sv3
As filed with the Securities and Exchange Commission on
December 11, 2006
U.S. SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-3
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
Syntel, Inc.
(Exact name of registrant as
specified in its charter)
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Michigan
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38-2312018
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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525 East
Big Beaver Road Suite 300
Troy, Michigan 48083
(248) 619-3524
(Address,
including zip code, and telephone number, including area code,
of registrants principal executive
offices)
Bharat Desai
Chairman and Chief Executive Officer
525 East Big Beaver Road Suite 300
Troy, Michigan 48083
(248) 619-3524
(Name, address,
including zip code, and telephone number, including area code,
of agent for service)
Copies to:
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Daniel Moore, Esq.
CAO, General Counsel and Secretary
525 East Big Beaver Road
Suite 300
Troy, MI 48083
(248) 619-3583
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D. Richard
McDonald, Esq.
Dykema Gossett PLLC
39577 North Woodward
Avenue, Suite 300
Bloomfield Hills, MI 48304
(248) 203-0859
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Fred B. Green, Esq.
Bodman LLP
6th Floor
at Ford Field
1901 St. Antoine Street
Detroit, MI 48226
(313) 392-1055
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Andrew J. Pitts, Esq.
Cravath, Swaine & Moore LLP
Worldwide Plaza
825 Eighth Avenue
New York, NY
10019-7475
(212) 474-1000
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Approximate date of commencement of proposed sale to
public: As soon as practicable after this
Registration Statement becomes effective.
If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans,
please check the following
box. o
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, other than
securities offered only in connection with dividend or interest
reinvestment plans, 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 _
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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 registration statement pursuant to General
Instruction I.D. or a post-effective amendment thereto that
shall become effective upon filing with the Commission pursuant
to Rule 462(e) under the Securities Act, check the
following box. o
If this form is a post-effective amendment to a registration
statement filed pursuant to General Instruction I.D. filed
to register additional securities or additional classes of
securities pursuant to Rule 413(b) under the Securities
Act, check the following box. o
CALCULATION OF REGISTRATION FEE
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Proposed Maximum
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Proposed Maximum
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Amount of
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Title of Each Class of
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Amount to be
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Offering Price
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Aggregate Offering
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Registration
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Securities to be Registered
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Registered
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per Share(1)
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Price(1)
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Fee
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Common Stock, without par value
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3,450,000
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$26.61
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$91,804,500
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$9,823
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(1)
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Estimated solely for the purpose of
calculating the registration fee in accordance with
Rule 457(c) under the Securities Act of 1933, and based
upon the average of the high and low prices of the
registrants common stock on The NASDAQ Global Select
Market on December 7, 2006. Includes the offering price
attributable to shares available for purchase by the
underwriters to cover over-allotments, if any.
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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 the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), shall determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION, DATED
DECEMBER 11, 2006
3,000,000 Shares
Syntel, Inc.
Common Stock
The shares of common stock are being sold by the selling
shareholders. We will not receive any of the proceeds from the
shares of common stock sold by the selling shareholders.
Our common stock is listed on The NASDAQ Global Select Market
under the symbol SYNT. The last price as reported on
the NASDAQ Global Select Market on December 8, 2006, was
$27.00 per share.
The underwriters have an option to purchase from the selling
shareholders a maximum of 450,000 additional shares to cover
over-allotments of shares.
Investing in our common stock involves risks. See Risk
Factors on page 6.
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Underwriting
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Proceeds to
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Price to
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Discounts and
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Selling
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Public
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Commissions
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Shareholders
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Per Share
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$
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$
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$
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Total
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$
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$
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$
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Delivery of the shares of common stock will be made on or
about ,
2007.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
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Credit
Suisse |
Deutsche
Bank Securities |
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Jefferies &
Company
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Janney
Montgomery Scott LLC
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The date of this prospectus is December 11, 2006.
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus and the documents incorporated by reference in this
prospectus. We have not authorized anyone to provide you with
information that is different. This prospectus may only be used
where it is legal to sell these securities. The information in
this prospectus may only be accurate on the date of this
prospectus.
PROSPECTUS
SUMMARY
This summary highlights important features of this offering
and the information contained or incorporated by reference in
this prospectus. This summary does not include all of the
information that you should consider before investing in our
common stock. You should carefully read all of the information
contained or incorporated in this prospectus, including
Risk Factors beginning on page 6 and the
consolidated financial statements and related notes, before
making an investment decision.
Except as otherwise indicated herein, or as the context may
otherwise require, the words we, our,
us, Syntel, and Company
refer to Syntel, Inc. and its consolidated subsidiaries
Business
Overview
We are a worldwide provider of information technology (IT) and
outsourcing services to Global 2000 companies. We believe we
combine deep industry knowledge with an understanding of our
customers needs and available technologies to provide
high-quality, value-enhancing services to our customers. We
utilize a Global Delivery Service model, leveraging an
integrated on-site/offshore approach that combines technical and
account management teams both on-site at the customer location
and offshore at Global Development Centers located primarily in
India. Our reported service offerings include:
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Applications Outsourcing, consisting of outsourcing services for
ongoing management, development and maintenance of business
applications.
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Business Process Outsourcing (BPO), consisting of high-value,
customized outsourcing solutions that enhance critical
back-office services such as transaction processing, loan
servicing, retirement processing, collections and payment
processing. Syntels primary BPO focus is in the financial
services, healthcare and insurance sectors.
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e-Business,
consisting of strategic advanced technology services in the
integration and development of technology applications,
including Customer Relationship Management (CRM), Data
Warehousing/Business Intelligence, Enterprise Applications
Integration (EAI), Enterprise Resource Planning (ERP) services
and Web Solutions.
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TeamSourcing, consisting of professional IT consulting services.
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We provide services to a broad range of Global 2000 companies in
the financial services, healthcare, insurance, automotive,
retail and other industries. Our five largest customers during
the first nine months of 2006, based on revenues, were Allstate,
American Express, DaimlerChrysler, Humana and State Street Bank.
We have been chosen as a preferred vendor by many of our
customers and have been recognized for our quality and
responsiveness. We seek to develop long-term relationships with
our customers so as to become a trusted business partner and
enable us to expand our roles with current customers. We also
have focused our sales effort on increasing our resources in the
development, marketing and sales of our Applications
Outsourcing, BPO,
e-Business
and TeamSourcing services to expand our customer base.
We were founded in 1980 and are headquartered in Troy, Michigan.
Our net revenues in the nine month period ended
September 30, 2006 increased to $197.1 million from
$163.9 million in the nine month period ended
September 30, 2005, representing a growth rate of 20.3%.
Worldwide headcount as of September 30, 2006 increased by
36% to 7,506 employees as compared to 5,536 employees as of
September 30, 2005.
Industry
Overview
Increasing globalization, adoption of the Internet as a business
tool and technological innovation are creating an increasingly
competitive business environment that requires companies to
fundamentally change their business processes. To effect change,
corporations are focusing on their core competencies and on
cost-effectively utilizing IT solutions to improve productivity,
lower costs and manage operations more effectively. As a result,
designing, developing and implementing advanced technology
solutions are key
1
priorities for the majority of corporations. This type of work
requires highly skilled individuals trained in diverse
technologies. However, there is a growing shortage of these
individuals and many companies are reluctant to expand their IT
departments through additional staffing. We believe that many
organizations are concluding that using outside specialists to
address their advanced technology and ongoing IT requirements
enables them to develop better solutions in shorter time frames
and to reduce implementation risks and ongoing maintenance
costs. Those outside specialists best positioned to benefit from
these trends have access to a pool of skilled technical
professionals, have demonstrated the ability to manage IT
resources effectively, have low-cost offshore software
development facilities and can efficiently expand operations to
meet customer demands. Demand for IT services that utilize
offshore resources has grown significantly as corporations
continue to seek ways to outsource not only specific projects
for the design, development and integration of new technologies,
but also ongoing management, development and maintenance of
existing IT systems. The 2005 NASSCOM-McKinsey report estimates
that the offshore IT services industry will grow at a 24.4%
compound annual growth rate from $18.4 billion in fiscal
2005 to $55.0 billion in fiscal 2010. As businesses
experience benefits from outsourcing IT functions, an increased
focus on outsourcing other mission-critical business processes
has occurred. The NASSCOM-McKinsey report estimates that the
offshore BPO industry will grow at a 37.0% compound annual
growth rate, from $11.4 billion in fiscal 2005 to
$55.0 billion in fiscal 2010. We believe that providers
that can deliver services using a combination of
on-site,
off-site and offshore professionals who know the customers
IT and business processes and provide access to a wide range of
expertise and best practices will benefit from these industry
trends.
Competitive
Strengths
Our principal competitive strengths include:
Global Delivery Service. Our ability to offer
flexible
on-site,
off-site and offshore services benefits our customers by
providing responsive delivery, access to the most knowledgeable
personnel and best practices, resource depth and
cost-effectiveness.
Trusted Business Partner. Our corporate
culture reflects a customer for life philosophy,
such that we are focused on developing an in-depth knowledge of
our customers business processes, IT applications and
industry to provide high value services.
Deep Industry Expertise. We have developed
methodologies, toolsets and proprietary knowledge applicable to
specific industries, including financial services, insurance and
healthcare, that allow us to be more responsive to customer
needs within these industries.
Depth and Breadth of Service Offerings. We
provide a comprehensive range of IT services, including
application development, application maintenance and support,
packaged software implementation, infrastructure management
services, BPO and testing services.
Proven Intellectual Capital. We benefit from
our experience in transitioning from a 100% onshore service
provider to a majority offshore service provider. This
intellectual capital includes methodologies for the selection of
appropriate customer IT functions for management by us, tools
for the transfer to us of the systems knowledge of our customer
and techniques for providing systems support improvement to our
customer.
Operating
Strategy
Our objective is to strengthen our position as a global IT
services and outsourcing provider. We intend to achieve this
through our strategies to:
Leverage Global Delivery Model. We will
continue to leverage our investment in our Global Development
Centers to provide reliable and cost-effective services to our
existing customers, expand services and to attract new customers.
2
Continue to Grow Application Outsourcing
Services. Through increased sales efforts and a
realignment of the development, marketing and sales, we seek to
continue to grow our revenues from higher value Applications
Outsourcing services.
Capitalize on Existing Capabilities in the High Growth BPO
Market. We will seek to continue to grow our expertise in
the area of value-added BPO solutions, primarily in the areas of
financial services and insurance.
Expand our Customer Base and Role with Current Customers.
We intend to leverage our trusted business partner status
with customers to cross-sell additional services in order to
expand our role with current customers, and to leverage our
expertise in transferring processes offshore and in specific
verticals to expand our customer base.
Attract and Retain Highly Skilled IT Professionals. We
believe our management structure and human resources
organization is designed to maximize our ability to retain our
professional IT staff, and we intend to leverage this ability to
continue to attract new professionals to our staff in both IT
and BPO.
Pursue Selective Partnership Opportunities. We intend to
continue to pursue additional partnership alliances with
software firms and IT application infrastructure firms that will
allow us to provide our services more efficiently to our
customers.
Corporate
Information
Our executive offices are located at 525 East Big Beaver Road,
Suite 300, Troy, Michigan 48083, and our telephone number
is
(248) 619-2800.
Our web site address is www.syntelinc.com. The information on
our website is not part of this prospectus.
3
The
Offering
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Common stock offered by the selling shareholders |
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3,000,000 shares. |
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Common stock outstanding |
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41,096,545 |
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Use of proceeds |
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We will not receive any proceeds from the sale of our common
stock by the selling shareholders in this offering. |
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Dividend policy |
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Subject to limitations imposed by Michigan law, dividend
payments are within the absolute discretion of our Board of
Directors. The dividends we have previously paid are described
under Market Price of Common Stock and Dividend Policy and
History. |
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Nasdaq Global Select Market symbol |
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SYNT |
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Risk Factors |
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See Risk Factors beginning on page 6 of this
prospectus for a discussion of factors you should carefully
consider before deciding to invest in our common stock. |
The number of shares of common stock to be outstanding after
this offering is based on the 41,096,545 shares outstanding
as of December 7, 2006. The number of shares of common
stock being offered in this offering represents 8.4% of our
outstanding common stock as of December 7, 2006.
Unless we indicate otherwise or the context otherwise requires,
all information in this prospectus assumes that the underwriters
do not exercise their over-allotment option.
In this prospectus, references to the number of shares of common
stock outstanding includes outstanding shares of restricted
common stock issued under our stock option plans. As of
December 7, 2006, there were 185,503 shares of
restricted common stock outstanding.
In this prospectus, references to the number of shares of common
stock outstanding do not include:
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239,610 shares issuable upon the exercise of stock options
granted pursuant to our stock option plans and outstanding as of
September 30, 2006 and having a weighted average exercise
price of $12.67 per share; and
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2,100,767 shares available for future grants or issuance
under our stock option plans.
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4
Summary
Financial Data
The following financial data as of and for the years ended
December 31, 2005, 2004 and 2003 have been derived from the
audited consolidated financial statements of Syntel. The
following financial data as of and for the nine month periods
ended September 30, 2006 and 2005 have been derived from
the unaudited condensed consolidated financial statements of
Syntel. The other operating data for all periods presented have
been derived from the Companys internal records. The
following information should be read together with the sections
in this prospectus entitled Selected Financial Data
and Managements Discussion and Analysis of Financial
Condition and Results of Operations.
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Nine Months Ended
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Year Ended December 31,
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September 30,
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2005
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2004
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2003
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2006
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2005
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(In thousands, except per share data)
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STATEMENT OF INCOME
DATA
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Net revenues
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$
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226,189
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$
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186,573
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$
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179,507
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$
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197,123
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$
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163,910
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Cost of revenues
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135,043
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107,120
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101,699
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123,267
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97,756
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Gross profit
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91,146
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79,453
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77,808
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73,856
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66,154
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Selling, general and administrative
expenses
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44,917
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36,999
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28,278
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35,299
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32,397
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Reduction in reserve requirements
applicable to Metier transaction
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(882
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Income from operations
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46,229
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42,454
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50,412
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38,557
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33,757
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Other income, principally interest
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4,592
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3,773
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3,168
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3,525
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2,654
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Income before income taxes
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50,821
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46,227
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53,580
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42,082
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36,411
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Provision for income taxes
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20,500
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5,253
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13,242
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4,443
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5,992
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Income before loss from equity
investments
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30,321
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40,974
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40,338
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37,639
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30,419
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Loss from equity investment
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34
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Net income
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$
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30,321
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$
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40,974
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$
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40,304
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$
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37,639
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$
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30,419
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DIVIDENDS PER SHARE
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$
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1.74
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$
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0.24
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$
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1.37
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$
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1.43
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$
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1.68
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EARNINGS PER SHARE:
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Basic
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$
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0.75
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$
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1.02
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$
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1.02
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$
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0.92
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$
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0.75
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Diluted
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$
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0.75
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$
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1.01
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$
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0.99
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$
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0.92
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$
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0.75
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Weighted average common shares
outstanding:
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Basic
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40,528
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40,216
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39,609
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40,783
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40,487
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Diluted
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40,651
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40,469
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40,797
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41,038
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40,588
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December 31,
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September 30,
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2005
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2004
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2003
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2006
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2005
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(In thousands, except headcount data)
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BALANCE SHEET DATA
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Working capital
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$
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120,866
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$
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170,786
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$
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142,207
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$
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98,063
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$
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129,630
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Total assets
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198,161
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226,968
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185,198
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174,673
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195,933
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Total current liabilities
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|
|
45,883
|
|
|
|
36,326
|
|
|
|
31,792
|
|
|
|
39,767
|
|
|
|
40,617
|
|
Total shareholders equity
|
|
|
152,278
|
|
|
|
190,642
|
|
|
|
153,406
|
|
|
|
134,906
|
|
|
|
155,316
|
|
OTHER DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Billable headcount in U.S.
|
|
|
1,341
|
|
|
|
1,145
|
|
|
|
1,138
|
|
|
|
1,380
|
|
|
|
1,241
|
|
Billable headcount in India
|
|
|
3,006
|
|
|
|
1,906
|
|
|
|
1,376
|
|
|
|
3,656
|
|
|
|
2,470
|
|
Billable headcount at other
locations
|
|
|
109
|
|
|
|
121
|
|
|
|
150
|
|
|
|
94
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total billable headcount
|
|
|
4,456
|
|
|
|
3,172
|
|
|
|
2,664
|
|
|
|
5,130
|
|
|
|
3,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
RISK
FACTORS
You should carefully consider the following risks and other
information in this prospectus, as well as in the documents
incorporated by reference in this prospectus, before deciding to
invest in shares of our common stock. The following risks and
uncertainties could materially adversely affect our business,
financial condition or operating results. In this event, the
trading price of our common stock could decline and you could
lose part or all of your investment.
Risks
Related to Our Business
Failure
to hire and retain a sufficient number of qualified IT
professionals could have a material adverse effect on our
business, results of operations and financial
condition.
Our business of delivering professional IT services is labor
intensive, and, accordingly, our success depends upon our
ability to attract, develop, motivate, retain and effectively
utilize highly-skilled IT professionals. We believe that there
is a growing shortage of, and significant competition for,
IT professionals who possess the technical skills and
experience necessary to deliver our services, both in the United
States and in India, and that such IT professionals are likely
to remain a limited resource for the foreseeable future. We
believe that, as a result of these factors, we operate within an
industry that experiences a significant rate of annual turnover
of IT personnel. Our business plans are based on hiring and
training a significant number of additional IT professionals
each year to meet anticipated turnover and increased staffing
needs. Our ability to maintain and renew existing engagements
and to obtain new business depends, in large part, on our
ability to hire and retain qualified IT professionals. We
perform a portion of our employee recruitment for U.S. positions
in foreign countries, particularly India. Any perception among
our current or potential employees or foreign IT professionals
that our ability to assist them in obtaining permanent residency
status in the United States has been diminished could result in
increased recruiting and personnel costs or lead to significant
employee attrition or both. For the nine month periods ended
September 30, 2006 and 2005 and the years ended
December 31, 2005, 2004 and 2003 attrition was 13%, 15%,
14%, 14% and 10%, respectively. For the same periods, the number
of net hires was 1,413, 1,009, 1,566, 666 and 1,067,
respectively. There can be no assurance that we will be able to
recruit and train a sufficient number of qualified IT
professionals or that we will be successful in retaining current
or future employees. Increased hiring by technology companies,
particularly in India, and increasing worldwide competition for
skilled technology professionals may lead to a shortage in the
availability of qualified personnel in the markets in which we
operate and hire. Failure to hire and train or retain qualified
IT professionals in sufficient numbers could have a material
adverse effect on our business, results of operations and
financial condition.
