News Column

SYNTEL INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 5, 2014

SYNTEL INC. AND SUBSIDIARIES

RESULTS OF OPERATIONS

Net Revenues. The Company's revenues consist of fees derived from its Banking and Financial Services; Healthcare and Life Sciences; Insurance; Manufacturing; and Retail, Logistics and Telecom business segments. Net revenues for the three months ended June 30, 2014 increased to $228.3 million from $202.5 million for the three months ended June 30, 2013, representing a 12.7% increase. The Company's verticalization sales strategy focusing on Banking and Financial Services; Healthcare and Life Sciences; Insurance; Manufacturing; Retail; Logistics and Telecom has enabled better focus and relationships with key clients. Further, continued focus on execution and investments in new offerings such as our Testing and Center of Excellence have a potential to contribute growth in the business. The focus is to continue investments in more new offerings and geographical expansion. Worldwide billable headcount as of June 30, 2014 increased by 3.8% to 16,829 employees as compared to 16,219 employees as of June 30, 2013. However, the growth in revenues was much higher when compared with the growth in the billable headcount. This is primarily because of a better utilization of onsite and offshore resources. As of June 30, 2014, the Company had approximately 78.9% of its billable workforce in India as compared to 80.8% as of June 30, 2013. The Company's top five clients accounted for 60.0% of the total revenues in the three months ended June 30, 2014, down from 64.8% of its total revenues in the three months ended June 30, 2013. The Company's top five clients accounted for 60.1% of the total revenue in the six months ended June 30, 2014 as compared to 65.2% of its total revenue in the six months ended June 30, 2013. The Company's top 10 clients accounted for 73.2% of the total revenues in the three months ended June 30, 2014 as compared to 78.3% in the three months ended June 30, 2013. The Company's top 10 clients accounted for 73.1% of the total revenues in the six months ended June 30, 2014 as compared to 78.7% in the six months ended June 30, 2013. The Company's top 3-30 clients accounted for 57.5% of the total revenues in the three months ended June 30, 2014, up from 52.9% of its total revenues in the three months ended June 30, 2013. The Company's top 3-30 clients accounted for 57.3% of the total revenues in the six months ended June 30, 2014, up from 51.9% of its total revenues in the six months ended June 30, 2013.

Cost of Revenues. The Company's cost of revenues consists of costs directly associated with billable consultants in the U.S. and offshore, including salaries, payroll taxes, benefits, relocation costs, immigration costs, finder's fees, trainee compensation and travel. The cost of revenues increased to 60.8% of total revenue for the three months ended June 30, 2014, from 58.7% for the three months ended June 30, 2013. The 2.1% increase in cost of revenues, as a percent of revenues, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, was attributable primarily to increases in compensation due to a change in the Company's salary model, increases in headcount, and salary increases for offshore and onsite employees, increased contract cost and increased benefits costs, offset by rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances in the second quarter of 2014. Salary increases are discretionary and determined by management. During the three months ended June 30, 2014, the Indian rupee has depreciated against the U.S. dollar, on average, 5.26% as compared to the three months ended June 30, 2013. This rupee depreciation positively impacted the Company's gross margin by 109 basis points, operating income by 164 basis points and net income by 148 basis points, each as a percentage of revenue. The cost of revenues decreased to 58.6% of total revenues for the six months ended June 30, 2014, from 58.8% for the six months ended June 30, 2013. The 0.2% decrease in cost of revenues, as a percent of revenues for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, was attributable primarily to a higher increase in revenue, rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances offset by increases

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in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs. During the six months ended June 30, 2014, the Indian rupee has depreciated against the U.S. dollar, on average, 9.72% as compared to the six months ended June 30, 2013. This rupee depreciation positively impacted the Company's gross margin by 202 basis points, operating income by 307 basis points and net income by 279 basis points, each as a percentage of revenue.

