due to a number of factors. Margins under an MSA can improve to the extent that the time and expense involved in negotiating additional SOWs, transitioning the processes to our Delivery Centers and starting up production are generally less with respect to additional services provided under an MSA than they are with respect to the initial services provided under that MSA. Margins under an MSA or an SOW can improve as a result of the realization of economies of scale as the volume of services increases or the achievement of productivity benefits. Thus, our more mature client relationships typically generate higher margins. A critical part of our strategy is therefore to expand relationships with our clients as a means to increase our overall revenues and improve our margins.
We follow a rigorous review process to evaluate all new business. Each new business proposal typically is reviewed twice by a committee that includes not only our business development and operational employees, but also members of our finance team. In this way, we try to ensure that contract terms meet our pricing and service objectives. See "BusinessOur New Business Review Process."
Our MSA with GE is for a term ending December 31, 2013. Under this agreement, subject to certain specified adjustments, GE has agreed to provide a minimum annual volume commitment of $360 million for each of the six years beginning January 1, 2005, subject to certain potential adjustments or credits. Such minimum annual commitment is then reduced in a phased manner for the final three years of the agreement, to $270 million for 2011, $180 million for 2012 and $90 million for 2013. However, the actual level of services purchased in the last two years has exceeded such minimum. GE has the ability to carry forward surpluses of up to 10% of the excess purchases in any year against the minimum commitment requirements in the subsequent two years. The actual amount of purchases in any given year depends on decisions by a variety of business units, and represents the sum of services ordered under more than 1,500 SOWs. Our pricing arrangements with GE vary by SOW and include some time and materials contracts and some fixed price contracts. Because of our long-term relationship with GE, the negotiation and implementation of new SOWs often occurs in less time than that required for a new client. Our business from GE comes from a variety of GE's businesses and decisions to use our services are currently, as a general matter, made by a number of people within GE. Therefore, although some decisions may be made centrally at GE, the total level of business we receive generally depends on the decisions of the various operating managers of such businesses. In addition, because our business from GE is derived from a variety of businesses within GE, our exposure to GE is diversified in terms of industry risk. See "Risk
38
FactorsGE accounts for a significant portion of our revenues and any loss of business from, or change in our relationship with, GE could have a material adverse effect on our business, results of operations and financial condition" and also "Certain Relationships and Related Party TransactionsOur Master Services Agreement with GE."
Our MSA with Genworth provides a minimum volume commitment of $24 million per year through 2009 and declining amounts per year thereafter through 2012. Most of our other MSAs do not obligate the client to purchase a specified amount of services. The volume of services provided to Global Clients thus depends on the commitments under individual SOWs.
Reimbursements of out-of-pocket expenses received from clients, consisting principally of travel expenses, have been included as part of net revenues from services. Net revenues represent revenues less certain business taxes we pay in Hungary and China.
Classification of certain net revenues. Our net revenues are classified as net revenues from a significant shareholder (which is GE), net revenues from Global Clients and other net revenues. Net revenues from Global Clients consist of revenues from services provided to all clients other than GE and the companies in which GE owns 20% or more of the stock. Revenues from Global Clients in 2005 and 2006 include revenues from two former GE-owned insurance businesses. These businesses were wholly-owned by GE in the beginning of 2004, but GE gradually divested its interest in these businesses in 2004, 2005 and 2006. After GE ceased to own at least 20% of such businesses, we began to treat the revenues from those businesses as Global Client net revenues, in each case from the date that GE ceased to be a 20% shareholder. Those two businesses generated total revenues of $42.0 million in 2004, all of which were classified as GE revenues; a total of $47.4 million in 2005, of which $44.8 million were GE revenues and $2.6 million were Global Client revenues; and a total of $46.4 million in 2006, of which $7.0 million were GE revenues and $39.3 million were Global Client revenues. We have continued to perform services for such businesses following their divestiture by GE even though they were not obligated by the GE MSA to continue to use our services. We entered into new MSAs with respect to one such business following its divestment by GE and agreed with the other to continue to work pursuant to the terms agreed to by GE.
In addition, our income statement for the year ended December 31, 2004 includes $23.8 million of revenues pursuant to a contract with a division of GE which was not assigned to GGH in the 2004 Reorganization. We refer to such 2004 revenues as the "Unassigned Revenues," because we did not continue to receive revenues under this contract following the 2004 Reorganization. After giving effect to the exclusion of the Unassigned Revenues, our net revenues for 2004 were $405.4 million and our net revenues from GE for such period were $385.1 million.
In addition to our revenues from GE and our revenues from Global Clients, our Genpact Mortgage Services subsidiary had $1.5 million in revenues in 2006 from interest income on mortgage loans that it funded directly and held for sale, typically on a short-term basis. The primary activity of this subsidiary, which we acquired in 2006, consists of mortgage loan application processing for mid-size financial institutions. Funding and secondary remarketing of loans is not part of our business plan for this unit, and from June 1, 2007 we will cease funding new mortgage loans. We will continue to have a limited obligation until November 30, 2007 to repurchase remarketed mortgage loans that are in default.
Expenses. Personnel expenses are the major component of both our cost of revenue and selling, general and administrative expenses. Personnel expenses include salaries and benefits as well as costs related to recruiting, training and retention. Our industry is labor intensive. Wage levels in the countries in which our Delivery Centers are located have increased in recent years and we expect such increases to continue for the foreseeable future. We attempt to address the impact of wage increases, and pressures to increase wages, in a number of ways, which include seeking to control entry-level wages, managing our attrition rate, and delivering productivity. We try to control increases in entry-level wages by implementing innovative recruiting policies, emphasizing training and promotion opportunities and maintaining an attractive work atmosphere and company culture. We have succeeded at keeping our entry-level wages in India, where most of our employees are located, at a relatively constant level for the past three years, but
39
there is no assurance we can continue to do so. See "Risk FactorsWage increases in the countries in which we have operations may prevent us from sustaining our competitive advantage and may reduce our profit margin." Effective training allows us to expand the pool of potential applicants and to upgrade our employees' skill levels so that employees may take on higher value-added tasks over time. By emphasizing training and promotion, we seek to create opportunities for employees to increase their salaries without increasing wage scales. In planning our expansion of capacity, we look for locations that help us ensure global delivery capability while helping us control average salary levels. In India and elsewhere where we may open multiple locations, we try to expand into cities where competition for personnel and wage levels may be lower than in more developed cities. In addition, under some of our contracts we have the ability to share with our clients a portion of any increase in costs due to inflation. Nevertheless, despite these steps, we expect general increases in wage levels in the future which could adversely affect our margins. A significant increase in attrition rates would also increase our recruiting and training costs and decrease our operating efficiency, productivity and profit margins. Increased attrition rates or increased pricing may also cause some clients to be less willing to use our services. See "Risk FactorsWage increases in the countries in which we have operations may prevent us from sustaining our competitive advantage and may reduce our profit margin."
Personnel expenses includes compensation, benefits and share options, and are allocated between cost of revenue and selling, general and administrative expenses based on the classification of the employee. Personnel expenses for employees who are directly responsible for performance of services, their supervisors and certain support personnel who may be dedicated to a particular client are included in cost of revenue. Personnel expenses for senior management employees who are not dedicated to a particular client, business development personnel and other personnel involved in support functions are included in selling, general and administrative expenses.
Our operational expenses include facilities maintenance expenses, travel and living costs, communications expenses and other costs. Travel and living costs, which represent the costs of travel, accommodation and meals of employees while traveling for business, are allocated between cost of revenue and selling, general and administrative expenses based on the allocation of the personnel expenses of the employee incurring such costs. Facilities maintenance, certain communication costs and certain other operational costs are allocated between cost of revenue and selling, general and administrative expenses in the same proportions as the allocation of our employees by headcount. Our depreciation and amortization expense is similarly allocated by headcount.
Cost of revenue. The principal component of cost of revenue is personnel expenses. We include in cost of revenue all personnel expenses for employees who are directly responsible for the performance of services, their supervisors and certain support personnel who may be dedicated to a particular client.
The operational expenses included in cost of revenue include a portion of our facilities maintenance expenses, travel and living expenses, communication expenses and certain other expenses. As noted above, facilities maintenance expenses, certain communication expenses and certain other expenses are allocated between cost of revenue and selling, general and administrative expenses based on headcount. Travel and living expenses are included in cost of revenue if the personnel expenses for the employee incurring such expense is included in cost of revenue. The operational expenses component of cost of revenue also includes consulting charges, which represent the cost of third-party software and other consultants that we may retain for particular services. Cost of revenue also includes a portion of our depreciation and amortization expense, which is allocated between cost of revenue and selling, general and administrative expenses based on headcount.
The ratio of cost of revenue to revenues for any particular SOW or for all SOWs under an MSA is typically higher in the early periods of the contract or client relationship than in later periods. This is because the number of supervisory and support personnel relative to the number of employees who are performing services declines. It is also because we may retain a portion of the benefit of productivity increases realized over time.
40
Selling, general and administrative expenses. Our selling, general and administrative, or SG&A, expenses are primarily comprised of personnel expenses for senior management, business development personnel and other support personnel who are not dedicated to particular clients. The operational costs component of SG&A expenses includes travel and living costs for such personnel, as well as a portion of our total facilities maintenance expenses, certain communication expenses and certain other expenses. Such portion of such costs is equal to the percentage of our total employees, by headcount, whose compensation cost is classified as SG&A expenses. The operational costs component of SG&A expenses also includes professional fees, which represent the costs of third party legal, tax, accounting and other advisors. SG&A expenses also include a portion of our depreciation and amortization expense, which is allocated between cost of revenue and selling, general and administrative expenses based on headcount.
The percentage of net revenue represented by our SG&A expenses increased significantly in 2005 and 2006 in connection with the separation of our company from GE and the expansion and diversification of our client base. As discussed above, since January 1, 2005, we have incurred significant expenses to expand the various administrative and support functions we needed to operate as an independent company. Since our separation from GE, we also significantly enhanced our business development capabilities. In many areas, we scaled up our operations in advance of securing new business, so that we would have the infrastructure and support capable of managing the new business. As a public company, we will also incur expenses in relation to compliance with the provisions of the United States securities laws, including in particular the Sarbanes-Oxley Act of 2002, as well as stock exchange requirements, which will be included as SG&A expenses.
Foreign exchange (gains) losses, net. Foreign exchange (gains) losses, net, consists of gain or loss on derivative contracts that hedge our foreign currency exposure and foreign currency transaction gains or losses. See note 2(j) of the notes to the Consolidated Financial Statements. See "Quantitative and Qualitative Disclosures about Market RiskForeign Currency Risk."
Approximately 85% of our revenues were paid in U.S. dollars in fiscal 2006. We also received payments in euros, U.K. pounds sterling and Japanese yen. Our costs are primarily in Indian rupees, as well as in U.S. dollars, Chinese renminbi and the currencies of the other countries in which we have operations. While many of our contracts provide for limited sharing of the risk of inflation and fluctuations in currency exchange rates, we bear a substantial part of this risk, and therefore our operating results could be negatively affected by adverse changes in wage inflation rates and foreign currency exchange rates. See discussion of wage inflation under "Expenses" above. We enter into forward currency contracts to hedge most of our Indian rupee-U.S. dollar and our Chinese renminbi-Japanese yen currency exposure, which are generally designed to qualify for hedge accounting. However, our ability to hedge such risks is limited by local law, the liquidity of the market for such hedges and other practical considerations. Thus, our results of operations may be adversely affected if we are not able to enter into the desired hedging arrangements or if our hedging strategies are not successful. Our foreign exchange (gains) losses, net, includes realized gain or loss on derivative contracts that qualify for hedge accounting and mark to market gain or loss on other derivatives. The effective portion of the mark to market gains and losses on qualifying hedges is deferred and recorded as a component of accumulated other comprehensive income until the transactions occur and is then recognized in the consolidated statements of income. Typically, with respect to the hedged portion of our Indian rupee-U.S. dollar exposure, and to a lesser extent with other currency exposures, the effect of foreign exchange rate fluctuations in a given period on our cost of revenue and selling, general and administrative expenses may be offset to the extent we are hedged by the effect on our foreign exchange (gains) losses, net. For example, an appreciation of the Indian rupee relative to the U.S. dollar may cause our costs relative to our net revenues to increase, but we may realize a foreign exchange gain when our hedges with respect to such cash flows are terminated.
Other income (expense). Other income (expense), net consists primarily of interest expense on indebtedness. It also includes realized and unrealized gain or loss on interest rate swaps. We have entered into interest rate swaps with respect to the floating rate interest exposure on our long-term debt. Other income (expense) also includes interest income on intercorporate deposits.
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Income taxes. We are incorporated in Bermuda and have operations in many countries. Our effective tax rate has varied and will, in the future, vary from year to year based on the tax rate in our jurisdiction of organization, the geographical source of our revenues and the tax rates in those countries, the tax relief and incentives available to us and the financing and tax planning strategies employed by us.
Luxembourg taxes. Since December 30, 2004, our parent company, Genpact Global Holdings, or GGH, has been organized in Luxembourg, as an investment company in risk capital, in the form of a private limited liability company or SICAR S.à.r.l. under the law dated June 15, 2004 of the Grand Duchy of Luxembourg, or the SICAR law. Under the SICAR law, GGH is not subject to income tax on any income attributable to its investments in its subsidiaries and other income attributable to investments in risk capital and is not required to withhold any taxes on distributions paid to its shareholders. Our parent company will be organized in Bermuda upon the consummation of the 2007 Reorganization. See "Prospectus SummaryThe CompanyThe 2007 Reorganization." Bermuda does not impose any income tax on us.
Indian taxes. Under the Indian Income Tax Act, 1961, our Delivery Centers in India, from which we derived 66% of our revenues in 2006, benefit from a ten-year holiday from Indian corporate income taxes in respect of their export income, as defined in the legislation. This holiday is available for a period of ten consecutive years beginning in the year in which each Delivery Center commenced operations, but in no case extending beyond March 31, 2009. Our Indian operations began taking advantage of the tax holiday in the Indian fiscal year ended March 31, 1998, with additional Delivery Centers added in subsequent years. Consequently, the tax holiday expires with respect to our Indian operations beginning with the year ended March 31, 2007 and through the year ending March 31, 2009.
As a result of the tax holiday, our income tax expense with respect to our Indian operations in 2006 was $0.6 million and was also minimal in prior years. In the absence of this tax holiday, income derived from our India operations would be taxed up to the maximum tax rate generally applicable to Indian enterprises which, as of December 31, 2006, was 33.66%. This would have resulted in substantially higher income tax expense than we actually incurred. The tax holiday enjoyed by our Delivery Centers in India expires in stages, on March 31 in each of 2007 (in respect of approximately 35% of our Indian operations), 2008 (in respect of approximately 15% of our Indian operations) and 2009 (in respect of the balance of our Indian operations), depending in each case on when each Delivery Center commenced operations. When our Indian tax holiday expires or terminates, our Indian tax expense will materially increase and thus our after-tax profitability will be reduced, unless we can obtain comparable benefits under new legislation or otherwise reduce our tax liability.
The SEZ legislation introduced a separate new 15-year tax holiday scheme for operations established in designated special economic zones, or SEZs. Under the SEZ legislation, qualifying operations are eligible for a deduction from taxable income equal to (i) 100% of their profits or gains derived from the export of services for the first five years from the commencement of operations; (ii) 50% of such profits or gains for the next five years; and (iii) 50% of such profits or gains for a further five years, subject to the creation of a "Special Economic Zone Re-investment Reserve Account," to be utilized only for acquiring new plant or machinery, or for other business purposes not including the distribution of dividends. This holiday is available only for new business operations that are conducted at qualifying SEZ locations and is not available to operations formed by splitting up or reconstructing existing operations or transferring existing technology infrastructure to new locations. See "Risk FactorsOver the next few years we will lose certain tax benefits provided by India to companies in our industry and it is not clear whether new tax policies will provide equivalent benefits and incentives."
We are currently in the process of establishing, subject to regulatory approvals, new Delivery Centers in four cities in India that would be eligible for these benefits. We do not presently know what percentage of our operations or income in India will be eligible for a tax holiday under the SEZ legislation, as it will depend on how much of our business can be conducted at the qualifying locations, and on how much of
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such business is considered new business under the SEZ legislation. Also, because this is new legislation that is in the process of being implemented, there is continuing uncertainty as to the interpretation of the law and the ability to obtain the required governmental and regulatory approvals. This uncertainty may delay implementation of our proposed SEZ sites. In view of the above, we expect that our effective tax rate will increase over the next few years and that such increase may be material.
The Government of India may assert that certain of our clients have a "permanent establishment" in India by reason of the activities we perform on their behalf, particularly those clients that exercise control over or have substantial dependency on our services. Such an assertion could affect the size and scope of the services requested by such clients in the future.
The Government of India has recently proposed levying a fringe benefit tax on the exercise of share options granted to employees based in India. As currently proposed, this tax would be payable by the issuers of the share options and recoverable at the option of the company from the employees. We are analyzing the consequences of this proposed levy upon our Indian operations, including the applicability to existing outstanding options. If the legislation is enacted and this tax is imposed and is not recoverable from our employees, our business, results of operations and financial condition could be materially and adversely effected.
Transfer Pricing. We have transfer pricing arrangements among our subsidiaries involved in various aspects of our business, including operations, marketing, sales and delivery functions. U.S. and Indian transfer pricing regulations, as well as the regulations applicable in the other countries in which we operate, require that any international transaction involving affiliated enterprises be made on arm's-length terms. We consider the transactions among our subsidiaries to be on arm's-length pricing terms. If, however, a tax authority in any jurisdiction reviews any of our tax returns and determines that the transfer prices we have applied are not appropriate, or that other income of our affiliates should be taxed in that jurisdiction, we may incur increased tax liability, including accrued interest and penalties, which would cause our tax expense to increase, possibly materially, thereby reducing our profitability and cash flows.
Other taxes. We have operating subsidiaries in other countries, including China, Hungary, Mexico, the Netherlands, the Philippines, Romania, Spain, the United Kingdom and the United States, as well as sales and marketing subsidiaries in certain jurisdictions including the United States and the United Kingdom, which are subject to tax in such jurisdictions. We have moved certain of our marketing operations from Luxembourg to the United States effective January 31, 2007, which may result in an increase in taxes on income attributable to such operations.
The Government of China has recently enacted amendments to the tax laws applicable to our operations that would increase the applicable tax rate from 15% to 25%, subject to certain grandfathering provisions. Depending upon the final application of these proposals and the growth of our business in China, the effect on our overall tax rate could be material.
Our ability to repatriate surplus earnings from our Delivery Centers in a tax-efficient manner is dependent upon interpretations of local law, possible changes in such laws and the renegotiation of existing double tax avoidance treaties. Changes to any of these may adversely affect our overall tax rate.
Tax audits. Our tax liabilities may also increase, including due to accrued interest and penalties, if the applicable income tax authorities in any jurisdiction, during the course of any audits, were to disagree with any of our tax return positions. Through the period ended December 30, 2004, we have an indemnity from GE for any additional taxes attributable to periods prior to the 2004 Reorganization.
The 2004 Reorganization
As noted above, the 2004 Reorganization was consummated on December 30, 2004, pursuant to which we became an independent company. The 2004 Reorganization has been accounted for under the purchase
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method under SFAS 141 Business Combination which resulted in a new basis of accounting. The total purchase consideration was $780 million. The allocation of the total consideration to the fair values of the net assets acquired resulted in goodwill of $485.2 million and intangible assets of $223.5 million. The intangible assets are being amortized over periods ranging from 1-10 years. As a result, for periods after December 31, 2004, we have had, and will continue to have, significant non-cash charges related to the amortization of such intangible assets. See notes 1 and 10 of the notes to the Consolidated Financial Statements.
In connection with the 2004 Reorganization, we incurred indebtedness of $180 million, of which $156.9 million was paid to various GE entities to acquire the operations in India, Mexico, China, the United States and elsewhere that then constituted our business.
Prior to the 2004 Reorganization, the financial statements of the various entities were presented on a combined basis as all the entities were under the common control of GE. Because the application of purchase accounting in connection with the 2004 Reorganization created a new basis of accounting, the financial statements and financial data in this prospectus for periods prior to the 2004 Reorganization are not directly comparable to those for periods after December 31, 2004. See also note 1 of the notes to the Consolidated Financial Statements.
Acquisitions
From time to time we may make acquisitions or engage in other strategic transactions if suitable opportunities arise, and we may use cash, securities or other assets as consideration. In March 2007, we acquired ICE Enterprise Solutions B.V., or ICE, (now called Genpact Netherlands B.V.) for cash consideration of euro 11.7 million and 7,973 common shares. We will be obligated to pay the sellers of ICE an additional cash amount in 2009 not to exceed euro 15.6 million if certain profitability targets are met. In August 2006, we acquired MoneyLine Lending Services, Inc., or MoneyLine, (now called Genpact Mortgage Services), a provider of mortgage origination and fulfillment services, for cash consideration of approximately $14.3 million. We will be obligated to pay the sellers of MoneyLine an additional cash amount in 2008 not to exceed $10 million if certain revenue and profitability targets are met. In August 2005, we acquired all the outstanding capital stock of Creditek Corporation, which provided us with an order-to-cash and receivables management business, for cash consideration of approximately $14.4 million. All three acquisitions were accounted for under the purchase method of accounting and, accordingly, the results of operations of these acquisitions are reflected in our financial statements from the respective dates of acquisition.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon the financial statements included in this prospectus, which have been prepared in accordance with U.S. GAAP. The notes to the financial statements contain a summary of our significant accounting policies. Set forth below are our critical accounting policies under U.S. GAAP.
Revenue recognition. As discussed above, we derive revenues from our services which are provided on a time and materials and a fixed-price basis. Revenues derived from time-and-materials contracts are recognized as the related services are performed. In the case of fixed-price contracts, including those for application maintenance and support services, revenues are recognized ratably over the term of the contracts. Revenues with respect to fixed-price contracts for development of software are recognized on a percentage of completion basis. This method of revenue recognition has been used because management considers this to be the best available measure of progress on these contracts as there is a direct relation between input and productivity.
For our time and materials contracts, we generally do not recognize revenue until an MSA or SOW are signed. If we receive a cash payment in respect of services prior to the time a contract is signed, we recognize this as an advance from a client until such time as the contract is signed, when it becomes revenue.
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We defer the revenues that are for the transition of services to our Delivery Centers (which revenues may include reimbursement of transition costs) and the related costs (up to the extent of the deferred revenues) over the period during which we expect to benefit from these costs, which is estimated to be three years.
Our accounts receivable include amounts for services that we have performed and for which an invoice has not yet been issued to the client. We follow a 30-day billing cycle and, as such, there may be at any point in time up to 30 days of revenues which we have accrued but not yet billed.
Business combinations, goodwill and other intangible assets. Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations requires that the purchase method of accounting be used for all business combinations. SFAS No. 141 specifies criteria as to intangible assets acquired in a business combination that must be recognized and reported separately from goodwill. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, all assets and liabilities of the acquired businesses including goodwill are assigned to reporting units.
Goodwill represents the cost of the acquired businesses in excess of the fair value of identifiable tangible and intangible net assets purchased. Goodwill is not amortized but is tested for impairment at least on an annual basis on September 30, relying on a number of factors including operating results, business plans and future cash flows. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its fair value, the second step of the process involves a comparison of the fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. Goodwill of a reporting unit will be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.
Intangible assets acquired individually, or with a group of other assets in a business combination, are carried at a cost less accumulated amortization based on their estimated useful lives as follows:
Customer-related intangible assets | 3-10 years | |
Marketing-related intangible assets | 1-5 years | |
Contract-related intangible assets | 1 year |
The intangible assets are amortized using a discounted cash flow method in each period which reflects the pattern in which their economic benefits are consumed or otherwise used up.
Derivative instruments and hedging activities. We enter into forward foreign exchange contracts to mitigate the risk of changes in foreign exchange rates on inter-company transactions and forecasted transactions denominated in foreign currencies. Certain of these transactions meet the criteria for hedge accounting as cash flow hedges under SFAS 133. Changes in the fair values of these hedges are deferred and recorded as a component of accumulated other comprehensive income until the hedged transactions occur and are then recognized in the statement of income. Changes in the fair value for other derivative contracts and the ineffective portion of hedging instruments are recognized in the statement of income of each period and are included in foreign exchange (gains) losses, net.
Income taxes. Under SFAS No. 109, deferred tax assets and liabilities were recognized for future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their tax bases and operating losses carried forward, if any. Deferred tax assets and liabilities were measured using legislatively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates was recognized in income in the period that included the legislative enactment date. Deferred tax assets were recognized in full, subject to a valuation allowance that reduced the amount recognized to that which was more likely than not to be realized. In
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assessing the likelihood of realization, we considered estimates of future taxable income. In the case of an entity which benefits from a corporate tax holiday, deferred tax assets or liabilities for existing temporary differences were recorded only to the extent such temporary differences were expected to reverse after the expiration of the tax holiday.
We also evaluate potential exposures related to tax contingencies or claims made by the tax authorities in various jurisdictions and determine if a reserve is required. A reserve is recorded if we believe that a loss is probable and the amount can be reasonably estimated. These reserves are based on estimates and subject to changing facts and circumstances considering the progress of ongoing audits, case law and new legislation. We believe that the reserves established are adequate in relation to any possible additional tax assessments.
Stock-Based compensation expense. Prior to January 1, 2006, we accounted for stock options granted under our stock option plan pursuant to the minimum value method of FASB Statement No. 123 "Accounting for Stock Based Compensation." Under this method, volatility is assumed to be zero and the option value is determined based on the expected term and the estimated rate of interest as reduced by the expected dividend yield.
Effective January 1, 2006, we adopted FASB Statement No. 123(R) which replaces Statement No. 123 and requires that all stock based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award. We adopted this statement using the prospective method of application and therefore prior year financial statements were not restated. Compensation expense for stock options is recorded as part of cost of revenue and selling, general and administrative expenses depending on the classification of the compensation expense generally for the individual who received the options.
Results of Operations
The following table sets forth certain data from our income statement in absolute amounts and as a percentage of net revenues for the years ended December 31, 2004, 2005 and 2006.
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Year Ended December 31, |
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2004 |
2005 |
2006 |
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|
(dollars in millions) |
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Net revenuesGE | $ | 408.9 | 95.3 | % | $ | 449.7 | 91.4 | % | $ | 453.3 | 73.9 | % | |||||
Net revenuesGlobal Clients | 20.3 | 4.7 | % | 42.2 | 8.6 | % | 158.3 | 25.8 | % | ||||||||
Other revenues | | | | | 1.5 | 0.2 | % | ||||||||||
Total net revenues | 429.1 | 100 | % | 491.9 | 100 | % | 613.0 | 100 | % | ||||||||
Cost of revenue | 263.6 | 61.4 | % | 304.0 | 61.8 | % | 360.9 | 58.9 | % | ||||||||
Gross profit | 165.5 | 38.6 | % | 187.9 | 38.2 | % | 252.2 | 41.1 | % | ||||||||
Operating expenses | |||||||||||||||||
Selling, general and administrative expenses | 76.3 | 17.8 | % | 117.5 | 23.9 | % | 159.2 | 26.0 | % | ||||||||
Amortization of acquired intangible assets | | | 47.0 | 9.6 | % | 41.7 | 6.8 | % | |||||||||
Foreign exchange (gains) losses, net | 7.3 | 1.7 | % | 12.8 | 2.6 | % | 13.0 | 2.1 | % | ||||||||
Other operating income | | | (6.2 | ) | 1.3 | % | (4.9 | ) | 0.8 | % | |||||||
Income from operations | 81.9 | 19.1 | % | 16.9 | 3.4 | % | 43.2 | 7.0 | % | ||||||||
Other income (expense), net | 8.2 | 1.9 | % | (6.1 | ) | 1.2 | % | (9.2 | ) | 1.5 | % | ||||||
Income before income taxes | 90.2 | 21.0 | % | 10.7 | 2.2 | % | 33.9 | 5.5 | % | ||||||||
Income taxes expense (benefit) | 6.7 | 1.6 | % | (6.4 | ) | 1.3 | % | (5.9 | ) | 1.0 | % | ||||||
Net income | $ | 83.4 | 19.4 | % | $ | 17.1 | 3.5 | % | $ | 39.8 | 6.5 | % | |||||
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Fiscal Year Ended December 31, 2006 Compared to Fiscal Year Ended December 31, 2005
Net revenues. Our net revenues increased by $121.2 million or 24.6%. This increase primarily resulted from increased net revenues from GE and Global Clients.