Government
regulation of immigration could impact our ability to bring a
sufficient number of IT professionals to the United States
or other jurisdictions.
We recruit IT professionals on a global basis and, therefore,
must comply with the immigration laws of the countries in which
we operate, particularly the United States. As of
September 30, 2006, 1,027 IT professionals,
representing approximately 38% of our U.S. workforce and
11% of our worldwide workforce worked under H-1B visas
(permitting temporary residence while employed in the United
States) and another 350 IT professionals, representing 16%
of our U.S. workforce and 5% of our worldwide workforce
worked under L-1 visas (permitting inter-company transfers of
employees that have been employed with a foreign subsidiary for
at least six months). United States federal law limits the
number of new H-1B visas to be approved in any fiscal year.
Currently, the total number of H-1B visas permitted is
65,000 per U.S. government fiscal year, a decrease from
195,000 of the 2003 fiscal year. In years in which this limit is
reached, we may be unable to obtain enough
H-1B visas
to bring a sufficient number of foreign employees to the United
States. If we were unable to obtain sufficient H-1B employees,
our business, results of operations and financial condition
could be materially and adversely affected. Furthermore,
Congress and administrative agencies have periodically expressed
concerns over the levels of legal immigration into the United
States. These concerns have in the past resulted and may in the
future result in proposed legislation,
6
rules and regulations aimed at reducing the number of work
visas, including L-1 and H-1B visas, that may be issued.
We are also subject to various immigration and work permit
restrictions in other jurisdictions where we operate or plan to
operate, including the European community. These restrictions
restrain our ability to increase the number of skilled
professionals in certain regions and could have an adverse
impact on our global strategy. The impact of these regulations,
including any changes to immigration and work permit regulations
in particular jurisdictions, could have a material adverse
effect on our business, results of operations and financial
condition.
Our
business could be materially adversely affected if one of our
significant clients terminates its engagement of us or if there
is a downturn in one of the industries we serve.
We have in the past derived, and believe we will continue to
derive, a significant portion of our revenues from a limited
number of large, corporate clients. Our ten largest clients
generated approximately 70%, 65%, 61% and 64% of our total
revenues for the nine months ended September 30, 2006 and
the years ended December 31, 2005, 2004 and 2003,
respectively. The Companys largest client for the nine
months ended September 30, 2006 and the years ended
December 31, 2005, 2004 and 2003, was American Express,
which generated approximately 18% of our total revenues for the
nine months ended September 30, 2006 and 16% of our total
revenues for each of the years ended December 31, 2005,
2004 and 2003, respectively. We expect to continue to derive a
significant portion of our revenues from American Express.
Failure to meet a clients expectations could result in
cancellation or non-renewal of our engagement and could damage
our reputation and adversely affect our ability to attract new
business. Many of our contracts, including all of our contracts
with our ten largest clients, are terminable by the client with
limited notice to us and without compensation beyond payment for
the professional services rendered through the date of
termination. An unanticipated termination of a significant
engagement, including in connection with the acquisition of a
significant client, could result in the loss of substantial
anticipated revenues and could require us to either maintain or
terminate a significant number of unassigned IT professionals.
The loss of any significant client or engagement could have a
material adverse effect on our business, results of operations
and financial condition.
We also have derived, and expect to continue to derive, a
significant portion of our revenues from clients in certain
industries, including the financial services, insurance and
healthcare industries. Clients in the financial services
industry generated approximately 42%, 39%, 40%, 38% and 33% of
our revenues for the nine months ended September 30, 2006
and 2005 and the years ended December 31, 2005, 2004 and
2003, respectively. A downturn in the financial services
industry or other industries from which we derive significant
revenues could result in less revenues from current and
potential clients in such industry and could have a material
adverse effect on our business, results of operations and
financial condition.
We may
be affected by political and regulatory conditions, including
wage increases, in India.
A significant element of our business strategy is to continue to
develop and expand offshore Global Development Centers in India.
Changes in the political or regulatory climate of India,
including the following, could have a material adverse effect on
our business, results of operations and financial condition:
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Political climate In the past, India has
experienced significant inflation and shortages of foreign
currency and has been subject to civil unrest. No assurance can
be given that we will not be adversely affected by changes in
inflation, exchange rate fluctuations, currency controls,
interest rates, tax provisions, social stability or other
political, economic or diplomatic developments in or affecting
India.
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Changes in liberalization policies of the
government The Indian government is
significantly involved in, and exerts significant influence
over, its economy. In the recent past, the Indian government has
provided significant tax incentives and relaxed certain
regulatory restrictions in order to encourage foreign investment
in certain sectors of the economy, including the technology
industry. Certain of these benefits directly benefited us
including, among others, tax holidays, liberalized
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7
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|
|
import and export duties and preferential rules on foreign
investment. There can be no assurance that these benefits will
be continued or that other similar benefits will be provided in
future periods.
|
Wage
pressures in India may reduce our profit margins.
Wage pressures in India may prevent us from sustaining our
competitive advantage and may reduce our profit margins. As of
September 30, 2006 and December 31, 2005,
approximately 71% and 67%, respectively, of our billable
workforce was in India, and we anticipate that this percentage
will increase over time. Wage costs in India have historically
been significantly lower than wage costs in the United States
and Europe for comparably skilled professionals, which has been
one of our competitive strengths. However, wage increases in
India may prevent us from sustaining this competitive advantage
and may negatively affect our profit margins. Wages in India are
increasing at a faster rate than in the United States,
which could result in increased costs for technology
professionals, particularly project managers and other
mid-level
professionals. We may need to increase the levels of our
employee compensation more rapidly than in the past to remain
competitive with other employers, or seek to recruit in other
low labor cost jurisdictions to keep our wage costs low. For
example, we recently established a long-term retention program
for our senior executives and employees. In addition, under SFAS
No. 123R, we are now required to expense stock-based awards
to employees. Compensation increases may result in a material
adverse effect on our business, results of operations and
financial condition.
Our
ability to repatriate earnings from our foreign operations is
limited by tax laws.
We treat earnings from our operations in India and other foreign
countries as permanently invested outside the United States. If
we repatriate any of such earnings, we will incur a dividend
distribution tax for distribution from India, currently 14.03%
under Indian tax law, and be required to pay United States
corporate income taxes on such earnings. As of
September 30, 2006, the estimated dividend distribution
taxes and United States corporate taxes that would be due upon
repatriation of accumulated earnings from our operations in
India were approximately $43.8 million. If we decided to
repatriate all undistributed repatriable earnings of foreign
subsidiaries as of September 30, 2006, we would have
accrued taxes of approximately $44.5 million.
The IT
services and BPO industry are intensely competitive, and we may
not be able to compete successfully against current and future
competitors.
The IT services and BPO industry are intensely competitive,
highly fragmented and subject to rapid change and evolving
industry standards. We compete with a variety of other
companies, depending on the services offered. In Applications
Outsourcing and
e-Business
services, we primarily compete with domestic firms such as
Accenture, Cognizant, EDS, IBM Global Services and Keane and
with an increasing number of India-based companies including
Infosys, Tata Consultancy Services and Wipro. The Company is
also seeing increased competition from non-Indian sources such
as China, Eastern Europe and the Philippines. In BPO, we
primarily compete with other offshore BPO vendors including HCL,
Wipro and WNS. In professional IT staffing engagements, our
primary competitors include participants from a variety of
market segments, including systems consulting and implementation
firms, applications software development and maintenance firms,
service groups of computer equipment companies and temporary
staffing firms. Many of our competitors have substantially
greater financial, technical and marketing resources and greater
name recognition than us. As a result, they may be able to
compete more aggressively on pricing, respond more quickly to
new or emerging technologies and changes in client requirements,
or devote greater resources to the development and promotion of
IT services and BPO than we do. India-based companies also
present significant price competition due to their competitive
cost structures and tax advantages. In addition, there are
relatively few barriers to entry into our markets and we have
faced, and expect to continue to face, additional competition
from new IT service and BPO providers. Further, there is a risk
that our clients may elect to increase their internal resources
to satisfy their IT services needs as opposed to relying on a
third-party
vendor like us. The IT services industry is also undergoing
consolidation, which may result in increased competition in our
target markets. Increased competition could result in price
reductions, reduced
8
operating margins and loss of market share. There can be no
assurance that we will be able to compete successfully with
existing or new competitors or that competitive pressures will
not materially adversely affect our business, results of
operations and financial condition.
We may
not be able to successfully manage the rapid growth of our
business.
We have recently experienced a period of rapid growth in
revenues that places significant demands on our managerial,
administrative and operational resources. Additionally, the
longer term transition in our delivery mix from onsite to
offshore staffing has also placed additional operational and
structural demands on us. Our future growth depends on
recruiting, hiring and training IT professionals, increasing our
international operations, expanding our U.S. and offshore
capabilities, adding effective sales and management staff and
adding service offerings. Effective management of these and
other growth initiatives will require that we continue to
improve our infrastructure, execution standards and ability to
expand services. Failure to manage growth effectively could have
a material adverse effect on the quality of our services and
engagements, our ability to attract and retain IT professionals,
our prospects and our business, results of operations and
financial condition.
Our
Applications Outsourcing services require increased attention
from senior management and our
e-Business
and BPO practices require increased sales and
marketing.
In recent years, we have realigned existing personnel and
resources, and have invested incrementally in the development of
our Applications Outsourcing business, with increased focus on
outsourcing services for ongoing applications management,
development and maintenance. Applications Outsourcing services
generally require a longer sales cycle (up to
twelve months) and generally require approval by more
senior levels of management within the clients
organization, as compared with traditional IT staffing services.
Pursuing such sales requires significant investment of time,
including by our senior management, and may not result in
additional business. We have also invested in the development of
our
e-Business
and BPO practices. Many
e-Business
and BPO engagements are short in duration (three to six months),
requiring increased sales and marketing. There can be no
assurance that the Companys increased focus on our
Applications Outsourcing,
e-Business
and BPO practices will be successful, and any failure of such
strategy could have a material adverse effect on our business,
results of operations and financial condition.
Our
fixed-price engagements may commit us to unfavorable
terms.
We undertake development and maintenance engagements which are
billed on a fixed-price basis, in addition to the engagements
billed on
time-and-materials
basis. Fixed-price revenues from development and maintenance
activity represented approximately 44%, 50%, 54% and 52% of
total revenues for the nine months ended September 30, 2006
and the years ended December 31, 2005, 2004 and 2003,
respectively. Our strategy includes increasing the percentage of
our revenues derived from fixed-price engagements. Any failure
to estimate accurately the resources and time required to
complete a fixed-price engagement on time and to the required
quality levels or any unexpected increase in the cost to us of
IT professionals, office space or materials could expose us to
risks associated with cost overruns and could have a material
adverse effect on our business, results of operations and
financial condition.
We may
be liable to our clients for disclosure of confidential
information or if we do not fulfill our obligations under our
engagements.
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. Many of our client agreements do not limit our potential
liability for breaches of confidentiality. If any person,
including any of our employees, penetrates our network security
or misappropriates sensitive data, we could be subject to
significant liability from our clients or from their 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.
9
Many of our engagements involve IT services that are critical to
the operations of our clients businesses. Any failure or
inability to meet a clients expectations in the
performance of services could result in a claim for substantial
damages against us, regardless of our responsibility for such
failure. There can be no assurance that the limitations of
liability set forth in our service contracts will be enforceable
in all instances or would otherwise protect us from liability
for damages. In addition, the costs of defending against any
such claims, even if successful, could be significant.
There can be no assurance that our insurance coverage will
continue to be available on reasonable terms, will be available
in sufficient amounts to cover one or more large claims or
defense costs, or that our insurer will not disclaim coverage as
to any future claim. The successful assertion of one or more
large claims against us that are uninsured, exceed available
insurance coverage or result in changes to our insurance
policies, including premium increases or the imposition of large
deductible or co-insurance requirements, could adversely affect
our business, results of operations and financial condition.
We
depend on the efforts and ability of key personnel, including
our Chief Executive Officer.
Our success is highly dependent on the efforts and abilities of
Bharat Desai, our co-founder, Chairman, President, and Chief
Executive Officer, and other key personnel. The diminution or
loss of the services of Mr. Desai or other key personnel
for any reason could have a material adverse effect on our
business, operating results and financial condition. We do not
maintain key man life insurance on Mr. Desai or any other
key personnel. Effective June 1, 2006, the Companys
then Chief Financial Officer resigned. The Company has appointed
an interim Chief Financial Officer and is conducting a search
for a permanent replacement.
Our
business could be materially adversely effected 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 presently hold no patents or registered copyrights. We hold
several trademarks or servicemarks, including:
Syntel®,
registered in the United States and Germany; Consider IT
Done®,
registered in the United States and Germany;
Identeontm;
IntelliSourcing®;
IntelliTransfer®;
SkillBay®;
TeamSourcing®;
Total ERP Applications Methodology
(TEAM)®;
Latest-to-Legacy®;
New2USA.com®;
and Digital
Blueprinting-Build-Optimize®.
We also have submitted United States federal and foreign
trademark applications for the names of additional service
offerings. There can be no assurance that we will 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 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 and
India 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. In particular, the laws of India could change in ways
that may prevent or restrict the transfer of software
components, libraries and toolsets from India to the United
States. There can be no assurance that we will be able to detect
unauthorized use and take appropriate steps to enforce our
rights, or that any such steps will be successful. Infringement
by others of our intellectual property, including the costs of
enforcing our intellectual property rights, could have a
material adverse effect on our business, results of operations
and financial condition.
Although we believe that our intellectual property does not
infringe on the intellectual property rights of others, there
can be no assurance that such a claim will not be asserted
against us in the future or that
10
any such claim, if asserted, would not be successful. The costs
of defending any such claims could be significant, and any
successful claim could require us to modify, discontinue or
change the name of any of our services. Any such changes could
have a material adverse effect on our business, results of
operations and financial condition.
Future
legislation in the United States and abroad could significantly
impact the ability of our clients to utilize our
services.
The issue of companies outsourcing services abroad has become a
topic of political discussion in the United States and other
countries. Measures aimed at limiting or restricting outsourcing
have been enacted in a few states, and there is currently
legislation pending in several states and at the federal level.
The measures that have been enacted to date have not
significantly adversely affected our business. There can be no
assurance that pending or future legislation that would
significantly adversely affect our business will not be enacted.
If enacted, such measures are likely to fall within two
categories: (1) a broadening of restrictions on outsourcing
by government agencies and on government contracts with firms
that outsource services directly or indirectly,
and/or
(2) measures that impact private industry, such as tax
disincentives, restrictions on the transfer or maintenance of
certain information abroad
and/or
intellectual property transfer restrictions. In the event that
any such measures are enacted, or if the prospect of such
measures being enacted increases, the ability of our clients to
utilize our services could be restricted or become less
economical and our business, results of operations and financial
condition could be adversely affected.
Our
margins may be adversely affected if demand for our services
slows.
If demand for our services slows, our utilization and billing
rates for our technology professionals could be adversely
affected, which may result in lower gross and operating profits.
Our
future success depends on our ability to market new services,
including
end-to-end
business solutions, to our existing and new
clients.
Over the past several years, we have been expanding the nature
and scope of our engagements by extending the breadth of
services we offer. The success of our service offerings depends,
in part, upon continued demand for such services by our existing
and new clients and our ability to meet this demand in a cost
competitive and effective manner. In addition, our ability to
effectively offer a wider breadth of
end-to-end
business solutions depends on our ability to attract existing or
new clients to these service offerings. To obtain engagements
for our
end-to-end
solutions, we also are more likely to compete with large,
well-established international consulting firms as well as other
India-based technology services companies, resulting in
increased competition and marketing costs. Our new service
offerings may not effectively meet client needs, and we may be
unable to attract existing and new clients to these service
offerings. The increased breadth of our service offerings may
also result in larger and more complex client projects, which
will require that we establish closer relationships with our
clients, and potentially with other technology service providers
and vendors, and develop a more thorough understanding of our
clients operations. Our ability to establish these
relationships will depend on a number of factors including the
proficiency of our technology professionals and our management
personnel and the willingness of our existing and potential
clients to provide us with information about their businesses.
If we are not able to successfully market and provide our new
and broader service offerings, our business, results of
operations and financial condition could be materially adversely
affected.
Our
business could be adversely affected if we do not anticipate and
respond to technology advances in our and our clients
industries.
Our business will suffer if we fail to anticipate and develop
new services and enhance existing services in order to keep pace
with rapid changes in technology and in the industries on which
we focus. The technology services and BPO markets are
characterized by rapid technological change, evolving industry
standards, changing client preferences and frequent new product
and service introductions. Our future success will depend on our
ability to anticipate these advances and develop new product and
service
11
offerings to meet our existing and potential clients
needs. We may fail to anticipate or respond to these advances in
a timely manner, or, if we do respond, the services or
technologies we develop may not be successful in the
marketplace. Further, products, services or technologies that
are developed by our competitors may render our services
non-competitive or obsolete. If we do not respond effectively to
these changes, our business, results of operations and financial
condition could be materially adversely affected.
We may
be required to include benchmarking provisions in future
engagements, which could have an adverse effect on our revenues
and profitability.
As the size and duration of our client engagements increase, our
current and future clients may require benchmarking provisions.