Banking and Financial Services Revenues. Banking and Financial Services revenues increased to $112.9 million for the three months ended June 30, 2014 or 49.5% of total revenues, from $106.0 million, or 52.4% of total revenues for the three months ended June 30, 2013. The $6.9 million increase was attributable primarily to revenues from new engagements contributing $61.5 million, largely offset by $53.4 million in lost revenues as a result of project completion and a $1.2 million net reduction in revenues from existing projects. Banking and Financial Services revenues increased to $221.0 million for the six months ended June 30, 2014 or 49.4% of total revenues, from $208.9 million, or 53.4% of total revenues for the six months ended June 30, 2013. The $12.1 million increase was attributable primarily to revenues from new engagements contributing $116.2 million, largely offset by $85.8 million in lost revenues as a result of project completion and a $18.3 million net reduction in revenues from existing projects.

Banking and Financial Services Cost of Revenues. Banking and Financial Services cost of revenues consists of costs directly associated with billable consultants in the U.S. and offshore, including salaries, payroll taxes, benefits, relocation costs, immigration costs, finder's fees, trainee compensation and travel. Banking and Financial Services cost of revenues increased to 59.6% of total Banking and Financial Services revenues for the three months ended June 30, 2014, from 56.9% for the three months ended June 30, 2013. The 2.7% increase in cost of revenues, as a percent of revenues for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, was attributable primarily to increases in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs, offset by rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances in the second quarter of 2014. Salary increases are discretionary and determined by management. Cost of revenues for the six months ended June 30, 2014 increased to 57.8% of revenues, from 56.6% for the six months ended June 30, 2013. The 1.2% increase in cost of revenues, as a percent of revenues for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, was attributable primarily to increases in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs, offset by rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances.

Insurance Revenues. Insurance revenues increased to $34.2 million for the three months ended June 30, 2014 or 15.0% of total revenues, from $30.0 million, or 14.8% of total revenues for the three months ended June 30, 2013. The $4.2 million increase was attributable primarily to revenues from new engagements contributing $20.9 million, largely offset by $16.7 million in lost revenues as a result of project completion. The revenues for the six months ended June 30, 2014 increased to $66.2 million, or 14.8% of total revenues, from $59.1 million or 15.1% of total revenues for the six months ended June 30, 2013. The $7.1 million increase was attributable primarily to revenues from new engagements contributing $38.2 million, largely offset by $24.1 million in lost revenues as a result of project completion and a $7.0 million net reduction in revenues from existing projects.

Insurance Cost of Revenues. Insurance cost of revenues consists of costs directly associated with billable consultants, including salaries, payroll taxes, benefits, finder's fees, trainee compensation and travel. Insurance cost of revenues increased to 66.2% for the three months ended June 30, 2014, from 61.3% for the three months ended June 30, 2013. The 4.9% increase in cost of revenues,

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as a percent of total revenues for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, was attributable primarily to increases in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs, offset by rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances in the second quarter of 2014. Salary increases are discretionary and determined by management. Cost of revenues for the six months ended June 30, 2014 increased to 63.5% of Insurance revenues, from 61.5% for the six months ended June 30, 2013. The 2.0% increase in cost of revenues, as a percent of revenues for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, was attributable primarily to increases in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs, offset by rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances.

Healthcare and Life Sciences Revenues. Healthcare and Life Sciences revenues increased to $38.8 million for the three months ended June 30, 2014, or 17.0% of total revenues from $33.7 million for the three months ended June 30, 2013, or 16.6% of total revenues. The $5.1 million increase was attributable primarily to revenues from new engagements contributing $7.4 million and a $4.7 million net increase in revenue from existing projects, offset by $7.0 million in lost revenues as a result of project completion. The revenues for the six months ended June 30, 2014 increased to $77.3 million, or 17.3% of total revenues, from $63.1 million or 16.1% of total revenues for the six months ended June 30, 2013. The $14.2 million increase was attributable primarily to revenues from new engagements contributing $13.2 million and a $11.0 million net increase in revenues from existing projects, offset by $10.0 million in lost revenues as a result of project completion.

Healthcare and Life Sciences Cost of Revenues. Healthcare and Life Sciences cost of revenues consists of costs directly associated with billable consultants in the U.S. and offshore, including salaries, payroll taxes, benefits, relocation costs, immigration costs, finder's fees, trainee compensation and travel. Healthcare and Life Sciences cost of revenues is constant at 55.5% of total Healthcare and Life Sciences revenues for the three months ended June 30, 2014 and for the three months ended June 30, 2013, due to increases in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs, offset by rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances in the second quarter of 2014. Salary increases are discretionary and determined by management. Cost of revenues for the six months ended June 30, 2014 decreased to 52.7% of total Healthcare and Life Sciences revenues, from 56.3% for the six months ended June 30, 2013. The 3.6% decrease in cost of revenues, as a percent of revenues for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, was attributable primarily to increase in revenue, rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances offset by increases in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs.