Net revenues from GE increased by $3.6 million or 0.8%. As described above under "Classification of Certain Net Revenues," the two insurance businesses in which GE has ceased to be a 20% shareholder generated total net revenues of $47.4 million in 2005, of which $44.8 million was classified as GE net revenues and $2.6 million was classified as Global Client net revenues, and total net revenues of $46.4 million in 2006, of which $7.0 million was classified as GE net revenues and $39.3 million was classified as Global Client net revenues. Notwithstanding a reduction in GE net revenues resulting from this classification, our net revenues from GE increased primarily as a result of increases in the volume of services provided to GE. This was attributable primarily to entering into new SOWs and to a lesser extent increasing the volume of services provided under existing SOWs. While net revenues from GE grew in absolute terms, such revenues declined as a percentage of our total net revenues from 91.4% in 2005 to 73.9% in 2006, due to strong growth in our Global Client base.
Net revenues from Global Clients increased by $116.1 million or 274.9%. This increase resulted from revenues from several new clients with which we entered into MSAs in 2005. In addition, a portion of the overall increase (approximately $15.3 million) was attributable to the full year inclusion of the results of Creditek, which we acquired in August 2005 and which accounted for $7.5 million in net revenues in 2005. Approximately $3.3 million of net revenues were attributable to our acquisition of MoneyLine Lending Services, Inc. (now called Genpact Mortgage Services) in August, 2006. A portion was also related to GE ceasing to be a 20% shareholder in certain businesses as described above. As a percentage of total net revenues, net revenues from Global Clients increased from 8.6% in 2005 to 25.8% in 2006.
Cost of revenue. The following table sets forth the components of our cost of revenue in absolute amounts and as a percentage of net revenues:
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Year Ended December 31, |
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2005 |
2006 |
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(dollars in millions) |
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Personnel expenses | $ | 186.8 | 38.0 | % | $ | 223.4 | 36.4 | % | |||
Operational expenses | 89.5 | 18.2 | % | 109.3 | 17.8 | % | |||||
Depreciation and amortization | 27.7 | 5.6 | % | 28.1 | 4.6 | % | |||||
Cost of revenue | $ | 304.0 | 61.8 | % | $ | 360.9 | 58.9 | % | |||
Cost of revenue increased by $56.9 million or 18.7%. As a percentage of net revenues, cost of revenue declined by 2.9%. The largest component of the increase in cost of revenues was personnel expenses which increased by $36.6 million, or 19.6%. Such increase reflected the general growth of our business. Personnel expenses as a percentage of net revenues declined from 38.0% in 2005 to 36.4% in 2006, which reflected the efficiencies in our workforce that we realized as we expanded our business.
In addition, operational expenses increased by $19.8 million. This increase reflected an increase in facilities management expenses due to the opening of new Delivery Centers, including dedicated Delivery Centers with excess capacity for new Global Clients in anticipation of performing additional services in the future for those clients. The operational expenses increases also reflected an increase in travel and living costs as a result of general volume growth. These increases were offset by a reduction in communications expenses as a result of a decline in overall telecommunications prices. As a percentage of net revenues, operational expenses decreased from 18.2% in 2005 to 17.8% in 2006.
As a result of the foregoing, our gross profit increased by $64.2 million or 34.2% and our gross margin increased from 38.2% in 2005 to 41.1% in 2006.
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Selling, general and administrative expenses. The following table sets forth the components of our selling, general and administrative expenses in absolute amounts and as a percentage of net revenues:
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Year Ended December 31, |
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2005 |
2006 |
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(dollars in millions) |
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Personnel expenses | $ | 70.9 | 14.4 | % | $ | 107.1 | 17.5 | % | |||
Operational expenses | 43.0 | 8.7 | % | 45.3 | 7.4 | % | |||||
Depreciation and amortization | 3.5 | 0.7 | % | 6.8 | 1.1 | % | |||||
Selling, general and administrative expenses | $ | 117.5 | 23.9 | % | $ | 159.2 | 26.0 | % | |||
Selling, general and administrative expenses increased by $41.7 million or 35.5%. This was primarily due to an increase in personnel expenses, which increased by $36.2 million or 51.1%. As a percentage of net revenues, SG&A expenses increased from 23.9% in 2005 to 26.0% in 2006 and personnel expenses increased from 14.4% in 2005 to 17.5% in 2006. These increases reflected the expenditures related to our efforts to expand and diversify our client base. In 2006, we continued to build the management and support capabilities we need to operate as an independent company and continued to build our business development function. Our results in 2006 reflected the full year effect of management, support and business development personnel hired at various times in 2005 as well as those hired in 2006.
The operational expenses component of SG&A expenses increased by $2.3 million. As a percentage of net revenues, such costs decreased from 8.7% in 2005 to 7.4% in 2006. The absolute increase reflected increases in facilities maintenance expenses, travel and living expenses and communications expenses. Depreciation and amortization expenses also increased in absolute terms and as a percentage of net revenues. The increase in operational expenses and depreciation and amortization expenses reflected general growth of the business, including the opening of new Delivery Centers to support future growth.
Amortization of acquired intangibles. In 2006, we continued to incur significant non-cash charges consisting of the amortization of acquired intangibles resulting from the 2004 Reorganization. Although such charges declined by $5.3 million compared to 2005, they remained substantial at $41.7 million or 6.8% of net revenues.
Foreign exchange (gains) losses, net. We realized a foreign exchange loss of $13.0 million in 2006 as a result of the movement of the Indian rupee against the U.S. dollar relative to our hedged position.
Other operating income. Other operating income, which consists of payments from GE for the use of our Delivery Centers and certain support functions for services that they manage and operate with their own employees, declined by $1.3 million in 2006. We do not recognize this amount as net revenues because GE manages and operates these services; however, our costs are included in cost of revenue and selling, general and administrative expenses.
Income from operations. As a result of the foregoing factors, income from operations increased by $26.3 million to $43.2 million. As a percentage of net revenues, income from operations was 3.4% in 2005 and 7.0% in 2006.
Other income (expense), net. Other expense, net increased by $3.1 million from $6.1 million in 2005 to $9.2 million in 2006, due to the amortization of debt issuance expenses in relation to the refinancing of the existing long-term debt. In 2006, we repaid a portion of our long-term debt in connection with a refinancing of our debt and terminated the swap. The repayment of our long-term debt also reduced our interest expense on long-term debt. However, our overall interest expense increased due to an increase in outstanding short-term debt.
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Income before income taxes. As a result of the foregoing factors, income before income taxes increased by $23.2 million or from 2.2% of net revenues in 2005 to 5.5% of net revenues in 2006.
Income taxes. We booked a net benefit for income taxes in 2005 and 2006 in the amounts of $6.4 million and $5.9 million respectively. This net benefit is due principally to the fact that we have incurred losses (including losses attributable to the amortization of intangibles, and in 2005, to losses on derivatives) in jurisdictions where the statutory tax rate is higher than that applicable to most of our income, as a result of the application of tax holidays and other tax benefits.
Net income. As a result of the foregoing factors, net income increased by $22.7 million from $17.1 million in 2005 to $39.8 million in 2006. As a percentage of net revenues, our net income was 3.5% in 2005 and 6.5% in 2006.
Fiscal Year Ended December 31, 2005 Compared to Fiscal Year Ended December 31, 2004
Net revenues. Our net revenues increased by $62.8 million or 14.6%. Excluding the Unassigned Revenue from our 2004 net revenues, our net revenues increased by $86.5 million or 21.4%. This increase resulted from increased net revenues from both GE and Global Clients.
Net revenues from GE increased by $40.8 million or 10.0%. Excluding the Unassigned Revenue, net revenues from GE increased by $64.6 million or 16.8%. This was attributable primarily to entering into new SOWs and to a lesser extent an increase in services provided under existing SOWs. While net revenues from GE grew in absolute terms, such net revenues declined as a percentage of our total net revenues from 95.3% in 2004 to 91.4% in 2005, due to strong growth in our Global Client base. Excluding the Unassigned Revenue, net revenues from GE as a percentage of total net revenues declined from 95.0% to 91.4%.
In December 2005, GE reduced its equity interest in one insurance business to less than 20%. As a result, the 2005 net revenues from this business consisted of $25.4 million which is included as net revenues from GE and $2.5 million which is included as net revenues from Global Clients. See "Classification of Certain Net Revenues" for an explanation of the classification of revenues related to businesses once owned by GE and subsequently sold.
Net revenues from Global Clients increased by $22.0 million or 108.4%. This increase reflected the inclusion in net revenues from Global Clients of $2.5 million of net revenues from the insurance business sold by GE as described above. See "Classification of Certain Net Revenues." In addition, it reflected the acquisition of Creditek Corporation in August of 2005, which resulted in an additional $7.5 million in Global Client net revenues. In addition, after we became an independent company as of December 30, 2004, we began actively soliciting Global Clients and entered into a number of new MSAs in 2005. We began recognizing revenues from these new clients in 2005. By comparison, our Global Client net revenues in 2004 consisted primarily of revenues from clients of our Mexico business.
As a percentage of total net revenues, net revenues from Global Clients increased from 4.7% in 2004 to 8.6% in 2005. Excluding the Unassigned Revenue, net revenues from Global Clients as a percentage of total net revenues increased from 5.0% in 2004 to 8.6% in 2005.
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Cost of revenue. The following table sets forth the components of our cost of revenue in absolute terms and as a percentage of net revenues:
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Year Ended December 31, |
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2004 |
2005 |
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(dollars in millions) |
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Personnel expenses | $ | 153.9 | 35.9 | % | $ | 186.8 | 38.0 | % | |||
Operational expenses | 87.4 | 20.4 | % | 89.5 | 18.2 | % | |||||
Depreciation and amortization | 22.2 | 5.2 | % | 27.7 | 5.6 | % | |||||
Cost of revenue | $ | 263.6 | 61.4 | % | $ | 304.0 | 61.8 | % | |||
Cost of revenue increased by $40.4 million or 15.3%. As a percentage of net revenues, cost of revenue increased by 0.4%. The increase included an increase of $32.9 million in personnel expenses, which also increased as a percentage of net revenues from 35.9% in 2004 to 38.0% in 2005. The increase in personnel expenses was primarily due to the general growth of the business as well as increasing our staff in anticipation of the growth of business from new Global Clients and wage increases, particularly in India and China. In addition, operational expenses increased by $2.1 million. The absolute increase reflected increases in consulting charges and certain other charges, offset in part by decreases in facilities maintenance and travel and living expenses. Consulting charges increased primarily because we contracted for software services from third parties in connection with the expansion of our business. The decline in facilities maintenance expenses reflected the fact that in 2004 we incurred significant expenses for repairs and the fact that our expansion was primarily in the form of owned Delivery Centers in 2005. Certain expenses, such as travel and living expenses, declined because in 2005, as we became an independent company, we adopted a policy so that transition expenses, along with any transition revenues, are recognized over the the period during which we expect to benefit from these costs, which is estimated to be three years. As a percentage of net revenues, operational expenses declined from 20.4% to 18.2% in 2005.
Depreciation and amortization costs increased by $5.4 million as a result of the investments made in technology and telecommunications equipment in 2004 as part of the transition to an independent company. These expenses increased as a percentage of net revenues from 5.2% in 2004 to 5.6% in 2005.
As a result of the foregoing, our gross profit increased by $22.4 million, or 13.5% and our gross margin decreased from 38.6% in 2004 to 38.2% in 2005.
Selling, general and administrative expenses. The following table sets forth the components of our selling, general and administrative expenses in absolute terms and as a percentage of net revenues:
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Year Ended December 31, |
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2004 |
2005 |
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(dollars in millions) |
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Personnel expenses | $ | 51.4 | 12.0 | % | $ | 70.9 | 14.4 | % | |||
Operational expenses | 23.0 | 5.4 | % | 43.0 | 8.7 | % | |||||
Depreciation and amortization | 1.9 | 0.5 | % | 3.5 | 0.7 | % | |||||
Selling, general and administrative expenses | $ | 76.3 | 17.8 | % | $ | 117.5 | 23.9 | % | |||
Selling, general and administrative expenses increased by $41.2 million or 54.0%. As a percentage of net revenue, SG&A expenses increased from 17.8% in 2004 to 23.9% in 2005. This reflected the expenditures we made in 2005 in order to become an independent company and to diversify and expand our client base. The principal component of the increase in SG&A expenses was an increase in personnel expenses, which increased by $19.5 million, or from 12.0% of net revenues in 2004 to 14.4% of net revenues in 2005. This reflected the hiring of additional personnel in many areas. We expanded our management infrastructure and expanded our business development capabilities and administrative functions such as finance, legal, accounting and human resources.
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The operational expense component of SG&A expenses increased by $20.1 million. As a percentage of net revenues, such operational expenses increased from 5.4% in 2004 to 8.7% in 2005. Operational expenses reflected in particular an increase in travel and living expenses, which increased substantially due to our business development efforts to pursue Global Clients. Our professional fees also increased as a result of the need for third party legal, accounting and other consultants in connection with becoming an independent company. These increases were offset in part by a decrease in facilities maintenance expenses, which declined (as was the case with facilities maintenance expense in cost of revenue) because in 2004 we incurred significant expenses for repairs and our expansion was primarily in the form of owned Delivery Centers in 2005.
Depreciation and amortization increased (as was the case with depreciation and amortization expense in cost of revenue) as a result of the investments made in technology and telecommunications equipment in 2004 as part of our transition to an independent company.
Amortization of acquired intangibles. The allocation of the total consideration in the 2004 Reorganization to the fair values of the assets acquired resulted in the creation of significant intangible assets. We began amortizing these intangible assets over a ten year period in 2005. Such non-cash amortization charges in 2005 were $47.0 million.
Foreign exchange (gains) losses, net. We realized a foreign exchange loss of $12.8 million in 2005 as a result of the movement of the Indian rupee against the U.S. dollar relative to our hedged position.
Other operating income. Other operating income was $6.2 million in 2005 and $0 in 2004. This consisted of payment by GE for the use of our Delivery Centers and certain support functions for services that they manage and operate with their own employees. We do not recognize this amount as revenue because GE manages and operates these services; however, our costs are included in cost of revenues and selling, general and administrative expenses.
Income from operations. Income from operations decreased by $65.1 million to $16.9 million in 2005 primarily as a result of the non-cash amortization of intangibles arising from the 2004 Reorganization, as well as the other factors discussed above. As a percentage of net revenues, income from operations was 19.1% in 2004 and 3.4% in 2005.
Other income (expense), net. Other income (expense), net changed from $8.2 million of income in 2004 to $6.1 million of expense in 2005. In 2004, we had interest income of $11.9 million in intercorporate deposits, which represented cash surplus generated by our business invested with GE. We distributed all such deposits to GE in connection with the 2004 Reorganization. In 2005, we had $10.6 million in interest expense on the indebtedness incurred in connection with the 2004 Reorganization.
Income before income taxes. As a result of the foregoing factors, as well as the other factors noted above, income before income taxes decreased by $79.5 million or from 21.0% of net revenues in 2004 to 2.2% of net revenues in 2005.
Income taxes. We booked a net provision for income taxes in 2004 in the amount of $6.7 million and a net benefit for income taxes in 2005 in the amount of $6.4 million. This difference arose principally because in 2005 we incurred losses (including losses on derivatives) in jurisdictions where the statutory tax rate is higher than that applicable to most of our income, as a result of the application of tax holidays and other benefits and the impact of a deferred tax liability on the amortization of intangibles.
Net income. As a result of the foregoing factors, net income decreased by $66.3 million from $83.4 million in 2004 to $17.1 million in 2005. As a percentage of net revenues, our net income was 19.4% in 2004 and 3.5% in 2005.
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Seasonality
Our financial results may vary somewhat from period to period. Our revenues are typically higher in the third and fourth quarters than the other quarters, as a result of several factors. We generally find that more contracts for software and IT services are signed in the first quarter as corporations begin new budget cycles. Volumes under such contracts then increase as the year progresses. In addition, revenues for collections services are often higher in the latter half of the year as our clients have greater demand for our services.
Liquidity and Capital Resources
We finance our operations and our expansion with cash from operations and short-term borrowing facilities. We also incurred $180 million of long-term debt to finance in part the 2004 Reorganization.
We expect that in the future our cash from operations, cash reserves and debt capacity will be sufficient to finance our operations as well as our growth and expansion. Our working capital needs are primarily to finance our payroll expenses in advance of the receipt of accounts receivable. Our capital requirements include the opening of new Delivery Centers, as well as acquisitions.
Cash flows from operating, investing and financing activities, as reflected in our consolidated statements of cash flows, are summarized in the following table:
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Year ended December 31, |
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2004 |
2005 |
2006 |
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(dollars in millions) |
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Net cash provided by (used in) | |||||||||||
Operating activities | $ | 126.5 | $ | 106.7 | $ | 36.6 | |||||
Investing activities | (120.4 | ) | (84.9 | ) | (49.5 | ) | |||||
Financing activities | 8.3 | (26.5 | ) | 2.6 | |||||||
Net increase (decrease) in cash and cash equivalents | $ | 14.4 | $ | (4.6 | ) | $ | (10.3 | ) | |||
Cash flow from operating activities. Our net cash provided by operating activities decreased by $70.2 million in 2006 compared to 2005. This primarily reflected the fact that accounts receivable increased by $64.0 million in 2006 compared to an increase of $43.6 million in 2005, partially offset by the fact that accrued expenses and other liabilities increased by only $1.2 million in 2006 compared to an increase of $51.8 million in 2005. These effects were offset in part by the fact that our net income increased by $22.7 million in 2006 compared to 2005. The increase in accounts receivable consisted of an increase of $33.0 million in accounts receivable from GE, and an increase of $33.9 million in accounts receivable from Global Clients. GE receivables have increased since our separation from GE because we were no longer included in GE's internal inter-corporate payments system. The increase in accounts receivable from Global Clients reflects the increase in Global Clients following the separation from GE. The increase in accrued expenses and other liabilities was less than the 2005 level, which was much higher than in 2004 because, following the 2004 Reorganization, we incurred certain expenses as an independent company that we did not previously have.
Our net cash provided by operating activities decreased by $19.7 million in 2005 compared to 2004. This primarily reflected the fact that accounts receivable increased by $43.6 million in 2005 compared to a decrease of $21.4 million in 2004. The increase in accounts receivable reflected increases in GE receivables and receivables from Global Clients which resulted from unusually low GE accounts receivable in 2004 due to GE prepaying all accounts receivable in anticipation of the 2004 Reorganization. GE receivables also increased for the same reasons as in 2006. Accrued expenses and other liabilities increased significantly in 2005 compared to 2004 because, following the 2004 Reorganization, we incurred certain expenses as an independent company that we did not previously have.
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Cash flow from investing activities. Our net cash used in investing activities decreased by $35.4 million in 2006 compared to 2005 due to a reduction in intercorporate deposits. We used this cash for operating activities and investments for purchases of property, plant and equipment of $79.2 million in connection with the opening of new Delivery Centers.
Our net cash used in investing activities decreased by $35.5 million in 2005 compared to 2004 due to a reduction in intercorporate deposits with GE. We used this cash for purchases of property, plant and equipment of $38.4 million and payment of $15.6 million (including acquisition expenses of $1.1 million) for the acquisition of Creditek Corporaton.
We expect capital expenditures in 2007 to relate primarily to our expansion plans, including acquiring SEZ land and building new Delivery Centers. We have not entered into any material commitments relating to the capital expenditures and the amounts and purpose of these expenditures may change in accordance with our business requirements.
Cash flow from financing activities. Our net cash provided by financing activities was $2.6 million in 2006, compared to net cash used in financing activities of $26.5 million in 2005. Our principal source of cash from financing activities was the incurrence of $83.0 million of short term debt in 2006. Principal uses were the net repayment of long-term debt of $29.1 million in 2006 at the time of the refinancing and restructuring of the long term debt facility. We also repurchased stock from GE for $50.0 million.
Our net cash used in financing activities of $26.5 million in 2005 reflected principally the repayment of $19.0 million of long-term debt as well as a net reduction in short term borrowings of $8.2 million and proceeds from the issuance of preferred stock to Genpact Global (Lux), S.à.r.l. (GA and OH's investment entity) for $2.3 million.
Financing Arrangements
Total debt excluding capital lease obligations was $226.0 million at December 31, 2006, compared to $157.9 million at December 31, 2005 and $184.0 million at December 31, 2004. Approximately $138.0 million of this indebtedness at December 31, 2006 represented long-term debt incurred to finance the 2004 Reorganization and $5.0 million of this indebtedness as of December 31, 2006 represented a financing arrangement entered into with GE to purchase software licenses. The remaining $83.0 million at December 31, 2006 was short-term borrowings.
The weighted average rate of interest with respect to outstanding long-term loans was 6.2%, and 4.3% for the years ended December 31, 2006 and 2005, respectively. We did not incur any long-term debt until December 30, 2004.
We incurred $180 million of long-term indebtedness in connection with the 2004 Reorganization. This indebtedness was restructured in 2006 and has been reduced to $138.0 million as of December 31, 2006. We are obligated to repay such indebtedness in annual installments, with the final maturity in 2011. We intend to prepay all of such indebtedness with a portion of the net proceeds of this offering. The agreement contains restrictive covenants, such as requiring lender consent for, among other things, the creation of any liens on any of our property, assets or revenues, the incurring of further indebtedness, the making of or holding of any investments, dispositions of assets, the declaration of any dividends, engaging in any substantially different material line of business, transactions with affiliates and entering into certain agreements. In addition, we must comply with financial covenants pertaining to interest coverage, leverage and the positive net worth of our Indian business. This debt is also secured by a charge over substantially all of our property and assets including but not limited to our equipment, goods, accounts receivable, real estate, bank accounts and our other current assets. As of the date of this prospectus, we believe that we are in full compliance with all the covenants and undertakings as described above.
We finance our short-term working capital requirements through cash flow from operations and credit facilities from banks and financial institutions. As of December 31, 2006, short-term credit facilities
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available to the company aggregated $100 million, of which $85 million was utilized. We intend to prepay all of such indebtedness with a portion of the net proceeds of this offering. Prior to January 1, 2005, affiliates of GE provided us with short-term borrowing facilities.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Obligations
The following table sets forth our total future contractual obligations as of December 31, 2006:
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Payments Due by Period (in millions) |
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Less than 1 year |
13 years |
35 years |
More than 5 years |
Total |
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Long-term debt | $ | 20.5 | $ | 51.3 | $ | 71.3 | $ | | $ | 143.0 | |||||
Capital leases | 2.2 | 2.9 | 0.6 | | 5.6 | ||||||||||
Operating leases | 14.4 | 13.8 | 5.3 | | 33.5 | ||||||||||
Purchase obligations | 5.2 | | | | 5.2 | ||||||||||
Capital commitments net of advances | 0.2 | | | | 0.2 | ||||||||||
Other long-term liabilities reflected on balance sheet | 0.3 | 8.0 | 1.0 | 1.8 | 11.1 | ||||||||||
Total contractual cash obligations | $ | 42.9 | $ | 76.0 | $ | 78.1 | $ | 1.8 | $ | 198.8 | |||||
Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Risk
Our exposure to market risk arises principally from exchange rate risk. A substantial portion of our revenues (approximately 85% in fiscal 2006) are received in U.S. dollars. We also receive revenues in euros, U.K. pound sterling and Japanese yen. Our expenses are primarily in Indian rupees and we also incur expenses in U.S. dollars, Chinese renminbi and the currencies of the other countries in which we have operations. Our exchange rate risk arises from our foreign currency revenues, receivables and payables. Based on the results of our European operations for fiscal 2006, and excluding any hedging arrangements that we had in place during that period, a 5.0% appreciation/depreciation in the euro against the U.S. dollar would have increased/decreased our revenues in fiscal 2006 by approximately $1.5 million. Similarly, a 5.0% depreciation in the Indian rupee against the U.S. dollar would have decreased our expenses incurred and paid in rupees in fiscal 2006 by approximately $13 million. Conversely, a 5.0% appreciation in the Indian rupee against the U.S. dollar would have increased our expenses incurred and paid in rupees in fiscal 2006 by approximately $14 million.
We have sought to reduce the effect of any Indian rupee-U.S. dollar, Chinese renmimbi-Japanese yen and certain other local currency exchange rate fluctuations on our results of operations by purchasing forward foreign exchange contracts and foreign exchange options to cover a portion of our expected cash flows. These instruments typically have maturities of one to three years. We use these instruments as economic hedges and not for speculative purposes and most of them qualify for hedge accounting under SFAS 133. Our ability to enter into derivatives that meet our planning objectives is subject to the depth and liquidity of the market for such derivatives. In addition, the laws of China limit the maturity of such arrangements to three years, and the laws of India limit the booking of forward contracts for hedging against exchange rate fluctuations up to an amount equal to the amount required, based on past performance. We may not be able to purchase contracts adequate to insulate ourselves from Indian rupee-U.S. dollar and Chinese renminbi-Japanese yen foreign exchange currency risks. In addition, any such contracts may not perform adequately as a hedging mechanism. See "Foreign Exchange (gains) losses, net."
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Interest Rate Risk
Our exposure to interest rate risk arises principally from interest on our indebtedness. As of December 31, 2006 we had approximately $138.0 million of long-term and approximately $83.0 million of short-term indebtedness from financial institutions and $5.0 million of long-term indebtedness from GE. Interest on our indebtedness is variable based on LIBOR and we are subject to market risk from changes in interest rates. We have, as of December 31, 2006, entered into floating to fixed interest rate swaps to hedge the interest rate risk on a portion of our long-term indebtedness. Based on our long-term indebtedness of $138.0 million as of December 31, 2006 and taking into account the impact of our interest rate swaps referred to above, a 1% change in interest rates would impact our net interest expense by $0.4 million. We intend to prepay all of our long-term indebtedness with a portion of the net proceeds of this offering.
Credit Risk
Our mortgage origination business funds mortgage loans and holds them on a short-term basis pending secondary sales. At December 31, 2006, the aggregate principal amount of loans we held was $16.8 million. We typically hold loans for less than 45 days. We are exposed to the risk of default by borrowers during the period we hold the loans and to the risk that we cannot remarket the loans. Our ability to remarket the loans is dependent on the depth and liquidity of the secondary mortgage market which has recently deteriorated. From June 1, 2007, we will cease funding new mortgage loans. We will continue to have an obligation to repurchase mortgage loans in default from purchasers until November 30, 2007.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108), which provides interpretative guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of materiality assessments. SAB 108 is effective for us as of December 31, 2006, allowing a one time transitional cumulative effect adjustment to beginning retained earnings as of January 1, 2006, for errors that were not previously deemed material, but are material under the guidance in SAB 108. We have adopted SAB 108 in the current year and the same has not resulted in any adjustment to our prior period financial statements.
Recently Issued Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board, or FASB, issued Financial Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109" (FIN 48). FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified in the balance sheet; and provides transition and interim-period guidance, among other provisions. FIN 48 is effective for fiscal years beginning after December 15, 2006 and, as a result, is effective for us for the year ending December 31, 2007. We are currently evaluating the impact of FIN 48 on our financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines "fair value" as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 provides guidance on the determination of fair value and lays down the fair value hierarchy to classify the source of information used in fair value measurement. We are currently evaluating the impact of SFAS No. 157 on
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our financial statements and will adopt the provisions of SFAS No. 157 for the fiscal year beginning January 1, 2008.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities including an Amendment of FASB Statement No. 115" (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other eligible items at fair value. SFAS No. 159 is expected to expand the use of fair value measurement in the preparation of the financial statements. However, SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. We are currently evaluating the impact of SFAS No. 159 on our financial statements and will adopt the provisions SFAS No. 159 for the fiscal year beginning January 1, 2008.