Benchmarking provisions allow a client in certain circumstances
to request that a benchmark study prepared by an agreed upon
third-party comparing our pricing, performance and efficiency
gains for delivered contract services to that of an agreed upon
list of other service providers for comparable services. Based
on the results of the benchmark study and depending on the
reasons for any unfavorable variance, we could then be required
to reduce the pricing for future services to be performed under
the balance of the contract, which could have an adverse impact
on our revenues and profitability.
We are
subject to corporate governance and disclosure requirements that
have resulted and likely will continue to result in increased
costs and management attention.
Compliance with new and changing corporate governance and public
disclosure requirements adds uncertainty to our compliance
policies and increases our costs of compliance. Changing laws,
regulations and standards include those relating to accounting,
corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ
Global Select Market rules. These new or changed laws,
regulations and standards may lack specificity and are subject
to varying interpretations. Their application in practice may
evolve over time as new guidance is provided by regulatory and
governing bodies. This could result in continuing uncertainty
regarding compliance matters and higher costs of compliance as a
result of ongoing revisions to such governance standards. Our
efforts to comply with evolving laws, regulations and standards
have resulted in, and are likely to continue to result in,
increased general and administrative expenses and a diversion of
management time and attention from revenue-generating activities
to compliance activities. In addition, new laws, regulations and
standards regarding corporate governance may make it more
difficult for us to obtain director and officer liability
insurance. Further, our board members, Chief Executive Officer
and Chief Financial Officer could face an increased risk of
personal liability in connection with their performance of
duties. As a result, we may face difficulties attracting and
retaining qualified board members and executive officers, which
could harm our business. If we fail to comply with new or
changed laws or regulations and standards differ, our business
and reputation may be harmed.
While
we believe we currently have adequate internal control over
financial reporting, we are required to assess our internal
control over financial reporting on an annual basis and any
future adverse results from such assessment could result in a
loss of investor confidence in our financial reports and have an
adverse effect on our stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 and the
accompanying rules and regulations promulgated by the SEC to
implement it require us to include in our
Form 10-K
an annual report by our management regarding the effectiveness
of our internal control over financial reporting. The report
includes, among other things, an assessment of the effectiveness
of our internal control over financial reporting as of the end
of our fiscal year. This assessment must include disclosure of
any material weaknesses in our internal control over financial
reporting identified by management.
The Committee of Sponsoring Organizations of the Treadway
Commission (COSO) provides a framework for companies to assess
and improve their internal control systems. The Public Company
Accounting Oversight Standard No. 2 (Standard
No. 2) provides the professional standards and related
performance guidance for auditors to attest to, and report on,
managements assessment of the effectiveness of internal
control over financial reporting under Section 404.
Managements assessment of internal control
12
over financial reporting requires management to make subjective
judgments and, particularly because Standard No. 2 is newly
effective, some of the judgments will be in areas that may be
open to interpretation and therefore the report may be uniquely
difficult to prepare, and our independent auditors may not agree
with managements assessment.
During this process, if our management identifies one or more
material weaknesses in our internal control over financial
reporting that cannot be remediated in a timely manner, we will
be unable to conclude such internal control is effective. While
we currently believe our internal control over financial
reporting is effective, the effectiveness of our internal
controls in future periods is subject to the risk that our
controls may become inadequate because of changes in conditions,
and, as a result, the degree of compliance of our internal
control over financial reporting. If we are unable to conclude
that our internal control over financial reporting is effective
as of December 31, 2006 (or if our independent auditors are
unable to attest that our managements report is fairly
stated or they are unable to express an opinion on the
effectiveness of our internal controls), we could lose investor
confidence in the accuracy and completeness of our financial
reports, which would have an adverse effect on our stock price.
We
rely on global telecommunications infrastructure to maintain
communication between our various locations and our
clients sites.
Disruptions in telecommunications, system failures, or virus
attacks could harm our ability to execute our Global Delivery
Model, which could result in client dissatisfaction and a
reduction of our revenues. A significant element of our Global
Delivery Model is to continue to leverage and expand our Global
Development Centers. Our Global Development Centers are linked
with a redundant telecommunications network architecture that
uses multiple service providers and various satellite and
optical links with alternate routing. We may not be able to
maintain active voice and data communications between our
various Global Development Centers and between our Global
Development Centers and our clients sites at all times due
to disruptions in these networks, system failures or virus
attacks. Any significant failure in our ability to communicate
could result in a disruption in business, which could hinder our
performance or our ability to complete projects on time. This,
in turn, could lead to client dissatisfaction and a material
adverse effect on our business, results of operations and
financial condition.
There
are risks associated with our investment in new facilities and
physical infrastructure.
Our business model includes developing and operating Global
Development Centers in order to support our Global Delivery
Service. We have Global Development Centers located in Mumbai,
Pune and Chennai, India and in August 2006, we completed
Phase I of the construction of a development and training
campus in Pune, India, including an office building for
950 seats, a food court and hotel. However, the full
completion of the development of the Pune facility is contingent
on our funding the continuation of the construction and
obtaining appropriate construction and other permits from the
Indian government. We cannot make any assurances that the
construction of the facility or any future facilities that we
may develop will occur on a timely basis or that they will be
completed. If we are unable to complete the construction of the
Pune facility or future facilities, our business, results of
operation and financial condition will be adversely affected. In
addition, we are developing the Pune facility in expectation of
increased growth in our business. If our business does not grow
as expected, we may not be able to benefit from our investment
in this or other facilities.
Our
earnings are affected by application of
SFAS No. 123R.
We began expensing stock options and other stock-based awards in
accordance with the Financial Accounting Standards Boards
recently-issued FASB Statement No. 123 (revised 2004)
Share-Based Payment (SFAS No. 123R) in fiscal
2006. SFAS No. 123R requires companies to measure and
recognize compensation expense for all stock-based payments at
fair value. Stock-based payments include stock option grants and
other transactions under stock plans. We grant options to
purchase common stock to some of our employees and directors
under various plans at prices equal to the market value of the
stock on the dates the options were granted. In addition, we
have issued shares of incentive restricted stock to our
13
non-employee directors and employees. During the first nine
months of 2006 we recorded $1.89 million of expense for
equity-based compensation. The assumptions used in calculating
and estimating future costs under SFAS No. 123R are
highly subjective and changes in these assumptions could
significantly affect our future earnings.
Terrorist
activity, war or natural disasters could make travel and
communication more difficult and adversely affect our
business.
Terrorist activity, war or natural disasters could adversely
affect our business, results of operations and financial
condition. Terrorist activity, other acts of violence or war, or
natural disasters have the potential to have a direct impact on
our clients. Such events may disrupt our ability to communicate
between our various Global Development Centers and between our
Global Development Centers and our clients sites, make
travel more difficult, make it more difficult to obtain work
visas for many of our technology professionals and effectively
curtail our ability to deliver our services to our clients. Such
obstacles to business may increase our expenses and materially
adversely affect our business, results of operations and
financial condition. In addition, many of our clients visit
several technology services firms prior to reaching a decision
on vendor selection. Terrorist activity, war or natural
disasters could make travel more difficult and delay, postpone
or cancel decisions to use our services.
We are
subject to risks of fluctuation in the exchange rate between the
U.S. dollar and the Indian rupee.
We hold a significant amount of our cash in Indian rupees.
Accordingly, changes in exchange rates between the Indian rupee
and the U.S. dollar could have a material adverse effect on
our revenues, other income, cost of services sold, gross margin
and net income, which may in turn have a negative impact on our
business, operating results and financial condition. The
exchange rate between the Indian rupee and the dollar has
changed substantially in recent years and may fluctuate
substantially in the future. We expect that a majority of our
revenues will continue to be generated in U.S. dollars for
the foreseeable future and that a significant portion of our
expenses, including personnel costs, as well as capital and
operating expenditures, will continue to be denominated in
Indian rupees. Consequently, the results of our operations are
adversely affected as the Indian rupee appreciates against the
U.S. dollar.
Any
future business combinations, acquisitions or mergers would
expose us to risks, including that we may not be able to
successfully integrate any acquired businesses.
We have expanded, and may continue to expand, our operations
through the acquisition of additional businesses. Financing of
any future acquisition could require the incurrence of
indebtedness, the issuance of equity (common or preferred) or a
combination thereof. There can be no assurance that we will be
able to identify, acquire or profitably manage additional
businesses or successfully integrate any acquired businesses
without substantial expense, delays or other operational or
financial risks and problems. Furthermore, acquisitions may
involve a number of special risks, including diversion of
managements attention, failure to retain key acquired
personnel, unanticipated events or legal liabilities and
amortization of acquired intangible assets. For example, in
2002, the Company incurred a charge in connection with a payment
made to the former owners of a business acquired by the Company
in 1999. In addition, any client satisfaction or performance
problems within an acquired firm could have a material adverse
impact on our reputation as a whole. There can be no assurance
that any acquired businesses would achieve anticipated revenues
and earnings. Any failure to manage our acquisition strategy
successfully could have a material adverse effect on our
business, results of operations and financial condition.
14
Risks
Related to this Offering and Our Stock
If our
stock price fluctuates after this offering, you could lose a
significant part of your investment.
The market price of our stock may be influenced by many factors,
some of which are beyond our control, including those described
above under Risks Related to Our
Business and the following:
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the failure of securities analysts to continue to cover our
common stock or changes in financial estimates by analysts;
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announcements by us or our competitors of significant contracts,
acquisitions or capital commitments;
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changes in market valuation or earnings of our competitors;
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variations in quarterly operating results;
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general economic conditions;
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terrorist acts;
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legislation;
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future sales of our common stock; and
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investor perception of us and our industry.
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In addition, the stock market in general has experienced extreme
price and volume fluctuations that have often been unrelated to
and disproportionate to the operating performance of companies
in our industry. These broad market and industry factors may
materially reduce the market price of our common stock,
regardless of our operating performance.
The trading price of our common stock since January 1, 2003
has ranged from a closing price high of $30.90 per share on
February 13, 2004 to a closing price low of $13.30 per
share on May 21, 2003.
Fluctuations
in our quarterly revenues and operating results could adversely
affect the price of our common stock.
We may experience in the future fluctuations in revenues and
operating results from quarter to quarter due to a number of
factors, including:
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the timing, number and scope of client engagements commenced and
completed during a quarter;
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progress on fixed-price engagements;
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timing and cost associated with expansion of our facilities;
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changes in IT professional wage rates;
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the accuracy of estimates of resources and time frames required
to complete pending assignments;
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the number of working days in a quarter;
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employee hiring, attrition and utilization rates;
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the mix of services performed
on-site,
off-site and offshore;
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termination of engagements;
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start-up
expenses for new engagements;
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longer sales cycles for Applications Outsourcing engagements;
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our clients budget cycles;
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investment time for training;
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15
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changes in our pricing policies or those of our competitors;
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the availability and duration of tax holidays;
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currency fluctuations, particularly between the U.S. dollar
and the Indian rupee;
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general economic and political factors; and
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the availability of U.S. visas and other immigration
requirements.
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Because a significant percentage of our selling, general and
administrative expenses are fixed, variations in revenues may
cause significant variations in operating results. Our operating
results could be below the expectations of market analysts and
investors, which could cause the price of our common stock to be
materially adversely affected. No assurance can be given that
quarterly results will not fluctuate causing an adverse effect
on our business, results of operations and financial condition
at the time.
Sales
of shares in this offering, or sales of shares eligible for
future sale, may cause the market price of our common stock to
drop significantly, even if our business is doing
well.
This offering may cause the market price of our common stock to
decline, perhaps significantly, even if our business is doing
well and even though we will not issue any additional shares to
be sold in this offering. In addition, our common stock may
experience increased volatility in the periods occurring near
this offering. The market price of our common stock could also
decline as a result of sales of a large number of shares of our
common stock 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.
Certain shareholders or entities controlled by them or their
permitted transferees, subject to the
lock-up
described below, will be able to sell their shares in the public
market from time to time without registering them, 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 (Securities Act). If any of these shareholders were
to sell a large number of their shares, the market price of our
common stock 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 stock.
In connection with this offering, the selling 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 shares without the prior
consent of Credit Suisse Securities (USA) LLC and Deutsche Bank
Securities Inc. for 90 days after the date of this
prospectus.
Except for the shareholders described in the preceding
paragraph, generally our other existing shareholders will not be
restricted by
lock-up
agreements in connection with this offering. Although 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 shares from the restrictions in any of the
lock-up
agreements described above.
Also, in the future, we may issue our securities in connection
with investments and acquisitions. The amount of our common
stock issued in connection with an investment or acquisition
could constitute a material portion of our then outstanding
common stock.
A few
significant shareholders control the direction of our business.
The concentrated ownership of our common stock will prevent you
and other shareholders from influencing significant corporate
decisions.
Following completion of this offering:
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Bharat Desai and Neerja Sethi will beneficially own %
of the outstanding shares of our common stock, or %
of the outstanding shares of our common stock if the
underwriters exercise their over-allotment option in
full; and
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16
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Management and their affiliates, excluding and its
affiliates, will own % of the outstanding shares of
our common stock.
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As a result, Mr. Desai and Ms. Sethi have the ability
to control all matters requiring shareholder approval, including
the nomination and election of directors, the determination of
our corporate and management policies and the determination,
without the consent of our other shareholders, of the outcome of
any corporate transaction or other matter submitted to our
shareholders for approval, including potential mergers or
acquisitions, asset sales and other significant corporate
transactions.
The
interests of our controlling and significant shareholders may
conflict with the interests of our other
shareholders.
We cannot assure you that the interests of Mr. Desai and
Ms. Sethi will coincide with the interests of the other
holders of our common stock. For example, Mr. Desai and
Ms. Sethi could cause us to make acquisitions that increase
the amount of our indebtedness or outstanding shares of common
stock or sell revenue-generating assets. So long as
Mr. Desai and Ms. Sethi continue to own a substantial
number of shares of common stock, Mr. Desai and
Ms. Sethi will continue to be able to strongly influence or
effectively control our decisions. In addition, other
shareholders will not be able to prevent Mr. Desai and
Ms. Sethi from selling shares, including all of the shares
of our common stock they hold.
We may
not pay dividends on our common stock in the
future.
We cannot assure you that we will pay dividends on our common
stock in the future. While we have declared a quarterly cash
dividend during each quarter of our last three fiscal years, we
have no obligation to do so. Subject to limitations imposed by
Michigan law, dividend payments are within the absolute
discretion of our Board of Directors. Any reduction or
elimination of dividends could adversely affect the market price
of our common stock.
Anti-takeover
provisions of our charter and bylaws, as well as Michigan law,
may reduce the likelihood of any potential change of control or
unsolicited acquisition proposal that you might consider
favorable.
The anti-takeover provisions of Michigan law create various
impediments to the ability of a third party to acquire control
of us, even if a change in control would be beneficial to our
existing shareholders. Additionally, provisions of our charter
and bylaws could deter, delay or prevent a third-party from
acquiring us, even if doing so would benefit our shareholders.
These provisions include:
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the authority of our board of directors to issue preferred stock
with terms as the board of directors may determine;
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the absence of cumulative voting in the election of directors;
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limitations on who may call special meetings of
shareholders; and
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advance notice requirements for shareholder proposals.
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17
FORWARD-LOOKING
STATEMENTS
This prospectus contains statements that 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
managements 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. Some of the factors that could cause
future results to materially differ from the recent results or
those projected in the forward-looking statements include those
listed under Risk Factors and elsewhere in this
prospectus, including the following:
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Recruitment and Retention of IT Professionals
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Government Regulation of Immigration
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Customer Concentration; Risk of Termination
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Exposure to Political and Regulatory Conditions in India
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Wage Pressures in India
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Ability to Repatriate Earnings
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Intense Competition
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Ability to Manage Growth
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Fixed-Price Engagements
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Potential Liability to Customers
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Dependence on Key Personnel
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Limited Intellectual Property Protection
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Potential Anti-outsourcing Legislation
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Adverse Economic Conditions
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Failure to Successfully Develop and Market New Products and
Services
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Benchmarking Provisions
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Corporate Governance Issues
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Telecom/Infrastructure Issues
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New Facilities
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Stock option Accounting
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Terrorist Activity, War or Natural Disasters
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Instability and Currency Fluctuations
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Risks Related to Possible Acquisitions
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Variability of Quarterly Operating Results
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For a more detailed discussion of certain risks associated with
the Companys business, see the section titled Risk
Factors in this prospectus. The Company undertakes no
obligation to update forward-looking statements to reflect
events or circumstances occurring after the date of this
prospectus.
18
USE OF
PROCEEDS
We will not receive any of the proceeds from shares of common
stock sold by our selling shareholders.
CAPITALIZATION
The following table sets forth the Companys capitalization
as of September 30, 2006.
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September 30, 2006
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(In thousands)
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Total debt
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$
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Shareholders equity
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Common stock, no par value per
share, 100,000,000 shares authorized;
40,856,146 shares issued and outstanding at
September 30, 2006
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1
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Additional paid-in capital
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62,852
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Restricted stock
190,783 shares issued and outstanding at September 30,
2006
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2,885
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Accumulated other comprehensive
income
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691
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Retained earnings
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68,477
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Total shareholders equity
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$
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134,906
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Total capitalization
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$
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134,906
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The table set forth above is based on shares of common stock
outstanding as of September 30, 2006. This table excludes:
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239,610 shares issuable upon exercise of outstanding
options under our stock option plans at a weighted average
exercise price of $12.67 per share; and
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2,100,767 shares available for future grants or issuance
under our stock option plans and our employee stock purchase
plan.
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19
MARKET
PRICE OF COMMON STOCK AND DIVIDEND POLICY AND HISTORY
As of December 7, 2006, there were 41,096,545 shares
of common stock outstanding, held by approximately
636 holders. Our common stock is traded on The NASDAQ
Global Select Market under the symbol SYNT.
The following table sets forth, for the periods indicated, the
high and low sales prices for our common stock. The last
reported sale price of our common stock on The NASDAQ Global
Select Market on December 8, 2006 was $27.00 per share.