Manufacturing Revenues. Manufacturing revenues decreased to $6.6 million for the three months ended June 30, 2014, or 2.9% of total revenues from $7.7 million for the three months ended June 30, 2013, or 3.8% of total revenues. The $1.1 million decrease was attributable primarily to a $2.2 million net decrease in revenues from existing projects and $0.6 million in lost revenues as a result of project completion, largely offset by a $1.7 million increase in revenues from new engagements. The revenues for the six months ended June 30, 2014 decreased to $12.9 million, or 2.9% of total revenues, from $16.0 million or 4.1% of total revenues for the six months ended June 30, 2013. The $3.1 million decrease for the six months ended June 30, 2014 was attributable primarily to a $4.5 million decrease in revenues from existing projects and a $1.3 million decrease in revenue from project completion, largely offset by a $2.7 million increase in revenues from new engagements.

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Manufacturing Cost of Revenues. Manufacturing cost of revenues consists of costs directly associated with billable consultants in the U.S., including salaries, payroll taxes, benefits, relocation costs, immigration costs, finder's fees, trainee compensation and travel. Manufacturing cost of revenues increased to 70.6% of total Manufacturing revenues for the three months ended June 30, 2014, from 65.8% for the three months ended June 30, 2013. The 4.8% increase in cost of revenues, for the three months ended June 30, 2014, as a percent of total Manufacturing revenues, as compared to the three months ended June 30, 2013, was attributable primarily to increases in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs, offset by rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances in the second quarter of 2014. Salary increases are discretionary and determined by management. Cost of revenues for the six months ended June 30, 2014 increased to 70.9% of total Manufacturing revenues, from 64.8% for the six months ended June 30, 2013. The 6.1% increase in cost of revenues, as a percent of revenues for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, was attributable primarily to increases in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs, offset by rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances.

Retail, Logistics and Telecom Revenues. Retail, Logistics and Telecom revenues increased to $35.7 million for the three months ended June 30, 2014 or 15.6% of total revenues, from $25.0 million, or 12.4% of total revenues for the three months ended June 30, 2013. The $10.7 million increase was attributable primarily to revenues from new engagements contributing $14.3 million, partially offset by $2.2 million in lost revenues as a result of project completion and a $1.4 million net reduction in revenue from existing projects. The revenues for the six months ended June 30, 2014 increased to $70.4 million, or 15.7% of total revenues, from $44.4 million or 11.3% of total revenues for the six months ended June 30, 2013. The $26.0 million increase was attributable primarily to revenues from new engagements contributing $22.7 million and a $6.8 million net increase in revenues from existing projects, partially offset by $3.5 million in lost revenues as a result of project completion.

Retail, Logistics and Telecom Cost of Revenues. Retail, Logistics and Telecom, cost of revenues consists of costs directly associated with billable consultants in the U.S. and offshore, including salaries, payroll taxes, benefits, relocation costs, immigration costs, finder's fees, trainee compensation and travel. Retail, Logistics and Telecom cost of revenues decreased to 58.9% of total Retail, Logistics and Telecom revenues for the three months ended June 30, 2014, from 61.5% for the three months ended June 30, 2013. The 2.6% decrease in cost of revenues, as a percent of revenues for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, was attributable primarily to an increase in revenue, rupee depreciation and a decrease in travel expenses due to decreases in foreign living allowances offset by increases in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs in the second quarter of 2014. Salary increases are discretionary and determined by management. Cost of revenues for the six months ended June 30, 2014 decreased to 56.6% of total Retail, Logisitics and Telecom revenues, from 62.8% for the six months ended June 30, 2013. The 6.2% decrease in cost of revenues, as a percent of revenues for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, was attributable primarily to an increase in revenue, rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances offset by increases in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs.