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Overview
We manage business processes for companies around the world. We combine our process expertise, information technology expertise and analytical capabilities, together with operational insight derived from our experience in diverse industries, to provide a wide range of services using our global delivery platform. Our goal is to help our clients improve the ways in which they do business by continuously improving their business processes including through the application of Six Sigma and Lean principles and leveraging technology. We strive to be a seamless extension of our clients' operations.
We have a unique heritage. We built our business by meeting the demands of the leaders of the General Electric Company, or GE, to increase the productivity of their businesses. We began in 1997 as the India-based captive business process services operation for General Electric Capital Corporation, or GE Capital, GE's financial services business. As the value of offshoring was demonstrated to the management of GE, it became a widespread practice at GE and our business grew in size and scope. We took on a wide range of complex and critical processes and we became a significant provider to many of GE's businesses, including Consumer Finance (now GE Money), Commercial Finance, Insurance, Healthcare, Industrial, NBC Universal and GE's Corporate Offices.
Our leadership team, our methods and our culture have been deeply influenced by our eight years as a captive operation of GE. Many elements of GE's successthe rigorous use of metrics and analytics, the relentless focus on improvement, a strong emphasis on the client and innovative human resources practicesare the foundations of our business.
We became an independent company at the beginning of 2005 and since that time we have grown rapidly, continued to expand our range of services and diversified our client base. Since January 1, 2005, we have entered into contracts with more than 35 new clients in a variety of industries, including banking and finance, insurance, manufacturing, transportation and healthcare. We have the benefit of a multi-year contract with GE that provides us with committed revenues through 2013. In addition we have opportunities for expansion with many new clients.
As of March 31, 2007, we have more than 28,000 employees with operations in nine countries. In 2006, we had net revenues of $613.0 million, of which 25.8% were from Global Clients. See "Management's Discussion and Analysis of Results of Operations and Financial ConditionClassification of Certain Net Revenues" for an explanation of the classification of revenues related to businesses once owned by GE and subsequently sold.
Our Opportunity
Globalization of the world's economy remains the most powerful economic trend of our lifetime. It is driven by expanding technology capabilities, the relaxation of local laws and regulations that previously impeded cross-border trade, more efficient global telecommunications and the recognition by business leaders that a highly skilled global workforce can be a competitive business advantage. These dynamics are creating an entirely new set of competitive challenges for companies around the world.
A century ago, the world experienced a wave of globalization which was propelled by the Industrial Revolution and other technological developments. It was characterized by the physical integration of the global economy, as cross-border delivery of manufactured goods flowed through an infrastructure of ships, railroads and, eventually, roads. Today's wave of globalization has even greater power to transform the global economy and the way in which business is conducted in virtually every industry. The power of this wave of globalization arises from two critical distinguishing characteristics: its speed and its breadth.
Speed, the most unique characteristic of this globalization, is a product of the revolutionary IT-enabled connectivity that has brought the world together as never before. Today's globalization is driven
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by inexpensive electronic communication delivery systems which have helped create a globalization of far greater breadth than the world has previously experienced. As was the case in the late 19th century, today's globalization is transforming industries that produce tradable goods. For example, IT capabilities have revolutionized global price discovery and the logistics of supply chain management that sit at the center of global manufacturing platforms. However, this wave of globalization is far broader in that it also affects services and intangibles that were once thought of as non-tradable. Such services can now be delivered on a real-time basis through IT-enabled pipelines to desktops and mobile devices anywhere in the world.
The current globalization trend has contributed to increased competition for companies around the world, particularly in the established economies of North America and Europe. These dynamics have forced companies to focus on ways to improve productivity and manage costs more aggressively in order to maintain or enhance their competitive positions and increase shareholder value. As part of their response to these pressures, in recent years, business leaders began offshoring business processes to captive businesses and outsourcing business processes to third parties, including by sending such processes offshore to workers in countries where wage levels were lower than in North America and Europe.
Outsourcing initially focused on realizing immediate cost savings and involved labor-intensive processes such as call center services and data entry. The frequency with which these processes were outsourced increased as companies recognized that offshore service providers could run these processes more efficiently by recruiting and training skilled labor in larger numbers and at lower cost than was available in a company's home market.
The use of information technology has also been an important catalyst for the growth of outsourcing. Before outsourcing business processes, companies more frequently outsourced IT operations. As companies realized benefits from outsourcing IT services, they became more willing to outsource other types of processes. At the same time, growth in the use of IT contributed to greater efficiencies in business processes and other productivity enhancements. As a result, knowledge of IT platforms and technology became increasingly important to effective business process management.
Initially, India became the primary destination for offshore business process outsourcing, due to wage levels that are much lower than in the United States. In addition, India offers a large, growing and highly educated English-speaking workforce, a time zone that offers a 24-hour work cycle from a North American and European perspective and a business and regulatory environment that is increasingly conducive to interacting with North American and European companies. However, as demand and the range of services have grown, other destinations have become increasingly important.
There are varying estimates of the size of these trends. According to International Data Corporation, or IDC, aggregate worldwide spending on IT and business process outsourcing, or BPO, services is estimated to be $934 billion for 2006. The offshore IT and BPO services segment is the fastest growing segment of this market. The NASSCOM-McKinsey report estimates the total addressable market for offshore IT and BPO services to be approximately $300 billion, of which only about 10% has been penetrated. The NASSCOM-McKinsey report projects that spending on offshore IT and BPO services will grow from $30 billion in 2005 to $110 billion in 2010, representing a CAGR of 30%.
This growth is a function of the increasing acceptance of outsourcing and the constantly expanding notions of what can be outsourced and the benefits that can be achieved. The services that are being outsourced today are much broader, and involve much higher valued functionality than originally outsourced, and include engineering, design, software programming, accounting, healthcare services, legal services, financial analysis, consulting activities and other services, and cut across all industries.
Ongoing competitive pressures and the need for further productivity improvements have led companies to consider outsourcing more critical and complex business processes and to focus on continuously improving those processes, rather than simply trying to operate them at a lower cost. As a result, many companies have been forced to redefine their core competencies. For example, companies
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across many industries have outsourced their accounting and finance functions, which were once considered core corporate activities, to third party providers. Today, companies look to achieve a wider range of objectives, from outsourcing as portrayed in the diagram below:
Each step along this continuum provides additional value to enterprises that outsource business processes. Delivering significant cost savings by transitioning business processes offshore allows companies to benefit from a labor cost arbitrage. Converting fixed costs into variable ones through outsourcing can provide additional capacity and ongoing business flexibility. Continuously improving business processes offers ongoing productivity benefits and margin expansion opportunities. Ultimately, companies seek business impact such as increased revenue, expanded margins, improved working capital management, increased customer satisfaction and enhancement in their competitive positions.
In the past, companies have often hired separate vendors for technology and process services. However, this specialization often limited the ability of large companies to benefit because providers lacked scale or depth of expertise. Today, the willingness to outsource a broader array of business processes, from the relatively simple to the more complex, and the fact that many business processes can be enhanced through the application of IT, has created an opportunity for service providers that have broad and deep capabilities, as well as expertise in both process operation and IT platforms.
Today, companies that are ready to embrace the outsourcing of complex business processes are seeking service providers that have a broad range of capabilities as well as an interest in a strategic relationship that will grow over time. Companies are also focused on service providers with a proven track record of both cost savings and continuous process improvement. Many senior, or C-level, executives today consider the following factors when looking to collaborate with a service provider:
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Our Solution
We manage a wide range of business processes that address the transactional, managerial, reporting and planning needs of our clients. We seek to build long-term client relationships with companies that wish to improve the ways in which they do business and where we can offer a full range of services. With our broad and deep capabilities and our global delivery platform, our goal is to deliver comprehensive solutions and continuous process improvement to clients around the world and across multiple industries.
Our Broad Expertise
Our services include finance and accounting, collections and customer services, insurance, supply chain and procurement, analytics, enterprise application and IT infrastructure. Significant business impact can often best be achieved by redesigning and operating a combination of processes, as well as providing multiple services that combine elements of several of our service offerings. In offering our services, we draw on three core capabilitiesprocess expertise, analytical ability and technology expertiseas well as the operational insight we have acquired from our experience managing thousands of processes in diverse industries.
We believe that one of the factors that differentiates us from our competitors is the operational insight we have developed from experience managing with thousands of processes.
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Our Strategic Client Model
We seek to create long-term relationships with our clients where they view us as an integral part of their organization and not just as a service provider. These relationships often begin with the outsourcing of discrete processes and, over time, expand to encompass multiple business processes across a broader set of functions. No matter how large or small the engagement, we strive to be a seamless extension of our client's operations. To achieve this goal, we developed the Genpact Virtual CaptiveSM model for service delivery, and we may implement all or some of its features in any given client relationship, depending on the client's needs. Under this approach, we provide a client with dedicated employees and management as well as dedicated infrastructure at our Delivery Centers. We train our people in the client's culture so that they are familiar not only with the process but with the business environment in which it is being executed.
In addition, members of our leadership team meet regularly to assess and review our relationship with that client as well as current and potential services that we may provide. This close collaboration between us and our clients not only gives our clients greater control and transparency of their important business processes, it also enables us to identify opportunities in that client's business where we can seek to take over such processes and then refine, enhance and improve them. This helps us to provide more services to those clients, to integrate us further into their business and to establish us as a reliable and important strategic service provider.
Our Global Delivery Platform
We have a global network of more than 25 Delivery Centers in nine countries. Our Delivery Centers are located in India, China, Hungary, Mexico, the Philippines, the Netherlands, Romania, Spain and the United States. Our presence in locations other than India provides us with multi-lingual capabilities, access to a larger talent pool and "near-shoring" capabilities to take advantage of time zones. With this network, we can manage complex processes in multiple geographic regions. We use different locations for different types of services depending on the needs of the relevant client and the mix of skills and cost of employees available in each location. We have been a pioneer in our industry in opening centers in several cities in India as well as in some of the other countries in which we operate. We expect to continue to expand our global footprint in order to better serve our clients.
Our People and Culture
We have an experienced and cohesive leadership team. Many members of our leadership team developed their management skills working within GE and many of them were involved in the founding of our business. They have built our business based on the experience gained in helping GE meet a wide range of challenges. As a result, we are an institutional embodiment of much of the wisdom and experience GE developed in improving and managing its own business processes.
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We have created, and constantly reinforce, a culture that emphasizes teamwork, constant improvement of our processes and, most importantly, dedication to the client. A key determinant of our success, especially as we continue to increase the scale of our business, is our ability to attract, hire, train and retain employees in highly competitive labor markets. We manage this challenge through innovative human resources practices. These include broadening the employee pool by opening Delivery Centers in diverse locations, using innovative recruiting techniques to attract the best employees, emphasizing ongoing training, instilling a vibrant and distinctive culture and providing well-defined long term career paths. We also have programs modeled on GE management training programs to develop the next generation of leaders and managers of our business.
As of March 31, 2007 we have more than 28,000 employees including over 5,500 Six Sigma trained green-belts, 300 Six Sigma trained black-belts and 60 Six Sigma trained master black-belts, as well as more than 4,500 Lean trained employees. This large number of employees with Six Sigma and Lean training helps infuse our organization with a disciplined, analytical approach to everything we do. In addition, more than 5,000 of our employees hold post-graduate degrees and more than 16,000 are university graduates. We monitor and manage our attrition rate very closely, and believe our attrition rate is one of the lowest in the industry. We attribute this to our reputation, our ability to attract high quality applicants, our emphasis on maintaining our culture and the breadth of exposure, experience and opportunity for advancement that we provide to our employees.
Our Strategy for Growth
The specific elements of our strategy to grow our business include the following:
Expand Relationships with Existing Clients
We intend to deepen and expand relationships with our existing clients, including GE. Since our separation from GE, we have succeeded in forming more than 35 new Global Client relationships with major companies. Many of those relationships are at an early stage and we believe they offer significant opportunities for growth. As we demonstrate the value that we can provide, often with a discrete process, we are frequently able to expand the scope of our work in a variety of ways. This may include managing processes that are "upstream" and "downstream" from the initial process. In addition, clients may become more willing over time to turn over more complex and critical processes to us as we demonstrate our capabilities. We also find opportunities to cross sell different types of services to existing clients. As we have seen with GE, we are continually finding opportunities to provide new services to our clients as we become more knowledgeable about their businesses and they seek constantly to improve their processes.
Develop New Client Relationships
In addition to expanding our current client relationships, we plan to continue to develop new long-term client relationships, especially with those clients where we have an opportunity to deliver a broad range of our capabilities and can have a meaningful impact on their businesses. We are selective in the opportunities that we pursue. We focus on clients who understand the importance of continuous process improvement and who wish to outsource complex and critical processes. We seek to build relationships with senior management in order to ensure executive support for our services and create more opportunities for growth.
Continue To Promote Process Excellence
The ability to deliver continuous process improvement is an important part of the value that we offer to our clients. We have built a significant repository of process expertise across a wide range of processes such as finance and accounting, supply chain, analytics and client service, and our process expertise is complemented by our ability to implement services and work across multiple technology platforms in
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diverse industries. Our goal is to continue to remain at the forefront of our industry by emphasizing our expertise in a wide range of processes, our excellence in applying the principles of Six Sigma and Lean, our analytical strength and our technology capabilities. As we expand our client base and the depth of relationships with clients, we will develop greater levels of operational insight making us more valuable to all of our clients.
Continue To Deepen Our Expertise and Global Capabilities
We will continue to expand our capabilities globally as well as across industries and service offerings. While we expect this will occur primarily through organic growth, we also plan to evaluate strategic partnerships, alliances and acquisitions to expand into new services offerings as well as into new industries. For example, we acquired a SAP services provider in 2007, a mortgage fulfillment services business in 2006 and an accounts receivable management business in 2005.
We believe we were also one of the first companies in our industry to establish a presence in several cities in India, such as Gurgaon, Jaipur and Kolkata, as well as in Dalian, China; Budapest, Hungary; and Bucharest, Romania, and to create a global service delivery capability. We intend to continue to expand our global delivery capabilities to ensure that we can meet the rapidly evolving needs of our clients, including processes requiring multi-jurisdictional and multi-lingual capabilities.
Maintain Our Culture and Enhance Our Human Capital
Our people are critical to the success of our business and our ability to grow will depend on our ability to continue to attract, train and retain large numbers of talented individuals. We will continue to develop and emphasize innovative recruiting techniques, such as expanding to new locations where talent may be untapped, recruiting new hires with our training academy and storefront offices, and giving existing employees incentives for referrals of new hires. We will continue to emphasize training throughout the tenure of an employee's career. We also believe that maintaining our vibrant and distinctive culture, in which we emphasize teamwork, continuous process improvement and dedication to the client, is critical to growing our business.
Our Services
We provide a wide range of services to our clients. We group our services into the following categories:
The services we provide any particular client often draw on processes and platforms in several of these categories. We understand that senior management of our clients is focused on achieving business objectives, rather than on transferring particular processes or employing particular platforms. Therefore, we focus on understanding the business needs of our clients and the business context of existing processes in order to design appropriate and comprehensive solutions for our clients, which may involve processes and platforms that fall into several categories.
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Finance and Accounting
We are one of the world's premier providers of finance and accounting, or F&A, services. This is currently one of our largest service offerings. Our finance and accounting services include end to end transaction services such as accounts payable processing and receivables management; core accounting services, including preparation of U.S. GAAP and SEC-compliant financial statements; core operations services including cash management, preparation of tax returns as well as decision support services which include cash flow analysis. Our services combine our process expertise with strong technology capabilities, including decision support tools such as Hyperion, SAS and Cognos, and platform support for ERP systems such as Oracle and SAP and new technology bundling such as OCR and invoice exchange.
The chart below highlights some of our F&A service offerings:
Collections and Customer Services
Our collections and customer services are provided primarily in the areas of consumer finance, commercial finance and mortgage services. Our collections services include a full range of accounts receivable management services, such as early to late stage collections, skip-tracing, refunds, account reconciliation and other specialized services. In our collections services, we act as an agent; we do not acquire debts for our own account. Our customer services include account servicing and customer care services such as handling customer queries, general servicing and dispute resolution. We provide voice and non-voice services. We also provide origination and order management services.
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The chart below highlights some of our collections and customer service offerings.
Insurance Services
We provide what we refer to as a "virtual insurance company" for our clients in the insurance industry. We cover many phases of insurance business processes including product development, sales and marketing, policy administration and claims management. We use our analytics capabilities to help our clients devise new models for underwriting, risk management and actuarial analysis. We also handle corporate functions for insurance companies, including reporting and monitoring services for regulatory compliance, portfolio and performance review services and financial planning and tax services. We offer services across the following three key insurance market segments:
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The chart below highlights some of our insurance service offerings.
Supply Chain and Procurement
Our supply chain and procurement services include sourcing services, sales, inventory and operations planning services, logistics services and after market services. This often includes designing sourcing and procurement processes to control "maverick" buying, overhauling inventory planning systems to optimize inventory levels, designing and implementing logistics services that integrate disparate technology systems and provide dynamic digital "dashboard" reporting, or designing after-market service systems that ensure fulfillment of contractual obligations and enhance database integrity. We commonly utilize our technology expertise in delivering our services in this area particularly in automating order management processes and monitoring and optimizing supply chain logistics. We have competency in many of the custom platforms used by our clients (e.g., i2, Manugistics and Xelus) and are not tied to any one platform. This enables us to utilize and design the best processes for our clients based on available systems.
The chart below highlights some of our supply chain and procurement service offerings.
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Analytics
In addition to incorporating analytics into our other service offerings, we view analytics as a service offering. Our clients frequently have or can easily obtain data that can be used to assess business opportunities, mitigate risks, improve performance or otherwise improve their businesses. However, they sometimes do not recognize the potential in analyzing such data or do not have the capability to apply the rigorous analytical models that might reveal opportunities. We help our clients seize such opportunities.
The chart below describes some of the most common applications of our analytics capabilities.
Enterprise Application Services
With our enterprise application services, we plan, design, build, test, implement, run and support software solutions for our clients. We leverage our domain knowledge in industries such as insurance, manufacturing, automotive and healthcare and use Six Sigma and Lean principles to reduce the cycle time of software implementations. This can include ERP, supply chain management, financial management and customer relationship management solutions as well as testing, database administration and architecture services. We also have significant expertise in Hyperion, SAS and Cognos, and platform support for ERP systems such as Oracle and SAP.
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IT Infrastructure Services
Our IT infrastructure services consist of the remote management of IT functions of our clients. This may include management of a client's networks services including LAN, WAN, wireless and VPN, end-user support, network security, malware protection, identity management and encryption services. We use Six Sigma and Lean principles to address technology problems and to enable our clients to reduce technology costs.
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The chart below highlights some of the IT infrastructure services we provide.
Six Sigma and Lean Methodologies
Our GE heritage taught us the importance of the principles of Six Sigma and Lean in refining business processes. Six Sigma is a method for improving quality by removing variation, defects and their causes in business process activities. Applying Six Sigma principles involves the application of a number of sub-methodologies, including DMAIC (define, measure, analyze, improve and control), which is a system for incremental improvement in existing processes, and DMADV (define, measure, analyze, design and verify), which is a system used to develop new processes at Six Sigma quality levels.
We have Six Sigma programs that train, test and grade employees in Six Sigma principles and award them Six Sigma qualifications. The rankings of Six Sigma qualifications from lowest to highest are green-belt, black-belt and master black-belt. As of March 31, 2007, we have more than 5,500 employees trained as Six Sigma green-belts, 300 employees trained as Six Sigma black-belts and 60 employees trained as Six Sigma master black-belts. Unlike many of our competitors who have a relatively small number of Six Sigma trained employees, we have a large number of Six Sigma green-belts and black-belts and therefore we can provide certain of our clients with dedicated Six Sigma trained personnel who can help the clients achieve continuous process improvement on a full time basis.
We constantly measure the performance of each process we manage for our clients and we work with our clients to develop customized reporting systems so that they have real time access to key metrics. We also apply these principles to our own internal processes in order to deliver efficient operations for our clients. Our expertise in applying Six Sigma and Lean methodologies is one of the key factors that distinguishes us from our competitors.
Lean is a methodology for measuring and reducing waste or inefficiency in a process. Among other things, it is designed to measure and eliminate overproduction, over-processing and waiting, and to improve the flow of a process. Lean tools and methods are easy to learn and simple to implement and lend
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themselves to being implemented by associates on the production floor thus making it valuable across the company. We have more than 4,500 Lean trained employees.
Industries
We provide our services across a wide range of industries including banking and financial services, insurance, manufacturing, transportation and health care. We set forth below a table showing our net revenues in 2006 attributable to the various industry groups that we serve.
Industry |
Year Ended December 31, 2006 (Net revenues in millions) |
||
---|---|---|---|
Banking, financial services and insurance | $ | 272.8 | |
Manufacturing | 268.1 | ||
Other | 72.1 | ||
Total | $ | 613.0 | |
Our Clients
Our clients include some of the best known companies in the world, many of which are leaders in their respective industries. GE has been our largest client and we benefit from a long-term contract whereby GE has committed to purchase stipulated minimum dollar amounts of services through 2013. Since our separation from GE, we have actively marketed our services to other companies and have succeeded in building a diversified client base. Many of these relationships are at an early stage and we believe they offer opportunities for growth.
GE accounted for approximately 74% of our revenues in fiscal 2006. We currently provide services to all of GE's business units including Commercial Finance, GE Money, Healthcare, Industrial, Infrastructure and NBC Universal as well as to GE's corporate head office. The services we currently provide to GE are broad in their nature and are drawn from all of our service offerings. Although we have a single MSA with GE, we have over 1,500 SOWs with GE. Currently, as a general matter, each GE business unit makes its own decisions as to whether to enter into a SOW with us and as to the terms of any such SOW. Therefore, although some decisions may be made centrally at GE, our revenues from GE are generally attributable to a number of different businesses each with its own senior manager responsible for decision making regarding outsourcing.
We have secured over 35 new Global Clients in a variety of industries since January 1, 2005. Our net revenues from Global Clients have rapidly increased in the last two years, from $20.3 million in 2004, to $42.2 million in 2005 and $158.3 million in 2006. Our net revenues from Global Clients as a percentage of total net revenues increased from 4.7% in 2004, to 8.6% in 2005 and 25.8% in 2006. The 2005 and 2006 net revenues from Global Clients include $2.6 million and $39.3 million, respectively, for businesses that were part of GE in 2004 and were included in net revenues from GE in 2004. See "Management's Discussion and Analysis of Results of Operations and Financial ConditionClassification of Certain Net Revenues." The majority of our Global Clients are based in the United States, and we also have Global Clients in Europe, Asia and Australia.
Our subsidiary, MoneyLine (now called Genpact Mortgage Services), which we acquired in 2006, provides services mortgage processing services to banking and finance industry clients and our subsidiary Creditek, which we acquired in 2005, provides collections and billing services to a number of different clients. MoneyLine and Creditek accounted for less than 5% of revenues, respectively in fiscal 2006. We include these revenues as part of revenue from Global Clients.
Our contracts with our clients generally take the form of an MSA, which is a framework agreement that is then supplemented by SOWs. Our MSAs specify the general terms applicable to the services we will
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provide. For a discussion of the components of our MSAs and SOWs see "Management's Discussion and Analysis of Results of Operations and Financial ConditionOverviewRevenues."
Case Studies
Wachovia
Wachovia has been a Global Client in our Genpact Virtual CaptiveSM model since 2005. We began by managing a number of discrete and diverse processes across several of Wachovia's lines of business. We have since further expanded the breadth and depth of services we provide to Wachovia. Our relationship with Wachovia today covers a wide range of services including finance and accounting services, financial modeling and comparables analysis for Corporate and Investment Banking, mutual fund services for their Capital Management Group and analytical services for their General Banking Group.
In 2006, we worked with Wachovia to improve its process for opening new bank branches. Wachovia opens new branches every year as part of its continued growth, but the time required to open a branch varied greatly depending on the location. We worked with Wachovia to map and analyze the existing process. Our Six Sigma black-belt and Lean trained employees worked to reduce the overall cycle time, eliminate non-essential steps and reduce the number of "hand-offs" from one Wachovia employee to another in the process by more than 50%. As a result, the new branch delivery model requires 20% less time. The team also created a new standardized, documented process with clear steps and guidelines that Wachovia will leverage for branch openings across all regions.
The following chart illustrates the variety of services we initially provided, as well as the new services we have added over time.
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Genworth Financial, Inc.
Genworth Financial has been a client since our beginning in 1997, when both of us were part of GE. We began with approximately 25 Genpact people doing policy administration, claims set-up and customer servicing. When GE spun off part of its insurance business to form Genworth Financial in May 2004, we continued to provide services and our relationship has continued to grow since that date even though GE no longer controls Genworth Financial. We executed new MSAs with Genworth Financial in 2005 which extended the term and expanded the scope of the relationship. Today, our Genworth Financial team provides a wide range of services, including actuarial support services and risk modeling services to Genworth's operations across twelve countries. Genworth Financial operates in our Virtual Captive model and serves as an extension of Genworth Financial's operations.
The following chart illustrates the variety of services we initially provided as well as the new services we have added over time.
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Nissan
Our relationship with Nissan began in 2005 and is an example of the benefit of our global delivery platform. We provide services to Nissan from our Delivery Centers in India, the Americas, Europe and Asia Pacific. We began by providing customer relationship management and collections, finance and accounting, and human resources services to Nissan. Our work for Nissan has expanded to include additional services such as procurement, analytics, business process re-engineering projects and onsite support on specific projects. We believe that our experience combined with our ability to provide global services was important in our selection by Nissan.
The following chart illustrates the services we provide to Nissan.
Penske Truck Leasing
Penske Truck Leasing, or Penske, in which GE is a 70% limited partner, has been a client since 1999. Penske's management team sought a service provider that could deliver improvement to a broad range of business processes, including finance and accounting (account reconciliations and general ledger accounting), risk, (collections and credit), and operations (billing, cash applications and vehicle regulatory services).
Penske leases, rents, and provides maintenance services to over 200,000 trucks in North America, and provides logistics services to customers in North America, Brazil, Europe and China. Genpact worked with Penske to redesign and operate certain of its processes in order to ensure that all necessary vehicle registrations and other required vehicle documents are completed when the new trucks are delivered. To accomplish this, Genpact employees in India monitor the delivery status of new trucks, estimate the time needed for document completion and prepare and file title and permit applications for just-in-time receipt. Genpact employees also provide ongoing processing services for fuel purchases and distances traveled, which information is then used to comply with the various state requirements regarding fuel and mileage taxes.
Our relationship with Penske currently involves more than 40 different processes delivered from our Delivery Centers in Mexico and India. While most of the services provided by Genpact fall into the areas noted above, Genpact also provides analytical services for Penske's operations and logistics needs. To support operations, Genpact has created a team consisting of more than 40 persons who respond to
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requests for financial and operation information, from any of Penske's 1,000 operational sites. With regard to logistics, Genpact has created a separate team, also consisting of more than 40 persons, to support Penske's logistics engineering teams in the US and Europe. This team provides initial data cleansing and validation as well as using the data in certain statistical optimization models. Penske is considering the expansion of these analytical services to its Brazil and China operations.
Penske has stated that our efforts have enabled them to save more than $20 million in direct costs annually, both from process improvements and lower labor costs. For example, delinquent receivables were reduced from 14% to 6% between 2001 and 2006. This was done by analyzing both internal processes linked to receivables and customer pay patterns and initiating a series of improvements over this five year period. Penske has estimated that this reduction in delinquency has helped to reduce working capital debt by $40 million to $50 million.
Our People
Our people are critical to the success of our business. Our Chief Executive Officer and other members of our senior leadership team have been involved in our business since its commencement under GE.