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Price Range
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Dividend per
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High
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Low
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Share(1)
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Year ended December 31,
2004
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First Quarter
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$
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30.90
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$
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24.32
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$
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0.06
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Second Quarter
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28.37
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16.21
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0.06
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Third Quarter
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17.88
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13.77
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0.06
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Fourth Quarter
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20.00
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16.25
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0.06
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Year ended December 31,
2005
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First Quarter
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$
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19.53
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$
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15.93
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$
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1.56
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Second Quarter
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18.73
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15.75
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0.06
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Third Quarter
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19.49
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16.14
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0.06
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Fourth Quarter
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22.00
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18.38
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0.06
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Year ending December 31,
2006
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First Quarter
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$
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22.19
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$
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17.00
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$
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0.06
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Second Quarter
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23.00
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18.03
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0.06
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Third Quarter
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23.12
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19.26
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1.31
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Fourth
Quarter(2)
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29.52
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22.21
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(1) |
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Dividends declared associated with each respective quarter. |
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For the period from October 1, 2006 through
November 30, 2006. |
The Board of Directors has declared a quarterly dividend of
$0.06 per share during each quarter of the Companys
last three fiscal years. In addition, the Board of Directors has
declared special dividends payable to Syntel shareholders of
$1.25 per share in 2003, $1.50 per share in 2005, and
$1.25 per share in 2006. The Company paid cash dividends of
$1.74 and $0.24 per share for the years ended
December 31, 2005 and 2004, respectively. Subject to
limitations imposed by Michigan law, dividend payments are
within the absolute discretion of Syntels Board of
Directors and will depend on, among other things, the
Companys results of operations, working capital
requirements, capital expenditure requirements, financial
condition, contractual restrictions, anticipated cash needs and
other factors that the Board of Directors may deem relevant.
20
SELECTED
FINANCIAL DATA
The following selected historical financial data as of and for
the years ended December 31, 2005, 2004, 2003, 2002 and
2001 have been derived from the audited consolidated financial
statements of Syntel. The following selected historical
financial data as of and for the nine month periods ended
September 30, 2006 and 2005 have been derived from the
unaudited condensed consolidated financial statements of Syntel.
The other operating data for all periods presented have been
derived from the Companys internal records. The results
for the nine month period ended September 30, 2006 are not
necessarily indicative of results for the full year. Because the
data presented below is only a summary and does not provide all
of the data contained in the financial statements, including the
notes thereto, it should be read together with the section in
this prospectus entitled Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the audited consolidated financial statements and interim
financial statements (unaudited) and the notes thereto appearing
elsewhere in this prospectus.
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Nine Months Ended
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Year Ended December 31,
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September 30,
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2005
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2004
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2003
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2002
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2001
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2006
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2005
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(In thousands, except per share data)
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STATEMENT OF INCOME
DATA
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Net revenues
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$
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226,189
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$
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186,573
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$
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179,507
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$
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161,507
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$
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172,283
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$
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197,123
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$
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163,910
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Cost of revenues
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135,043
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|
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107,120
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|
|
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101,699
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|
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94,010
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|
|
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106,943
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|
|
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123,267
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|
|
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97,756
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|
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Gross profit
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91,146
|
|
|
|
79,453
|
|
|
|
77,808
|
|
|
|
67,497
|
|
|
|
65,340
|
|
|
|
73,856
|
|
|
|
66,154
|
|
Selling, general and administrative
expenses
|
|
|
44,917
|
|
|
|
36,999
|
|
|
|
28,278
|
|
|
|
31,421
|
|
|
|
34,522
|
|
|
|
35,299
|
|
|
|
32,397
|
|
Capitalized development cost
impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,624
|
|
|
|
|
|
|
|
|
|
Reduction in reserve requirements
applicable to Metier transaction
|
|
|
|
|
|
|
|
|
|
|
(882
|
)
|
|
|
(5,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
46,229
|
|
|
|
42,454
|
|
|
|
50,412
|
|
|
|
41,774
|
|
|
|
29,194
|
|
|
|
38,557
|
|
|
|
33,757
|
|
Other income, principally interest
|
|
|
4,592
|
|
|
|
3,773
|
|
|
|
3,168
|
|
|
|
3,191
|
|
|
|
3,780
|
|
|
|
3,525
|
|
|
|
2,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
50,821
|
|
|
|
46,227
|
|
|
|
53,580
|
|
|
|
44,965
|
|
|
|
32,974
|
|
|
|
42,082
|
|
|
|
36,411
|
|
Provision for income taxes
|
|
|
20,500
|
|
|
|
5,253
|
|
|
|
13,242
|
|
|
|
12,338
|
|
|
|
8,636
|
|
|
|
4,443
|
|
|
|
5,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before loss from equity
investments and investment write off
|
|
|
30,321
|
|
|
|
40,974
|
|
|
|
40,338
|
|
|
|
32,627
|
|
|
|
24,338
|
|
|
|
37,639
|
|
|
|
30,419
|
|
Loss from equity investments and
investment write offs (net of tax)
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
141
|
|
|
|
3,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
30,321
|
|
|
$
|
40,974
|
|
|
$
|
40,304
|
|
|
$
|
32,486
|
|
|
$
|
20,445
|
|
|
$
|
37,639
|
|
|
$
|
30,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS PER SHARE
|
|
$
|
1.74
|
|
|
$
|
0.24
|
|
|
$
|
1.37
|
|
|
|
|
|
|
|
|
|
|
$
|
1.43
|
|
|
$
|
1.68
|
|
EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.75
|
|
|
$
|
1.02
|
|
|
$
|
1.02
|
|
|
$
|
0.84
|
|
|
$
|
0.53
|
|
|
$
|
0.92
|
|
|
$
|
0.75
|
|
Diluted
|
|
$
|
0.75
|
|
|
$
|
1.01
|
|
|
$
|
0.99
|
|
|
$
|
0.81
|
|
|
$
|
0.52
|
|
|
$
|
0.92
|
|
|
$
|
0.75
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
40,528
|
|
|
|
40,216
|
|
|
|
39,609
|
|
|
|
38,733
|
|
|
|
38,220
|
|
|
|
40,783
|
|
|
|
40,487
|
|
Diluted
|
|
|
40,651
|
|
|
|
40,469
|
|
|
|
40,797
|
|
|
|
39,917
|
|
|
|
38,987
|
|
|
|
41,038
|
|
|
|
40,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except headcount data)
|
|
|
BALANCE SHEET DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
120,866
|
|
|
$
|
170,786
|
|
|
$
|
142,207
|
|
|
$
|
144,487
|
|
|
$
|
103,502
|
|
|
$
|
98,063
|
|
|
$
|
129,630
|
|
Total assets
|
|
|
198,161
|
|
|
|
226,968
|
|
|
|
185,198
|
|
|
|
183,572
|
|
|
|
152,247
|
|
|
|
174,673
|
|
|
|
195,933
|
|
Total current liabilities
|
|
|
45,883
|
|
|
|
36,326
|
|
|
|
31,792
|
|
|
|
28,728
|
|
|
|
39,989
|
|
|
|
39,767
|
|
|
|
40,617
|
|
Total shareholders equity
|
|
|
152,278
|
|
|
|
190,642
|
|
|
|
153,406
|
|
|
|
154,844
|
|
|
|
112,258
|
|
|
|
134,906
|
|
|
|
155,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Billable headcount in U.S.
|
|
|
1,341
|
|
|
|
1,145
|
|
|
|
1,138
|
|
|
|
1,111
|
|
|
|
987
|
|
|
|
1,380
|
|
|
|
1,241
|
|
Billable headcount in India
|
|
|
3,006
|
|
|
|
1,906
|
|
|
|
1,376
|
|
|
|
943
|
|
|
|
419
|
|
|
|
3,656
|
|
|
|
2,470
|
|
Billable headcount at other
locations
|
|
|
109
|
|
|
|
121
|
|
|
|
150
|
|
|
|
101
|
|
|
|
138
|
|
|
|
94
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total billable headcount
|
|
|
4,456
|
|
|
|
3,172
|
|
|
|
2,664
|
|
|
|
2,155
|
|
|
|
1,544
|
|
|
|
5,130
|
|
|
|
3,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Syntel is a worldwide provider of IT and outsourcing services to
Global 2000 companies. The Companys service offerings
include Applications Outsourcing, consisting of outsourcing
services for ongoing management, development and maintenance of
business applications; BPO consisting of high-value, customized
outsourcing solutions that enhance critical back-office services
such as transaction processing, loan servicing, retirement
processing, collections and payment processing;
e-Business,
consisting of strategic advanced technology services in the CRM,
Data Warehousing, EAI, ERP and Web solutions; and TeamSourcing
consisting of professional IT consulting services.
The Companys revenues are generated from professional
services fees provided through four segments, Applications
Outsourcing, BPO,
e-Business
and TeamSourcing. The Company has invested significantly in
developing its ability to sell and deliver Applications
Outsourcing and BPO services, which the Company believes have
higher growth and gross margin potential. The following table
outlines the revenue mix for the nine month periods ended
September 30, 2006 and 2005 and the years ended
December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2006
|
|
|
2005
|
|
|
Percent of total
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications Outsourcing
|
|
|
76
|
%
|
|
|
76
|
%
|
|
|
76
|
%
|
|
|
72
|
%
|
|
|
76
|
%
|
e-Business
|
|
|
14
|
|
|
|
16
|
|
|
|
19
|
|
|
|
14
|
|
|
|
14
|
|
TeamSourcing
|
|
|
7
|
|
|
|
7
|
|
|
|
5
|
|
|
|
7
|
|
|
|
7
|
|
BPO
|
|
|
3
|
|
|
|
1
|
|
|
|
0
|
|
|
|
7
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues are generated principally on either a time and
materials or a fixed-price, fixed-timeframe basis. We believe
the ability to offer fixed-price, fixed-timeframe processes is
an important competitive differentiator that allows Syntel and
its clients to better understand the clients needs, and to
design, develop, integrate and implement solutions that address
those needs. During the three months ended September 30,
2006 and 2005 and the years ended December 31, 2005, 2004
and 2003, revenues from fixed price development contracts
constituted 16%, 20%, 21%, 21% and 25% of total revenues
respectively.
On Applications Outsourcing engagements, the Company typically
assumes responsibility for engagement management and generally
is able to allocate certain portions of the engagement to
on-site,
off-site and
offshore personnel. Applications Outsourcing revenues generally
are recognized on either a
time-and-materials
or fixed-price basis. For the nine month periods ended
September 30, 2006 and 2005 and the years ended
December 31, 2005, 2004 and 2003, fixed-price revenues from
development and maintenance activity comprised approximately
49%, 57%, 55%, 58% and 56% of total Applications Outsourcing
revenues, respectively.
On BPO engagements, services are provided at our offshore
facilities, which gives the benefit of lower cost to the
customer. BPO revenues generally are recognized on a
time-and-materials
basis as services are performed. For the nine month periods
ended September 30, 2006 and 2005 and the years ended
December 31, 2005 and 2004, the revenue from BPO
engagements comprised approximately 7%, 3%, 3% and 1% of total
revenues, respectively.
Historically, most
e-Business
engagement revenues were recognized on a
time-and-materials
basis under the direct supervision of the customer (similar to
TeamSourcing engagements); however, as the Company expanded its
expertise in delivering
E-commerce
engagements, Syntel has assumed the project management role and
entered into fixed-price arrangements for a significant number
of new
e-Business
22
engagements started during 2005, 2004 and 2003. For the nine
month periods ended September 30, 2006 and 2005 and the
years ended December 31, 2005, 2004 and 2003, fixed-price
revenues from development and maintenance activity comprised
approximately 56%, 63%, 61%, 54% and 51% of total
e-Business
revenues, respectively.
On TeamSourcing engagements, Syntels professional services
typically are provided at the customers site and under the
direct supervision of the customer. TeamSourcing revenues
generally are recognized on a
time-and-materials
basis as services are performed. The Companys dependence
on TeamSourcing engagements has decreased significantly.
The Companys most significant cost is personnel cost,
which consists of compensation, benefits, recruiting, relocation
and other related costs for its IT professionals. The Company
has established a human resource allocation team whose purpose
is to staff IT professionals on engagements that efficiently
utilize their technical skills and allow for optimal billing
rates. Syntel India, a wholly owned subsidiary of the Company,
provides software development services from Mumbai, Pune and
Chennai, India, where salaries of IT professionals are
comparatively lower than in the U.S.
The Company has performed a significant portion of its employee
recruiting in other countries. As of September 30, 2006,
approximately 38% of Syntels U.S. workforce (11% of
Syntels worldwide workforce) worked under H-1B visas
(permitting temporary residence while employed in the U.S.) and
another 16% of the Companys U.S. workforce (5% of the
Companys worldwide workforce) worked under L-1 visas
(permitting inter-company transfers of employees that have been
employed with a foreign subsidiary for at least six months).
The Company has made substantial investments in infrastructure
in recent years, including: (1) adding BPO facilities and
expanding IT facilities in Mumbai, India; (2) developing a
Technology Campus in Pune, India; (3) expanding the Global
Development Center in Chennai, India; (4) upgrading the
Companys global telecommunication network;
(5) increasing Applications Outsourcing sales and delivery
capabilities through significant expansion of the sales force
and the Strategic Solutions Group, which develops and formalizes
proprietary methodologies, practices and tools for the entire
Syntel organization; (6) hiring additional experienced
senior management; (7) expanding global recruiting and
training capabilities and (8) enhancing human resource and
financial information systems.
Through its strong relationships with customers, the Company has
been able to generate recurring revenues from repeat business.
These strong relationships also have resulted in the Company
generating a significant percentage of revenues from key
customers. The Companys top ten customers accounted for
approximately 70%, 63%, 65%, 61% and 64% of revenues for the
nine month periods ended September 30, 2006 and 2005 and
the years ended December 31, 2005, 2004 and 2003,
respectively.
The Companys largest and only customer contributing
revenues in excess of 10% of total consolidated revenues for the
nine month periods ended September 30, 2006 and 2005 and
the years ended December 31, 2005, 2004 and 2003 was
American Express, contributing approximately 18%, 15%, 16%, 16%
and 16%, respectively. Although the Company does not currently
foresee a credit risk associated with accounts receivable from
these customers, credit risk is affected by conditions or
occurrences within the economy and the specific industries in
which these customers operate.
23
Results
of Operations
The following table sets forth for the periods indicated
selected income statement data as a percentage of the
Companys net revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2006
|
|
|
2005
|
|
|
Percent of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
59.7
|
|
|
|
57.4
|
|
|
|
56.7
|
|
|
|
62.5
|
|
|
|
59.6
|
|
Gross profit
|
|
|
40.3
|
|
|
|
42.6
|
|
|
|
43.3
|
|
|
|
37.5
|
|
|
|
40.4
|
|
Selling, general and
administrative expenses
|
|
|
19.9
|
|
|
|
19.8
|
|
|
|
15.8
|
|
|
|
17.9
|
|
|
|
19.8
|
|
Reduction in reserve requirements
applicable to Metier transaction
|
|
|
|
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
20.4
|
%
|
|
|
22.8
|
%
|
|
|
28.0
|
%
|
|
|
19.6
|
%
|
|
|
20.6
|
%
|
Following is selected segment financial data for the years ended
December 31, 2005, 2004 and 2003 and nine month periods
ended September 30, 2006 and 2005. The Company does not
allocate assets to operating segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications outsourcing
|
|
$
|
171,331
|
|
|
$
|
143,007
|
|
|
$
|
136,424
|
|
|
$
|
142,433
|
|
|
$
|
124,725
|
|
e-Business
|
|
|
31,210
|
|
|
|
29,249
|
|
|
|
33,795
|
|
|
|
27,885
|
|
|
|
22,687
|
|
TeamSourcing
|
|
|
16,953
|
|
|
|
12,480
|
|
|
|
9,288
|
|
|
|
13,460
|
|
|
|
12,279
|
|
BPO
|
|
|
6,695
|
|
|
|
1,837
|
|
|
|
|
|
|
|
13,345
|
|
|
|
4,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
226,189
|
|
|
$
|
186,573
|
|
|
$
|
179,507
|
|
|
$
|
197,123
|
|
|
$
|
163,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications outsourcing
|
|
$
|
72,411
|
|
|
$
|
62,696
|
|
|
$
|
62,282
|
|
|
$
|
53,592
|
|
|
$
|
52,224
|
|
e-Business
|
|
|
9,687
|
|
|
|
11,302
|
|
|
|
14,389
|
|
|
|
7,336
|
|
|
|
7,547
|
|
TeamSourcing
|
|
|
4,886
|
|
|
|
4,598
|
|
|
|
1,137
|
|
|
|
4,937
|
|
|
|
3,596
|
|
BPO
|
|
|
4,162
|
|
|
|
857
|
|
|
|
|
|
|
|
7,991
|
|
|
|
2,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
91,146
|
|
|
$
|
79,453
|
|
|
$
|
77,808
|
|
|
$
|
73,856
|
|
|
$
|
66,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications outsourcing
|
|
|
42.3
|
%
|
|
|
43.8
|
%
|
|
|
45.7
|
%
|
|
|
37.6
|
%
|
|
|
41.9
|
%
|
e-Business
|
|
|
31.0
|
|
|
|
38.6
|
|
|
|
42.6
|
|
|
|
26.3
|
|
|
|
33.3
|
|
TeamSourcing
|
|
|
28.8
|
|
|
|
36.8
|
|
|
|
12.2
|
|
|
|
36.7
|
|
|
|
29.3
|
|
BPO
|
|
|
62.2
|
|
|
|
46.7
|
|
|
|
|
|
|
|
59.9
|
|
|
|
66.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40.3
|
%
|
|
|
42.6
|
%
|
|
|
43.3
|
%
|
|
|
37.5
|
%
|
|
|
40.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
$
|
44,917
|
|
|
$
|
36,999
|
|
|
$
|
28,278
|
|
|
$
|
35,299
|
|
|
$
|
32,397
|
|
Reduction in reserve requirements
applicable to Metier transaction
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(882
|
)
|
|
$
|
|
|
|
$
|
|
|
Income from operations
|
|
$
|
46,229
|
|
|
$
|
42,454
|
|
|
$
|
50,412
|
|
|
$
|
38,557
|
|
|
$
|
33,757
|
|
24
Results
of Operations for Period Ended September 30,
2006
Revenues. The Companys revenues consist
of fees derived from its Applications Outsourcing,
e-Business,
TeamSourcing and BPO business segments. Net revenues in the
three months ended September 30, 2006 increased to
$69.2 million from $58.5 million in the three months
ended September 30, 2005, representing an 18.3% increase.