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Corporate Direct Costs-Cost of Revenues. Certain expenses, for cost centers such as Centers of Excellence, Architecture Solutions Group (ASG), Research and Development (R&D), Cloud Computing, Application Management, are not specifically allocated to specific segments because management believes it is not practical to allocate such expenses to individual segments as they are not directly attributable to any specific segment. Accordingly, these expenses are separately disclosed as Corporate Direct Costs and adjusted only against the Total Gross Profit.

Corporate Direct Costs cost of revenues increased to 0.7% of total sales for the three months ended June 30, 2014, from 0.5% for the three months ended June 30, 2013. The 0.2% increase in cost of revenues, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, was attributable primarily to increases in headcount and benefits partially offset by rupee depreciation and a decrease in travel expenses in the second quarter of 2014. Salary increases are discretionary and determined by management. Cost of revenues for the six months ended June 30, 2014 increased to 0.6% of total revenues, from 0.5% for the six months ended June 30, 2013. The 0.1% increase in cost of revenues, as a percent of revenues for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, was attributable primarily to increases in headcount and benefits partially offset by rupee depreciation and a decrease in travel expenses.

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses consist primarily of salaries, payroll taxes and benefits for sales, solutions, finance, administrative, and corporate staff; travel; telecommunications; business promotions; and marketing and various facility costs for the Company's global development centers and other offices.

Selling, general, and administrative expenses for the three months ended June 30, 2014 were $26.3 million or 11.5% of total revenues, compared to $18.7 million or 9.2% of total revenues for the three months ended June 30, 2013.

Selling, general and administrative expenses for the three months ended June 30, 2014 were impacted by an increase in revenue of $25.7 million that resulted in a 1.5% decrease in selling, general and administrative expenses as a percentage of total revenue. The overall increase in selling, general and administrative expenses was attributable to an increase in corporate expenses of $3.7 million primarily on account of a decrease in foreign exchange gain of $6.3 million and an increase in legal and professional fees of $0.4 million offset by an out-of-period accounting adjustment during the second quarter that lowered SG&A by $3 million (which related to the prior period cumulative impact, arising out of the modification of the accounting treatment adopted by the Company during the second quarter, around certain foreign currency related balance sheet translations, exchange gains or losses on certain forward contracts and the related tax impacts) an increase in compensation due to increases in headcount of $1.8 million, an increase in facility related costs of $1.2 million, an increase in travel expenses of $0.3 million, an increase in marketing expenses of $0.2 million, an increase in voice and data expenses of $0.2 million, an increase in other expenses of $0.2 million.

Selling, general, and administrative expenses for the six months ended June 30, 2014 were $58.5 million or 13.1% of total revenues, compared to $44.4 million or 11.3% of total revenues for the six months ended June 30, 2013.

Selling, general and administrative costs for the six months ended June 30, 2014 were impacted by an increase in revenue of $56.2 million resulting in a 1.8% decrease in selling, general and administrative expenses as a percentage of total revenue. The overall increase in selling, general and administrative costs was attributable to an increase in corporate expenses of $7.3 million consisted of a decrease in foreign exchange gain of $9.4 million and an increase in professional fees and other related costs of $0.9 million, partially offset by an out-of-period accounting adjustment of $3.0 million, an increase in compensation due to increases in headcount of $3.5 million, an increase in facility related costs of $2.0 million, an increase in marketing expenses of $0.4 million, an increase in travel expenses of $0.3 million, an increase in voice and data expenses of $0.3 million and an increase in other expenses of $0.3 million.

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Other Income (loss), Net. Other income includes interest and dividend income, gains and losses from sale of securities, other investments, treasury operations and interest expenses on loans and borrowings.

Other income (loss), net for the three months ended June 30, 2014 was $12.2 million or 5.3% of total revenues, compared to $(1.3) million or (0.7)% of total revenues for the three months ended June 30, 2013. The increase in other income of $13.5 million was attributable to an increase in forward contract gains of $10.0 million, an increase in gains from the sale of mutual funds of $2.0 million and an increase in interest income of $1.7 million, offset by an increase in interest expenses of $0.2 million during the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

Other income, net for the six months ended June 30, 2014 was $24.0 million or 5.4% of total revenues, compared to $7.5 million or 1.9% of total revenues for the six months ended June 30, 2013. The increase in other income of $16.5 million was attributable to an increase in forward contract gains of $10.9 million, an increase in gains from the sale of mutual funds of $3.1 million and an increase in interest income of $3.1 million, partially offset by an increase in interest expenses of $0.6 million.