As of March 15, 2007, we had more than 28,000 employees worldwide. As of that date, approximately 5,900 of our employees held post-graduate degrees and approximately 16,400 were university graduates. In addition, as of March 31, 2007, we had 5,500 Six Sigma green-belt trained employees, 300 Six Sigma black-belt trained employees and 60 Six Sigma master black-belt trained employees. We also had more than 4,500 Lean trained employees as of that date.
Recruiting
We face increasing competition for skilled employees, particularly in India. We have developed a number of innovative methods in order to recruit sufficiently skilled employees while still controlling our entry-level salaries. In particular, we seek to widen the available talent pool by recruiting aggressively in places where there is less competition. We also hire people who do not have prior experience or training and use our extensive training capability to equip them with the skills they need to be effective. Some measures we use include the following:
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Training
We believe in extensive and continuous training of our employees. We have the infrastructure to train approximately 1,000 people at any one time with over 400 trainers and we have approximately 5,600 people enrolled in part-time professional degree programs provided by universities and other third parties. Our training programs are designed to transfer the industry specific knowledge and experience of our industry leaders to ensure we maintain our deep process expertise and domain expertise across all industries in which we work. Our training programs cover a vast number of topics, including specific service offerings, key technical and IT skills, our different clients' workplace cultures and Six Sigma and Lean methodologies. We also have programs modeled on GE management training programs to develop the next generation of leaders and managers of our business, all of whom are needed to support the rapid growth we are experiencing.
A large part of our continuous training is designed to "up-skill" our employees. That is, we run training programs for employees on an ongoing basis so that they can acquire new skills and move on to higher responsibility or higher-value jobs.
Retention
In order to meet our growth and service commitments we are constantly striving to attract and retain employees. There is significant turnover of employees in the business process outsourcing and information technology sectors generally, particularly in India where the majority of our employees are currently based. Competition for skilled employees in India is very high due to recent economic growth and an increased number of competitors.
Our attrition rate for all employees who have been employed by us for one day or more was 32% in 2006. A number of our competitors calculate employee attrition rates for their Indian employees who have been employed for six months or more. On this basis our Indian employee attrition rate for 2006 was approximately 21%, which we believe is relatively low for our industry based on statistics published by third parties such as NASSCOM. We attribute this low attrition rate to a number of factors including our effective recruiting measures, our extensive training and our strong culture.
We also take aggressive action to monitor and minimize potential attrition. Using Six Sigma principles we have developed an early warning system that tracks employees and gives us an insight into which employees are most likely to resign. These employees are automatically highlighted to management who can take action such as relocating the employee or enrolling the employee in continuing education programs to reduce the possibility and impact of such a resignation.
As another measure designed to minimize attrition, we follow the practice of "right-skilling" our employees to the tasks assigned to them. This means that we match the level of services required to the experience and qualification of the employee concerned and we avoid having over-qualified people in any particular job. This allows us to give our highly qualified and experienced people higher-value jobs and, coupled with the practice of up-skilling, ensures better career paths for all our employees.
Sales and Marketing
We market our services to both existing and potential clients through our business development team. This team consists of approximately 79 people as of March 31, 2007 based in the United States, Europe and Asia. We focus heavily on trying to expand the services we provide to our existing strategic clients. We have dedicated global relationship managers for each of our strategic relationships. We constantly measure our client satisfaction levels to ensure that we maintain high service levels for each client, using measures such as net promoter scores.
Our marketing efforts typically involve a lengthy selling cycle to secure a new client. Our efforts may begin in response to a perceived opportunity, a reference by an existing client, a request for proposal, an introduction by one of our directors or otherwise. In addition to our business development personnel, the sales effort involves people from the relevant service areas, people familiar with that prospective client's industry, business leaders and Six Sigma resources. We may expend substantial time and capital in securing
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new business. See "Management's Discussion and Analysis of Results of Operations and Financial ConditionOverviewRevenues."
As our relationship with a client grows, the time required to win an engagement for additional services often gradually declines. In addition, as we become more knowledgeable about a client's business and processes, our ability to identify opportunities to create value for the client typically increases. In particular, productivity benefits and greater business impact can often be achieved by focusing on processes that are "upstream" or "downstream" from the processes we initially handle, or by applying our analytical and IT capabilities to re-engineer processes. In addition, clients often become more willing over time to turn over more complex and critical processes to us as we demonstrate our capabilities.
We also try to foster relationships between our senior leadership team and our clients' senior management. These "C-level" relationships ensure that both parties are focused on driving client value from the top down. High-level executive relationships have been particularly constructive as a means of increasing business from our existing clients. It also provides us with a forum for addressing client concerns.
Our New Business Review Process
We follow a rigorous review process to evaluate all new business. This is to ensure that all new business fits with our pricing and service objectives. This process starts with the presentation of new business to our deal review committee which comprises members of our senior leadership team along with operations people and members of our finance department. This committee applies a set of well developed criteria to review the key terms of that new business. If, as a result of the review, the committee concludes that the new business is potentially attractive and a good use of our resources, then our business development team is authorized to pursue the opportunity. Prior to executing any contract in respect of new business, our deal review committee meets again to review the client relationship and to confirm that the terms of the new business continue to meet our criteria.
Delivery Centers
We commenced business in 1997 in Gurgaon, India. Since then we have established global delivery capabilities consisting of more than 25 Delivery Centers in nine countries (not including our employees who are onsite at our clients' premises). We choose the location of our Delivery Centers based on a number of factors which include the available talent pool, infrastructure, government support and operating costs as well as client demand. We were one of the first companies in our industry to move into some of our locations including Dalian, China; Budapest, Hungary; Bucharest, Romania; and Gurgaon, Jaipur and Kolkata in India. We aim to be continuously connected with our clients' requirements so that we are ready to serve their needs. We constantly evaluate new locations, including new countries and new cities within countries in which we currently operate, for new Delivery Centers and offices.
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The large number of different countries from which we service our clients differentiates us from a number of our competitors and enables us to take advantage of different languages and time-zones which, in turn, enhances our ability to service global clients. As of March 31, 2007, we provided services in approximately 20 different languages. Some of our clients also contract with us for additional redundancy and back-up protections.
The map below shows the location of our existing global Delivery Centers and our regional corporate offices. We have multiple locations in some cities.
We set forth below a table showing our net revenues in 2006 attributable to the main regions in which we have Delivery Centers.
Region |
Year Ended December 31, 2006 (Net revenues in millions) |
||
---|---|---|---|
India | $ | 486.5 | |
Asia, other than India | 32.4 | ||
Americas | 63.5 | ||
Europe | 30.5 | ||
Total | $ | 613.0 | |
Properties
We have Delivery Centers in nine countries. Our only material properties are our premises at Phase V, Gurgaon which comprises of 193,898 square feet and Uppal, Hyderabad which comprises approximately 449,286 square feet, both of which we own. We have a mixture of owned and leased properties and substantially all of our leased properties are leased under long-term leases with varying expiration dates.
Intellectual Property
We develop intellectual property in the course of our business and our MSAs with our clients regulate the ownership of such intellectual property. We have applied for patents, trademarks and domain names. Some of our intellectual property rights relate to proprietary business process enhancements.
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We generally use third-party software platforms and the software systems of our clients to provide our services. We normally enter into licensing agreements with our clients in relation to their software systems.
It is our practice to enter into an Employee Information & Proprietary Information Agreement with all of our new employees that:
Competition
We compete in a highly competitive and rapidly evolving global market. We have a number of competitors offering the same or similar services to us. Our competitors include:
In addition, a client or potential client may choose not to outsource its business, including by setting up captive outsourcing operations or by performing formerly outsourced services for themselves.
Regulation
We are subject to regulation in many jurisdictions around the world as a result of the complexity of our operations and services, including at the federal, state and local level, particularly in the countries where we have operations and where we deliver services. These countries include China, Hungary, India, Mexico, the Netherlands the Philippines, Romania, Spain, the United States and the United Kingdom. We are also subject to regulation by regional bodies such as the European Union.
In addition, the terms of our service contracts typically require that we comply with applicable laws and regulations. In some contracts, we are required to comply even if such laws and regulations apply to our clients, but not to us. In other service contracts our clients undertake the responsibility to inform us about laws and regulations that may apply to us in jurisdictions in which they are located.
If we fail to comply with any applicable laws and regulations, we may be restricted in our ability to provide services, and may also be the subject of civil or criminal actions involving penalties, any of which could have a material adverse effect on our operations. Our clients generally have the right to terminate our contracts for cause in the event of regulatory failures, subject to notice periods. See "Risk FactorsRisks Related to our BusinessAny failures to adhere to the regulations that govern our business could result in our being unable to effectively perform our services. Failure to adhere to regulations that govern our clients' businesses could result in breaches of contract under our MSAs."
In the United States, we are subject to laws and regulations arising out of our work in the area of banking, financial services and insurance, such as the Financial Modernization Act (sometimes referred to as the Gramm-Leach-Bliley Act), the Fair Credit Reporting Act, the Fair and Accurate Credit Transactions
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Act, the Right to Financial Privacy Act, the USA Patriot Act, the Bank Service Company Act, the Home Owners Loan Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act and the Real Estate Settlement Procedures Act as well as regulation by U.S. agencies such as the Securities and Exchange Commission, the Federal Reserve, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Commodity Futures Trading Commission, the Federal Financial Institutions Examination Council, the Office of the Comptroller of the Currency and the Office of Thrift Supervision. We are also subject to regulation under the Health Insurance Portability and Accountability Act, the Federal Trade Commission Act, the Family Educational Rights and Privacy Act, the Communications Act, the Electronic Communications Privacy Act and applicable regulations in the area of health and other personal information that we process as part of our services.
Because of our debt collections work in the United States, we are also regulated by laws such as the Truth in Lending Act, the Fair Credit Billing Act and the Fair Debt Collections Practices Act and underlying regulations. We are currently licensed to engage in debt collection activities in all States, except Minnesota and Tennessee, as well as the cities of New York, Buffalo and Washington D.C.
We are subject to laws in the United States, the United Kingdom and the EU that are intended to limit the impact of outsourcing on employees in those countries. See "Risk FactorsFuture legislation in the United States and other jurisdictions could significantly impact the ability of our clients to utilize our services."
We are also subject to laws and regulations on direct marketing, such as the Telemarketing Consumer Fraud and Abuse Prevention Act and the Telemarketing Sales Rule, the Telephone Consumer Protection Act and rules promulgated by the Federal Communications Commission, and the CAN-SPAM Act.
We are subject to laws and regulations governing foreign trade, such as the Arms Export Control Act, as well as by government bodies such as the Commerce Department's Bureau of Industry and Security, the State Department's Directorate of Defense Trade Controls and the Treasury Department's Office of Foreign Assets Control.
We benefit from tax relief provided by laws and regulations in India, China and Hungary, which include tax holidays under the Indian Income Tax Act, 1961 that expire in stages by 2009, and a government-mandated relatively low tax rate in China. The Indian SEZ legislation introduced a new tax holiday in certain situations for operations established in designated "special economic zones." The new tax benefits are available only for new business operations that are conducted at qualifying SEZ locations. We are currently in the process of establishing, subject to regulatory approvals, new Delivery Centers in four cities in India that would be eligible for these benefits. We do not presently know what percentage of our operations or income in India in future years will be eligible for a tax holiday under the new law. See "Management's Discussion and Analysis of Financial Condition and Results of OperationsOverviewIncome Taxes." In addition to the tax holidays described above, certain benefits are also available to us under certain Indian state laws. These benefits include rebates and waivers in relation to payments for the transfer or registration of property (including for the purchase or lease of premises), waivers of conversion fees for land, exemption from state pollution control requirements, entry tax exemptions, labor law exemptions and commercial usage of electricity.
Our hedging activities and currency transfer are restricted by regulations in certain countries, including India and China.
Certain Other Bermuda Law Considerations
As a Bermuda company, we are also subject to regulation in Bermuda. Among other things, we must comply with the provisions of the Companies Act regulating the payment of dividends and making of distributions from contributed surplus. See "Description of Share Capital."
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We are classified as a non-resident of Bermuda for exchange control purposes by the Bermuda Monetary Authority. Pursuant to its non-resident status, we may engage in transactions in currencies other than Bermuda dollars. There are no restrictions on our ability to transfer funds, other than funds denominated in Bermuda dollars, in and out of Bermuda or to pay dividends to United States residents that are holders of its common shares.
Under Bermuda law, "exempted" companies are companies formed for the purpose of conducting business outside Bermuda from a principal place of business in Bermuda. As an exempted company, we may not, without a license or consent granted by the Minister of Finance, participate in certain business transactions, including transactions involving Bermuda landholding rights and the carrying on of business of any kind for which we are not licensed in Bermuda.
Legal Proceedings
There are no legal proceedings pending against us which are likely to have a material adverse effect on our business, results of operations and financial condition.
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Directors and Executive Officers
The following table sets forth information concerning our directors and executive officers as of March 31, 2007:
Name |
Age |
Position(s) |
||
---|---|---|---|---|
Pramod Bhasin | 55 | President, Chief Executive Officer and Director | ||
Vivek N. Gour | 44 | Chief Financial Officer | ||
V.N. Tyagarajan | 45 | Executive Vice President, Business Development | ||
Patrick Cogny | 40 | Chief Executive Officer of Genpact Europe | ||
Mitsuru Maekawa | 59 | Chief Executive Officer of Genpact Asia | ||
Rakesh Chopra | 55 | Senior Vice President and Business Leader | ||
Juan Ferrara | 48 | Senior Vice President, Operations-Americas | ||
Victor Guaglianone | 52 | Senior Vice President and General Counsel | ||
Piyush Mehta | 38 | Senior Vice President, Human Resources | ||
Anju Talwar | 46 | Senior Vice President and Business Leader | ||
Tajinder Vohra | 41 | Senior Vice President and Business Leader | ||
Walter A. Yosafat | 46 | Senior Vice President and Chief Information Officer | ||
Rajat Kumar Gupta | 58 | Chairman | ||
John Barter | 60 | Director | ||
J Taylor Crandall | 53 | Director | ||
Steven A. Denning | 58 | Director | ||
Mark F. Dzialga | 42 | Director | ||
James C. Madden | 45 | Director | ||
Denis J. Nayden | 52 | Director | ||
Gary M. Reiner | 52 | Director | ||
Robert G. Scott | 61 | Director | ||
A. Michael Spence | 63 | Director | ||
Lloyd G. Trotter | 61 | Director |
Executive Officers
Pramod Bhasin is our President and Chief Executive Officer. Mr. Bhasin founded our business in 1997 while employed by GE. Prior to 1997, he served in various positions at GE, including as Chief Financial Officer for GE Capital's Corporate Finance Group.
Vivek N. Gour has served as our Chief Financial Officer and Senior Vice-President since January 2005. From September 2003 to December 2004, he served as Chief Financial Officer for GE Capital Business Processes. From September 2002 to September 2003, he served as Chief Financial Officer and Senior Vice-President of our business and of GE Capital India and from August 2001 to September 2002 as Senior Vice-President (Strategic Projects), GE Capital India.
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V.N. Tyagarajan has served as our Executive Vice President and Head of Sales, Marketing & Business Development since February 2005. From October 2002 to January 2005, he was Senior Vice President, Quality and Global Operations, for GE's Commercial Equipment Finance division. Between 1999 and 2002, he served as our Chief Executive Officer.
Patrick Cogny became our Chief Executive Officer of Genpact Europe in 2005. Prior to this, he spent 15 years working for GE in the Healthcare business and in the GE Europe corporate headquarters, in France, the United States and Belgium.
Mitsuru Maekawa became our Chief Executive Officer of Genpact Asia in 2002. From 1988 to 2001 he worked for GE Medical Systems, a division of GE Healthcare, where he was as General Manager of sales for GE Yokogawa Medical Systems from 1999 to 2001.
Rakesh Chopra rejoined us as Senior Vice President and Business Leader in 2006. From 2005 to 2006 he was the Country Manager at Convergys India. From 2004 to 2005 he was the Country Manager at EXL Services and from 2003 to 2004 he was Vice President and General Manager of American Express India. Prior to this, from 1992 to 2003 he held roles with us as Business Leader as well as Chief Financial Officer and with GE Capital India as Six Sigma Quality Leader. During that time he was also Chief Financial Officer for GE Plastics India and Chief Executive Officer for a GE Capital India credit card joint venture.
Juan Ferrara joined us as Senior Vice President, Operations-Americas in March 2007. Prior to this, he spent close to 25 years working for McKinsey & Company and from 1997 to 2007 he was a managing director at McKinsey & Company.
Victor Guaglianone has served as our Senior Vice President, General Counsel & Corporate Secretary since January 2007. From 2004 to 2007, he was senior counsel at Holland & Knight LLP. From 2003 to 2004, he served as a commercial arbitrator for the American Arbitration Association. Prior to 2003, he spent 16 years at GE Capital, most recently as Vice President and Associate General Counsel.
Piyush Mehta became our Senior Vice President of Human Resources in March 2005. He has worked for us since 2001 as Vice President of Human Resources.
Anju Talwar has been with us since our business was founded in 1997. She has served as our Senior Vice President and Business Leader since 2006 and is responsible for our Wachovia relationship. Prior to this, from 2004 to 2006 she was our Global Process Management Leader and from 2001 to 2003 she was Chief Executive Officer of Genpact Software.
Tajinder Vohra became our Senior Vice President and Business Leader in 2006 and is responsible for our supply chain and procurement business, our enterprise application services and our IT infrastructure services. From 1990 to 2006 he worked for GE Healthcare in various operations, business development and services roles.
Walter A. Yosafat became our Senior Vice President and Chief Information Officer in March 2007. From 2001 to February 2007, he was the Chief Information Officer and eBusiness Leader at Trane, an American Standard company.
Directors
In addition to Mr. Bhasin, our directors are as follows:
Rajat Kumar Gupta became one of our directors in April 2007 and was appointed as the Chairman of our board of directors in April 2007. From July 2005 to April 2007, he was an advisory director. He has served as Senior Partner Worldwide at McKinsey & Company since 2003. Between 1994 and 2003, he served in various positions at McKinsey & Company, including as Managing Director Worldwide. He is a director on the board of The Goldman Sachs Group, Inc.
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John Barter has served as one of our directors since July 2005. From 2000 to 2001, he served as the Chief Financial Officer and a Director of Kestrel Solutions, Inc., a privately-owned company established to develop and bring to market a new product in the telecommunications industry. Kestrel Solutions, Inc. filed a voluntary petition for bankruptcy in 2002. From 1994 to 1997, he was the Executive Vice President of Allied Signal, Inc. and President of Allied Signal Automotive. He is also a director on the boards of BMC Software, Inc., Lenovo Group Limited and SRA International, Inc.
J Taylor Crandall became one of our directors in January 2005. Since 1996, he has been a Managing Partner of Oak Hill Capital Management, LLC. He is also a director on the board of American Skiing Company.
Steven A. Denning became one of our directors in January 2005. Mr. Denning is the Chairman and a Managing Director of General Atlantic LLC, a private equity firm, and has been with General Atlantic (or its predecessor) since 1980. He is also a director on the boards of Eclipsys Corporation, IHS Inc., Hewitt Associates, Inc. and The Thomson Corporation.
Mark F. Dzialga became one of our directors in January 2005. Since 1998, he has been a Managing Director of General Atlantic LLC, a private equity firm. He is also a director on the board of Emdeon Corporation, Hexaware Technologies Ltd and Schaller Anderson Inc.
James C. Madden became one of our directors in January 2005. Since February 2007, he has been a General Partner at Accretive LLC, a private equity firm. From 2005 to January 2007, he was a Special Advisor of General Atlantic LLC, a private equity firm. From 1998 to 2004, he was the Chairman and Chief Executive Officer of Exult, Inc.
Denis J. Nayden became one of our directors in January 2005. Since 2003, he has been a Managing Partner of Oak Hill Capital Management, LLC. From 2000 to 2003, he was the Chairman and Chief Executive Officer of GE Capital. He is also a director on the boards of GMC Communities Trust and Duane Reade Inc.
Gary M. Reiner became one of our directors in January 2007. He has served as Senior Vice President & Chief Information Officer at GE since 1996.
Robert G. Scott became one of our directors in April 2006. From 2001 to 2003, he served as President and Chief Operating Officer at Morgan Stanley. He currently serves as an advisory director at Morgan Stanley.
A. Michael Spence became one of our directors in April 2005. He is a Professor Emeritus of Management at the Graduate School of Business at Stanford University and a Senior Fellow of the Hoover Institution at Stanford University. He has been a Partner at Oak Hill Capital Partners since 1999. From 1990 to 1999 he served as dean of the Stanford Business School. In 2001, he was awarded the Nobel Prize in Economics. He is also a director on the board of General Mills, Inc.
Lloyd G. Trotter became one of our directors in January 2007. He has served as Vice Chairman, GE, since 2006, and as President and Chief Executive Officer of GE Industrial since 2006. Between 1989 and 2006, he held various positions at GE, including Executive Vice President, Operations, President and Chief Executive Officer of GE Industrial Systems and President and Chief Executive Officer of GE Consumer & Industrial.
Composition of the Board of Directors
Our business and affairs are managed under the direction of our board of directors. Our board of directors currently consists of 12 members, 9 of whom are independent directors under currently applicable listing standards of the New York Stock Exchange.
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Director Independence
Pursuant to the corporate governance listing standards of the NYSE, a director employed by us cannot be deemed to be an "independent director," and consequently Mr. Bhasin is not an independent director. In addition, in accordance with the NYSE corporate governance listing standards, the board has determined that Messrs Reiner and Trotter, both of whom are executive officers of GE, our largest client, are not independent. The board has determined that none of the other directors has a material relationship with us for purposes of the NYSE corporate governance listing standards and accordingly each is independent under such NYSE standards. In making its independence determinations the board considered the relationship between our company and Genpact Investment Co. (Lux) SICAR S.à.r.l., or GICo, the investment vehicle through which General Atlantic and Oak Hill will own % of our outstanding common shares following the consummation of this offering (assuming no exercise of the underwriters over-allotment option), the fact that Messrs Crandall, Denning, Dzialga and Nayden serve on our board as designees of GICo pursuant to the terms of the shareholders agreement, the fact that Messrs. Crandall and Nayden are managing partners of Oak Hill and the fact that Messrs. Denning and Dzialga are managing directors of General Atlantic. Messrs Reiner and Trotter serve as members of our board of directors as GE nominees and are also appointed pursuant to the terms of our shareholders agreement. See "Prospectus SummaryThe Company" and "Certain Relationships and Related Party TransactionsShareholders Agreement."
Committees of the Board of Directors
Upon completion of this offering, our board of directors will conduct its business through three standing committees: the audit committee, the compensation committee and the nominating and governance committee. Our board of directors has adopted written charters for each of these committees, which are available on our website. In addition, from time to time, special committees may be established under the direction of the board of directors when necessary to address specific issues. Our audit committee, compensation committee and nominating and governance committee are composed entirely of independent directors.
Audit Committee. The audit committee has responsibility for, among other things:
The audit committee has the power to investigate any matter brought to its attention within the scope of its duties and to retain counsel for this purpose where appropriate.
Our audit committee consists of Messrs. Barter, Madden and Scott. Mr. Barter has been determined to be an "audit committee financial expert," as such term is defined in Item 401(h) of Regulation S-K, and to have accounting or related financial management expertise as required by the NYSE listing standards.
Compensation Committee. Our compensation committee has responsibility for, among other things:
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Our compensation committee consists of Messrs. Crandall, Denning, Dzialga, Nayden and Spence.
Nominating and Governance Committee. Our nominating and governance committee has responsibility for, among other things:
Our nominating and governance committee consists of Messrs. Denning, Gupta, Nayden and Scott.
Compensation Committee Interlocks and Insider Participation
Our board of directors has a compensation committee as described above. If an executive officer of another entity is expected to serve as a member of our compensation committee, none of our executive officers shall serve on such entity's compensation committee (or any other committee serving a similar function).
Codes of Conduct and Ethics and Corporate Governance Guidelines
Our board of directors has adopted a code of ethics applicable to our directors, officers and employees; a code of business conduct and ethics applicable to our directors and executive officers; and corporate governance guidelines, each in accordance with applicable rules and regulations of the SEC and the New York Stock Exchange.
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Compensation Discussion and Analysis
This Compensation Discussion and Analysis section discusses the compensation policies and programs for our Chief Executive Officer, our Chief Financial Officer and our three next most highly paid executive officers as determined under the rules of the Securities and Exchange Commission. Such individuals are referred to as our named executive officers.
The primary objectives of our compensation program for our executives, including our named executive officers, are to attract, motivate and retain highly talented individuals who are committed to our core values of leadership, performance, passion, innovation, teamwork, integrity and respect. Our compensation program is designed to reward the achievement of our specific annual, long-term and strategic goals, and align the interests of our executives, including our named executive officers, with those of our shareholders by rewarding performance that exceeds established goals, with the ultimate objective of improving shareholder value.
Currently, our compensation committee is responsible for reviewing the overall goals and objectives of our executive compensation programs, as well as our compensation plans, and making any changes to such goals, objectives and plans. Our compensation committee bases our executive compensation on the same objectives that guide us in establishing all of our compensation programs:
For 2006, our executive compensation program had four primary components: (a) base salary, (b) annual cash bonus payments, (c) equity-based compensation granted in the form of options to purchase our common shares (we refer to an option to purchase one of our common shares as a Company option) and (d) other benefits and perquisites. Our compensation committee reviews each component of compensation at least every 15 months and has adopted guidelines for allocating compensation between long-term and currently paid out compensation and between cash and non-cash compensation and combine the compensation elements for each executive in a manner we believe best fulfill the objectives of our compensation program.
Our compensation committee is responsible for evaluating the performance of each of our executives, including the named executive officers, approving the compensation level of each of our executives, establishing criteria for granting Company options to our executives and other employees and approving such grants of Company options. Other than with respect to the grants of Company options, which are made from time to time by our compensation committee, each of these tasks is generally performed annually by our compensation committee. Our Chief Executive Officer provides input on individual performance and assessment to assist our compensation committee in their determinations and make recommendations to our compensation committee during their annual review. The compensation committee may also, at its discretion, solicit the input of other executives or employees and outside consultants and advisors.
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Compensation Components
Base Salary. Base salary reflects the experience, knowledge, skills and performance record our executives, including our named executive officers, bring to their positions and the general market conditions in the country in which the executives are located. In 2005, we entered into employment agreements with two of our named executive officers, Pramod Bhasin, our Chief Executive Officer, and V.N. Tyagarajan, our Executive Vice President of Global Sales and Marketing, pursuant to which we have agreed to provide these executives with minimum base salaries of $567,500 and $300,000, respectively. See "Narrative Disclosure to Summary Compensation Table and Grant of Plan-Based Awards TableEmployment Agreements With Named Executive Officers." Our compensation committee reviews the salaries of our executives, including our named executive officers, at least every fifteen months and determines changes in base salaries based on various factors, including "Criticality of Role," performance and potential of the executive, general Company performance and the market practices in the country where the named executive officer is located. The term "Criticality of Role" encompasses the executive's role in our company and the importance of that role in our overall business. In connection with such review, our Chief Executive Officer provides recommendations and rankings of the executives who directly report to him, including our other named executive officers, and the compensation committee considers the Chief Executive Officer's recommendations in setting base salaries. The base salaries approved by our compensation committee for our named executive officers in 2006 were generally 4% to 10% higher than base salaries in 2005, based on the recommendations of our Chief Executive Officer. Our compensation committee has approved increases in base salaries for the named executives officers in 2007 ranging from 6%-9% over 2006 base salaries, based on the recommendations of our Chief Executive Officer. The actual date of the increase is tied to the applicable named executive officer's date of joining Genpact.
Annual Cash Bonus. Annual cash bonuses are designed to provide more immediate rewards to our executives, including our named executive officers, for their performance during the most recent year. We believe that the immediacy of these cash bonuses, in contrast to our equity grants, which vest over a period of time, provides a significant incentive to our executives towards achieving their respective individual objectives, our Company objectives and our overall long term goal of creating value for our shareholders and employees. Thus, we believe our cash bonuses are an important motivating factor for our executives, in addition to being a significant factor in attracting and retaining our executives.