Net revenues in the nine month period ended September 30,
2006 increased to $197.1 million from $163.9 million
in the nine month period ended September 30, 2005,
representing a 20.3% increase. The Companys
verticalization sales strategy focusing on Banking and Financial
Services; Healthcare; Insurance; Telecom; Automotive; Retail;
Logistics and Travel has enabled better focus and relationship
with key customers leading to continued growth in business.
Further, continued focus on execution and investments in new
offerings such as our Testing Center of Excellence have started
producing results. The focus is to continue investments in more
new offerings. Worldwide billable headcount as of
September 30, 2006 increased by 33% to 5,130 employees as
compared to 3,847 employees as of September 30, 2005.
However, the growth in revenues was not commensurate with the
growth in the billable headcount. This is primarily because a
significant growth in the billable headcount was in India, where
our revenues per offshore billable resource are generally lower
as compared to an
on-site
based resource. As of September 30, 2006, the Company had
approximately 71.3% of its billable workforce in India as
compared to 64.2% as of September 30, 2005. The
Companys top five customers accounted for 51.1% of the
total revenues in the three months ended September 30,
2006, up from 44.5% of its total revenues in the three months
ended September 30, 2005. Moreover, the Companys top
10 customers accounted for 70.7% of the total revenues in the
three months ended September 30, 2006 as compared to 64.4%
in the three months ended September 30, 2005.
Applications Outsourcing
Revenues. Applications Outsourcing revenues
increased to $49.4 million for the three months ended
September 30, 2006, or 71.4% of total revenues, from
$43.9 million, or 75% of total revenues for the three
months ended September 30, 2005. The $5.5 million
increase was attributable primarily to revenues from new
engagements and net increase in revenues from existing projects
by $22.1 million, largely offset by $16.6 million in
lost revenues as a result of project completion. The revenues
for the nine months ended September 30, 2006 increased to
$142.4 million, or 72.3% of total revenues, from
$124.7 million, or 76.1% of total revenues, for the nine
months ended September 30, 2005. The $17.7 million
increase for nine months ended September 30, 2006 was
attributable principally to revenues from new engagements
contributing $65.4 million largely offset by
$47.7 million in lost revenues as a result of project
completion and net reduction in revenues from existing projects.
Application Outsourcing Cost of Revenues. 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,
finders fees, trainee compensation and travel.
Applications Outsourcing costs of revenues increased to 63.0% of
total Applications Outsourcing revenues for the three months
ended September 30, 2006, from 58.0% for the three months
ended September 30, 2005. The 5.0 percentage point
increase in cost of revenues, as a percent of revenues for the
three months ended September 30, 2006 was attributable
primarily, to offshore wage increases, cost related to a special
dividend of $1.25 per share on restricted stock of
$0.12 million and increased offshore headcount. Cost of
revenues for the nine months ended September 30, 2006
increased to 62.4% of total Applications Outsourcing revenues,
from 58.1% for the nine months ended September 30, 2005.
The 4.3 percentage point increase in cost of revenues, as a
percent of revenues for the nine months ended September 30,
2006 was attributable primarily to onsite wage increases
effective January 2006, offshore wage increases effective April
2006, visa filing expenses, cost related to FAS 123(R),
cost related to a special dividend of $1.25 per share on
restricted stock of $0.12 million and increased offshore
headcount.
e-Business
Revenues. e-Business
revenues increased to $9.9 million for the three months
ended September 30, 2006, or 14.3% of total revenues, from
$7.9 million, or 13.6% of revenues for the three months
ended September 30, 2005. The $2.0 million increase
was attributable primarily to revenues from new engagements and
net increase in revenues from existing projects by
$4.1 million largely offset by $2.1 million in lost
revenues as a result of project completion. The revenues for the
nine months ended September 30, 2006 increased to
$27.9 million, or 14.1% of total revenues, from
$22.7 million or 13.8% of
25
total revenues for the nine months ended September 30,
2005. The $5.2 million increase for nine months ended
September 30, 2006 was attributable primarily to revenues
from new engagements and net increase in revenues from existing
projects by $8.7 million largely offset by
$3.5 million in lost revenues as a result of project
completion.
e-Business
Cost of
Revenues. e-Business
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, finders fees, trainee compensation and travel.
e-Business
cost of revenues decreased to 68.3% of total
e-Business
revenues for the three months ended September 30, 2006,
from 71.6% for the three months ended September 30, 2005.
The 3.3 percentage point decrease in cost of revenues as a
percent of revenues for the three months ended
September 30, 2006 is principally attributable to increase
in
e-Business
revenue by $2.0 million during three months ended
September 30, 2006 as compared to three months ended
September 30, 2005, partly offset by increase in offshore
wages, cost related to FAS 123(R) and cost related to a
special dividend of $1.25 per share on restricted stock of
$0.05 million. Cost of revenues for the nine months ended
September 30, 2006 increased to 73.7% of total
e-Business
revenues, from 66.7% for the nine months ended
September 30, 2005. The 7.0 percentage point increase
in cost of revenues, as a percent of revenues for the nine
months ended September 30, 2006 was attributable primarily
to onsite wage increases effective January 2006, offshore wage
increases effective April 2006, visa filing expenses, cost
related to FAS 123(R), cost related to a special dividend
of $1.25 per share on restricted stock of
$0.05 million and increased offshore headcount.
TeamSourcing Revenues. TeamSourcing revenues
decreased to $4.2 million for the three months ended
September 30, 2006, or 6.1% of total revenues, from
$4.7 million, or 8.1% of total revenues, for the three
months ended September 30, 2005. The $0.5 million
decrease was attributable primarily to revenues from new
engagements and revenue from the SkillBay web portal which helps
clients of Syntel with their supplemental staffing requirements
contributing $2.2 million offset by $2.7 million in
lost revenues as a result of project completion and net
reduction in revenues from existing projects. The revenues for
the nine months ended September 30, 2006 increased to
$13.5 million, or 6.8% of total revenues, from
$12.3 million, or 7.5% of total revenues, for the nine
months ended September 30, 2005. The $1.2 million
increase for nine months ended September 30, 2006 was
attributable principally to revenues from new engagements and
revenue from the SkillBay web portal contributing
$6.0 million largely offset by $4.8 million in lost
revenues as a result of project completion and net reduction in
revenues from existing projects.
TeamSourcing Cost of Revenues. TeamSourcing
cost of revenues consists of costs directly associated with
billable consultants in the U.S., including salaries, payroll
taxes, benefits, relocation costs, immigration costs,
finders fees, trainee compensation and travel.
TeamSourcing cost of revenues decreased to 58.4% of TeamSourcing
revenues for the three months ended September 30, 2006,
from 72.8% for the three months ended September 30, 2005.
Cost of revenues for the nine months ended September 30,
2006 decreased to 63.3% of total TeamSourcing revenues, from
70.7% for the nine months ended September 30, 2005. This
decrease in cost of revenues, as a percent of total TeamSourcing
revenues, for both periods was attributable primarily to the
better utilization of TeamSourcing resources and by net revenues
from SkillBay web portal placements.
BPO Revenues. This segment started
contributing revenues during the first quarter of 2004. Revenues
from this segment were $5.7 million, or 8.2% of total
revenues, for the three months ended September 30, 2006 as
against $1.9 million, or 3.3% of total revenues for the
three months ended September 30, 2005. The
$3.8 million increase was attributable primarily to
revenues from new engagements and net increase in revenues from
existing projects. The revenues for the nine months ended
September 30, 2006 increased to $13.3 million, or 6.8%
of the total revenues, from $4.2 million, or 2.6% of the
total revenues for the nine months ended September 30,
2005. The $9.1 million increase was attributable primarily
to revenues from new engagements and net increase in revenues
from existing projects of $9.4 million, partially offset by
$0.3 million in lost revenues as a result of project
completion.
BPO Cost of Revenues. BPO cost of revenues
consists of costs directly associated with billable consultants,
including salaries, payroll taxes, benefits, finders fees,
trainee compensation and travel. Cost of
26
revenues for the three months ended September 30, 2006
increased to 40.1% of BPO revenues, from 37.6% for the three
months ended September 30, 2005. Cost of revenues for the
nine months ended September 30, 2006 increased to 40.1% of
BPO revenues, from 33.9% for the nine months ended
September 30, 2005. Both the 2.5% and 6.2% increase in cost
of revenues, as a percent of total BPO revenues, was
attributable primarily to increased billable headcount due to
increased operations.
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
Companys Global Development Centers and other offices.
Selling, general and administrative costs for the three months
ended September 30, 2006 were $13.1 million, or 18.9%
of total revenues, compared to $10.5 million, or 18.0% of
total revenues, for the three months ended September 30,
2005.
The 0.9 percentage point increase is primarily due to
increases in revenue, three specific charges and increases in
certain costs in the three months ended September 30, 2006
as against the three months ended September 30, 2005. The
increase in revenue resulted in an approximately
2.8 percentage point decrease in selling, general and
administrative costs as a percentage of revenue because the
Company has certain fixed costs, which do not increase as
revenue increases. Selling, general and administrative costs for
the three months ended September 30, 2006 include a one
time provision for a claim payable to a customer of
$0.4 million, cost related to a special dividend of
$1.25 per share on restricted stock of $0.2 million
and write-offs of assets of $0.2 million. Combined, these
three items account for 1.2 percentage point increase in
selling, general, and administrative expenses as a percentage of
revenue. Cost increases include increase in travel of
$0.2 million, depreciation of $0.5 million, rent of
$0.6 million towards the additional new facilities at
Mumbai, Pune and Chennai in India, telecommunication expenses of
$0.1 million, office expenses of $0.8 million and
professional expenses of $0.2 million, partially offset by
decreases in legal fees of $0.1 million and provision for
doubtful debts of $0.5 million, which has resulted in an
approximately 2.5 percentage point increase.
Selling, general and administrative costs for the nine months
ended September 30, 2006 were $35.3 million, or 17.9%
of total revenues, compared to $32.4 million, or 19.8% of
total revenues, for the nine months ended September 30,
2005.
Selling, general and administrative costs for the nine months
ended September 30, 2006 include a one time legal expense
related to settlement fees of $0.6 million, provision for
doubtful debts of $0.1 million, provision for a claim
payable to a customer of $0.4 million, cost related to a
special dividend of $1.25 per share on restricted stock of
$0.2 million and write-offs of assets of $0.2 million.
Selling, general and administrative costs for the nine months
ended September 30, 2005 include a one time special
performance based incentive program for sales teams of
$0.4 million and compensation expense related to a special
dividend of $1.50 per share on restricted stock held by
employees of $0.1 million.
In addition to the above-described items, the
1.9 percentage point decrease is primarily due to increases
in revenue and increases in certain costs in the nine months
ended September 30, 2006 as against the nine months ended
September 30, 2005. The increase in revenue has resulted in
an approximately 3.4 percentage point decrease in selling,
general and administrative costs as a percentage of revenue
because the Company has certain fixed costs, which do not
increase as revenue increases. Cost increases include increase
in travel of $0.2 million, depreciation of
$0.7 million, rent of $1.4 million towards the
additional new facilities at Mumbai, Pune and Chennai in India,
telecommunication expenses of $0.3 million, office expenses
of $1.5 million and professional expenses of
$0.2 million, partially offset by decreases in compensation
cost of $1.2 million, marketing cost of $0.2 million
and consultancy fees of $0.6 million, which has resulted in
an approximately 1.5 percentage point increase.
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 also provides for
tax contingencies based on the Companys assessment of
future regulatory reviews of filed tax
27
returns. Such reserves, which are recorded in income taxes
payable, are based on managements estimates and
accordingly are subject to revision based on additional
information.
The provision for income tax contingencies no longer required
for any particular tax year is credited to the current
periods income tax expenses. During the three months ended
September 30, 2006 and September 30, 2005, the
effective income tax rate was 2.0% and 12.9% respectively.
During the nine months ended September 30, 2006 and
September 30, 2005, the effective income tax rate was 10.6%
and 16.5% respectively. The tax rates for the three months and
nine months ended September 30, 2006 were impacted by
reversal of tax reserves of $2.0 million. The tax rates for
the three months and nine months ended September 30, 2005
were impacted by the reversal of a tax reserve of
$2.6 million and a provision for valuation allowance of
$1.7 million attributable to certain deferred tax benefits,
on the write-off of certain investments in 2001, which are not
expected to be materialized.
Results
of Operations for Year Ended December 31, 2005 versus Year
Ended December 31, 2004
Revenues. Net revenues increased to
$226.2 million in 2005 from $186.6 million in 2004,
representing a 21.2% increase. The Companys revenues have
increased primarily consequent to our increased workforce.
Information technology offshoring is clearly becoming a mega
trend with increasing numbers of global corporations
aggressively outsourcing their crucial applications development
or business processes to vendors with an offshore presence.
Syntel has also benefited from this trend. At the beginning of
2004, the Company introduced the Client Partner Program, which
enabled better relationships with key customers leading to
growth in business. Further, during the year 2005, the Company
introduced Business Unit Heads which enables better relationship
and leadership for each of its Business Units. Worldwide
billable headcount, including personnel employed by Syntel
India, Syntel Singapore, Syntel Europe and Syntel Germany as of
December 31, 2005, increased 41% to 4,465 employees as
compared to 3,172 employees as of December 31, 2004.
However, the growth in revenues was not commensurate with the
growth in the billable headcount. This is primarily because a
significant growth in the billable headcount was in India, where
our recoveries per offshore billable resource is generally lower
as compared to an
on-site
based resource. As of December 31, 2005, the Company had
approximately 67% of its billable workforce in India as compared
to 60% as of December 31, 2004. The top five customers
accounted for 45% of the total revenues in 2005, up from 40% of
the total revenues in 2004. Moreover, the top ten customers
accounted for 65% of the revenues in 2005 as compared to 61% in
2004.
Applications Outsourcing
Revenues. Applications Outsourcing revenues
increased from $143.0 million, or 76% of total revenues, in
2004, to $171.3 million, also 76% of total revenues, in
2005. The $28.3 million increase is attributable
principally to revenue from new engagements, contributing
$64.3 million partially offset by a net decrease in
existing projects in the amount of $6.0 million and by
$30.0 million in lost revenues as a result of project
completions.
Applications Outsourcing Cost of
Revenues. Cost of revenues consists of costs
directly associated with billable consultants worldwide,
including salaries, payroll taxes, benefits, relocation costs,
immigration costs, finders fees and trainee compensation.
Applications Outsourcing cost of revenues increased to 57.7% of
Applications Outsourcing revenues in 2005, from 56.2% in 2004.
The 1.5% increase in cost of revenues as a percent of revenues
was attributable primarily to increased compensation cost
associated with a special dividend on restricted stock and a
performance-based incentive program for delivery teams, during
the three months ended March 31, 2005, contributing an
increase of 0.1%, the salary revision, effective April 1,
2005, in India, contributing an increase of 0.5%, visa filing
expenses, contributing an increase of 0.5% and increase in
offshore headcount, contributing an increase of 1.3%. These
increases were partially offset by a 0.4% decrease due to write
back of leave accruals, related to the change in leave policy in
India and a 0.5% decrease due to reversal of payroll tax
provision.
e-Business
Revenues. e-Business
revenues increased from $29.2 million in 2004, or 16% of
total consolidated revenues, to $31.2 million in 2005, or
14% of total consolidated revenues. The $2.0 million
increase is attributable principally to revenue from new
engagements, contributing $10.0 million, partially
28
offset by a net decrease in existing projects in the amount of
$1.3 million and by $6.7 million in lost revenues as a
result of project completions.
e-Business
Cost of Revenues. Cost of revenues consists of
costs directly associated with billable consultants, including
salaries, payroll taxes, benefits, relocation costs, immigration
costs, finders fees and trainee compensation.
e-Business
cost of revenues increased to 69.0% of
e-business
revenues in 2005, from 61.4% in 2004, an increase of 7.6%. This
increase was attributable primarily to compensation cost
associated with a special dividend on restricted stock and a
performance-based incentive program for delivery teams during
the three months ended March 31, 2005 and the salary
revision effective April 1, 2005 in India, partially offset
by the write back of leave accruals related to the change in
leave policy in India.
TeamSourcing Revenues. TeamSourcing revenues
increased from $12.5 million, or 7% of total consolidated
revenues, in 2004, to $16.9 million, also 7% of total
consolidated revenues, in 2005. The $4.4 million increase
is attributable principally to revenue from new engagements and
increased revenue of $4.3 million from the SkillBay web
portal partially further increased by $1.6 million due to
net increase in revenue from existing projects and partly offset
by $1.5 million in lost revenues as a result of project
completion and net reduction in revenues from exiting projects.
TeamSourcing Cost of Revenues. TeamSourcing
cost of revenues consists of costs directly associated with
billable consultants, including salaries, payroll taxes,
benefits, relocation costs, immigration costs, finders
fees and trainee compensation. TeamSourcing cost of revenues
increased to 71.2% of TeamSourcing revenues in 2005, from 63.2%
in 2004. The 8.0% increase in cost of revenues, as a percent of
total TeamSourcing revenues, was attributable primarily to the
higher cost TeamSourcing placements partially offset by net
revenues from SkillBay web portal placements.