Income Taxes

The Company records provisions for income taxes based on enacted tax laws and rates in the various taxing jurisdictions in which it operates. In determining the tax provisions, the Company provides for tax uncertainties in income taxes, when it is more likely than not, based on the technical merits, that a tax position would not be sustained upon examination. Such uncertainties, which are recorded in income taxes payable, are based on management's estimates and accordingly, are subject to revision based on additional information. The provision no longer required for any particular tax year is credited to the current period's income tax expenses. Conversely, in the event of a future tax examination, any additional tax expense not previously provided for will be recognized in the period in which the actual liability is concluded or the management determines that the Company will not prevail on certain tax positions taken in filed returns, based on the "more likely than not" concept.

During the three months ended June 30,2014 and 2013, the effective income tax rates were 21.4% and 25.2%, respectively. During the six months ended June 30, 2014 and 2013, the effective income tax rates were 22.2% and 24.5%, respectively. The tax rate for the three months ended June 30, 2014 and 2013 was affected by the effective tax rate impact of changes in the offshore/onshore profit mix of the Company offset by certain Company facilities going out of tax holiday effective April 1, 2013.

Other Comprehensive Income (Loss)

The other comprehensive income (loss) consists of foreign currency translation adjustments, gains (losses) on net investment hedge derivatives, unrealized gains (losses) on securities and a component of a defined benefit plan. During the three months ended June 30, 2014 the other comprehensive loss amounted to $5.3 million primarily attributable to foreign currency translation adjustments of $7.0 million which includes an out-of-period adjustment of $3.0 million, which related to the past period cumulative impact, arising out of the modification of the accounting treatment adopted by the Company during the second quater, around certain foreign currency related balance sheet translations, exchange gains or losses on certain forward contracts and the related tax impacts. During the six months ended June 30, 2014 the other comprehensive gain amounted to $20.9 million, primarily attributable to foreign currency translation adjustments of $17.8 million.

During the three and six months ended June 30, 2013 the other comprehensive loss amounted to $54.3 million and $52.8 million, respectively, primarily attributable to foreign currency translation adjustments of $49.8 million and $47.9 million, for the three and six months ended June 30, 2013, respectively.

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FINANCIAL POSITION

Cash and Cash Equivalents: Cash and Cash equivalents increased to $170.89 million at June 30, 2014 from $136.32 million at June 30, 2013.

LIQUIDITY AND CAPITAL RESOURCES

The Company generally has financed its working capital needs through operations. The Mumbai, Chennai, Pune (India) and other expansion programs are financed from internally generated funds. The Company's cash and cash equivalents consist primarily of certificates of deposit and treasury notes. These amounts are held by various banking institutions including US-based and India-based banks. As of June 30, 2014, the total cash and cash equivalents and short term investment balance were $769.8 million. Out of the above, an amount of $700.6 million was held by Indian subsidiaries which was composed of an amount of $95.4 million held in US dollars with the balance of the amount held in Indian rupees. The Company believes that the amount of cash and cash equivalent outside the U.S. will not have a material impact on liquidity.

Net cash generated by operating activities was $91.2 million for the six months ended June 30, 2014. The number of days sales outstanding in net accounts receivable was approximately 54 days and 55 days as of June 30, 2014 and 2013, respectively. The decrease in the number of day's sales outstanding in net accounts receivable was due to higher collections during the corresponding period in 2014.

Net cash used in investing activities was $95.1 million for the six months ended June 30, 2014, consisting principally of $8.1 million of capital expenditures primarily for the construction/acquisition of the Global Development Center at Pune, the Knowledge Process Outsourcing facility at Mumbai and an additional facility in Chennai, the acquisition of computers, software and communications equipment and the purchase of mutual funds of $201.6 million and the purchase of term deposits with banks of $131.4 million, largely offset by $131.6 million from sales of mutual funds and $114.4 million from maturities of term deposits with banks.