Bonuses are generally determined by our compensation committee in January or February following the end of the year and, as with the base salary component, are based on the recommendation and rankings provided by our Chief Executive Officer. The same factors used to determine base salary for the new year, which are described above, are used to determine bonuses for the prior year, with a greater emphasis on the performance of the individual and our company. For Messrs. Bhasin and Tyagarajan, who have employment agreements, the compensation committee also takes into consideration the requirements for bonus payments under their agreements. Mr. Bhasin's employment agreement provides that his annual bonus will be equal to 120% of his base salary, subject to the attainment of performance criteria established by our board of directors. Mr. Tyagarajan's employment agreement provides that his target annual bonus will be equal to 100% of his base salary, subject to a maximum of $500,000. See "Narrative Disclosure to Summary Compensation Table and Grant of Plan-Based Awards TableEmployment Agreements with Named Executive Officers." The 2006 bonuses paid to Messrs. Bhasin and Tyagarajan exceeded the amounts set forth in their employment agreements in recognition of their outstanding individual performance and their contributions to our success.
For 2006, certain of our named executive officers also received incentive payments under the General Electric Special Bonus Plan, pursuant to which General Electric agreed to pay such executives a retention bonus if the executive remained with us for 18 months following the 2004 Reorganization.
Equity-Based Compensation. Our equity-based compensation program is designed primarily to attract and retain highly qualified individuals, given that competition for talent is high in our industry. In addition, we believe that awarding our executives, including our named executive officers, with Company
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options with vesting schedules that require continued service enables us to retain our executives for longer periods. Finally, we believe awards of Company options provide closer alignment between the interests of our employees and our shareholders. Consistent with this philosophy, following our 2004 Reorganization, we granted our executives, including our named executive officers, an initial grant of Company options, which generally vest over five years following the grant date as an incentive for our executives to stay with our newly reorganized Company. In addition, we granted Mr. Bhasin an additional 2,500 Company options that were subject to certain performance-based vesting conditions to align even more closely our Chief Executive Officer's interests with those of our shareholders by tying vesting of those Company options to achievement of target equity values. For a description of the vesting conditions of these 2,500 Company options, see the "Outstanding Equity Awards at Fiscal Year End" table. In 2006, we granted Company options to Patrick Cogny in recognition of his agreement to relocate to Budapest, Hungary and to bring his total equity compensation level in line with that of our other executives. We did not grant any Company options to any of our other named executive officers in 2006. For more details on the vesting schedules of Company options granted to our named executive officers as of December 31, 2006, see the "Outstanding Equity Awards at Fiscal Year End" table. In 2007, we granted Company options to certain of our employees and executives, including Messrs. Bhasin, Cogny, Gour and Tyagarajan, to reward these individuals for their efforts in our growth and to provide added incentives to remain with us following the initial public offering. In making these grants in 2007, we used the advice of an independent compensation consultant. The vesting schedules of the grants to our named executive officers were designed so that one third of the Company options would vest on each of December 31, 2010, December 31, 2011 and December 31, 2012. The extended vesting schedule is intended to provide incentives for long-term performance.
We currently do not have any stock ownership guidelines for executives or other employees but may implement such guidelines in the future.
In the future, our compensation committee and board of directors may consider awarding additional or alternative forms of equity incentives, such as grants of restricted stock, restricted stock units and other performance based awards, and may also determine to seek additional input from compensation consultants.
Benefits and Perquisites. We provide other benefits to our named executive officers that are generally available to other employees in the country in which the named executive officer is located. We believe these benefits are consistent with the objectives of our compensation program and allow our named executive officers to work more efficiently. We also provide our named executive officers with certain perquisites which we believe are reasonable and consistent with market trends in the countries in which our named executive officers are located. Such benefits and perquisites are intended to be part of a competitive overall compensation program. For more details on the benefits provided to our named executive officers, see "Summary Compensation Table" and "Narrative Disclosure to Summary Compensation Table and Grant of Plan-Based Awards Table."
Severance Arrangements. We have entered into employment agreements with Messrs. Bhasin and Tyagarajan which provide for certain payments in the event of a termination of employment. We also provide for certain benefits in the event of a termination of employment under our Company option award agreements with Mr. Bhasin. The severance payments and benefits were based on individual negotiations with the executives and are an important part of employment arrangements designed to retain these named executive officers and provide certainty with respect to the payments and benefits to be provided upon certain termination events. For additional details on these payments and benefits, see "Potential Payments Upon Termination."
Change in Control. While Company options granted to our named executive officers may be accelerated by our board upon a change in control, this is not generally a current requirement under our option plans and award agreements. The only named executive officer with current rights to change in control-related payments or benefits is Mr. Bhasin, who receives both "single trigger" and "double trigger"
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benefits based on his employment agreement and option award agreements. These benefits were based on individual negotiations with Mr. Bhasin in connection with his commencement of employment with us and are described in more detail in "Narrative Disclosure to Summary Compensation Table and Grant of Plan-Based Awards TableEmployment Agreements with Named Executive OfficersPramod Bhasin" and "Potential Payments Upon Termination or Change in Control."
Summary Compensation Table
The following table sets forth information concerning the compensation of our Chief Executive Officer, Chief Financial Officer and the other named executive officers (as defined in "Compensation Discussion and Analysis") for the fiscal year ended December 31, 2006.
Name |
Year |
Salary ($) |
Bonus ($) |
Option Awards ($)(1) |
Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) |
All Other Compensation ($) |
Total Compensation ($) |
|||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Pramod Bhasin President, Chief Executive Officer and Director(2) |
2006 | 610,000 | (3) | 1,000,000 | 971,123 | 80,444 | (4) | 192,422 | (5) | 2,853,989 | ||||
Vivek N. Gour Chief Financial Officer(2) |
2006 | 261,035 | 254,010 | (6) | 176,478 | 6,919 | (7) | | 698,442 | |||||
V.N. Tyagarajan Executive Vice President, Business Development |
2006 | 330,000 | 550,000 | 376,169 | | 41,920 | (8) | 1,298,089 | ||||||
Patrick Cogny Chief Executive Officer of Genpact Europe(2) |
2006 | 318,793 | 81,887 | 99,364 | | 292,638 | (9) | 792,682 | ||||||
Mitsuru Maekawa Chief Executive Officer of Genpact Asia(2) |
2006 | 317,065 | 311,664 | (10) | 55,493 | | 159,843 | (11) | 844,065 |
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Table and Grant of Plan-Based Awards TableEmployment Agreement with Named Executive Officers" and "Potential Payments Upon Termination or Change of Control."
Grant of Plan-Based Awards
The following table provides certain information regarding equity-based awards granted to our named executive officers during the fiscal year ended December 31, 2006. There were no grants under any non-equity incentive plans to any of our named executive officers for the year ended December 31, 2006.
Name |
Grant date |
Non-Equity Incentive Plan Option Awards: Number of Securities Underlying Options (#) |
Exercise Price of Option Awards ($/Sh) |
Grant Date Fair Value of Option Awards ($) |
||||
---|---|---|---|---|---|---|---|---|
Patrick Cogny | 2/27/06 | 100 | 1,177(1 | ) | 61,100 |
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Narrative Disclosure to Summary Compensation Table and Grant of Plan-Based Awards Table
Employment Agreements with Named Executive Officers
Below are descriptions of the material terms of our employment agreements with our named executive officers other than those with respect to termination and change of control.
Pramod Bhasin. We entered into an employment agreement with Pramod Bhasin, our President and Chief Executive Officer, effective as of January 1, 2005. The employment agreement has an indefinite term and may be terminated by us or Mr. Bhasin or due to Mr. Bhasin's death or disability, subject to the termination provisions described below. The employment agreement provides for an annual base salary of not less than $567,500, which will be reviewed annually by our board of directors, and a target annual cash bonus equal to 120% of annual base salary, subject to attainment of performance criteria established by our board of directors. For 2006, as discussed in the "Compensation Discussion and Analysis," the compensation committee awarded a bonus in excess of the maximum provided in the employment agreement in recognition of Mr. Bhasin's outstanding individual performance and contribution to our success.
Mr. Bhasin is entitled to benefits, perquisites and fringe benefits that are no less favorable than the benefits and perquisites provided to our other senior executives and up to $200,000 in reimbursement for lease, maintenance and utility payments in connection with his housing and expenses relating to his automobile and driver. Mr. Bhasin is also entitled to relocation expense reimbursement and four weeks' vacation.
Pursuant to the terms of the employment agreement, in September 2005, Mr. Bhasin purchased 535.045 interests of Genpact Management Investors, LLC at the per interest price of $1,869, for a total purchase price of $1,000,000. As of December 31, 2006, Genpact Management Investors, LLC held shares in us indirectly through GICo, an investment entity of General Atlantic and Oak Hill. In connection with the 2007 Reorganization, we expect that Genpact Management Investors, LLC will be liquidated and that the shares it holds in our Company will be distributed directly to Mr. Bhasin and our other employees who currently hold Company shares through this entity.
Pursuant to the terms of his employment agreement, Mr. Bhasin also received 20,000 Company options. Of these, 17,500 Company options are subject to time-based vesting and the remaining 2,500 Company options are subject to performance-based vesting (the "performance options"). The Company options were granted on July 26, 2005. Information with respect to these grants is included in the "Outstanding Equity Awards at Fiscal Year End" table.
Mr. Bhasin is also entitled to retention bonus payments upon the occurrence of any of the following: (a) January 1, 2010, (b) a change in control (as defined in the 2005 Plan), (c) the termination of Mr. Bhasin's employment under the employment agreement (other than by Genpact Limited for cause (as defined in his employment agreement)) and (d) an Investor Group Sale (as defined below), subject to his continued employment with us until the applicable time. The maximum aggregate retention bonus amounts payable is $5,000,000, and any previously paid retention bonus amounts are subtracted from subsequent retention bonus amounts payable. Any retention bonus payment will be paid out at our election in cash, in our common shares or any combination of cash and our common shares within five business days following the triggering event. An "Investor Group Sale" is defined as a sale or other disposition by General Atlantic or Oak Hill of any number of our common shares (other than dispositions between such entities and their affiliates).
Generally, with some modification in the event of an Investor Group Sale, as described below, the retention bonus is equal to the product of a vested percentage (described below) and $5,000,000 less the excess of $11,000,000 over the then current fair market value of 17,500 of our common shares, subject to adjustment to reflect stock splits or other changes in our company's capital structure. The retention bonus in the event of an Investor Group Sale is equal to the product of the general formula for the retention
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bonus described above and the percentage of our common shares sold in the aggregate (including prior sales) by such entities. No retention bonus amounts were paid to Mr. Bhasin under his employment agreement prior to this offering. Depending on the number of common shares sold by the Investor Group in connection with this offering we expect that Mr. Bhasin will receive a retention bonus payment of approximately $ in connection with this offering.
The vested percentage for determining the amount of the retention bonus amount payable upon a triggering event begins at 0% on January 1, 2005 and increases by 5% every three months thereafter until it reaches 100% on January 1, 2010, subject to special adjustments if Mr. Bhasin's employment is terminated, as described below. Mr. Bhasin shall not receive any unpaid retention bonus if terminated for cause. In the event of a change in control other than the acquisition of our Company for non-cash consideration and Mr. Bhasin continues to be the Chief Executive Officer of the surviving company then the vested percentage will be 100%. In addition, if following a change in control involving the acquisition of our Company for non-cash consideration, Mr. Bhasin's employment is terminated due to death or disability, by us without cause or by Mr. Bhasin for good reason (as defined below), the vested percentage will be 100%.
For purposes of Mr. Bhasin's employment agreement, the term "good reason" means reducing the nature or scope of Mr. Bhasin's authorities or duties, reduction in base salary, target bonus or fringe benefits or requiring Mr. Bhasin to report to any person other than our board of directors, which has not been cured by us within 30 days following notice by Mr. Bhasin.
In the event of a termination of his employment, Mr. Bhasin will receive various payments and benefits pursuant to his employment agreement. Following the termination of Mr. Bhasin's employment for any reason, including for cause (as defined in his employment agreement) Mr. Bhasin is entitled to a pension benefit of $190,000 per year, payable on the same terms and conditions as the benefit accrued by Mr. Bhasin under the General Electric Company Pension Plan, as amended and restated as of July 1, 2003. If Mr. Bhasin's employment terminates due to his death or disability, Mr. Bhasin or his estate, as applicable, will receive any vested but unpaid portion of the retention bonus, calculated as though Mr. Bhasin's employment continued for 12 months after such termination. If Mr. Bhasin's employment is terminated by Mr. Bhasin voluntarily, he will receive a pro-rated bonus for the fiscal year of termination if the performance criteria for the year are achieved and any vested but unpaid portion of the retention bonus. Such payments would be made in lump sum following termination.
If Mr. Bhasin's employment is terminated by us without cause (as defined in the employment agreement) or by Mr. Bhasin for good reason, Mr. Bhasin is entitled to a lump sum payment, within five days of such termination, of an amount equal to a pro-rated bonus for the year in which termination occurs and any vested but unpaid portion of the retention bonus, calculated as though Mr. Bhasin's employment continued for 12 months after such termination (or in case of terminations prior to January 1, 2007, as though employment continued for 24 months), plus an amount equal to the two times the sum Mr. Bhasin's then current base salary and the annual bonus received for the fiscal year preceding the fiscal year of termination. In addition, we will continue to provide Mr. Bhasin and his dependents with health benefits at the same level of coverage and benefits as is provided to our US-based senior executives for two years following the date of termination, or if such continuation is not permitted under the relevant plans, an amount in cash equal to the amount necessary to provide Mr. Bhasin with such health benefits.
Mr. Bhasin is not entitled to receive any payment of any unpaid retention bonus if terminated by us for cause.
Mr. Bhasin's payments upon termination of employment described above are subject to his execution of a release. The release would also be executed by us and release Mr. Bhasin from any claims by us relating to Mr. Bhasin's employment or services other than claims based on acts or omissions of Mr. Bhasin that involve fraud or which are not known to the non-employee directors on the date of such release. The release also includes a mutual non-disparagement provision.
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Under his employment agreement, for one year after the termination of his employment, Mr. Bhasin is not permitted to engage in or carry on, directly or indirectly, any enterprise, whether as an advisor, principal, agent, partner, officer, director, employee, shareholder (other than certain minor passive ownership), associate or consultant to any of a specified group of five companies or any successor of any such entity, which group may be amended annually by our board of directors so long as the number of entities does not exceed five. In addition, for two years after his termination of employment, Mr. Bhasin is not permitted knowingly to (a) attempt to influence, persuade or induce or assist any other person in so doing, any of our employees or independent contractors to give up, or to not commence, employment or a business relationship with us, (b) unless otherwise contrary to law, directly or indirectly, through direction to any third party, hire or engage, or cause to be hired or engaged, any person who is or was one of our employees or independent contractors or (c) attempt to influence, persuade or induce, or assist any other person in so doing, any of our agents, consultants, vendors, suppliers or clients to give up or not commence, a business relationship with us.
V.N. Tyagarajan. We entered into an employment agreement with V.N. Tyagarajan, our Executive Vice President and Head of Sales, Marketing and Business Development, on September 21, 2005. The employment agreement has an indefinite term and may be terminated by us or Mr. Tyagarajan or due to Mr. Tyagarajan's death or disability, subject to the termination provisions described below. The employment agreement provides for an annual base salary of not less than $300,000 and a target bonus of 100% of annual base salary, capped at $500,000. For 2006, as discussed in the "Compensation Discussion and Analysis," the compensation committee awarded a bonus in excess of the maximum provided in the employment agreement in recognition of Mr. Tyagarajan's outstanding individual performance and contribution to our success. Mr. Tyagarajan is entitled to benefits and perquisites generally available to our other senior executives and is entitled to four weeks vacation and automobile perquisites.
Under his employment agreement, Mr. Tyagarajan received 5,000 Company options on July 26, 2005.
If Mr. Tyagarajan's employment is terminated by us for cause (as defined in his employment agreement) or if Mr. Tyagarajan terminates his employment for any reason, for one year following such termination, Mr. Tyagarajan may not engage in or carry on, directly or indirectly, any enterprise, whether as an advisor, principal, agent, partner, officer, director, employee, shareholder, associate or consultant for or on behalf of any of a specified group of five companies. If Mr. Tyagarajan's employment is terminated by us without cause, he will be entitled to a lump sum cash payment equal to 50% of his base salary in effect on the date of termination, in addition to any earned but unpaid base salary and bonus, and will be subject to the above-described restriction for six months following his termination. In addition, under his employment agreement, Mr. Tyagarajan may not, for thirty-six months following the termination of his employment, (a) directly or indirectly solicit any person who is on the date of Mr. Tyagarajan termination our employee or independent contractor, (b) attempt to influence, persuade or induce, or assist any other person in doing so, any entity that is on the date of his termination a client of ours to give up or not commence, a business relationship with us or (c) directly or indirectly solicit for business or corporate opportunity any entity that is one of our clients on the date of his termination.
Other Named Executive Officers. We do not have employment agreements with any of our other named executive officers.
Equity-Based Compensation Plans
We maintain the following equity-based compensation plans as an additional means to attract able persons to enter and remain in our employ and to provide a means whereby our employees, managers, directors and consultants can acquire and maintain share ownership and to further align the interests of award recipients and our shareholders: the Genpact Global Holdings 2007 Stock Option Plan, the Genpact Global Holdings 2006 Stock Option Plan and the Gecis Global Holdings 2005 Stock Option Plan (collectively, the "Company Stock Plans").
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A total of common shares are available for options granted under the Company Stock Plans. At , 2007, there were options to purchase common shares outstanding under the Company Stock Plans at a weighted average exercise price of $ per share, including options held by each of our named executive officers. Other than the grant to Mr. Cogny indicated in the "Grant of Plan Based Awards Table," we did not grant any Company options to our named executive officers in 2006.
The terms of each Company Stock Plan are substantially similar. The Company Stock Plans are administered by the compensation committee, which is authorized to, among other things, select the officers and other employees who will receive grants and determine the exercise price and vesting schedule of the options.
The exercise price per share of our common stock subject to the Company options is set by our compensation committee at the time of grant and is not less than the fair market value of the underlying shares on the date of grant. Prior to our offering, the fair market value was determined by our board of directors or compensation committee, as applicable, as required under our Company Stock Plans.
Company options granted under the Company Stock Plans are also currently subject to our Shareholders Agreement. See "Certain Relationships and Related Party TransactionsShareholders Agreement" for a description of our Shareholders Agreement. In addition, currently, optionees are required to execute a stock purchase agreement in connection with the exercise of their options. We currently anticipate that following the consummation of this offering, optionees will no longer be required to enter into such stock purchase agreements in connection with the exercise of their Company options. Pursuant to the terms of the current form of stock purchase agreement, if an optionee's employment with us is terminated for any reason at any time prior to the 30 day period preceding a change in control (as defined below in "Potential Payments Upon Termination or Change of ControlCompany Stock Plans"), beginning six months and one day after the date of exercise, we have a call option on any or all of the shares issued upon the exercise of Company options, or option shares, based on the fair market value of the shares on the date the call option is exercised. If the optionee's employment is terminated by us for cause, the price for the call option is the lesser of fair market value of the share and the per share exercise price of the original Company option. In addition, under the stock purchase agreement, we have the right to require the optionee to sell his or her option shares in the event of a sale of 30% or more of our issued and outstanding shares or of our shares entitled to vote in the election of directors representing 30% or more of the voting power of such equity securities (a "sale event"), and we must require the purchaser in a sale event to offer holders of option shares terms and conditions which, in the aggregate, are no less favorable to the purchaser than the terms and conditions provided to the us or our shareholders in connection with such sale event. As of the date of this offering, none of our named executive officers have exercised their options and therefore none of our named executive officers have entered into a stock purchase agreement with respect to their options.
Our board of directors may amend, alter, suspend, discontinue or terminate the Company Stock Plans or any award agreement under the Company Stock Plans at any time, subject to any required shareholder approvals. No such amendment, alteration, suspension, discontinuance or termination that would impair the rights of any participant with respect to any option will be effective without the consent of the affected participant, unless such amendment, alternation, suspension, discontinuance or termination is required by applicable law.
Company options granted under the Company Stock Plans may not be transferred, except in certain limited circumstances.
We intend to file with the Securities and Exchange Commission a registration statement on Form S-8 covering our common shares issuable under the Company Stock Plans, as required under the Company Stock Plans.
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For a description of the provisions in our Company Stock Plans and related arrangements relating to termination of employment or a change of control, see "Employment Agreement With Named Executive OfficersCompany Stock Plans."
General Electric Special Bonus Plan
Messrs. Gour and Maekawa received payments under the General Electric Special Bonus Plan, pursuant to which General Electric agreed to pay such executives a retention bonus payment, provided that the executive remained with us for 18 months following the 2004 Reorganization. See "Prospectus SummaryThe Company2004 Reorganization."
Retirement Benefits
We provide our employees in the United States, including Messrs. Bhasin and Tyagarajan, with a tax-qualified defined contribution 401(k) plan, pursuant to which employees may elect to defer pre-tax salary amounts up to the limits set by the Internal Revenue Code. We match 100% of the first 4% of salary deferred by our employees under the 401(k) plan. In addition, we provide our employees in the United States with an additional employer contribution under our tax-qualified defined contribution profit-sharing plan.
Pursuant to our employment agreement with Mr. Bhasin, following the termination of his employment for any reason, he is entitled to a pension benefit of $190,000, payable on the same terms and conditions as the benefit accrued by Mr. Bhasin under the General Electric Company Pension Plan, as amended and restated as of July 1, 2003.
We maintain a Gratuity Plan, which is a defined benefit plan required to be provided to all Indian employees by applicable law, including Mr. Gour. In addition, in India, we maintain a Superannuation Plan, which is a defined contribution plan under which we do not make any employer contributions, and a Provident Fund Plan which is a defined contribution plan required under applicable law.
We do not provide retirement benefits to our other named executive officers.
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Outstanding Equity Awards at Fiscal Year End
The following table provides information regarding each unexercised Company option held by each of our named executive officers as of December 31, 2006.
Name |
Number of Securities Underlying Unexercised Options (#) Exercisable |
Number of Securities Underlying Unexercised Options (#) Unexercisable |
Option Awards Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) |
Option Exercise Price ($) |
Option Expiration Date |
||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Pramod Bhasin | 7,875 | 9,625 | | 623 | 7/26/2015 | (1) | |||||
Pramod Bhasin | | | 2,500 | 623 | 7/26/2015 | (2) | |||||
Vivek N. Gour | 1,350 | 1,650 | | 623 | 7/26/2015 | (1) | |||||
V.N. Tyagarajan | 2,000 | 3,000 | | 623 | 7/26/2015 | (3) | |||||
Patrick Cogny | 518 | 632 | | 623 | 7/26/2015 | (4) | |||||
Patrick Cogny | 10 | 90 | | 1,177 | 2/27/2016 | (5) | |||||
Mitsuru Maekawa | 450 | 550 | | 623 | 7/26/2015 | (1) |
(1) These Company options were granted on July 26, 2005, and vest with respect to 20% on the first anniversary of January 1, 2005; thereafter, 5% of the Company options vest every three months until the Company options are 100% vested.
(2) Mr. Bhasin was granted 2,500 Company options under the Company Stock Planson July 26, 2005, that are subject to performance-based vesting conditions (the "Company performance options"). Pursuant to the terms of Mr. Bhasin's award agreement, in the event of any "partial exit" (defined as a sale or other disposition, which does not constitute and occurs prior to a change in control, by any of General Atlantic and Oak Hill (other than to General Atlantic, Oak Hill and their respective affiliates) of any number of our common shares or other securities), if the "internal rate of return" (as defined in the award agreement) on a cumulative basis is at least 25% in connection with such partial exit, the Company performance options will vest with respect to a percentage of the Company performance options equal to the product of 0.8 multiplied by the percentage of the aggregate number of common shares beneficially owned by General Atlantic and Oak Hill on January 1, 2005, which have in the aggregate been sold in such partial exit and all prior partial exits. In the event of a partial exit where General Atlantic and Oak Hill realize an internal rate of return on a cumulative basis of at least 30% in connection with such partial exit, the relevant multiple is 0.9. In the event the internal rate of return on a cumulative basis is at least 35%, the relevant multiple is 1.0. Any Company performance options remaining unvested following a partial exit may vest upon the occurrence of other vesting events. We expect that Company performance options with respect to approximately shares will vest in connection with the "partial exit" resulting from the offering.
In addition to potential vesting dates based on "partial exits" described above, the Company performance options will also be subject to vesting upon the earlier of a change in control (as defined in "Potential Payments Upon Termination or Change of ControlCompany Stock Plans") and January 1, 2010, in each case subject to Mr. Bhasin's continued employment. Upon the earlier of such events, the Company performance options will vest with respect to a percentage based on the internal rate of return (as defined in the option award agreement) realized by General Atlantic and Oak Hill. If the internal rate of return is at least 25%, the Company performance options will become vested with respect to a percentage equal to the excess of 80% of the Company performance options over the aggregate percentage of Company performance options that have become vested and exercisable prior to the vesting date pursuant to any partial exit. If the internal rate of return is at least 30%, the Company performance
96
options will become vested with respect to a percentage equal to the excess of 90% of the Company performance options over the aggregate percentage of Company performance options that have become vested prior to the vesting date pursuant to any partial exit. If the internal rate of return is at least 35%, the Company performance options will become vested with respect to a percentage equal to the excess of 100% of the Company performance options over the aggregate percentage of Company performance options that have become vested prior to the vesting date pursuant to any partial exit. See "Potential Payments Upon Termination or Change of Control" for details on the consequences of certain terminations on the vesting of the Company performance options.
(3) These Company options were granted on July 26, 2005, and vest with respect to 20% on the first anniversary of February 2, 2005 and, thereafter, 5% of the Company options vest every three months until the Company options are 100% vested.
(4) These Company options were granted on July 26, 2005, and vest with respect to 20% on the first anniversary of March 1, 2005; thereafter, 5% of the Company options vest every three months until the Company options are 100% vested.
(5) These Company options were granted on February 27, 2006, and vest with respect to 10% on March 1, 2007; 20% on March 1, 2008; 30% on March 1, 2009; and 40% on March 1, 2010.
Option Exercises
None of our named executive officers exercised any Company options in the fiscal year ended December 31, 2006.
Pension Benefits
The chart below provides information on certain pension benefits provided to our named executive officers for the fiscal year ended December 31, 2006.
Name |
Plan Name |
Number of Years Credited Service (#) |
Present Value Accumulated Benefit ($) |
Payments during fiscal year last ($) |
||||
---|---|---|---|---|---|---|---|---|
Pramod Bhasin | Employment Agreement with Mr. Bhasin | not applicable | 160,887 | (1) | 0 | |||
Vivek N. Gour |
Gratuity Plan for Indian Employees |
5.35 |
26,874 |
(2) |
0 |
Nonqualified Deferred Compensation
We do not provide our named executive officers with any nonqualified deferred compensation.
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Potential Payments Upon Termination or Change in Control
Below is a description of the potential payments and benefits that would be provided to our named executive officers upon termination of their employment or a change in control under their employment agreements and award agreements under the Company Stock Plans.
Employment Agreements with Named Executive Officers
Pramod Bhasin and V.N. Tyagarajan
We have entered into employment agreements with Messrs. Bhasin and Tyagarajan, which provide for certain payments and benefits to be paid to each upon certain terminations of employment. See "Narrative Disclosure to Summary Compensation Table and Grant of Plan-Based Awards TableEmployment Agreements with Named Executive Officers" for a description of these provisions.