BPO Revenues. The BPO segment started
contributing revenues during 2004. Revenues from this segment
were $6.7 million, or 3% of total revenues, in 2005
compared to $1.8 million, or 1% of total revenues, in 2004.
Also, as of February 1, 2005, the Company signed a joint
venture agreement with a large banking institution which helped
it to ramp up its business in the BPO segment.
BPO Cost of Revenues. The BPO segment cost of
revenues consists of costs directly associated with billable
consultants, including salaries, payroll taxes, benefits,
finders fees, trainee compensation and travel. Cost of
revenues for the year ended 2005 decreased to 37.8% of the
segments revenues from 53.3% for the year ended
December 31, 2004. The 15.5% decrease in cost of revenues,
as a percent of total BPO revenues, was attributable primarily
to better utilization of resources.
As a result of the continued uncertainty and weakness in the
global economic and political environment, companies continue to
seek to outsource their IT spending offshore. However, the
Company also sees clients needs to reduce their costs and
the increased competitive environment among IT companies. The
Company expects these conditions to continue in the next few
quarters. In response to the continued pricing pressures and
increased competition for outsourcing clients, the Company
continues to focus on expanding its service offerings into areas
with higher and sustainable price margins, managing its cost
structure and anticipating and correcting for decreased demand
and skill and pay level imbalances in its personnel. The
Companys immediate measures include increased management
of compensation expenses through headcount management and
variable compensation plans, as well as increasing utilization
rates or reducing non-deployed
sub-contractors
or non-billable IT professionals.
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, as well as travel, telecommunications, business
promotions, marketing and various facility costs for the
Companys Global Development Centers and various offices.
Selling, general and administrative costs for the year ended
December 31, 2005 were $44.9 million, or 19.9% of
total revenues, compared to $37.0 million, or 19.8% of
total revenues, for the year ended December 31, 2004.
29
Selling, general and administrative costs for the year ended
December 31, 2005 include a one-time special
performance-based incentive program for sales teams of
$0.4 million, compensation expense related to a special
dividend of $1.50 per share on restricted stock held by
employees of $0.1 million and expense related to allowance
for doubtful accounts of $1.1 million.
After considering the impact of the above-mentioned items, the
decrease in selling, general and administrative expenses as a
percentage of revenue is primarily due to increase in revenue
during the year ended December 31, 2005 as against the year
ended December 31, 2004, which resulted in an approximately
3.4% decrease partially offset by an increase in compensation
costs of $0.1 million in the U.S. and India, travel
expenses of $0.7 million, depreciation of $1.6 million
and rent of $0.6 million towards the BPO offices at the
Hiranandani, Mumbai and the Pune facilities in India, consulting
charges of $0.3 million, legal expenses of
$0.4 million, professional charges of $0.5 million,
recruiting expenses of $0.3 million, provision for doubtful
debts of $0.1 million, office expenses of $1.4 million
and telecommunication expenses of $0.3 million, which
resulted in an approximately 2.8% increase.
Results
of Operations for Year Ended December 31, 2004 versus Year
Ended December 31, 2003
Revenues. Net revenues increased from
$179.5 million in 2003 to $186.6 million in 2004,
representing a 3.9% increase. During the first quarter of 2004
the Company entered into its first BPO agreement, which
contributed $1.8 million revenue for the year 2004.
Further, our revenues have increased primarily consequent to our
increased workforce. Information technology offshoring is
becoming a major trend with increasing numbers of global
corporations aggressively outsourcing their crucial applications
development or business processes to vendors with an offshore
presence. Syntel has also benefited from this trend. At the
beginning of 2004, the Company introduced the Client Partner
Program, which enabled better relationships with key customers
leading to growth in business. Worldwide billable headcount,
including personnel employed by Syntel India, Syntel Singapore,
Syntel Europe and Syntel Germany as of December 31, 2004
increased 19% to 3,172 employees as compared to 2,664 employees
as of December 31, 2003. However, the growth in revenues
was not commensurate with the growth in the billable headcount.
This is primarily because a significant growth in the billable
headcount was in India, where our recoveries per offshore
billable resource is generally lower as compared to an
on-site
based resource. As of December 31, 2004, the Company had
approximately 60% of its billable workforce in India as compared
to 52% as of December 31, 2003. The Company also decreased
its dependence on its larger customers. The top five customers
accounted for 40% of the total revenues in 2004, down from 42%
of the total revenues in 2003. Moreover, the top ten customers
accounted for 61% of the revenues in 2004 as compared to 64% in
2003.
Applications Outsourcing
Revenues. Applications Outsourcing revenues
increased from $136.4 million, or 76% of total revenues, in
2003, to $143.0 million, also 76% of total revenues, in
2004. The $6.6 million increase is attributable principally
to revenue from new engagements, contributing
$45.9 million, partially offset by a net decrease in
existing projects in the amount of $15.6 million and by
$23.7 million in lost revenues as a result of project
completions.
Applications Outsourcing Cost of
Revenues. Cost of revenues consists of costs
directly associated with billable consultants worldwide,
including salaries, payroll taxes, benefits, relocation costs,
immigration costs, finders fees and trainee compensation.
Applications Outsourcing cost of revenues increased to 56.2% of
Applications Outsourcing revenues in 2004, from 54.3% in 2003.
The 1.9% increase in cost of revenues as a percent of revenues
was attributable primarily to the aggressive offshore hiring
during 2004, which impacted costs, but did not necessarily add
to revenues as a significant number of these hires went into
training.
e-Business
Revenues. e-Business
revenues decreased from $33.8 million in 2003, or 19% of
total consolidated revenues, to $29.2 million in 2004, or
16% of total consolidated revenues. The $4.6 million
decrease was attributable principally to lost revenues as a
result of project completion and net reduction in revenues from
existing projects contributing approximately $12.2 million,
partially offset by approximately $5.9 million in revenue
from new engagements and a nonrecurring $1.7 million
reduction in revenue in 2003 resulting from a regular warrant
granted to a significant customer as a sales incentive.
30
e-Business
Cost of Revenues. Cost of revenues consists of
costs directly associated with billable consultants, including
salaries, payroll taxes, benefits, relocation costs, immigration
costs, finders fees and trainee compensation.
e-Business
cost of revenues increased to 61.4% of
e-Business
revenues in 2004, from 57.4% in 2003, an increase of 4.0%. This
increase was attributable primarily to the aggressive hiring
which impacted costs, but did not necessarily add to revenues as
a significant number of these hires were still in training.
TeamSourcing Revenues. TeamSourcing revenues
increased from $9.3 million, or 5% of total consolidated
revenues, in 2003, to $12.5 million, or 7% of total
consolidated revenues, in 2004. The $3.2 million increase
is attributable principally to revenue from new engagements and
increased revenue of $4.7 million from the SkillBay web
portal partially offset by $1.5 million in lost revenues as
a result of project completion and net reduction in revenues
from exiting projects.
TeamSourcing Cost of Revenues. TeamSourcing
cost of revenues consists of costs directly associated with
billable consultants, including salaries, payroll taxes,
benefits, relocation costs, immigration costs, finders
fees, and trainee compensation. TeamSourcing cost of revenues
decreased to 63.2% of TeamSourcing revenues in 2004, from 87.8%
in 2003. The 24.6% decrease in cost of revenues, as a percent of
total TeamSourcing revenues was attributable primarily to the
higher margin TeamSourcing placements and net revenues from
SkillBay web portal placements during 2004.
BPO Revenues. The BPO segment started
contributing revenues during 2004. Revenues from this segment
were $1.8 million, or 1% of total revenues, in 2004.
BPO Cost of Revenues. The BPO segment cost of
revenues consists of costs directly associated with billable
consultants, including salaries, payroll taxes, benefits,
finders fees, trainee compensation, travel and
consumables, as well as dedicated connectivity charges. The BPO
segment cost of revenues was 53.3% of the segments
revenues for the year ended December 31, 2004.
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, as well as travel, telecommunications, business
promotions, marketing and various facility costs for the
Companys Global Development Centers and various offices.
Selling, general and administrative costs for the year ended
December 31, 2004 were $37.0 million or 19.8% of total
revenues, compared to $28.3 million, or 15.8% of total
revenues, for the year ended December 31, 2003.
Selling, general and administrative costs for the year ended
December 31, 2003 includes net reversals of
$0.5 million primarily on account of successful recovery of
receivables previously provided for as allowance for doubtful
accounts, a $2.0 million revision of the estimated reserve
for litigation and legal fees due to settlements and other
changes in estimates of underlying legal costs, a
$0.7 million reduction in office related expenses due to
the settlement of vendor disputes, and a downward revision of
the 2002 estimates of bonus compensation of $0.8 million.
After considering the impact of the above-mentioned items, the
selling, general and administrative expenses were 19.8% and
18.0% of total revenues for the years ended December 31,
2004 and 2003, respectively. The 1.8 percentage point
increase in selling, general and administrative expenses as a
percentage of revenue is primarily due to net increases in costs
related to depreciation of $1.0 million, communication
expenses of $0.9 million, compensation and hiring related
expense in the U.S. and India of $0.6 million, travel
expenses of $0.4 million, marketing expenses of
$0.3 million and corporate expenses of $1.5 million,
which resulted in an approximately 2.6 percentage point
increase, partially offset by increases in revenue during the
twelve months ended December 31, 2004 as against the twelve
months ended December 31, 2003, which resulted in an
approximately 0.8 percentage point decrease.
31
Quarterly
Results of Operations
Set forth below are selected financial data by calendar quarter
for each of the seven quarters beginning with the quarter ended
March 31, 2005 through the quarter ended September 30,
2006. In the opinion of management, this information has been
presented on the same basis as the Companys Consolidated
Financial Statements appearing elsewhere in this prospectus and
all necessary adjustments (consisting only of normal recurring
adjustments) have been included in order to present fairly the
unaudited quarterly results. The results of operations for any
quarter are not necessarily indicative of the results for any
future period.
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|
|
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|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
Year Ended December 31, 2006
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenues
|
|
$
|
50,732
|
|
|
$
|
54,677
|
|
|
$
|
58,501
|
|
|
$
|
62,279
|
|
|
$
|
63,496
|
|
|
$
|
64,410
|
|
|
$
|
69,217
|
|
Cost of revenues
|
|
|
29,704
|
|
|
|
32,754
|
|
|
|
35,298
|
|
|
|
37,287
|
|
|
|
39,162
|
|
|
|
41,470
|
|
|
|
42,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
21,028
|
|
|
|
21,923
|
|
|
|
23,203
|
|
|
|
24,992
|
|
|
|
24,334
|
|
|
|
22,940
|
|
|
|
26,582
|
|
Selling, general and
administrative expenses
|
|
|
11,165
|
|
|
|
10,699
|
|
|
|
10,533
|
|
|
|
12,520
|
|
|
|
10,598
|
|
|
|
11,645
|
|
|
|
13,056
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
operations
|
|
|
9,863
|
|
|
|
11,224
|
|
|
|
12,670
|
|
|
|
12,472
|
|
|
|
13,736
|
|
|
|
11,295
|
|
|
|
13,526
|
|
Other income, principally interest
|
|
|
1,136
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|
|
|
708
|
|
|
|
810
|
|
|
|
1,938
|
|
|
|
889
|
|
|
|
1,338
|
|
|
|
1,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
10,999
|
|
|
|
11,932
|
|
|
|
13,480
|
|
|
|
14,410
|
|
|
|
14,625
|
|
|
|
12,633
|
|
|
|
14,824
|
|
Provision for income taxes
|
|
|
2,005
|
|
|
|
2,246
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|
|
|
1,741
|
|
|
|
14,508
|
|
|
|
2,570
|
|
|
|
1,580
|
|
|
|
293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,994
|
|
|
$
|
9,686
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|
|
$
|
11,739
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|
|
$
|
(98
|
)
|
|
$
|
12,055
|
|
|
$
|
11,053
|
|
|
$
|
14,531
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Earnings per share,
diluted(1)
|
|
$
|
0.22
|
|
|
$
|
0.24
|
|
|
$
|
0.29
|
|
|
$
|
0.00
|
|
|
$
|
0.29
|
|
|
$
|
0.27
|
|
|
$
|
0.35
|
|
Weighted average shares
outstanding, diluted
|
|
|
40,526
|
|
|
|
40,570
|
|
|
|
40,669
|
|
|
|
40,838
|
|
|
|
40,948
|
|
|
|
41,043
|
|
|
|
41,123
|
|
|
|
|
(1) |
|
Earnings per share for the quarter are computed independently
and may not equal the earnings per share computed for the total
year. |
The Companys quarterly revenues and results of operations
have not fluctuated significantly from quarter to quarter in the
past but could fluctuate in the future. Factors that could cause
such fluctuations include: the timing, number and scope of
customer engagements commenced and completed during the quarter;
fluctuation in the revenue mix by segments; progress on
fixed-price engagements; acquisitions; timing and cost
associated with expansion of the Companys facilities;
changes in IT professional wage rates; the accuracy of estimates
of resources and time frames required to complete pending
assignments; the number of working days in a quarter; employee
hiring and training, attrition and utilization rates; the mix of
services performed
on-site,
off-site and offshore; termination of engagements;
start-up
expenses for new engagements; longer sales cycles for
Applications Outsourcing engagements; customers budget
cycles and investment time for training.
Income
Tax Matters
Syntel Indias software development centers/units enjoy
favorable tax provisions due to their registration in Special
Economic Zone (SEZ), as Export Oriented Unit (EOU), Software
Technologies Parks of India (STPI) units.
Units of Syntel India registered with STPI, EOU and certain
units located in SEZ are exempt from payment of corporate income
taxes for ten years of operations on the profits generated by
these units or March 31, 2009, whichever is earlier. Three
units located in SEZ are eligible for 100% exemption from
payment of corporate taxes for the first five years of operation
and 50% exemption for the next five years. As of
32
April 1, 2006, three of the Companys Software
Development units located at Mumbai are no longer eligible to
enjoy the above-mentioned tax exemption.
Provision for Indian Income Tax is made in respect of business
profits generated from the above-mentioned software development
units are not eligible for tax benefits and income from
investments and interest income.
The benefit of the tax Holiday granted by the Indian authorities
was $11.0 million, $7.6 million and $9.1 million
for the years 2005, 2004 and 2003, respectively.
The American Jobs Creation Act of 2004 provided a special
one-time favorable effective federal tax rate for
U.S.-based
organizations. The Company repatriated cash dividends of
$61.0 million during 2005 out of the retained earnings of
its controlled foreign subsidiary, Syntel Limited, to the
U.S. in accordance with the Act. The Company recorded a tax
charge of approximately $12.3 million, including
U.S. Federal and state taxes and the Indian dividend
distribution tax under the Indian Income Tax laws, during the
fourth quarter of 2005. Proceeds from these extraordinary
dividends are required to be invested in the United States for
specific purposes permitted under the Act pursuant to an
approved written domestic reinvestment plan. As of
December 31, 2005, the Company has invested approximately
$42.5 million towards permitted investments under the Act
against this extraordinary dividend pursuant to an approved
Domestic reinvestment plan.
The Company intends to use remaining accumulated and future
earnings of foreign subsidiaries to expand operations outside
the United States and accordingly undistributed earnings of
foreign subsidiaries are considered to be indefinitely
reinvested outside the United States and no provision for the
U.S. federal and state income tax or applicable dividend
distribution tax has been provided thereon. If the Company
determines to repatriate all undistributed repatriable earnings
of foreign subsidiaries as of September 30, 2006, the
Company would have accrued taxes of approximately
$44.5 million.
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 also
provides for tax contingencies based on the Companys
assessment of future regulatory reviews of filed tax returns.
Such reserves, which are recorded in income taxes payable, are
based on managements 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 periods income tax expenses. Conversely, in the
event of a future tax examination, if the Company does not
prevail on certain tax positions taken in filed returns, the tax
expense related thereto will be recognized in the period in
which the examiners position is determined to be final.
During the nine month periods ended September 30, 2006 and
2005 and the years ended December 31, 2005, 2004 and 2003,
the effective income tax rate was 10.6%, 16.5%, 40.2%, 11.4% and
24.7%, respectively. The tax rate for the nine months ended
September 30, 2006 was impacted by reversal of a tax
reserve of $2.0 million. The tax rate for the nine months
ended September 30, 2005 was impacted by the reversal of a
tax reserve of $2.6 million, a provision for valuation
allowance of $1.7 million attributable to certain deferred
tax benefits and on the write-off of certain investments in
2001, which are not expected to be materialized. The tax rate
for the year ended December 31, 2005 was impacted by
reversal of a tax reserve of $2.6 million, provision for
valuation allowance of $1.7 million and the tax related to
the repatriation of $12.3 million. Without the above, the
effective tax rate for the year ended December 31, 2005
would have been 17.8%. During year ended December 31, 2004,
the tax rate was impacted by reversal of a tax reserve of
$1.7 million, a tax credit of $0.5 million in Syntel
India and the research and development tax credit of
$0.5 million in Syntel. Without the above, the effective
income tax rate during the year ended December 31, 2004
would have been 17.3%. During year ended December 31, 2003,
the tax rate was impacted by provision of a tax reserve of
$3.1 million. Without the above, the effective income tax
rate during the year ended December 31, 2003 would have
been 19%. The tax rate continues to be positively impacted by
the combined effects of offshore transition and reduced onsite
profitability.
Syntel India has not provided for disputed Indian income tax
liabilities aggregating $2.46 million for the financial
years
1995-96 to
2001-02.
Syntel India has obtained an opinion from an independent legal
33
counsel for the financial year
1998-99 and
opinions from another independent legal counsel for financial
years
1995-96 to
1997-98,
1999-2000 to
2001-2002,
which supports Syntel Indias stand in this matter.
Syntel India had filed an appeal with Commissioner of Income tax
(Appeals) for the financial year
1998-99 and
received a favorable decision. However, the Income tax
department has gone into further appeal with the Income Tax
Appellate Tribunal (ITAT) against this favorable decision. The
ITAT has dismissed the appeal filed by the Income tax
department. Since the Income tax department has recourse to file
further appeal, there is no change in the relevant provision for
the tax.