Net cash used in financing activities was $2.9 million for the six months ended June 30, 2014 consisting principally of a scheduled quarterly repayment of a loan and borrowing of $3.4 million and offset by excess tax benefits on stock-based

compensation plans of $0.5 million.

On May 23, 2013, Syntel entered into a Credit Agreement with Bank of America, N.A. for $150 million in credit facilities consisting of a three-year term loan facility of $60 million and a three-year revolving credit facility of $90 million. The maturity date of both the three year term loan facility and the three year revolving credit facility is May 23, 2016. The Credit Agreement is guaranteed by two of the Company's domestic subsidiaries, SkillBay and Syntel Consulting (collectively, the "Guarantors"). In connection with the credit facilities, the Company and the Guarantors also entered into a related security and pledge agreement granting a security interest in the assets of the Company and the Guarantors, including, without limitation, a pledge of 65% of the equity interests in Syntel India.

The interest rates applicable to the loans incurred under the Credit Agreement are (a) with respect to Revolving Loans, (i) the Eurodollar Rate plus 1.25% with respect to Eurodollar Loans and (ii) the Base Rate plus 0.25% with respect to Base Rate Loans, and (b) with respect to the Term Loan, (i) the Eurodollar Rate plus 1.50% with respect to Eurodollar Loans and (ii) the Base Rate plus 0.50% with respect to Base Rate Loans (each as defined in the Credit Agreement).

As at June 30, 2014, the interest rate was 1.477350% for the three year revolving credit facility and was 1.727350% for the three year term loan facility.

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With the interest rate charged on the credit facilities being variable, the fair value of the same would approximate its reported value as of June 30, 2014, as it would reflect the current market value.

Principal payments on the term loan are due every quarter. During the three months ended June 30, 2014, a principal payment of $ 1.875 million was made. The related Credit Agreement requires compliance with certain financial ratios and covenants. As of June 30, 2014, the Company was in compliance with all debt covenants.

As at June 30, 2014 the outstanding balance of the term loan and three-year revolving credit facility including interest were $52.22 million and $90.14 million respectively.

Future scheduled payments on the three-year revolving credit facility and term loan, at June 30, 2014 are as follows:

Revolving Credit Term Loan Facility (In thousands) 2014 $ 3,750 $ - 2015 $ 8,625 $ - 2016 $ 39,750 $ 90,000



CRITICAL ACCOUNTING POLICIES

We believe the following critical accounting policies, among others, involve the more significant judgments and estimates used in the preparation of our consolidated financial statements. The Company has discussed this critical accounting policy and the estimates with the Audit Committee of the Board of Directors.

Revenue Recognition. Revenue recognition is the most significant accounting policy for the Company. The Company recognizes revenue from time and material contracts as services are performed. During the three months ended June 30, 2014 and 2013 revenues from time and material contracts constituted 61% and 63% of total revenues, respectively. Revenue from fixed-price, application management, maintenance and support engagements is recognized as earned, which generally results in straight-line revenue recognition as services are performed continuously over the term of the engagement. During the three months ended June 30, 2014 and 2013, revenues from fixed price application management and support engagements constituted 29% and 28% of total revenues, respectively.

Revenue on fixed price development projects is measured using the proportional performance method of accounting. Performance is generally measured based upon the efforts incurred to date in relation to the total estimated efforts required through the completion of the contract. The Company monitors estimates of total contract revenues and cost on a routine basis throughout the delivery period. The cumulative impact of any change in estimates of the contract revenues or costs is reflected in the period in which the change becomes known. In the event that a loss is anticipated on a particular contract, provision is made for the estimated loss. The Company issues invoices related to fixed price contracts based on either the achievement of milestones during a project or other contractual terms. Differences between the timing of billings and the recognition of revenue based upon the proportional performance method of accounting are recorded as revenue earned in excess of billings or deferred revenue in the accompanying financial statements. During the three months ended June 30, 2014 and 2013, revenues from fixed price development contracts constituted 10% and 9% of total revenues, respectively.

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Significant Accounting Estimates

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses for the reporting period. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. The Company bases its estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.