Company Stock Plans
Under the Company Stock Plans, upon the occurrence of a change of control (as defined below) or dissolution or liquidation, our board of directors may provide that all Company options will become immediately exercisable. Our board of directors may also, upon at least ten days' advance notice, cancel any outstanding Company options and pay to the holders of such Company options, in cash or shares, the value of such Company options based upon the price per share received by our other shareholders in the event of a change in control. Our obligations under the Company Stock Plans will be binding upon any successor corporation or organization. The Company Stock Plans require that we make appropriate provisions to preserve optionees' rights under the Company Stock Plans including, where it is intended that Company options survive a change in control, by requiring that outstanding Company options be assumed or that substantially equivalent options be substituted for our outstanding Company options. The term "change in control" for purposes of our Company Stock Plans is defined as the following: (a) the acquisition by any person or entity (other than General Atlantic, Oak Hill or GE Capital International (Mauritius) or any of their respective affiliates (referred to for purposes of this definition as the "Investors"), directly or indirectly, of more than 50% of the combined voting power of the then outstanding securities entitled to vote generally in the election of our directors, including, without limitation, as a result, in whole or part, by reason of a sale or other disposition by General Atlantic, Oak Hill or any of their respective affiliates of their direct or indirect interest in GICo and/or Genpact Global (Lux)) or any successor entities; (b) any merger, consolidation, reorganization, recapitalization, tender or exchange offer or any other transaction with or affecting us, GICo and/or Genpact Global (Lux) as a result of which a person or entity other than an Investor owns after such transaction, directly or indirectly, more than 50% of the combined voting power of the then outstanding securities entitled to vote generally in the election of our directors; or (c) the sale, lease, exchange, transfer or other disposition to any person or entity, other than an Investor, of all or substantially all, of our assets and our consolidated subsidiaries.
Subject to certain limitations relating to incentive stock options and exemptions available under certain securities regulations, Company options granted under the Company Stock Plans will be subject to adjustment or substitution as to the number, price or kind of share or other consideration subject to such Company options or as otherwise determined by our board of directors to be equitable in the event of changes in our outstanding shares or capital structure by reason of share or extraordinary cash dividends, share splits, reverse share splits, recapitalization, reorganizations, mergers, consolidations, separations, combinations, exchanges or other relevant corporate transactions or changes in capitalization or in the event of any change in applicable laws or any change in circumstances which results in or would result in any substantial dilution or enlargement of the rights granted to, or available for, participants, or which otherwise warrants equitable adjustment because it interferes with the intended operation of the Company Stock Plans.
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Generally, except as described below, our Company option award agreements with our named executive officers do not provide for accelerated vesting upon a termination of employment. With respect to the 17,500 Company options granted to Mr. Bhasin on July 26, 2005, in the event Mr. Bhasin's employment agreement is terminated due to death or disability (as defined in his employment agreement), such Company options will become vested as to that number of additional option shares that would have vested if Mr. Bhasin had remained employed by us for an additional period of 12 months following the date of such termination. If Mr. Bhasin's employment is terminated by us without cause (as defined in his employment agreement) or by Mr. Bhasin for good reason (as defined in his employment agreement and described above), the Company options will become vested and exercisable on the date of such termination as to that number of additional option shares that would have vested for an additional 12 months (or in the case of terminations on or prior to December 31, 2006, 24 months). In the event of a change in control of our Company Mr. Bhasin's Company options described above will become fully vested.
With respect to the Company performance options, If Mr. Bhasin's employment is terminated due to death or disability or, after December 31, 2006, by us without cause or by Mr. Bhasin for good reason, the Company performance options will become vested on the date of such termination as to that number of option shares, if any, that is necessary to vest Mr. Bhasin an additional 20% of the total option shares. See description of performance-based vesting under the "Outstanding Equity Awards at Fiscal Year End" table for consequences of a change in control with respect to the Company performance options.
In the event Mr. Bhasin's employment is terminated due to death or disability, by us without cause or by Mr. Bhasin for good reason, all his vested Company options and his Company performance options will continue to be exercisable for three years. In the event of a termination by Mr. Bhasin without good reason, all his vested Company options and his Company performance options will be exercisable for 90 days following termination. In the event of termination by us for cause, all his vested and unvested options will terminate.
Termination and Change of Control Potential Payments and Benefits Table
The amounts included in the table below do not include payments and benefits to the extent they are provided on a non-discriminatory basis to salaried employees generally upon termination of employment. The amounts indicated are based on the payments and benefit that would have been incurred by the company if the named executive officer's employment had terminated as of December 29, 2006, which is the last business day of the fiscal year ended December 31, 2006. Where applicable, the value of one of our
99
common shares on December 29, 2006 was $1,909, which we estimate to be the fair market value of our common shares as of that date.
Name |
Involuntary Termination without Cause ($) |
Involuntary Termination for Cause ($) |
Voluntary Termination with Good Reason (1) ($) |
Voluntary Termination without Good Reason ($) |
Termination due to Death ($) |
Termination due to Disability ($) |
Change of Control ($) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Pramod Bhasin | ||||||||||||||||
Cash Severance | 7,664,521 | (2) | | 7,664,521 | (2) | 1,744,521 | (3) | 1,750,000 | (4) | 1,750,000 | (4) | 5,000,000 | (5) | |||
Equity Treatment |
10,288,000 |
(6) |
|
10,288,000 |
(6) |
|
5,144,000 |
(7) |
5,144,000 |
(7) |
15,592,750 |
(8) |
||||
Health and Welfare |
276,728 |
(9) |
|
276,728 |
(9) |
|
|
|
|
|||||||
Pension Benefits |
160,887 |
(10) |
160,887 |
(10) |
160,887 |
(10) |
160,887 |
(10) |
160,887 |
(10) |
160,887 |
(10) |
|
|||
TOTAL |
18,390,136 |
160,887 |
18,390,136 |
1,905,408 |
7,054,887 |
7,054,887 |
20,592,750 |
|||||||||
VN Tyagarajan |
||||||||||||||||
Cash Severance |
165,000 |
(11) |
|
|
|
|
|
|
||||||||
Equity Treatment |
|
|
|
|
|
|
|
|||||||||
Health and Welfare |
|
|
|
|
|
|
|
|||||||||
Pension Benefits |
|
|
|
|
|
|
|
|||||||||
TOTAL |
165,000 |
0 |
0 |
0 |
0 |
0 |
0 |
100
101
Prior to our initial public offering, we did not pay our directors any cash compensation for service on the board of directors and committees of our board of directors. From 2005 to 2006 we granted each of our non-employee directors, other than the chairman of the audit committee of the board of directors, 450 Company options, with a per share exercise price equal to the per share fair market value of the underlying shares on the grant date, upon the commencement of his or her service as a director. The directors who received such Company options are as follows: J. Madden, R. Scott and M. Spence. The chairman of the audit committee, J. Barter, received 475 Company options, with an exercise price equal to the per share fair market value of the underlying shares on the grant date. Twenty percent of these Company options vest on the first anniversary of the date of the first board of directors meeting attended by the director, and thereafter, vest at the rate of five percent of the Company options per quarter until the Company options are 100% vested on the fifth anniversary of the date of the first board of directors meeting attended by the director, subject to continued service as a director.
Our practice prior to our initial public offering has been not to provide compensation for employee directors and directors who are designated by our majority shareholders for their service on the board and board committees, although we do reimburse all of our directors for all out-of-pocket business expenses. Following our initial public offering, our non-employee directors will each receive an annual retainer of $40,000, except that Mr. Barter will receive an annual retainer of $75,000 for his service as chairman of the audit committee. In addition, following our initial public offering we will grant each of our directors who is appointed to our board of directors by our majority shareholders and who does not already have Company options, 250 Company options.
The following table sets forth the compensation of our directors for the fiscal year ended December 31, 2006.
Name |
Year |
Option Awards ($) (1) |
All Other Compensation($)(2) |
Total ($) |
||||
---|---|---|---|---|---|---|---|---|
J. Barter | 2006 | 36,792 | (3) | | 36,792 | |||
J. C. Madden | 2006 | 37,182 | (4) | | 37,182 | |||
R. G. Scott | 2006 | 46,243 | (5) | | 46,243 | |||
A. M. Spence | 2006 | 37,182 | (6) | 11,783 | 48,965 |
(1) The amounts shown under this column reflect the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2006, in accordance with FAS 123(R) of awards pursuant to our 2005 Stock Option Plan and 2006 Stock Option Plan and thus include amounts from awards granted in and prior to 2006. Assumptions used in the calculation of these amounts are included in Note 19 "Employee stock incentive plan" to our audited financial statements for the fiscal year ended December 31, 2006 included elsewhere in this prospectus. However, as required, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions.
(2) Amounts under this column represent reimbursement for travel expenses. Other than Mr. Spence, none of our directors were reimbursed for expenses greater than $10,000.
(3) As of December 31, 2006, Mr. Barter held 475 Company options. The per share grant date fair value of these Company options, which were granted on September 28, 2005, was $169.
(4) As of December 31, 2006, Mr. Madden held 450 Company options. The per share grant date fair value of these Company options, which were granted on September 28, 2005, was $169.
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(5) As of December 31, 2006, Mr. Scott held 450 Company options. The per share grant date fair value of these Company options, which were granted on February 27, 2006 was $611.
(6) As of December 31, 2006, Mr. Spence held 450 Company options. The per share grant date fair value of these Company options, which were granted on September 28, 2005, was $169.
103
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Shareholders Agreement
Prior to the consummation of this offering we and the selling shareholders will enter into an amended and restated shareholders agreement relating to the common shares the selling shareholders hold in us. Pursuant to this agreement GE is currently entitled to nominate two persons to our board of directors, General Atlantic is entitled to nominate two persons to our board of directors and Oak Hill is entitled to nominate two persons to our board of directors, assuming no change in their respective shareholdings. In addition, each of the selling shareholders is subject to certain restrictions on the transfer of their common shares.
The agreement grants the selling shareholders certain rights to require us to register for public resale under the Securities Act all common shares that they request be registered after the expiration of the relevant lock-up period following this offering. In addition, the agreement grants the selling shareholders piggyback rights on any registration for our account or the account of another shareholder. These rights are subject to customary cutbacks and other restrictions. In connection with this offering or the other registrations described above, we will indemnify any selling shareholders and we will bear all fees, costs and expenses (except underwriting discounts and selling commission).
Our Master Services Agreement with GE
Our MSA with GE is for a term ending December 31, 2013. It can be renewed for a single three-year term upon mutual written agreement with at least twelve months prior written notice. Under the MSA, GE has agreed to purchase a stipulated minimum dollar amount of services or pay us certain costs in lieu thereof. The minimum annual volume commitment is $360 million for each of the six years beginning January 1, 2005. The annual commitment is then reduced in a phased manner for the final three years of the MSA, with the commitment being $270 million for 2011, $180 million for 2012, and $90 million for 2013. The minimum committed amount is subject to reduction in certain circumstances, including (1) as a result of the termination of any SOWs by GE for cause, (2) as a result of non-performance of services by us due to certain force majeure events or (3) in certain other circumstances relating to business offered to us by GE that we chose not to perform. In the event that the actual purchased dollar volume for any year falls below the minimum volume commitment, GE has agreed to make certain payments to us. The payments GE is required to pay to us if it does not meet the minimum volume commitment are significantly lower than the amount by which GE's purchases fall short of that minimum volume commitment. In the event that GE purchases more than the minimum volume commitment in a given year, it is entitled to a limited credit against future shortfalls.
Our pricing arrangements with GE vary by SOW and include some time and materials contracts and some fixed price contracts, as well as productivity benefit sharing. See "Management's Discussion and Analysis of Financial Condition and Results of OperationsOverview."
There is no restriction on our ability to provide services to other parties, except that we have agreed not to allow employees who have performed certain software-related services for GE to work on a similar project for companies that GE names in writing as its competitors for a period of 12 months following the completion of such services to GE. We have the right of first opportunity during the term of the MSA to respond to a request for proposal from GE in respect of any business process services that are (1) similar to those already provided to GE, (2) able to be provided by us in India, China, Hungary or Mexico and (3) anticipated to involve an annual purchase dollar volume in excess of $200,000, so long as GE has not previously terminated such services for cause. GE is not prevented from either negotiating or contracting for the outsourcing of services with other parties thereafter.
GE can terminate the MSA for cause, which includes the failure to achieve certain performance standards, or upon a change in control of our company, which does not include a change in control arising
104
from an initial public offering. GE can also terminate any pre-existing SOW for convenience, but only with a notice period and, in certain cases, the payment of certain amounts. Following the consummation of this offering GE will lose the ability to terminate the MSA solely based on a change of control of our company. We have agreed to indemnify GE for losses arising from material breaches of any SOW, non-compliance with laws and certain other matters. Our liability is subject to limits in certain cases. We and GE have agreed to mutual non-solicitation of employees until June 2010. In a separate agreement, GE has agreed through December 31, 2009, subject to exceptions, to restrictions on its ability to set up a separate business unit to provide English-language business process services from low-wage countries to certain GE businesses or set up a business that provides outsourcing services from a low-wage country to provide services to third parties.
Our Master Services Agreement with Wachovia
Our MSA with Wachovia is for a term ending November 30, 2012 and can be renewed by Wachovia for a single two-year term. The MSA covers all services to be provided under SOWs and specifies the pricing methodology for all SOWs. We may propose transactional or fixed pricing for new or amended SOWs, but only if such pricing is as favorable to Wachovia as the prices computed using the methodology in the MSA. Wachovia has agreed to share with us a portion of certain productivity benefits, after certain reimbursements for investments made to facilitate such benefits. Wachovia has not agreed to any volume commitment under the MSA. See "Wachovia Securities Purchase Agreement and Ancillary Agreement."
We are entitled to bid on any business process to be outsourced by Wachovia, but Wachovia is not required to use our services exclusively. We have agreed not to perform certain types of services for three of Wachovia's principal competitors. We are obligated to offer Wachovia the opportunity to be a pilot client for, and preferred access to, any advances we have developed in the provision of services substantially similar to the services provided to Wachovia. Wachovia has agreed to not solicit our employees for 12 months following the termination of the MSA.
Under the MSA, we agree to actively involve Wachovia in the selection of employees who perform their services and employees cannot be assigned to certain key positions without Wachovia's consent. We have agreed to pay certain penalties if we do not achieve certain specified milestones while transitioning the work under SOWs or if we do not achieve certain performance levels. Wachovia has the right, upon the occurrence of certain force majeure type events and regulatory concerns, to take-over the processes we provide for them. Wachovia has the right to periodically benchmark our prices and we must decrease prices if they are found to exceed benchmarked prices beyond certain levels.
Wachovia can terminate the MSA or any SOW (1) for cause at any time, (2) in the event of a change of control with six months' notice and (3) for convenience with at least 180 days' notice along with the payment of certain costs and charges. Wachovia may also terminate the MSA with lesser periods of notice upon the occurrence of certain adverse events or circumstances with respect to us. We have agreed to provide certain services, if so required by Wachovia, for up to a year following the termination of any SOW in order to assist with the transition of work back to Wachovia. Wachovia has agreed to pay certain costs and, in certain circumstances, termination charges, if SOWs are terminated following any extraordinary event that increases or decreases the estimated average monthly usage of resources above a certain limit. Upon termination of the MSA, Wachovia also has the right to purchase, or in certain circumstances lease, any Delivery Centers or equipment used by us to primarily deliver services to them. We have also agreed to indemnify Wachovia for losses arising from breaches of any our representations, warranties and covenants, non-compliance with laws and certain other factors. We are also liable for certain operational losses suffered by Wachovia as a direct result of a breach by us of our obligations. Our liability is subject to limits in certain cases.
105
Wachovia Securities Purchase Agreement and Ancillary Agreement
Wachovia purchased common shares from GE under a securities purchase agreement dated November 30, 2005. We agreed to indemnify Wachovia for losses that arise from breaches of our representations and warranties, provided such losses exceed $5 million. Our liability under that indemnity is capped at $20 million in the aggregate.
Under the ancillary agreement between us and Wachovia dated November 30, 2005, Wachovia agreed to make a payment to us if the number of our FTEs performing services for Wachovia does not exceed certain specified levels by December 31, 2010 and any one of the following events has occurred: (1) an initial public offering or a change of control event has occurred prior to that date, in which case the payment is due on January 31, 2011; (ii) an initial public offering or a change of control event occurs prior to when the MSA is terminated, in which case the payment is to be made on the termination of the MSA; or (iii) the MSA is terminated prior to an initial public offering or change of control event, in which case the payment is due on the earlier of the initial public offering or the change of control event. The amount of the payment depends on the number of employees performing services for Wachovia at such time as well as the price of our common shares at the time of any initial public offering and the movement of an index comprised of the share prices of certain of our competitors. Wachovia has also agreed, for the period from December 31, 2010 through March 31, 2012, to use commercially reasonable efforts to maintain the number of our FTEs utilized by Wachovia at the December 31, 2010 level.
Tax Matters Agreement
We are party to a tax matters agreement with two of our shareholders, GICo and GE, relating to the 2004 Reorganization. Under this agreement, GE indemnifies us and GICo for certain tax liabilities that arose either prior to the 2004 Reorganization or relating to the 2004 Reorganization. See "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesCash Flow from Financing Activities."
106
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth, as of March 31, 2007, information regarding the beneficial ownership of our common shares by:
Beneficial ownership is determined in accordance with the SEC rules and includes voting or investment power with respect to the securities. Common shares subject to options that are currently exercisable or exercisable within 60 days are deemed to be outstanding and beneficially owned by the person holding such options. Such shares, however, are not deemed to be outstanding for the purposes of computing the percentage ownership of any other person.
Percentage of beneficial ownership is based on 1,036,782 common shares of GGH outstanding on March 31, 2007, after giving effect to the conversion of preferred stock. The numbers of shares outstanding will change upon consummation of the 2007 Reorganization.
|
|
|
|
|
Shares Beneficially Owned Immediately After Offering |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
Shares Offered Hereby |
|||||||||||||
|
|
|
Assuming No Exercise of Over- Allotment Option |
Assuming Full Exercise of Over- Allotment Option |
||||||||||||
|
Shares Beneficially Owned as of March 31, 2007 |
Assuming No Exercise of Over-Allotment Option |
Assuming Full Exercise of Over-Allotment Option |
|||||||||||||
Name of Beneficial Owner(2) |
||||||||||||||||
Number(1) |
%(1) |
Number |
Number |
Number |
% |
Number |
% |
|||||||||
Principal Securityholders: | ||||||||||||||||
Genpact Investment Co. (Lux)(3) | 649,374 | 62.63 | ||||||||||||||
GE Capital International (Mauritius)(4) | 297,566 | 28.70 | ||||||||||||||
WIH Holdings (Mauritius)(5) | 76,483 | 7.38 | ||||||||||||||
Directors and Named Executive Officers: | ||||||||||||||||
Rajat Kumar Gupta(6) | 157 | * | ||||||||||||||
Pramod Bhasin(7) | 9,612 | * | ||||||||||||||
John Barter(8) | 166 | * | ||||||||||||||
J Taylor Crandall(3) | 649,374 | 62.63 | ||||||||||||||
Steven Denning(3) | 649,374 | 62.63 | ||||||||||||||
Mark F. Dzialga(3) | 649,374 | 62.63 | ||||||||||||||
James C. Madden(9) | 180 | * | ||||||||||||||
Denis Nayden(3) | 649,374 | 62.63 | ||||||||||||||
Gary M. Reiner(10) | 297,566 | 28.70 | ||||||||||||||
Robert G. Scott(11) | 90 | * | ||||||||||||||
A. Michael Spence(12) | 180 | * | ||||||||||||||
Lloyd G. Trotter(13) | 297,566 | 28.70 | ||||||||||||||
Vivek N. Gour(14) | 1,437 | * | ||||||||||||||
V. N. Tyagarajan(15) | 2,511 | * | ||||||||||||||
Patrick Cogny(16) | 470 | * | ||||||||||||||
Mitsuru Maekawa(17) | 537 | * | ||||||||||||||
Directors and executive officers as a group (23 persons)(18) | 17,328 | 1.67 |
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General Atlantic, Oak Hill, GE and Wachovia are parties to a shareholders agreement. See "Certain Relationships and Related Party Transactions."
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The following is subject to change once the terms of the 2007 Reorganization and our company's Bermuda organizational documents are determined.
General
We are an exempted company organized under the Companies Act 1981 (Bermuda) (the "Companies Act"). We are registered with the Registrar of Companies in Bermuda under registration number 39838. Genpact Limited was incorporated on March 29, 2007 in connection with the 2007 Reorganization. See "Prospectus SummaryThe CompanyThe 2007 Reorganization." Our registered office is located at Canon's Court, 22 Victoria Street, Hamilton HM EX, Bermuda. The rights of our shareholders, including those persons who will become shareholders in connection with this offering, are governed by Bermuda law and our memorandum of association and bye-laws. The Companies Act may differ in some material respects from laws generally applicable to United States corporations and their shareholders. The following is a summary of the material provisions of Bermuda law and our organizational documents, including our memorandum of association and our bye-laws. For more detailed information, please see our memorandum of association and our bye-laws, copies of which, as amended and in effect as of the date of the consummation of this offering, will be filed as exhibits to the registration statement of which this prospectus forms a part.
Share Capital
Our authorized capital consists of common shares, $ par value per share. Immediately following this offering, common shares will be issued and outstanding. All of our issued and outstanding shares prior to completion of this offering are and will be fully paid up and all of our common shares to be issued in this offering will be issued fully paid up. Immediately prior to this offering, there was no public market for our common shares.
Pursuant to our bye-laws, and subject to the requirements of the New York Stock Exchange on which our common shares are to be listed, our board of directors is authorized to issue any of our authorized but unissued shares. Upon the consummation of this offering, there will be no limitations on the right of non-Bermudians or non-residents of Bermuda to hold our common shares.
Common Shares
Holders of our common shares are entitled, subject to the provisions of our bye-laws, to one vote per share on all matters submitted to or requiring a vote of holders of common shares. Unless a different majority is required by Bermuda law or by our bye-laws, resolutions to be approved by holders of common shares may be passed by a simple majority of votes cast at a meeting at which a quorum is present. A quorum consists of at least one shareholder present in person or by proxy and entitled to vote representing more than 50% of the total issued common shares.
Upon the liquidation, dissolution or winding up of our company, the holders of our common shares are entitled to receive their ratable share of the net assets of our company available after payment of all debts and other liabilities.
Our common shares have no preemptive, subscription, redemption or conversion rights.
Share Classes
Pursuant to Bermuda law and our bye-laws, our board of directors by resolution may establish one or more series of preference shares having such par value, designations, dividend rates, relative voting rights, conversion or exchange rights, redemption rights, liquidation rights and other relative participation, optional or other rights, qualifications, limitations or restrictions as may be fixed by the board of directors
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without any shareholder approval. Such rights, preferences, powers and limitations as may be established could also have the effect of discouraging an attempt to obtain control of our company.
Dividends
Under Bermuda law, a company may declare and pay dividends from time to time unless there are reasonable grounds for believing that the company is or would, after the payment, be unable to pay its liabilities as they become due or that the realizable value of its assets would thereby be less than the aggregate of its liabilities and issued share capital and share premium accounts. Under our bye-laws, each common share is entitled to dividends if, as and when dividends are declared by our board of directors. There are no restrictions in Bermuda on our ability to transfer funds (other than funds denominated in Bermuda dollars) in or out of Bermuda or to pay dividends to U.S. residents who are holders of our common shares.
Any cash dividends payable to holders of our common shares listed on the New York Stock Exchange will be paid to , our transfer agent in the United States, for disbursement to those holders.
We have never declared or paid any dividends on our common shares, other than dividends paid to GE in the 2004 Reorganization.
Variation of Rights
The rights attaching to a particular class, unless otherwise provided for by the terms of issue of the relevant class, may be varied either: (i) with the consent in writing of the holders of 75% of the issued shares of that class; or (ii) with the sanction of a resolution passed by a majority of the votes cast at a general meeting of the relevant class of shareholders at which a quorum consisting of at least two persons holding or representing more than 50% of the issued shares of the relevant class is present. Our bye-laws specify that the creation or issue of shares ranking equally with existing shares will not, unless expressly provided by the terms of issue of existing shares, vary the rights attached to existing shares. In addition, the creation or issue of preference shares ranking prior to common shares will not be deemed to vary the rights attached to common shares or, subject to the terms of any other series of preference shares, to vary the rights attached to any other series of preference shares.
Repurchase of Shares
At its discretion and without the sanction of a resolution, our board of directors may authorize the purchase by our company of our own shares, of any class, at any price. To the extent permitted by Bermuda law, the shares to be purchased may be selected in any manner whatsoever, upon such terms as our board of directors may determine in its discretion.
Transfer of Common Shares
Our board of directors may refuse to recognize an instrument of transfer of a common share unless (1) the instrument of transfer is duly stamped, if required by law, and lodged with us, accompanied by the relevant share certificate and such other evidence of the transferor's right to make the transfer as our board of directors may reasonably require, (2) the transfer is in respect of only one class of share and (3) the permission of the Bermuda Monetary Authority has been obtained, if applicable. Subject to such restrictions, a holder of common shares may transfer the title to all or any of his common shares by completing the usual common form or any other form which our board of directors may approve. An instrument of transfer must be signed by the transferor and transferee, although in the case of a fully paid up common share, our board of directors may accept an instrument signed only by the transferor.
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Certain Provisions of the Bye-laws and Bermuda Law
Certain provisions of our memorandum of association, bye-laws and the Companies Act may have an anti-takeover effect, may delay, defer or prevent a tender offer or takeover attempt that you might consider in your best interest, including an attempt that might result in your receipt of a premium over the market price for your common shares, and may make more difficult the removal of our incumbent directors.
Election and Removal of Directors
Our bye-laws provide that our board of directors shall consist of not less than two and not more than fifteen directors. However, we may increase the maximum number of directors by resolution of the shareholders. Our board of directors currently consists of twelve directors. Currently, each director serves in such capacity for such term as we may determine by resolution or, in the absence of such determination, until the termination of the next annual general meeting.
Our bye-laws state that shareholders may only remove a director for cause. A director may only be removed at a special meeting convened for that purpose provided notice of any such meeting is served upon the director concerned not less than 14 days before the meeting. A director is entitled to attend the meeting and be heard on the motion for his or her removal.
Our board of directors may fill any vacancy occurring as a result of the death, disability, disqualification or resignation of a director or as a result of an increase in the size of the board of directors and to appoint an alternate director to any director so appointed so long as a quorum of directors remains in office.
A director may appoint and remove his own alternate director, who may be removed by resolution of the board. An alternate director may also be a director in his own rights and may act as an alternate to more than one director.
Meetings of Shareholders
Under Bermuda law, a company is required to convene at least one general meeting of shareholders each calendar year. Bermuda law provides that a special general meeting of shareholders may be called by the board of directors of a company and must be called upon the request of shareholders holding not less than 10% of the paid-up capital of the company carrying the right to vote at general meetings. Bermuda law also requires that shareholders be given at least five days' advance notice of a general meeting, but the accidental omission to give notice to any person does not invalidate the proceedings at a meeting. Under our bye-laws, at least 5 days' notice of an annual general meeting or a special general meeting must be given to each shareholder entitled to vote at such meeting. This notice requirement is subject to the ability to hold such meetings on shorter notice if such notice is agreed: (i) in the case of an annual general meeting, by all of the shareholders entitled to attend and vote at such meeting; or (ii) in the case of a special general meeting, by a majority in number of the shareholders entitled to attend and vote at the meeting holding not less than 95% in nominal value of the shares entitled to vote at such meeting. The quorum required for a general meeting of shareholders is at least one individual present in person or by proxy at the start of the meeting.
Advance Notice Requirements for Nominations
Our bye-laws contain advance notice procedures with regard to shareholder proposals related to the nomination of candidates for election as directors. These procedures provide that any shareholder entitled to vote for the election of directors may nominate persons for election as directors only if written notice of such shareholder's intent to make such nomination is given to our corporate secretary not later than (i) with respect to an election to be held at an annual general meeting, not less than 90 days nor more than
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120 days prior to the anniversary date of the immediately preceding annual meeting or not later than ten days after notice or public disclosure of the date of the annual meeting is given or made available to shareholders, whichever date is earlier, and (ii) with respect to an election to be held at a special general meeting for the election of directors, the close of business on the tenth day following the date on which notice of such meeting is first given to shareholders.