A similar appeal was filed by Syntel India with the Commissioner
of Income tax (Appeals) for the financial year
1999-2000
was however dismissed in March 2004, against which, Syntel India
has filed further appeal with the ITAT. Syntel India has also
received orders for appeals filed with Commissioner of Income
tax (Appeals) against the demands raised in March 2004 by the
Income Tax Officer for similar matters relating to the financial
years
1995-96 to
1997-98 and
2000-01 to
2001-02, and
has received a favorable decision for
1995-96 and
for the other years the contention of Syntel India is partially
upheld. Syntel India has further appealed with the ITAT for the
amounts not allowed by the Commissioner of Income tax (Appeals).
The income tax department has filed further appeals against the
relief granted to Syntel India by CIT (A).
Syntel India has not provided for other disputed Indian income
tax liabilities aggregating to $4.32 million for the
financial years
2001-02 to
2002-03
against which Syntel India has filed the appeals with the
Commissioner of Income Tax (Appeals). Syntel India has obtained
opinions from independent legal counsels, which support Syntel
Indias stand in this matter. Syntel India has received an
order from the Commissioner of Income Tax (Appeals) for the
financial year
2001-02 and
the appeal of Syntel India was partially allowed by the
Commissioner of Income Tax (Appeals). Syntel India has further
appealed with the ITAT for the amounts not allowed by the
Commissioner of Income tax (Appeals). The Income tax department
has filed a further appeal against the relief granted to Syntel
India by CIT (A).
Further, Syntel India has not provided for disputed Indian
income tax liabilities aggregating to $0.10 million for
various years, for which Syntel India has filed necessary
appeals/petitions.
All of the above tax exposures involve complex issues and may
need an extended period to resolve the issues with the Indian
income tax authorities. Management, after consultation with
legal counsel, believes that the resolution of above matters
will not have a material adverse effect on Syntel Indias
financial position.
In December 2004, FASB Staff Position
No. FAS 109-2,
Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act of 2004 (FSP
FAS 109-2),
was issued, providing guidance under SFAS No. 109,
Accounting for Income Taxes, for recording the
potential impact of the repatriation provisions of the American
Jobs Creation Act of 2004, enacted on October 22, 2004. FSP
FAS 109-2
allows time beyond the financial reporting period of enactment
to evaluate the effects of the Jobs Act before applying the
requirements of FSP
FAS 109-2.
The American Jobs Creation Act of 2004 provided a special
one-time favorable effective federal tax rate for
U.S.-based
organizations. The Company repatriated cash dividends of
$61.0 million out of the retained earnings of its
controlled foreign subsidiary, Syntel Limited, to the United
States in accordance with the Act. The Company recorded a tax
charge of approximately $12.3 million, including United
States Federal and state taxes and Indian dividend distribution
tax under the Indian Income Tax laws, related to this
repatriation during the fourth quarter of 2005. Proceeds from
these extraordinary dividends are required to be invested in the
United States for specific purposes permitted under the Act
pursuant to an approved written domestic reinvestment plan. As
of September 30, 2006, the Company had fully invested all
of the proceeds towards permitted investments under the Act
against this extraordinary dividend pursuant to an approved
Domestic reinvestment plan.
34
Tax
Credit
During the year ended December 31, 2004, the provision for
income taxes was reduced by research and development tax credits
claimed. The tax credits relate to increased qualified
expenditures for software development. The Company completed a
review of such qualified expenditures and filed refund claims
for the tax years ended December 31, 1999, 2000, 2001 and
2002. The appropriate tax benefit for these years has been
recorded currently in conjunction with the completion of the
review. This tax credit had a positive impact of
$0.5 million on taxes.
In addition, during the year ended December 31, 2004,
Syntel India accounted for a credit of approximately
$0.5 million in respect of U.S. branch profit taxes related
to prior periods up to June 30, 2004 and also reclassified
in the balance sheet $1.0 million from income taxes payable
to deferred tax liability.
Liquidity
and Capital Resources
The Company generally has financed its working capital needs
through operations. Both the Mumbai and Chennai expansion
programs, as well as the 1999 acquisitions of Metier, Inc. and
IMG, Inc. were financed from internally generated funds.
Additionally, construction of the Technology Campus in Pune,
India is being financed through internally generated funds.
The Companys cash and cash equivalents consist primarily
of certificates of deposit, corporate bonds and treasury notes.
A part of such amounts are held by JP Morgan Chase Bank NA and
remaining amounts are held by various banking institutions
including India-based banks.
Net cash provided by operating activities for the nine month
periods ended September 30, 2006 and 2005 and the years
ended December 31, 2005, 2004 and 2003 was
$20.7 million, $27.8 million, $36.4 million,
$48.5 million and $44.1 million, respectively. The
number of days sales outstanding in accounts receivable was
approximately 64 days, 65 days, 52 days,
61 days and 60 days as of September 30, 2006 and
2005 and December 31, 2005, 2004 and 2003, respectively.
Net cash used in investing activities was $27.1 million for
the nine months ended September 30, 2006, consisting
principally of $96.9 million for the purchase of short term
investments and $9.3 million of capital expenditures
consisting principally of capital work in progress, including
capital advances towards construction of a Global Development
Center at Pune, India, PCs and communications equipment,
partially offset by the sale of short term investments of
$79.1 million. Net cash provided by investing activities
was $20.6 million for the nine months ended
September 30, 2005, consisting principally of
$39.2 million for the sale of short term investments
partially offset by $11 million of capital expenditures and
the purchase of short term investments of $7.6 million.
Net cash provided by investing activities was $21.6 million
for the year ended December 31, 2005. During 2005, the
Company invested $27.9 million to purchase short-term
investments and $16.4 million for capital expenditures,
consisting principally of PCs, communications equipment and
infrastructure and facilities. This was partially offset by
proceeds from sale of or maturities of short-term investments of
$65.9 million.
Net cash used in investing activities was $33.1 million for
the year ended December 31, 2004. During 2004, the Company
invested $94.3 million to purchase short-term investments
and $12.0 million for capital expenditures, consisting
principally of PCs, communications equipment and infrastructure
and facilities. This was partially offset by proceeds from sale
or maturities of short-term investments of $73.2 million.
Net cash used in investing activities was $20.2 million for
the year ended December 31, 2003. During 2003, the Company
invested $52.3 million to purchase short-term investments
and $4.2 million for capital expenditures, consisting
principally of PCs, communications equipment and infrastructure
and facilities. This was partially offset by proceeds from sale
or maturities of short-term investments of $36.3 million.
35
Net cash used in financing activities was $57.0 million for
the nine months ended September 30, 2006, consisting
principally of $58.6 million in dividends paid out
partially offset by $1.6 million of proceeds from the
issuance of shares under the Companys employee stock
option plan and employee stock purchase plan.
Net cash used in financing activities was $66.6 million for
the nine months ended September 30, 2005, consisting
principally of $68.4 million in dividends paid out and
$0.7 million in common stock repurchases, partially offset
by $2.5 million of proceeds from the issuance of shares
under the Companys employee stock option plan and employee
stock purchase plan.
Net cash used in financing activities in 2005 was
$68.1 million, due principally to the dividend distribution
of $70.9 million and the repurchase of 35,000 shares
of common stock for $0.7 million, partially offset by
proceeds from the issuance of shares under stock option and
stock purchase plans of $3.4 million.
Net cash used in financing activities in 2004 was
$8.0 million, due principally to the dividend distribution
of $9.7 million and the repurchase of 100,000 shares
of common stock for $1.4 million, partially offset by
proceeds from the issuance of shares under stock option and
stock purchase plans of $3.1 million.
Net cash used in financing activities in 2003 was
$45.9 million, due principally to the dividend distribution
of $52.3 million and the repurchase of 10,000 shares
of Common Stock for $0.1 million, partially offset by
proceeds from the issuance of shares under stock option and
stock purchase plans of $6.5 million.
The Company has a line of credit with JP Morgan Chase Bank NA,
which provides for borrowings up to $20.0 million. The line
of credit has been renewed and amended and now expires on
August 31, 2007. The line of credit has a
sub-limit of
$5.0 million for letters of credit, which bear a fee of
1% per annum of the face value of each standby letter of
credit issued. Borrowings under the line of credit bear interest
at (i) a formula approximating the Eurodollar rate plus the
applicable margin of 1.25%, (ii) the banks prime rate
minus 1.0% or (iii) negotiated rate plus 1.25%. There were
no outstanding borrowings at September 30, 2006.
The Company believes that the combination of present cash
balances and future operating cash flows will be sufficient to
meet the Companys currently anticipated cash requirements
for at least the next 12 months.
The following table sets forth the Companys known
contractual obligations as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than 1
|
|
|
|
|
|
|
|
|
More Than 5
|
|
|
|
Total
|
|
|
Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
Years
|
|
|
|
(In thousands)
|
|
|
Contractual
obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
9,988
|
|
|
|
2,667
|
|
|
|
4,034
|
|
|
|
3,174
|
|
|
|
113
|
|
Purchase obligations
|
|
|
2,886
|
|
|
|
2,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
reflected on the registrants balance sheet under GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,874
|
|
|
$
|
5,553
|
|
|
$
|
4,034
|
|
|
$
|
3,174
|
|
|
$
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain agreements for lease and purchase obligations included
above are cancelable with a specified notice period or penalty,
however all contracts are reflected in the table above as if
they will be performed for the full term of the agreement.
36
Critical
Accounting Policies
We believe the following critical accounting policy, among
others, affects 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
September 30, 2006 and 2005 and the years ended
December 31, 2005, 2004 and 2003, revenues from time and
material contracts constituted 58%, 51%, 50%, 46% and 48% 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
September 30, 2006 and 2005 and the years ended
December 31, 2005, 2004 and 2003, revenues from fixed price
application management and support engagements constituted 26%,
29%, 29%, 33% and 27% 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 changes become 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 September 30, 2006 and 2005
and the years ended December 31, 2005, 2004 and 2003,
revenues from fixed price development contracts constituted 16%,
20%, 21%, 21% and 25% of total revenues, respectively.
Significant
Accounting Estimates
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles (GAAP)
in the U.S. 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 makes 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 changes
is reflected in the period in which the changes become known.
Allowance for Doubtful Accounts. The Company
records an allowance for doubtful accounts based on a specific
review of aged receivables. 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 customer
accounts, the aging of the accounts receivable, analysis of
credit data, bad debt write-offs and other known factors.
37
Income Taxes Estimates of Effective Tax Rates and
Reserve 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 also
provides for tax contingencies based on the Companys
assessment of future regulatory reviews of filed tax returns.
Such reserves, which are recorded in income taxes payable, are
based on managements 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 periods income tax expense. During the three
months ended September 30, 2006 and 2005 and the years
ended December 30, 2005, 2004 and 2003 the effective income
tax rate was 2.0%, 12.9%, 40.2%, 11.4% and 24.7%, respectively.
Accruals for Legal Expenses and Exposures. 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.
Undistributed Earnings of Foreign
Subsidiaries. The Company intends to use
accumulated and future earnings of foreign subsidiaries to
expand operations outside the U.S. and accordingly undistributed
earnings of foreign subsidiaries are considered to be
indefinitely reinvested outside the U.S. and no provision for
U.S. federal and state income tax or applicable dividend
distribution tax has been provided thereon.
Recent
Accounting Pronouncements
In July 2006, FASB issued Interpretation No. 48
(FIN 48) Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109, to create a
single model to address accounting for uncertainty in tax
positions. FIN 48 clarified the accounting for income tax
by prescribing a minimum recognition threshold a tax position is
required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. FIN 48 is
effective for fiscal years beginning after December 15,
2006. The Company has not determined the effect, if any, the
adoption of FIN 48 will have on its results of operations
or financial position.
In September 2006, the FASB issued Statement No. 157
(SFAS 157), Fair Value Measurements, which addresses how
companies should measure fair value when they are required to
use a fair value measure for recognition or disclosure purposes
under GAAP. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. The Company is currently
evaluating the impact SFAS 157 will have on the
Companys financial position, results of operations and
liquidity and its related disclosures.
In September 2006, FASB issued Statement No. 158
(SFAS 158) Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of
FASB Statements No. 87, 88, 106, and 132(R), which requires
companies to recognize the overfunded or underfunded status of a
defined benefit postretirement plan as an asset or liability in
its balance sheet and to recognize changes in that funded status
in the year in which the changes occur through comprehensive
income, which is effective for fiscal years ending after
December 15, 2006. The Company is currently evaluating the
impact SFAS 158 will have on the Companys financial
position, results of operations and liquidity and its related
disclosures.
38
BUSINESS
Company
Overview
Syntel is a worldwide provider of IT and outsourcing services to
Global 2000 companies. The Company tailors its services to
specific industries, and utilizes a global delivery service
model. Syntels integrated
on-site/offshore
business model combines technical and account management teams
located
on-site at
the customer location and offshore at dedicated development
centers located primarily in India. The Companys core
service offerings include: (i) Applications Outsourcing,
consisting of application management services for ongoing
management, development and maintenance of business
applications; (ii) BPO, consisting of high-value,
customized outsourcing solutions that enhance critical
back-office services such as transaction processing, loan
servicing, retirement processing, collections and payment
processing;
(iii) e-Business,
consisting of strategic advanced technology services in the
integration and development of technology applications,
including
E-commerce,
Web development, CRM, Data Warehousing, EAI, ERP and Web
solutions and (iv) TeamSourcing, consisting of professional
IT consulting services.
The Companys Global Delivery Service provides Syntel with
flexibility to deliver to each customer a unique mix of services
on-site at
the customers location, off-site at Syntels
U.S. locations and offshore at Global Development Centers
in Mumbai, Chennai and Pune, India. The benefits to the customer
from this customized service approach include responsive
delivery based on an in-depth understanding of the specific
processes and needs of the customer, quick turnaround, access to
the most knowledgeable personnel and best practices, resource
depth,
24-hour
support seven days a week and cost-effectiveness. By linking
each of its service locations together through a dedicated data
and voice network, Syntel provides a seamless service capability
to its customers around the world largely unconstrained by
geography, time zones or cultures.
Syntel provides its services to a broad range of Global
2000 companies in the financial services, healthcare,
insurance, automotive, retail and other industries. During the
first nine months of 2006 the Company provided services to over
80 customers, principally in the U.S., including Allstate,
American Express, DaimlerChrysler, Humana and State Street Bank.
The Company has been chosen as a preferred vendor by many of its
customers and has been recognized for its quality and
responsiveness. We seek to develop long-term relationships with
our customers so as to become a trusted business partner and
enable us to expand our roles with current customers.
Additionally, the Company believes that its vertical expertise,
breadth of service and cultural alignment are also important
decision factors in the Company being chosen as a preferred
vendor. The Company has a focused sales effort that includes a
strategy of migrating existing TeamSourcing customers to
higher-value
e-Business
and Applications Outsourcing services. Recently, the Company has
focused on increasing its resources in the development,
marketing and sales of its Applications Outsourcing, BPO,
e-Business and TeamSourcing services to expand its customer base.
The Company believes its human resources are its most valuable
asset and invests significantly in programs to recruit, train
and retain IT professionals. The Company recruits globally
through its worldwide recruiting network and maintains a broad
package of employee support programs. Syntel believes that its
management structure and human resources organization is
designed to maximize the Companys ability to efficiently
expand its IT professional staff in response to customer needs.
As of September 30, 2006, Syntel had 7,506 total full time
employees and its worldwide billable headcount consisted of
5,130 consultants providing professional services to
Syntels customers.
Industry
Increasing globalization, rapid adoption of the Internet as a
business tool and technological innovation are creating an
increasingly competitive business environment that requires
companies to fundamentally change their business processes. This
change is driven by increasing demand from customers for
increased quality, lower costs, faster turnaround and highly
responsive and personalized service. To effect these changes and
adequately address these needs, companies are focusing on their
core competencies and on cost-effectively utilizing IT solutions
to improve productivity, lower costs and manage operations more
effectively.
39
Designing, developing and implementing advanced technology
solutions are key priorities for the majority of corporations.
In addition, the development and maintenance of new IT
applications continues to be a high priority. This type of work
requires highly skilled individuals trained in diverse
technologies. However, there is a growing shortage of these
individuals and many companies are reluctant to expand their IT
departments through additional staffing, particularly at a time
when they are attempting to minimize their fixed costs and
reduce workforces. The Company believes that many organizations
are concluding that using outside specialists to address their
advanced technology and ongoing IT requirements enables them to
develop better solutions in shorter time frames and to reduce
implementation risks and ongoing maintenance costs. Those
outside specialists best positioned to benefit from these trends
have access to a pool of skilled technical professionals, have
demonstrated the ability to manage IT resources effectively,
have low-cost offshore software development facilities, and can
efficiently expand operations to meet customer demands.
Demand for IT services has grown significantly as companies seek
ways to outsource not only specific projects for the design,
development and integration of new technologies, but also
ongoing management, development and maintenance of existing IT
systems.
The Company believes that outsourcing the ongoing management,
development and maintenance of IT applications is becoming
increasingly critical to business enterprises. The difficulties
of IT planning, budgeting and execution in the face of
technological innovations and uncertainties, the focus on cost
cutting, and a growing shortage of skilled personnel are driving
senior corporate management to strategically pursue outsourcing
of critical internal IT functions. Organizations are seeking an
experienced IT services outsourcing provider that not only has
the expertise and knowledge to address the complexities of
rapidly changing technologies, but also possesses the capability
to understand and automate the business processes and knowledge
base of the organization. In addition, the IT provider must be
able to develop customized solutions to problems unique to the
organization.