Revenue Recognition. The use of the proportional performance method of accounting requires that the Company make estimates about its future efforts and costs relative to its fixed price contracts. While the Company has procedures in place to monitor the estimates throughout the performance period, such estimates are subject to change as each contract progresses. The cumulative impact of any such change is reflected in the period in which the change becomes known.

Allowance for Doubtful Accounts. The Company records an allowance for doubtful accounts based on a specific review of aged receivables. As of June 30, 2014 and December 31, 2013, the allowance for doubtful accounts was $2.0 million respectively. The provision for the allowance for doubtful accounts is recorded in selling, general and administrative expenses. These estimates are based on our assessment of the probable collection from specific client accounts, the aging of the accounts receivable, analysis of credit data, bad debt write-offs and other known factors.

Income Taxes-Estimates of Effective Tax Rates and Reserves for Tax Contingencies. The Company records provisions for income taxes based on enacted tax laws and rates in the various taxing jurisdictions in which it operates. In determining the tax provisions, the Company provides for tax uncertainties in income taxes, when it is more likely than not, based on the technical merits, that a tax position would not be sustained upon examination. Such uncertainties, which are recorded in income taxes payable, are based on management's estimates and accordingly are subject to revision based on additional information. The provision no longer required for any particular tax year is credited to the current period's income tax expenses. Conversely, in the event of a future tax examination, any additional tax expense not previously provided for will be recognized in the period in which the actual liability is concluded or management determines that the Company will not prevail on certain tax positions taken in filed returns, based on the "more likely than not" concept.

Accruals for Legal Expenses and Exposures. The Company is party to various legal actions arising in the ordinary course of business, including litigation and governmental and regulatory controls. The Company has not accrued any liability for legal contingencies as no legal contingency has been deemed to be probable of occurring. The Company's estimates regarding legal contingencies are based on information known about the matters and its experience in contesting, litigating and settling similar matters. It is the opinion of management with respect to pending or threatened litigation matters that unfavorable outcomes are remote and that estimates of possible loss are not able to be made. Although actual amounts could differ from management's estimates, none of the actions are believed by management to involve future amounts that would be material to the Company's financial position or results of operations.

The Company estimates the costs associated with known legal exposures and their related legal expenses and accrues reserves for either the probable liability, if that amount can be reasonably estimated, or otherwise the lower end of an estimated range of potential liability. There was no accrual related to litigation at June 30, 2014 and December 31, 2013.

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Undistributed earnings of foreign subsidiaries. The Company intends to use accumulated and future earnings of foreign subsidiaries to expand operations outside the United States and accordingly undistributed earnings of foreign subsidiaries are considered to be indefinitely reinvested outside the United States and no provision for U.S. federal and state income tax or applicable dividend distribution tax has been provided thereon.

FORWARD LOOKING STATEMENTS

Certain information and statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this report, including the allowance for doubtful accounts, contingencies and litigation, potential tax liabilities, interest rate or foreign currency risks, and projections regarding our liquidity and capital resources, could be construed as forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements containing words such as "could", "expects", "may", "anticipates", "believes", "estimates", "plans", and similar expressions. In addition, the Company or persons acting on its behalf may, from time to time, publish other forward looking statements. Such forward looking statements are based on management's estimates, assumptions and projections and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in the forward looking statements.

Although management believes that the expectations, forecasts and goals reflected in these forward-looking statements are reasonable, actual results could differ materially for a variety of reasons, including, without limitation, the risks and uncertainties detailed in "Item 1A. Risk Factors" in the Company's annual report on Form 10-K for the year ended December 31, 2013.

Other factors not currently anticipated may also materially and adversely affect our results of operations, cash flows, financial position and prospects. There can be no assurance that future results will meet expectations. While we believe that the forward-looking statements in this Quarterly Report on Form 10-Q are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim any obligation to update or alter any statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

Goodwill

During the first quarter of year 2014, as a result of the completion of organizational changes, the Company changed its basis of segmentation to vertical segments. The company reassigned goodwill to the new reportable segment Healthcare and Life Sciences.

In accordance with guidance on goodwill impairment in the FASB Codification, goodwill is evaluated for impairment at least annually. Management believes goodwill was not impaired at June 30, 2014.


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