A shareholder's notice to our corporate secretary must be in proper written form and must set forth information related to the shareholder giving the notice and the owner on whose behalf the nomination is made, including:
As to each person whom the shareholder proposes to nominate for election as a director:
Advance Notice Requirements for Shareholder Proposals
Our bye-laws contain advance notice procedures with regard to shareholder proposals not related to director nominations. These notice procedures, in the case of an annual meeting of shareholders, are the same as the notice requirements for shareholder proposals related to director nominations discussed above insofar as they relate to the timing of receipt of notice by our corporate secretary.
A shareholder's notice to our corporate secretary must be in proper written form and must set forth, as to each matter the shareholder proposes to bring before the meeting:
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Access to Books and Records and Dissemination of Information
Members of the general public have the right to inspect the public documents of a company available at the office of the Registrar of Companies in Bermuda. These documents include a company's memorandum of association, including its objects and powers, and any alterations to its memorandum of association. Our shareholders have the additional right to inspect the bye-laws of the company, minutes of general meetings and the company's audited financial statements, which must be presented at the annual general meeting. The register of shareholders of a company also is open to inspection by shareholders without charge and by members of the general public on the payment of a fee. We are required to maintain our share register in Bermuda but may, subject to the provisions of Bermuda law, establish a branch register outside Bermuda. We maintain our principal share register in Hamilton, Bermuda. We are required to keep at our registered office a register of directors and officers that is open for inspection for not less than two hours each day by members of the public without charge. Bermuda law does not, however, provide a general right for shareholders to inspect or obtain copies of any other corporate records.
Amendments to our Memorandum of Association and Bye-laws
Bermuda law provides that the memorandum of association of a company may be amended by a resolution passed at a general meeting of shareholders. Our bye-laws provide that no bye-law shall be rescinded, altered or amended, and no new bye-law shall be made, unless it shall have been approved by a resolution of our board of directors and by a resolution of our shareholders.
Under Bermuda law, the holders of an aggregate of not less than in aggregate 20% in par value of the company's issued share capital or any class thereof have the right to apply to the Bermuda courts for an annulment of any amendment of the memorandum of association adopted by shareholders at any general meeting, other than an amendment which alters or reduces a company's share capital as provided in the Companies Act. Where such an application is made, the amendment becomes effective only to the extent that it is confirmed by the Bermuda court. An application for an annulment of an amendment of the memorandum of association must be made within twenty-one days after the date on which the resolution altering the company's memorandum of association is passed and may be made on behalf of persons entitled to make the application by one or more of their number as they may appoint in writing for the purpose. No application may be made by shareholders voting in favor of the amendment.
Board Actions
Under Bermuda law, the directors of a Bermuda company owe their fiduciary duty principally to the company, rather than the shareholders. Our bye-laws provide that some actions are required to be approved by our board of directors. Actions must be approved by a majority of the votes present and entitled to be cast at a properly convened meeting of our board of directors.
Our bye-laws contain a provision by virtue of which our shareholders waive any claim or right of action that they have, both individually and on our behalf, against any director or officer in relation to any action or failure to take action by such director or officer, except in respect of any fraud or dishonesty of such director or officer. Our bye-laws also indemnify our directors and officers in respect of their actions and omissions, except in respect of their fraud or dishonesty. The indemnification provided in our bye-laws is not exclusive of other indemnification rights to which a director or officer may be entitled, provided these rights do not extend to his or her fraud or dishonesty.
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Our bye-laws provide that our business is to be managed and conducted by our board of directors. Bermuda law requires that our directors be individuals, but there is no requirement in our bye-laws or Bermuda law that directors hold any of our shares. There is also no requirement in our bye-laws or Bermuda law that our directors must retire at a certain age.
Related Party Transactions and Loans
Provided a director discloses a direct or indirect interest in any contract or arrangement with us as required by Bermuda law, such director is entitled to vote in respect of any such contract or arrangement in which he or she is interested unless he or she is disqualified from voting by the chairman of the relevant board meeting.
Under Bermuda law, a director (including the spouse or children of the director or any company of which such director, spouse or children own or control more than 20% of the capital or loan debt) cannot borrow from us, (except loans made to directors who are bona fide employees or former employees pursuant to an employees' share scheme) unless shareholders holding 90% of the total voting rights have consented to the loan.
Amalgamations and Similar Arrangements
A Bermuda exempted company may acquire the business of another Bermuda exempted company or a company incorporated outside Bermuda when the business of the target company is within the acquiring company's objects as set forth in its memorandum of association.
Any amalgamation of our company with another company or corporation (other than certain affiliate companies) first requires the approval of our board of directors and then the approval of our shareholders, by the affirmative vote of a majority of the combined voting power of all of the outstanding common shares, voting together as a single class, subject to any voting rights granted to holders of any preference shares.
Takeovers
Bermuda law provides that where an offer is made for shares of a company and, within four months of the offer, the holders of not less than 90% of the shares which are the subject of the offer accept, the offeror may by notice require the non-tendering shareholders to transfer their shares on the terms of the offer. Dissenting shareholders may apply to the court within one month of the notice objecting to the transfer. The test is one of fairness to the body of the shareholders and not to individuals, and the burden is on the dissentient shareholder to prove unfairness, not merely that the scheme is open to criticism.
Appraisal Rights and Shareholder Suits
Under Bermuda law, in the event of an amalgamation of a Bermuda company with another company, a shareholder of the Bermuda company who is not satisfied that fair value has been offered for his or her shares in the Bermuda company may apply to the Bermuda Court to appraise the fair value of his or her shares. Under Bermuda law and our bye-laws, an amalgamation by us with another company would require the amalgamation agreement to be approved by our board of directors and by resolution of our shareholders.
Class actions and derivative actions are generally not available to shareholders under Bermuda law. However, the Bermuda courts would ordinarily be expected to follow English case law precedent, which would permit a shareholder to commence an action in the name of a company to remedy a wrong done to the company where the act complained of is alleged to be beyond the corporate power of the company or is illegal or would result in violation of the company's memorandum of association or bye-laws. Furthermore, consideration would be given by the Bermuda courts to acts that are alleged to constitute a fraud against the minority shareholders or, for instance, where an act requires the approval of a greater percentage of the company's shareholders than that which actually approved it.
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When the affairs of a company are being conducted in a manner oppressive or prejudicial to the interests of some part of the shareholders, one or more shareholders may apply to the Bermuda courts, which may make an order as it sees fit, including an order regulating the conduct of the company's affairs in the future or ordering the purchase of the shares of any shareholder by other shareholders or by the company.
Discontinuance/Continuation
Under Bermuda law, an exempted company may be discontinued in Bermuda and continued in a jurisdiction outside Bermuda as if it had been incorporated under the laws of that other jurisdiction. Our bye-laws provide that our board of directors may exercise all our power to discontinue to another jurisdiction without the need of any shareholder approval.
Indemnification of Directors and Officers
Our bye-laws provide that each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of us or, while a director or officer of us, is or was serving at our request as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, whether the basis of such proceeding is the alleged action of such person in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, will be indemnified and held harmless by us to the fullest extent authorized by the Companies Act against all damage or expense, liability and loss reasonably incurred or suffered by such person in connection therewith provided that any such person shall not be indemnified and held harmless if there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that, in respect of the matter for which the person is seeking indemnification, that person engaged in fraud or acted dishonestly or, in the case of a criminal matter, acted with knowledge that the such conduct was unlawful. Any indemnification is made out of our assets and to the extent that a person is entitled to claim indemnification in respect of amounts paid or discharged by him or her, the relevant indemnity shall take effect as our obligation to reimburse tat person making such payment or effecting such discharge. Our bye-laws also provide that we will be indemnified against all liabilities incurred in defending any such proceeding in advance of its final disposition, subject to the provisions of the Companies Act. These rights are not exclusive of any other right that any person may have or acquire under any statute, provision of our memorandum of association, bye-laws, agreement, vote of shareholders or disinterested directors or otherwise. No repeal or modification of these provisions will in any way diminish or adversely affect the rights of any director, officer, employee or agent of us under our memorandum of association in respect of any occurrence or matter arising prior to any such repeal or modification.
Our bye-laws provide that none of our directors will be personally liable to us or our shareholders for monetary damages for breach of fiduciary duty as a director, except, to the extent required by the Companies Act, for liability:
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Neither the amendment nor repeal of this provision will eliminate or reduce the effect of the provision in respect of any matter occurring, or any cause of action, suit or claim that, but for the provision, would accrue or arise, prior to the amendment or repeal.
Foreign Exchange Controls
We have been designated as a non-resident of Bermuda by the Bermuda Monetary Authority for the purposes of the Exchange Control Act, 1972. This designation allows us to engage in transactions in currencies other than the Bermuda dollar, and there are no restrictions on our ability to transfer funds, other than funds denominated in Bermuda dollars, in and out of Bermuda or to pay dividends to United States residents who are holders of our common shares.
Transfer of Common Shares to Residents of Bermuda
The Bermuda Monetary Authority has given its consent for the issue and free transferability of all of the common shares that are the subject of this offering to and between non-residents of Bermuda for exchange control purposes, provided that our common shares remain listed on an appointed stock exchange, which includes the New York Stock Exchange. Approvals or permissions given by the Bermuda Monetary Authority do not constitute a guarantee by the Bermuda Monetary Authority as to our performance or our creditworthiness. Accordingly, in giving such consent or permissions, the Bermuda Monetary Authority shall not be liable for the financial soundness, performance or default of our business or for the correctness of any opinions or statements expressed in this prospectus. Certain issues and transfers of common shares involving persons deemed resident in Bermuda for exchange control purposes require the specific consent of the Bermuda Monetary Authority.
In accordance with Bermuda law, share certificates are only issued in the names of companies, partnerships or individuals. In the case of a shareholder acting in a special capacity (for example as a trustee), certificates may, at the request of the shareholder, record the capacity in which the shareholder is acting. Notwithstanding such recording of any special capacity, we are not bound to investigate or see to the execution of any such trust. We will take no notice of any trust applicable to any of our common shares, whether or not we have been notified of such trust.
Transfer Agent and Registrar
The transfer agent and registrar of our common shares is .
New York Stock Exchange Listing
We will apply to have our common shares quoted on the New York Stock Exchange under the symbol "G."
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COMMON SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common shares. We cannot predict the effect, if any, that market sales of common shares or the availability of common shares will have on the market price of our common shares. Sales of substantial amounts of common shares in the public market, or the perception that such sales could occur, could cause the prevailing market price to decrease or to be lower than it might be in the absence of those sales or perceptions.
Upon the closing of this offering, we will have outstanding approximately common shares, assuming no exercise of the underwriters' over-allotment option. In addition, we have an aggregate of approximately common shares reserved for issuance under our share option plans. All of the common shares sold in this offering will be freely tradable without restriction under the Securities Act of 1933, as amended (the "Securities Act"), except for any common shares that may be acquired by an affiliate of us, as the term "affiliate" is defined in Rule 144 under the Securities Act. Persons who may be deemed to be affiliates generally include individuals or entities that control, are controlled by, or are under common control with, us and may include our directors and officers as well as our significant shareholders. All remaining common shares will be "restricted securities" as defined in Rule 144, and may not be sold other than through registration under the Securities Act or under an exemption from registration, such as the one provided by Rule 144.
Rule 144
Generally, Rule 144 provides that a person who has beneficially owned "restricted" shares for at least one year will be entitled to sell on the open market in brokers' transactions, within any three-month period, a number of shares that does not exceed the greater of:
Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and the availability of current public information about our company.
In the event that any person who is deemed to be our affiliate purchases common shares in this offering or acquires common shares pursuant to one of our employee benefit plans, sales under Rule 144 of the common shares held by that person are subject to the volume limitations and other restrictions (other than the one-year holding period requirement) described in the preceding two paragraphs.
Under Rule 144(k), a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the common shares proposed to be sold for at least two years, including the holding period of any prior owner other than our affiliates, is entitled to sell such common shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately upon the closing of this offering.
Rule 701
Under Rule 701, common shares acquired upon the exercise of certain currently outstanding options or pursuant to other rights granted under our share plans may be resold, to the extent not subject to lock-up agreements, (1) by persons other than affiliates, beginning 90 days after the effective date of this offering, subject only to the manner of sale provisions of Rule 144, and (2) by affiliates, subject to the
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manner of sale, current public information and filing requirements of Rule 144, in each case, without compliance with the one-year holding period requirement of Rule 144.
Form S-8 Registration Statements
We intend to file one or more registration statements on Form S-8 under the Securities Act following this offering to register our common shares that are issuable pursuant to our share option plans. These registration statements are expected to become effective upon filing. Common shares covered by these registration statements will then be eligible for sale in the public markets, subject to any applicable lock-up agreements and to Rule 144 limitations applicable to affiliates.
Lock-Up Agreements
We have agreed not to issue, sell or otherwise dispose of any common shares during a 180-day period following the date of this prospectus. We may, however, grant options to purchase common shares and issue common shares upon the exercise of outstanding or subsequently granted options under our existing equity incentive plans, and we may issue or sell common shares in connection with an acquisition or business combination as long as the acquiror of such common shares agrees in writing to be bound by the obligations and restrictions of our lock-up agreement.
Our executive officers and directors and certain of our other shareholders have agreed that, for a period of 180 days from the date of this prospectus, they will not, without the prior written consent of Morgan Stanley & Co. Incorporated, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc. on behalf of the underwriters, dispose of or hedge any common shares or any securities convertible into or exercisable or exchangeable for our common shares, subject to certain exceptions. Morgan Stanley & Co. Incorporated, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc. on behalf of the underwriters, in their sole discretion, may release any of the securities subject to these lock-up agreements at any time without notice.
Immediately following the consummation of this offering, the shareholders subject to such lock-up agreements will hold common shares, representing approximately % of our then outstanding common shares, or approximately % if the underwriters exercise their option to purchase additional common shares in full.
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CERTAIN MATERIAL BERMUDA AND UNITED STATES FEDERAL TAX CONSEQUENCES
The following summary of our taxation and the taxation of our shareholders is based upon current law and does not purport to be a comprehensive discussion of all the tax considerations that may be relevant to a decision to purchase shares. Legislative, judicial or administrative changes may be forthcoming that could affect this summary.
The following legal discussion (including and subject to the matters and qualifications set forth in such summary) of the material tax considerations under (1) "Certain Bermuda Tax Considerations" is based upon the advice of Appleby, our Bermuda legal counsel and (2) "U.S. Federal Income Tax Considerations" is based upon the advice of Cravath, Swaine & Moore LLP, our U.S. counsel. Each of these firms has reviewed the relevant portion of this discussion (as set forth above) and believes that such portion of the discussion constitutes, in all material respects, an accurate summary of the relevant income tax considerations relating to the company and the ownership of common shares by investors that are U.S. holders (as defined below). The advice of such firms does not include any factual or accounting matters, determinations or conclusions or facts relating to the business, income, reserves or activities of the company. The advice of these firms relies upon and is premised on the accuracy of factual statements and representations made by the company concerning the business and properties, ownership, organization, source of income and manner of operation of the company.
The discussion is based on current law. Legislative, judicial or administrative changes or interpretations may be forthcoming that could be retroactive and could materially adversely affect the tax consequences to us and to holders of common shares.
The tax treatment of a holder of common shares, or of a person treated as a holder of common shares for U.S. federal income, state, local or non-U.S. tax purposes, may vary depending on the holder's particular tax situation. Statements contained in this prospectus as to the beliefs, expectations and conditions of the company as to the application of such tax laws or facts represent the view of management as to the application of such laws and do not represent the advice of counsel.
Certain Bermuda Tax Considerations
Bermuda does not currently impose any income, corporation or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax on us or our shareholders, other than shareholders ordinarily resident in Bermuda, if any. There is currently no Bermuda withholding or other tax on principal, interest or dividends paid to holders of the common shares, other than holders ordinarily resident in Bermuda, if any. We cannot assure you that we or our shareholders will not be subject to any such tax in the future. We are not subject to stamp duty on the issue or transfer of our common shares.
The company has received a written assurance dated March 2007 from the Bermuda Minister of Finance under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, as amended, that if any legislation is enacted in Bermuda imposing tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of that tax would not be applicable to us or to any of our operations, or to our shares, debentures or obligations until March 28, 2016; provided that the assurance is subject to the condition that it will not be construed to prevent the application of such tax to people ordinarily resident in Bermuda and holding such common shares, debentures or other obligations, or to prevent the application of any taxes payable by us in respect of real property or leasehold interests in Bermuda held by us. We cannot assure you that we will not be subject to any such tax after March 28, 2016.
As an exempted company, we are liable to pay in Bermuda an annual fee based upon our authorized share capital and our share premium account at a current rate of BD$1,870 per annum.
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U.S. Federal Income Tax Considerations
This is a general summary of material U.S. Federal income tax considerations with respect to your acquisition, ownership and disposition of common shares.
For purposes of this discussion, you are a U.S. holder if you beneficially own our common shares and are:
This summary is based upon the U.S. Internal Revenue Code of 1986, as amended, or the Code, relevant regulations, rulings and judicial decisions as of the date of this document, all of which are subject to change, possibly with retroactive effect. We cannot assure you that a later change in law will not significantly alter the tax considerations that we describe in this summary. We have not requested a ruling from the U.S. Internal Revenue Service with respect to any of the tax consequences described below. As a result, there can be no assurance that the U.S. Internal Revenue Service will not disagree with or challenge any of the conclusions described below.
This summary is for general purposes only. It applies to you only if you are a U.S. holder and you hold your common shares as a capital asset (that is, for investment purposes). It does not address any U.S. Federal tax laws other than U.S. Federal income tax laws and it does not address any state, local or foreign tax laws. In addition, this summary does not represent a detailed description of the U.S. Federal income tax consequences to you in light of your particular circumstances. This summary does not address the U.S. Federal income tax consequences applicable to you if you are subject to special treatment under the U.S. Federal income tax laws, including if you are:
If a partnership or other entity treated as a pass-through entity for U.S. Federal income tax purposes holds common shares, the tax treatment of an interest holder in the entity will generally depend upon the
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status of the interest holder and the activities of the entity. If a U.S. holder is an interest holder in such an entity holding common shares, such holder is urged to consult its tax advisors.
WE RECOMMEND THAT YOU CONSULT YOUR OWN TAX ADVISORS CONCERNING THE OVERALL TAX CONSEQUENCES ARISING IN YOUR OWN PARTICULAR SITUATION UNDER U.S. FEDERAL, STATE, LOCAL OR FOREIGN LAW OF ACQUIRING, OWNING AND DISPOSING OF COMMON SHARES.
Taxation of Distributions
We do not currently expect to make distributions on our common shares. If we do make distributions on our common shares, those distributions (other than certain pro rata distributions of common shares) will be treated as a dividend to the extent paid out of current or accumulated earnings and profits (as determined under U.S. Federal income tax principles). Should any distribution exceed our current or accumulated earnings and profits, the excess will be treated as a nontaxable return of capital reducing your adjusted tax basis in the common shares to the extent of your adjusted tax basis in those shares. Any remaining excess will be treated as capital gain. If you are an individual, trust or estate, dividends paid on our common shares will generally be treated as "qualified dividend income" that is taxable to you at a preferential maximum rate of 15% (through 2010) provided that (1) we are not a passive foreign investment company, or PFIC, for the taxable year in which the dividend is paid or the immediately preceding taxable year (see discussion below); (2) you have owned the common shares for more than 60 days in the 121-day period beginning 60 days before the date on which the common shares become ex-dividend; (3) you are not under an obligation to make related payments with respect to positions in substantially similar or related property; and (4) certain other requirements are met. You should consult your own tax advisor regarding your eligibility for this reduced rate of taxation on dividends in light of your particular circumstances. The amount of the dividend will be treated as foreign-source dividend income to you and will not be eligible for the dividends received deduction generally allowed to U.S. corporations under the Code.
The amount of a dividend will include any amounts withheld by us or our paying agent in respect of any Bermudian taxes. Subject to applicable limitations that may vary depending upon your circumstances, any Bermudian taxes withheld from dividends on common shares will be creditable against your U.S. Federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. A portion of any dividend we pay might be treated as U.S.-source income for this purpose. The rules governing foreign tax credits are complex and, therefore, you should consult your own tax advisor regarding the availability of foreign tax credits in your particular circumstances. Instead of claiming a credit, you may, at your election, deduct any otherwise creditable Bermudian taxes in computing your taxable income, subject to generally applicable limitations under U.S. law.
Sale or Other Disposition of Common Shares
For U.S. Federal income tax purposes, gain or loss you realize on the sale or other disposition of common shares will be capital gain or loss, and will be long-term capital gain or loss if you held the common shares for more than one year, except as provided below with respect to passive foreign investment companies. The amount of your gain or loss will be equal to the difference between your tax basis in the common shares disposed of and the amount realized on the disposition. Such gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes.
Passive Foreign Investment Company Rules
We believe that we will not be considered a PFIC for U.S. Federal income tax purposes for our current year or in future years. However, since PFIC status depends upon the composition of a company's
122
income and assets and the market value of its assets from time to time, there can be no assurance that we will not be considered a PFIC for any taxable year. If we are treated as a PFIC for any taxable year during which you held common shares, certain adverse consequences could apply.
If we were treated as a PFIC for any taxable year, gain you recognized on a sale or other disposition of common shares would be allocated ratably over your holding period for the common shares. The amounts allocated to the taxable year of the sale or other exchange and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, and an interest charge would be imposed on the tax imposed with respect to the amount allocated to such taxable year. Similar rules apply to certain distributions on common shares. An election to mark-to-market our common shares would be available to you to mitigate the adverse consequences resulting from PFIC status, provided that our common shares are traded as "marketable stock." An election to treat us as a qualifying fund would not be available to you because we would not provide the information you need to make the election.
In addition, if we were to be treated as a PFIC in a taxable year in which we pay a dividend or the prior taxable year, the 15% dividend rate discussed above with respect to dividends paid to non-corporate holders would not apply.
Controlled Foreign Corporation Rules
We do not expect to be considered a controlled foreign corporation, or a CFC. A corporation is CFC if more than 50% of the total combined voting power of all classes of its shares or more than 50% of the total value of its shares is owned, directly or indirectly by attribution, by 10% shareholders. You are a 10% shareholder if you own at least 10% of the total combined voting power of all classes of our shares, directly or indirectly by attribution. If we were a CFC and you were a 10% shareholder, then you would be required to include in your gross income for a taxable year your pro rata share of our earnings and profits for that year attributable to specified types of income or investments, even if you do not receive any distributions during that year.
Information Reporting and Backup Withholding
Payment of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and to backup withholding (currently at a 28% rate) unless (i) you are a corporation or other exempt recipient or (ii) in the case of backup withholding, you provide a correct taxpayer identification number and certify that you are not subject to backup withholding.
The amount of any backup withholding from a payment to you will be allowed as a credit against your U.S. Federal income tax liability and may entitle you to a refund, provided that you promptly furnish the required information to the Internal Revenue Service.
123
Under the terms and subject to the conditions contained in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. Incorporated, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc. are acting as representatives and joint book-running managers, have severally agreed to purchase, and we and the selling shareholders have agreed to sell to them, severally, the number of common shares indicated below:
Name |
Number of Common Shares |
||
---|---|---|---|
Morgan Stanley & Co. Incorporated | |||
Citigroup Global Markets Inc. | |||
J.P. Morgan Securities Inc. | |||
Total | |||
The underwriters are offering the shares subject to their acceptance of the shares from us and the selling shareholders and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters' over-allotment option described below.
The underwriters initially propose to offer part of the shares directly to the public at the public offering price listed on the cover page of this prospectus and part to certain dealers at a price that represents a concession not in excess of $ a share under the public offering price. No dealer may reallow a concession to other dealers. After the initial offering of the common shares, the offering price and other selling terms may from time to time be varied by the representatives.
We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of additional shares at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional shares as the number listed next to the underwriter's name in the preceding table bears to the total number of shares listed next to the names of all underwriters in the preceding table. If the underwriters' option is exercised in full, the total price to the public would be $ , the total underwriters' discounts and commissions would be $ , total proceeds to us would be $ and total proceeds to the selling shareholders would be $ .
The underwriters have informed us that they do not intend sales to discretionary accounts to exceed five percent of the total number of common shares offered by them.
Application will be made to have the common shares approved for quotation on the New York Stock Exchange under the symbol "a."
Each of us, the selling shareholders, our directors and our executive officers has agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated, Citigroup Global Markets Inc. and J.P.
124
Morgan Securities Inc. on behalf of the underwriters, it will not, during the period ending 180 days after the date of this prospectus:
whether any such transaction described above is to be settled by delivery of common shares or such other securities, in cash or otherwise. The restrictions described in this paragraph do not apply to:
The 180-day restricted period described above is subject to extension such that, in the event that either (a) during the last 17 days of the 180-day restricted period, we issue an earnings release or material news or a material event relating to us occurs or (b) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, the "lock-up" restrictions described above will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
In order to facilitate the offering of the common shares, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of our common shares. Specifically, the underwriters may sell more common shares than they are obligated to purchase under the underwriting agreement,
125
creating a short position in our common shares for their own account. A short sale is covered if the short position is no greater than the number of common shares available for purchase by the underwriters under the over allotment option. The underwriters can close out a covered short sale by exercising the over allotment option or purchasing common shares in the open market. In determining the source of common shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of common shares compared to the price available under the over allotment option. The underwriters may also sell common shares in excess of the over allotment option, creating a naked short position. The underwriters must close out any naked short position by purchasing common shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common shares in the open market after pricing that could adversely affect investors who purchase in the offering. As an additional means of facilitating the offering, the underwriters may bid for, and purchase, common shares in the open market to stabilize the price of our common shares. The underwriting syndicate may also reclaim selling concessions allowed to an underwriter or a dealer for distributing our common shares in the offering, if the syndicate repurchases previously distributed common shares to cover syndicate short positions or to stabilize the price of our common shares. These activities may raise or maintain the market price of the common shares above independent market levels or prevent or retard a decline in the market price of the common shares. The underwriters are not required to engage in these activities, and may end any of these activities at any time.
From time to time, the underwriters have provided, and continue to provide, investment banking and other corporate banking services to us. Citibank, N.A. is a lender under our term loan facility which is being prepaid with the proceeds of this offering.
We estimate that the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $ million, including registration fees of $0.2 million, printing and delivery expenses of approximately $ million, directors and offices insurance premiums related to this offering of approximately $ million, accounting and legal professional fees of approximately $ million and other expenses of approximately $ million. The selling shareholders are paying the underwriting discounts and commissions relating to the common shares they are selling and we are bearing the other expenses of this offering described above.
We, the selling shareholders and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.
Pricing of the Offering
Prior to this offering, there has been no public market for the common shares. The initial public offering price will be determined by negotiations among us, the selling shareholders and the representative of the underwriters. Among the factors to be considered in determining the initial public offering price will be our future prospects and our industry in general, sales, earnings and certain other financial operating information of ours in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to ours. The estimated initial public offering price range set forth on the cover page of this preliminary prospectus is subject to change as a result of market conditions and other factors.
126
The validity of our common shares offered hereby will be passed on by Appleby, our Bermuda counsel. Certain U.S. securities law matters in connection with this offering will be passed upon for us by Cravath, Swaine & Moore LLP, our U.S. counsel, and for the underwriters by Davis Polk & Wardwell.
The consolidated/combined financial statements of Genpact Global Holdings SICAR S.à.r.l. as of December 31, 2006 and 2005, and for each of the years in the three-year period ended December 31, 2006, have been included herein and in the registration statement in reliance upon the report of KPMG, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
The audit report covering the December 31, 2006 and 2005, consolidated financial statements contains an explanatory paragraph that states that prior to December 30, 2004, the business of Genpact Global Holdings SICAR S.à.r.l. was conducted through various entities and divisions that were wholly-owned by General Electric Company. On December 30, 2004, in the 2004 Reorganization, General Electric Company transferred such operations to Genpact Global Holdings SICAR S.à.r.l. and sold a 60% interest in Genpact Global Holdings SICAR S.à.r.l. through a series of integrated transactions. As these transactions resulted in a change of control of the business, the acquisition was accounted for under the purchase method under Statement of Financial Accounting Standards No. 141, Business Combinations. Consequently, our financial statements for the periods after the acquisition are presented on a new basis of accounting and are not directly comparable to the financial statements for the period prior to the acquisition.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act of 1933, as amended, with respect to the common shares we propose to sell in this offering. This prospectus, which constitutes part of the registration statement, does not contain all of the information set forth in the registration statement. For further information about us and the common shares we propose to sell in this offering, we refer you to the registration statement and the exhibits and schedules filed as a part of the registration statement. Statements contained in this prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, we refer you to the copy of the contract or document that has been filed. The registration statement may be inspected without charge at the principal office of the SEC in Washington, D.C. and copies of all or any part of the registration statement may be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Copies of such material can also be obtained at prescribed rates by mail from the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. The SEC's toll-free number is 1-800-SEC-0330. In addition, the SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. Prior to this offering, we were not required to file reports with the SEC.
Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended. The periodic reports and other information that we file with the SEC will be available for inspection and copying at the SEC's public reference facilities and on the website of the SEC referred to above.
127
GENPACT GLOBAL HOLDINGS SICAR S.À.R.L.
Index to Consolidated / Combined Financial Statements
|
Page |
|
---|---|---|
Report of Independent Registered Public Accounting Firm | F-2 | |
Consolidated Balance Sheets | F-3 | |
Consolidated / Combined Statements of Income | F-5 | |
Consolidated / Combined Statements of Stockholders' Equity and Comprehensive Income (Loss) |
F-6 | |
Consolidated / Combined Statements of Cash Flows | F-9 | |
Notes to the Consolidated / Combined Financial Statements | F-10 |
F-1
When the transactions referred to in Notes 1 and 20 of the notes to the Consolidated/Combined Financial Statements have been consummated, we will be in a position to render the following report.
KPMG
Report of Independent Registered Public Accounting Firm
To
Board of Directors and Stockholders of
Genpact Global Holdings SICAR S.à.r.l.
We have audited the accompanying consolidated balance sheets of Genpact Global Holdings SICAR S.à.r.l. (the "Company") and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders' equity and comprehensive income (loss), and cash flows for the years ended December 31, 2006 and 2005 and the combined statements of income, stockholders' equity and comprehensive income (loss), and cash flows of the Company's predecessor for the year ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the Company's consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for the two year period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States. Further, in our opinion, the Company's predecessor combined financial statements referred to above present fairly, in all material respects, the results of operations of the Company's predecessor and its cash flows for the year ended December 31, 2004, in conformity with accounting principles generally accepted in the United States.
As discussed in Note 1 to the financial statements, prior to December 30, 2004, the business of the Company was conducted through various entities and divisions that were wholly owned by General Electric Company (GE). On December 30, 2004, in the 2004 Reorganization, GE transferred such operations to the Company and sold a controlling interest in the Company. As these transactions resulted in a change of control of the business, the acquisition was accounted for under the purchase method pursuant to Statement of Financial Accounting Standards No. 141, Business Combinations. Consequently, the Company's financial statements for the periods after the acquisition are presented on a new basis of accounting and are not directly comparable to the financial statements for the period prior to the acquisition.
KPMG
May ,
2007, except as to Notes 1 and 20,
which are as of , 2007
Gurgaon, India
F-2
GENPACT GLOBAL HOLDINGS SICAR S.À.R.L.
Consolidated Balance Sheets
(In thousands of U.S. Dollars, except share and per share data)
|
|
As of December 31, |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Notes |
2006 |
2005 |
|||||||
Assets | ||||||||||
Current assets | ||||||||||
Cash and cash equivalents | $ | 35,430 | $ | 44,698 | ||||||
Accounts receivable, net | 5 | 43,854 | 9,919 | |||||||
Accounts receivable from a significant shareholder, net | 5, 26 | 97,397 | 64,384 | |||||||
Inter-corporate deposits with a significant shareholder | 6, 26 | 1,010 | 35,644 | |||||||
Deferred income taxes | 24 | 1,144 | 1,428 | |||||||
Due from a significant shareholder | 8, 26 | 10,236 | 7,812 | |||||||
Prepaid expenses and other current assets | 8 | 53,829 | 23,266 | |||||||
Total current assets | 242,900 | 187,151 | ||||||||
Property, plant and equipment, net |
9 |
157,976 |
113,513 |
|||||||
Deferred income taxes | 24 | 1,549 | 237 | |||||||
Customer-related intangible assets, net | 10 | 119,680 | 157,419 | |||||||
Other intangible assets, net | 10 | 11,908 | 14,413 | |||||||
Goodwill | 10 | 493,452 | 477,106 | |||||||
Other assets | 11 | 53,827 | 20,363 | |||||||
Total assets | $ | 1,081,292 | $ | 970,202 | ||||||
See accompanying notes to the Consolidated / Combined Financial Statements.
F-3
GENPACT GLOBAL HOLDINGS SICAR S.À.R.L.
Consolidated Balance Sheets (continued)
(In thousands of U.S. Dollars, except share and per share data)
|
|
|
As of December 31, |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Unaudited Pro Forma Stockholders' equity |
|||||||||||
|
Notes |
2006 |
2005 |
||||||||||
Liabilities and stockholders' equity | |||||||||||||
Current liabilities | |||||||||||||
Short-term borrowings | 14 | $ | 83,000 | $ | | ||||||||
Current portion of long-term debt | 15 | 19,383 | 20,586 | ||||||||||
Current portion of long-term debt from a significant shareholder | 15, 26 | 1,131 | | ||||||||||
Current portion of capital lease obligations | 12 | 64 | 131 | ||||||||||
Current portion of capital lease obligations payable to a significant shareholder | 12, 26 | 1,686 | 1,294 | ||||||||||
Accounts payable | 9,230 | 7,305 | |||||||||||
Income taxes payable | 1,617 | 4,948 | |||||||||||
Deferred income taxes | 24 | 1,858 | | ||||||||||
Due to a significant shareholder | 13, 26 | 8,928 | 11,231 | ||||||||||
Accrued expenses and other current liabilities | 13 | 136,949 | 129,810 | ||||||||||
Total current liabilities | 263,846 | 175,305 | |||||||||||
Long-term debt, less current portion |
15 |
118,657 |
137,300 |
||||||||||
Long-term debt from a significant shareholder, less current portion | 15, 26 | 3,865 | | ||||||||||
Capital lease obligations, less current portion | 12 | | 65 | ||||||||||
Capital lease obligations payable to a significant shareholder, less current portion | 12, 26 | 3,067 | 1,837 | ||||||||||
Deferred income taxes | 24 | 20,481 | 27,541 | ||||||||||
Due to a significant shareholder | 16, 26 | 7,019 | 4,174 | ||||||||||
Other liabilities | 16 | 39,662 | 32,009 | ||||||||||
Total liabilities | 456,597 | 378,231 | |||||||||||
Stockholders' equity |
|||||||||||||
2% Cumulative Series A convertible preferred stock, 3,077,868 and 3,078,270 authorized, issued and outstanding, and $208,577 and $196,764 aggregate liquidation value as of December 31, 2006 and 2005, respectively; none pro forma | 19 | 95,414 | 95,427 | ||||||||||
5% Cumulative Series B convertible preferred stock, 3,017,868 and 3,018,270 authorized, issued and outstanding, and $216,502 and $198,695 aggregate liquidation value as of December 31, 2006 and 2005, respectively; none pro forma | 19 | 93,554 | 93,567 | ||||||||||
Common stock, $31 par value, 394,642 and 394,000 shares authorized, issued and outstanding as of December 31, 2006 and 2005 respectively; pro forma | 19 | 12,234 | 12,214 | ||||||||||
Additional paid-in capital | 482,805 | 443,553 | |||||||||||
Retained earnings | 5,978 | 5,978 | 681 | ||||||||||
Accumulated other comprehensive income (loss) | (15,295 | ) | (15,295 | ) | (53,471 | ) | |||||||
Treasury stock, 20,056 common stock and 59,000 2% Cumulative Series A convertible preferred stock | 19 | (49,995 | ) | | |||||||||
Total stockholders' equity | 624,695 | 624,695 | 591,971 | ||||||||||
Commitments and contingencies | 27 | ||||||||||||
Total liabilities and stockholders' equity | $ | 1,081,292 | $ | 970,202 | |||||||||
See accompanying notes to the Consolidated / Combined Financial Statements.
F-4
GENPACT GLOBAL HOLDINGS SICAR S.À.R.L.
Consolidated / Combined Statements of Income
(In thousands of U.S. Dollars, except share and per share data)
|
Notes |
Year ended December 31, 2006 |
Year ended December 31, 2005 |
Year ended December 31, 2004 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
|
(Predecessor) |
|||||||||
Net revenues | |||||||||||||
Net revenues from servicessignificant shareholder |
26 | $ | 453,305 | $ | 449,672 | $ | 408,879 | ||||||
Net revenues from servicesothers | 158,282 | 42,222 | 20,256 | ||||||||||
Other revenues | 1,460 | | | ||||||||||
Total net revenues | 613,047 | 491,894 | 429,135 | ||||||||||
Cost of revenue | |||||||||||||
Services | 21, 26 | 359,791 | 303,963 | 263,597 | |||||||||
Others | 21 | 1,090 | | | |||||||||
Total cost of revenue | 360,881 | 303,963 | 263,597 | ||||||||||
Gross profit | 252,166 | 187,931 | 165,538 | ||||||||||
Operating expenses: |
|||||||||||||
Selling, general and administrative expenses | 22, 26 | 159,203 | 117,469 | 76,279 | |||||||||
Amortization of acquired intangible assets | 10 | 41,715 | 47,010 | | |||||||||
Foreign exchange (gains) losses, net | 13,021 | 12,784 | 7,321 | ||||||||||
Other operating income | 26 | (4,930 | ) | (6,185 | ) | | |||||||
Income from operations | 43,157 | 16,853 | 81,938 | ||||||||||
Other income (expense), net |
23 |
(9,235 |
) |
(6,146 |
) |
8,219 |
|||||||
Income before income taxes | 33,922 | 10,707 | 90,157 | ||||||||||
Income tax expense (benefit) | 24 | (5,850 | ) | (6,397 | ) | 6,748 | |||||||
Net income | $ | 39,772 | $ | 17,104 | $ | 83,409 | |||||||
Pro forma earnings per common share outstanding |
20 |
||||||||||||
Basic | $ | ||||||||||||
Diluted | $ | ||||||||||||
Pro forma weighted average number of common shares outstanding used in computing earnings per common share | |||||||||||||
Basic | |||||||||||||
Diluted |
See accompanying notes to the Consolidated / Combined Financial Statements.
F-5
GENPACT GLOBAL HOLDINGS SICAR S.À.R.L.
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
(In thousands of U.S. Dollars, except share and per share data)
|
2% Cumulative Series A Convertible Preferred stock |
5% Cumulative Series B Convertible Preferred stock |
Common stock (Note 19) |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
|
Treasury Stock |
|
|
|||||||||||||||||||||||||||||||||
|
|
|
Accumulated Other Comprehensive Income (loss) |
|
|
||||||||||||||||||||||||||||||||||
|
Shares (Nos) |
Amounts |
Shares (Nos) |
Amounts |
Shares (Nos) |
Amounts |
Additional Paid-in Capital |
Retained Earnings |
Common Stock (Nos) |
Series A Preferred stock (Nos) |
Amounts |
Total Stockholders' Equity |
Comprehensive Income (loss) |
||||||||||||||||||||||||||
Balance as of January 1, 2006 | 3,078,270 | $ | 95,427 | 3,018,270 | $ | 93,567 | 394,000 | $ | 12,214 | $ | 443,553 | $ | 681 | $ | (53,471 | ) | | | $ | | $ | 591,971 | |||||||||||||||||
Issuance of Common stock on exercise of options | | | | | 642 | 20 | 380 | | | | | | 400 | ||||||||||||||||||||||||||
Repurchase of Common stock and preferred stock from a significant shareholder | | | | | | | | | | (20,056 | ) | (59,000 | ) | (49,995 | ) | (49,995 | ) | ||||||||||||||||||||||
Repurchase and retirement of Cumulative Series A convertible Preferred stock from employees | (402 | ) | (13 | ) | | | | | (52 | ) | | | | | | (65 | ) | ||||||||||||||||||||||
Repurchase and retirement of Cumulative Series B convertible Preferred stock from employees | | | (402 | ) | (13 | ) | | | (52 | ) | | | | | | (65 | ) | ||||||||||||||||||||||
Stock-based compensation expense (Note 18) | | | | | | | 4,501 | | | | | | 4,501 | ||||||||||||||||||||||||||
Accrual of dividend on Preferred stock | | | | | | | 34,475 | (34,475 | ) | | | | | | |||||||||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||||||||||
Net income | | | | | | | | 39,772 | | | | | 39,772 | $ | 39,772 | ||||||||||||||||||||||||
Other comprehensive income: | |||||||||||||||||||||||||||||||||||||||
Unrealized gain on cash flow hedging derivatives, net | | | | | | | | | 24,333 | | | | 24,333 | 24,333 | |||||||||||||||||||||||||
Currency translation adjustments | | | | | | | | | 14,790 | | | | 14,790 | 14,790 | |||||||||||||||||||||||||
Comprehensive income (loss) | | | | | | | | | | | | | $ | 78,895 | |||||||||||||||||||||||||
Adjustments to initially apply to SFAS No. 158, net of taxes | | | | | | | | | (947 | ) | | | | (947 | ) | ||||||||||||||||||||||||
Balance as of December 31, 2006 | 3,077,868 | $ | 95,414 | 3,017,868 | $ | 93,554 | 394,642 | $ | 12,234 | $ | 482,805 | $ | 5,978 | $ | (15,295 | ) | (20,056 | ) | (59,000 | ) | $ | (49,995 | ) | $ | 624,695 | ||||||||||||||
See accompanying notes to the Consolidated / Combined Financial Statements.
F-6
GENPACT GLOBAL HOLDINGS SICAR S.À.R.L.
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
(In thousands of U.S. Dollars, except share and per share data)
|
2% Cumulative Series A Convertible Preferred stock |
5% Cumulative Series B Convertible Preferred stock |
Common stock (Note 19) |
|
|
|
|
|
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|
|
Accumulated Other Comprehensive Income (loss) |
|
|
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|
Shares (Nos) |
Amounts |
Shares (Nos) |
Amounts |
Shares (Nos) |
Amounts |
Additional Paid-in Capital |
Retained Earnings |
Total Stockholders' Equity |
Comprehensive Income (loss) |
|||||||||||||||||||||||
Balance as of January 1, 2005 | 3,060,000 | $ | 104,223 | 3,000,000 | $ | 102,180 | 394,000 | $ | 13,420 | $ | 403,177 | $ | | $ | | $ | 623,000 | ||||||||||||||||
Change in par value of Common stock and preferred stock from $34.06 to $31 per share | | (9,363 | ) | | (9,180 | ) | | (1,206 | ) | 19,749 | | | | ||||||||||||||||||||
Issuance of 2% Cumulative Series A convertible Preferred stock of par value $31 each | 18,270 | 567 | | | | | 571 | | | 1,138 | |||||||||||||||||||||||
Issuance of 5% Cumulative Series B convertible Preferred stock of par value $31 each | | | 18,270 | 567 | | | 571 | | | 1,138 | |||||||||||||||||||||||
Stock-based compensation expense (Note 18) | | | | | | | 3,062 | | | 3,062 | |||||||||||||||||||||||
Accrual of dividends on Preferred stock | | | | | | | 16,423 | (16,423 | ) | | | ||||||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||||
Net income | | | | | | | | $ | 17,104 | | 17,104 | $ | 17,104 | ||||||||||||||||||||
Other comprehensive income: | |||||||||||||||||||||||||||||||||
Unrealized loss on a cash flow hedging derivatives, net | | | | | | | | | (30,148 | ) | (30,148 | ) | (30,148 | ) | |||||||||||||||||||
Currency translation adjustments | | | | | | | | | (23,323 | ) | (23,323 | ) | (23,323 | ) | |||||||||||||||||||
Comprehensive income (loss) | | | | | | | | | | | $ | (36,367 | ) | ||||||||||||||||||||
Balance as of December 31, 2005 | 3,078,270 | $ | 95,427 | 3,018,270 | $ | 93,567 | 394,000 | $ | 12,214 | $ | 443,553 | $ | 681 | $ | (53,471 | ) | $ | 591,971 | |||||||||||||||
See accompanying notes to the Consolidated / Combined Financial Statements.
F-7
GENPACT GLOBAL HOLDINGS SICAR S.À.R.L.
Consolidated / Combined Statements of Stockholders' Equity and Comprehensive Income (Loss)
(In thousands of U.S. Dollars, except share and per share data)
|
2% Cumulative Series A Convertible Preferred stock |
5% Cumulative Series B Convertible Preferred stock |
Common stock (Note 19) |
|
|
|
|
|
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Accumulated Other Comprehensive Income (loss) |
|
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|
Shares (Nos) |
Amounts |
Shares (Nos) |
Amounts |
Shares (Nos) |
Amounts |
Additional Paid-in Capital |
Retained Earnings/ |
Total Stockholders' Equity |
Comprehensive Income (loss) |
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Predecessor period Note 1 | ||||||||||||||||||||||||||||||||
Balance as of January 1, 2004 | | $ | | | $ | | 38,516,221 | $ | 30,294 | $ | 39,477 | $ | 196,455 | $ | 7,129 | $ | 273,355 | |||||||||||||||
Contribution from a significant shareholder | | | | | | | 49,764 | | | 49,764 | ||||||||||||||||||||||
Expenses not reimbursed by a significant shareholder | | | | | | | | (17,608 | ) | | (17,608 | ) | ||||||||||||||||||||
Distribution of dividend to a significant shareholder | | | | | | | | (4,927 | ) | | (4,927 | ) | ||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||
Net income | | | | | | | | 83,409 | | 83,409 | $ | 83,409 | ||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||
Minimum pension liability, net | | | | | | | | | 192 | 192 | 192 | |||||||||||||||||||||
Unrealized gain on cash flow hedging derivatives, net | | | | | | | | | 11,643 | 11,643 | 11,643 | |||||||||||||||||||||
Currency translation adjustments | | | | | | | | | 10,485 | 10,485 | 10,485 | |||||||||||||||||||||
Comprehensive income | | | | | | | | | | | $ | 105,729 | ||||||||||||||||||||
Balance as of December 30, 2004 | | $ | | | $ | | 38,516,221 | $ | 30,294 | $ | 89,241 | $ | 257,329 | $ | 29,449 | $ | 406,313 | |||||||||||||||
Successor period Note 1 | ||||||||||||||||||||||||||||||||
Common and Preferred stock issued to acquire Predecessor business | ||||||||||||||||||||||||||||||||
Issuance of Common stock of par value of $34.06 each | | | | | 394,000 | 13,420 | 232,042 | | | $ | 245,462 | |||||||||||||||||||||
Issuance of 2% Cumulative Series A convertible Preferred stock of par value $34.06 each | 3,060,000 | 104,223 | | | | | 86,415 | | | 190,638 | ||||||||||||||||||||||
Issuance of 5% Cumulative Series B convertible Preferred stock of par value $34.06 each | | | 3,000,000 | 102,180 | | | 84,720 | | | 186,900 | ||||||||||||||||||||||
Balance as of December 31, 2004 | 3,060,000 | $ | 104,223 | 3,000,000 | $ | 102,180 | 394,000 | $ | 13,420 | $ | 403,177 | $ | | $ | | $ | 623,000 | |||||||||||||||
See accompanying notes to the Consolidated / Combined Financial Statements.
F-8
GENPACT GLOBAL HOLDINGS SICAR S.À.R.L.
Consolidated / Combined Statements of Cash Flows
(In thousands of U.S. Dollars)
|
Year ended December 31, |
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|
2006 |
2005 |
2004 |
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|
|
(Predecessor) |
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Operating activities | |||||||||||
Net income | $ | 39,772 | $ | 17,104 | $ | 83,409 | |||||
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | |||||||||||
Depreciation and amortization | 34,944 | 31,206 | 24,173 | ||||||||
Amortization of debt issue costs | 3,289 | 1,103 | | ||||||||
Amortization of acquired intangible assets | 43,047 | 48,625 | | ||||||||
Loss (gain) on sale of property, plant and equipment, net | (298 | ) | (268 | ) | (556 | ) | |||||
Provision for doubtful debts | 1,446 | 1,988 | (571 | ) | |||||||
Unrealized (gain) loss on revaluation of derivatives | (1,812 | ) | 18,776 | 7,100 | |||||||
Expenses paid by signficant shareholder | | | 14,120 | ||||||||
Expenses not reimbursed by significant shareholder | | | (17,608 | ) | |||||||
Stockbased compensation expense | 4,501 | 3,062 | | ||||||||
Deferred taxes | (8,804 | ) | (13,196 | ) | (2,739 | ) | |||||
Change in operating assets and liabilities: | |||||||||||
Decrease (increase) in accounts receivable | (64,046 | ) | (43,580 | ) | 21,408 | ||||||
Decrease (increase) in other assets | (20,919 | ) | (15,329 | ) | (7,028 | ) | |||||
(Decrease) increase in accounts payable | (1,221 | ) | (2,790 | ) | 3,167 | ||||||
(Decrease) increase in accrued expenses and other current liabilities | 1,221 | 51,795 | (4,209 | ) | |||||||
Increase in income taxes payable | (3,295 | ) | 827 | 1,125 | |||||||
(Decrease) increase in other liabilities | 8,743 | 7,411 | 4,680 | ||||||||
Net cash provided by operating activities | $ | 36,568 | $ | 106,734 | $ | 126,471 | |||||
Investing activities | |||||||||||
Purchase of property, plant and equipment | (79,217 | ) | (38,415 | ) | (27,747 | ) | |||||
Proceeds from sale of property, plant and equipment | 4,526 | 1,631 | 4,295 | ||||||||
Inter-corporate deposits placed | (167,746 | ) | (347,538 | ) | (434,527 | ) | |||||
Repayment of intercorporate deposits placed | 202,521 | 310,821 | 337,583 | ||||||||
Payment for business acquisition, net | (9,561 | ) | (11,350 | ) | | ||||||
Net cash used in investing activities | ($ | 49,477 | ) | ($ | 84,851 | ) | ($ | 120,396 | ) | ||
Financing activities | |||||||||||
Repayment of capital lease obligations | (1,647 | ) | (1,535 | ) | (1,610 | ) | |||||
Proceeds from longterm debt | 115,072 | | | ||||||||
Repayment of longterm debt | (144,127 | ) | (19,000 | ) | | ||||||
Short-term borrowings, net | 83,000 | (8,200 | ) | 10,444 | |||||||
Contribution from significant shareholder | | | 4,426 | ||||||||
Repurchase of Common and Preferred stock from a significant shareholder | (49,995 | ) | | | |||||||
Repurchase of Preferred stock | (130 | ) | | | |||||||
Proceeds from issuance of Common stock | 400 | | | ||||||||
Proceeds from issuance of Preferred stock | | 2,276 | | ||||||||
Distribution to significant shareholder | | | (4,927 | ) | |||||||
Net cash provided by (used in) financing activities | $ | 2,573 | $ | (26,459 | ) | $ | 8,333 | ||||
Effect of exchange rate changes | 1,068 | (505 | ) | 1,425 | |||||||
Net (decrease) increase in cash and cash equivalents | (10,336 | ) | (4,576 | ) | 14,408 | ||||||
Cash and cash equivalents at the beginning of the period | 44,698 | 49,779 | 15,022 | ||||||||
Cash and equivalents at the end of the period | $ | 35,430 | $ | 44,698 | $ | 30,855 | |||||
Acquisition of business (refer note 1) | |||||||||||
Net cash provided by operating activities | | ||||||||||
Investing activityPurchase of business, net of cash acquired | (126,004 | ) | |||||||||
Financing activityProceeds from long-term debt | 175,783 | ||||||||||
Cash and equivalents at the end of the period | $ | 49,779 | |||||||||
Supplementary information | |||||||||||
Cash paid during the period for interest | $ | 14,399 | $ | 9,085 | $ | 1,001 | |||||
Cash paid during the period for income taxes | $ | 7,658 | $ | 4,796 | $ | 6,757 | |||||
Distribution of intercorporate deposits to significant shareholder | $ | | $ | | $ | 299,307 | |||||
Distribution of other assets to significant shareholder | $ | | $ | | $ | 1,303 | |||||
Waiver of liability by significant shareholder | $ | | $ | | $ | 31,218 | |||||
Property, plant and equipment acquired under capital lease obligation | $ | 3,065 | $ | 2,185 | $ | 2,573 | |||||
Goodwill acquired during the year | $ | 14,831 | $ | 9,428 | $ | 485,234 | |||||
Intangibles acquired during the year | $ | 811 | $ | 1,123 | $ | 223,500 |
See accompanying notes to the Consolidated / Combined Financial Statements.
F-9
GENPACT GLOBAL HOLDINGS SICAR S.À.R.L.
Notes to the Consolidated / Combined Financial Statements
(In thousands of U.S. Dollars, except share and per share data)
1. Organization and description of business
Genpact Global Holdings SICAR S.à.r.l., a Luxembourg entity ("GGH" and together with its subsidiaries, the "Company") is in the business of managing business processes for companies around the world. The Company combines its process expertise, information technology expertise and analytical capabilities, together with operational insight derived from its experience in diverse industries, to provide a wide range of services using its global delivery platform. The Company's service offerings include finance and accounting, collections and customer service, insurance services, supply chain and procurement, analytics, enterprise application services and IT infrastructure services.
On March 29, 2007, Genpact Limited, a Bermuda company, was formed as a subsidiary of GGH.
On , 2007, the shareholders of GGH transferred their equity in GGH to Genpact Limited in exchange for common shares of Genpact Limited (the "2007 Reorganization"). All applicable share and per share amounts in the acconpanying consolidated financial statements have been retroactively adjusted to reflect the 2007 Reorganization.
Successor and Predecessor entities and periods presented
Prior to December 30, 2004, the business of the Company was conducted through various entities and divisions of the General Electric Company ("GE"). On December 30, 2004, in a series of transactions collectively referred to herein as the "2004 Reorganization", GE transferred such operations to a newly formed entity, GGH. GGH has no operations and de minimis assets from the date of its formation through December 30, 2004. In connection with such transfers, the Company incurred debt of $180,000, $156,859 of which was used to finance in part the consideration for the transfer. GE sold a controlling interest in GGL.
For the year ended December 31, 2004, the financial statements are presented on a combined basis as all the entities and divisions that were transferred to GGH in the 2004 Reorganization were under the common control of GE (predecessor basis).
As the 2004 Reorganization resulted in a transfer of control of the Company, the 2004 Reorganization was accounted for under the purchase method pursuant to Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations.
The application of the purchase method of accounting, which requires assets acquired and liabilities assumed to be recorded at their fair values, creates a new basis of accounting and accordingly results in depreciation and amortization expense of acquired intangible assets in the periods subsequent to December 31, 2004. Accordingly, the financial statements of the predecessor for 2004 are not directly comparable to the Company's financial statements for 2005 and 2006.
Prior to December 31, 2004, substantially all of the revenues of the Company were derived from services provided to GE entities. In connection with the 2004 Reorganization, GE and Genworth (which was then owned by GE) entered into a Master Services Arrangement ("MSA") with the Company. The GE MSA, which, as amended in 2005, provides that GE will purchase services in an amount not less than a minimum volume commitment ("MVC") of $360,000 each year for six years beginning January 1, 2005, $270,000 in 2011, $180,000 in 2012 and $90,000 in 2013. Revenues in excess of the MVC can be credited, subject to certain limitations, against short falls in the subsequent years.
Similarly, the Genworth MSA provides that Genworth will purchase services in an amount not less th