This involves maintaining a combination of
on-site,
off-site and offshore professionals who know the customers
IT processes, providing access to a wide range of expertise and
best practices, providing responsiveness and accountability to
allow internal IT departments to meet organization goals, and
providing low cost, value-added services to stay within the
organizations IT budget constraints. In todays
environment, large organizations are increasingly finding that
full facilities management outsourcing providers who own and
manage an organizations entire IT function do not permit
the organization to retain control over, or permit flexible
reallocation of, its IT resources.
According to International Data Corporation (IDC), the IT
services market was $446 billion in 2005 and is projected
to grow at a 5.8% annual growth rate from 2006 to 2010. The 2005
NASSCOM-McKinsey report estimates that the offshore IT services
industry will grow at a 24.4% compound annual growth rate from
$18.4 billion in fiscal 2005 to $55.0 billion in
fiscal 2010. The report estimates that India-based companies
accounted for 65% of revenues in fiscal 2005 and that India will
retain its dominant position as the most favored offshore IT
services destination for the foreseeable future.
With the success businesses are having with outsourcing their IT
services work, many have begun exploring BPO. According to IDC,
the global business outsourcing market was $384.5 billion
in 2005 and is projected to grow at a 10.0% compound annual
growth rate from 2005 through 2010 to $617.9 billion.
Demand for offshore BPO services has also grown substantially in
recent years. The NASSCOM-McKinsey report estimates that the
offshore BPO industry will grow at a 37.0% compound annual
growth rate, from $11.4 billion in fiscal 2005 to
$55.0 billion in fiscal 2010. The report identifies the
banking and insurance industries as representing 50% of the
potential offshore BPO market and estimates that providers have
captured less than 10% of the total opportunity, even in
industries that began outsourcing processes early on, such as
insurance (life, health and property and casualty) and retail
banking (including deposits and lending, credit cards, mortgages
and loans). The report estimates that India-based companies
accounted for 46% of offshore BPO revenue in fiscal 2005 and
that India will retain its dominant position as the most favored
offshore BPO destination for the foreseeable future.
40
Competitive
Advantages
Syntel has developed mature processes to handle large, complex
assignments and more efficiently deliver higher quality IT and
BPO solutions through a global delivery model. Management
believes that Syntels global delivery model, vertical
domain expertise, focus on customer service and
end-to-end
product are key competitive advantages.
Global Delivery Service. Syntel performs its
services
on-site at
the customers location, off-site at Syntels
U.S. locations and offshore at its Indian locations. By
linking each of its service locations together through a
dedicated data and voice network, Syntel provides a seamless
service capability to its customers around the world, largely
unconstrained by geographies, time zones and cultures. This
Global Delivery Service gives the Company the flexibility to
deliver to each customer a unique mix of
on-site,
off-site and offshore services to meet varying customer needs
for direct interaction with Syntel personnel, access to
technical expertise, resource availability and cost-effective
delivery. The benefits to the customer from this customized
service include responsive delivery based on an in-depth
understanding of the specific processes and needs of the
customer, quick turnaround, access to the most knowledgeable
personnel and best practices, resource depth,
24-hour
support seven days a week and cost-effectiveness. To support its
Global Delivery Service, the Company currently has three Global
Development Centers located in Mumbai, Pune, and Chennai, India.
The Company also has a Support Center located in Cary, North
Carolina. The Mumbai Global Development Center employed
3,055 persons as of September 30, 2006 and has a
capacity of approximately 3,299 people. The Pune Global
Development Center employs 1,429 people and has a capacity
of approximately 1,887 people. The Chennai Global
Development Center employed 1,131 persons as of
September 30, 2006 and has a capacity of approximately
1,513 persons.
In August 2006, the Company completed Phase 1 of a
state-of-the-art
development and training campus in Pune, India which includes an
office building with space for 950 seats, a food court and
hotel. When fully completed, the facility will cover over
1 million square feet and will accommodate 9,000 employees
within a 40 acre office park. It will be both a customer
and employee focused facility, including such amenities as
training facilities, cafeteria and fitness center.
Trusted Business Partner. The Syntel corporate
culture reflects a customer for life philosophy,
which emphasizes flexibility, responsiveness, cost-consciousness
and a tradition of excellence. The Company recognizes that its
best source for new business opportunities comes from existing
customers and believes its customer service is a significant
factor in Syntels high rate of repeat business. At
engagement initiation, Syntels services are typically
based on expertise in the software life cycle and underlying
technologies. Over time, however, as Syntel develops an in-depth
knowledge of a customers business processes, IT
applications and industry, Syntel gains a competitive advantage
to perform additional higher-value IT services for that customer.
Deep Industry Expertise. Syntel has developed
methodologies, toolsets and proprietary knowledge applicable to
specific industries. Syntel combines deep industry knowledge
with an understanding of its clients needs and
technologies to provide high value, high quality services.
Syntels industry expertise can be leveraged to assist
other clients in the same industry, thereby improving quality
and the value of its services. The Companys domain
expertise extends to multiple verticals, with particular
strength in financial services, insurance, and healthcare. For
the nine months ended September 30, 2006, the
Companys revenue breakdown by industry vertical for
financial services, healthcare, insurance, auto, retail, and
other was 43%, 17%, 17%, 11%, 3% and 9%, respectively.
Depth and Breadth of Service Offerings. The
Company provides a comprehensive range of IT services, including
application development, application maintenance and support,
packaged software implementation, infrastructure management
services, BPO and testing services. Syntels knowledge and
experience spans multiple computing platforms and technologies,
which enable us to address a range of business needs and to
function as a virtual extension of its clients IT
departments. The Company offers a broad spectrum of services in
select industry sectors, which it leverages to capitalize on
opportunities throughout its clients organizations. The
Company continues to create market-based service offerings to
meet the emerging needs of its customers.
41
Proven Intellectual Capital. Over its
26-year
history, Syntel has developed a proven set of methodologies,
practices, tools and technical expertise for the development and
management of its customers information systems. The
Company believes that its intellectual capital is an important
part of its competitive advantage. The Company benefits from its
own experience in transitioning from a 100% onshore service
provider to a majority offshore-centric service provider. The
Company employs a team of professionals in its Strategic
Offerings Group whose mission is to develop and formalize
Syntels intellectual capital for use by the
entire Syntel organization. This intellectual capital includes
methodologies for the selection of appropriate customer IT
functions for management by Syntel, tools for the transfer to
Syntel of the systems knowledge of the customer, and techniques
for providing systems support improvements to the customer. The
Company believes its intellectual capital enhances its ability
to understand customer needs, design customized solutions and
provide quality services on a timely and
cost-effective
basis. The Company strives to continually enhance this knowledge
base by creating competencies in emerging technical fields such
as internet/intranet applications, client/server applications,
object-oriented software,
e-commerce
and data warehousing technology. Through these efforts, the
Company becomes more valuable to the customer and is often able
to expand the scope of its work to existing customers.
Fixed-Price and Fixed-Timeframe. We have
historically performed approximately half of our services on a
fixed-price, fixed-timeframe basis, which we believe aligns our
objectives with those of our clients. We deliver solutions for
both enterprise-wide and departmental initiatives on a
fixed-price, fixed-timeframe basis using our proprietary tools
and methodologies. We believe our ability to offer fixed-price,
fixed-timeframe process is an important competitive
differentiator that allows us and our clients to better
understand our clients business needs, and to design,
develop, integrate and implement solutions that address those
needs.
Business
Strategy
The Companys objective is to become a strategic partner
with its customers in managing the full IT services
lifecycle by utilizing its Global Delivery Model, intellectual
capital and customer service orientation. The Company plans to
continue to pursue the following strategies to achieve this
objective:
Leverage Global Delivery Model. The ability to
deliver a seamless service capability virtually anywhere in the
world from its domestic and offshore facilities gives the
Company an effective ability to meet customer needs for
technical expertise, best practice IT solutions, resource
availability, responsive turnaround and cost-effective delivery.
The Company strives to leverage this capability to provide
reliable and cost-effective services to its existing customers,
expand services to existing customers and to attract new
customers. Moreover, the flexibility and capacity of the Global
Delivery Service and the Companys worldwide recruitment
and training programs enhance the ability of the Company to
expand its business as the number of customers grows and their
IT demands increase. The Company continues to expand the
capacity of its Global Development Centers worldwide. The
Company has made a significant migration of resources to
offshore development locations. Measured by billable headcount,
approximately 71% of services were delivered from offshore
centers as of September 30, 2006 versus 51% as of
September 30, 2003.
Continue to Grow Applications Outsourcing
Services. Through Applications Outsourcing, the
Company markets its higher value applications management
services for ongoing applications management, development and
maintenance. In recent years, the Company has significantly
increased its investment in Applications Outsourcing services
and realigned its resources to focus on the development,
marketing and sales of its Applications Outsourcing and
e-Business
services, including the hiring of additional salespeople and
senior managers, redirecting personnel experienced in the sale
of higher value contracts, developing proprietary methodologies,
increasing marketing efforts and redirecting organizational
support in the areas of finance and administration, human
resources and legal.
Capitalize on Existing Capabilities in the High Growth BPO
Market. The Company will seek to capitalize on
its existing value-added BPO solutions capabilities, primarily
in the areas of financial services and insurance. By leveraging
a mature Global Delivery Model and domain expertise, the Company
is able to deliver process improvements as well as provide
competitively priced BPO solutions. In addition to
42
offering its existing BPO solutions, the Company also expects to
build on its solution set to capitalize on additional
opportunities.
Expand Customer Base and Role with Current
Customers. The Companys emphasis on
customer service and long-term relationships has enabled the
Company to generate recurring revenues from existing customers.
The Company also seeks to expand its customer base by leveraging
its expertise in providing services to the financial services,
healthcare, insurance, automotive retail and other industries,
as well as to government entities. With the expansion of the
Companys Indian operations, the Company is increasing its
marketing efforts in other parts of the world, particularly in
Europe.
Attract and Retain Highly Skilled IT
Professionals. The Company believes that its
human resources are its most valuable asset. Accordingly, its
success depends in large part upon its ability to attract,
develop, motivate, retain and effectively utilize highly skilled
IT professionals. Over the years, the Company has developed a
worldwide recruiting network, logistical expertise to relocate
its personnel, and programs for human resource retention and
development. The Company (1) employs professional
recruiters who recruit qualified professionals throughout the
U.S. and India, (2) trains employees and new recruits
through both computer-based training and its four training
centers, one of which is located in the U.S. and three of which
are located in India, and (3) maintains a broad range of
employee support programs, including relocation assistance, a
comprehensive benefits package, career planning, a qualified
stock purchase program, and incentive plans. The Company
believes that its management structure and human resources
organization is designed to maximize the Companys ability
to efficiently expand its professional IT staff in response to
customer needs. The Company believes that its recent investment
in its Pune, India campus has positively impacted its ability to
attract and retain high quality talent.
Pursue Selective Partnership
Opportunities. The Company has entered into
partnership alliances with several software firms and IT
application infrastructure firms, including Ab Initio, Actuate,
BEA Systems, Business Objects, Cognos, IBM, Informatica,
Mercury, Microstrategy, Oracle, SAP, Serden Technologies and
TIBCO, among others. The alliances provide a strong software
implementation strategy for the customer, combining the
partners software with Syntels extensive
implementation and delivery capabilities. Before entering into a
partnership alliance, the Company considers a number of
criteria, including: (1) technology employed;
(2) projected product lifecycles; (3) size of the
potential market; (4) software integration requirements of
the product and (5) the reputation of the potential partner.
Global
Delivery Model
Syntels Global Delivery Service gives the Company the
flexibility and resources to perform services
on-site at
the customers location, off-site at the Companys
U.S. locations and offshore at the Companys Indian
locations. By linking each of its service locations together
through a dedicated data and voice network, Syntel provides a
seamless service capability to its customers. The Global
Delivery Service gives the Company the flexibility to deliver to
each customer a customized mix of integrated
on-site,
off-site and offshore services to meet varying customer needs
for direct interaction with Syntel personnel, access to
technical expertise and best practices, resource availability
and cost effective delivery.
Through
on-site
service delivery at the customers location, the Company is
able to gain comprehensive knowledge concerning the
customers personnel, processes, technology and culture,
and maintain direct customer contact to facilitate project
management, problem solving and integration of Syntel services.
Off-site service delivery at the Companys
U.S. locations provides the customer with access to the
diverse skill base and technical expertise resident at different
regional centers, availability of resources and cost-effective
delivery due to the savings in transportation, facilities and
relocation costs associated with
on-site
work. Offshore service delivery at the Companys Indian
locations provides the customer with the capacity to receive
around-the-clock attention to applications maintenance and
project development for faster turnaround, greater availability
of resources, expertise resident in India and more
cost-effective delivery than the Companys off-site
services.
The Company has developed global recruiting and training
programs which have efficiently provided skilled IT
professionals to meet customer needs. In addition, the
Companys sales, solutions and delivery functions are
closely integrated in the Global Delivery Service so that
appropriate resources can be provided to the customer at the
right time and at the most advantageous location. Each customer
is tracked and
43
serviced through a multi-stage customer care process. Regular
meetings are held with key project management, sales, technical,
legal and finance personnel to monitor progress, identify issues
and discuss solutions. As engagements evolve and customer needs
change, the Company can reallocate resources responsively among
these locations as necessary.
Service
Offerings
The Company provides a range of information technology services
that are grouped into four segments as follows.
Applications Outsourcing. Syntel provides
high-value application management services for ongoing
management, development and maintenance of business
applications. Through Applications Outsourcing, the Company
assumes responsibility for, and manages selected applications
support functions of, the customers. The Global Delivery Service
is central to Syntels delivery of Applications Outsourcing
services. It enables the Company to respond to customers
needs for ongoing service and flexibility and has provided the
capability to become productive quickly on a cost-effective
basis to meet timing and resource demands for mission critical
applications.
Syntel has developed methodologies, processes and tools to
effectively integrate and execute Applications Outsourcing
engagements. Referred to as
IntelliTransfer®,
this methodology is implemented in three stages of
planning, transition and launch. Syntel first focuses on the
customers personnel, processes, technology and culture to
develop a plan to effectively assimilate the business process
knowledge of the customer. Syntel then begins to learn the
business processes of the customer, and, finally, seeks to
assume responsibility for performance of a particular customer
applications system or systems. As the Company develops an
in-depth knowledge of the customers personnel, processes,
technology and culture, Syntel acquires a competitive advantage
to pursue more value-added services. The Company believes its
approach to providing these services results in a long-term
customer relationship involving a key Syntel role in the
business processes and applications of the customer.
Because providing both
e-Business
and Applications Outsourcing services typically involves close
participation in the IT strategy of a customers
organization, Syntel adjusts the manner in which it delivers
these services to meet the specific needs of each customer. For
example, if the customers business requires fast delivery
of a mission-critical applications update, Syntel will combine
its on-site
professionals, who have knowledge of the customers
business processes and applications, together with its global
infrastructure to deliver
around-the-clock
resources. If the customers need is for cost reduction,
Syntel may increase the portion of work performed at its
offshore Global Development Centers, which have significantly
lower costs. The Company believes that its ability to provide
flexible service, delivery and access to resources permits
responsiveness to customer needs and are important factors that
distinguish its
e-Business
and Applications Outsourcing services from other IT service
firms.
Business Process Outsourcing (BPO). Syntel
seeks to provide high-value BPO solutions to its customers, as
opposed to low-value, capital-intensive voice-based BPO
services. Through BPO, Syntel provides outsourced solutions for
a clients business processes, providing them with the
advantage of a low-cost position and process enhancement through
optimal use of technology. Syntel uses a proprietary tool called
Identeontm
to assist with strategic assessments of business processes,
identifying the right processes for outsourcing. In the area of
financial services, Syntel focuses on the middle and back-office
business processes of the transaction cycle. Syntels
insurance BPO services include claims processing and policy
administration, among others. BPO accounted for approximately 3%
of revenues for the year ended December 31, 2005 and
approximately 7% of revenues for the nine months ended
September 30, 2006.
e-Business
Services. Syntel provides strategic advanced
technology services for the design, development, implementation
and maintenance of solutions to enable customers to be more
competitive. Many of todays advanced technology solutions
are built around utilization of the Internet, which has
transformed many businesses. The Company provides customized
technology services in the areas of web solutions, including web
architecture, web-enablement of legacy applications, and portal
development. The Company also provides CRM services, which
involve software solutions that put Syntels customers in
closer touch with their own customers. Syntel helps its
customers select the appropriate package software options, then
customize and implement the solutions. In the area of Data
Warehousing/Business Intelligence, Syntel helps customers make
more strategic
44
use of information within their businesses through the
development and implementation of data warehouses and data
mining tools. In the area of Enterprise Applications
Integration, Syntel takes an enterprise-wide view of its
customers environment and implements package software
solutions that create better integration, and therefore better
information utilization, between front-office and back-office
applications. In the area of Enterprise Resource Planning,
Syntel helps implement, customize and maintain various third
party software packages. Additionally, the Company has
effectively engaged several partnerships to provide its
implementation, customization, migration and maintenance
services with leading software and IT application software
infrastructure providers including Ab Initio, Actuate, BEA
Systems, Business Objects, Cognos, IBM, Informatica, Mercury,
Microstrategy, Oracle, SAP, Serden Technologies and TIBCO, among
others. The Company maintains a package agnostic approach to its
clients. These partnerships are expected to provide the Company
with increased opportunities for market penetration.
TeamSourcing®. Syntel
offers professional IT consulting services directly to its
customers and, to a lesser degree, in partnership with other
service providers. The professional IT consulting services
include individual professionals and teams of professionals
dedicated to assisting customer systems projects and ongoing IT
functions. This service responds to the demand from internal IT
departments for additional expertise, technical skills and
personnel. The Companys wide range of TeamSourcing
services include IT applications systems specification, design,
development, implementation and maintenance, which involve
diverse computer hardware, software, data and networking
technologies and practices.
Customers
Syntel provides its services to a broad range of Global 2000
corporations in the financial services, healthcare, insurance,
automotive, retail and other industries. The Company currently
provides services to approximately 80 customers, principally in
the U.S. The Company also provides services to customers in
Europe and Southeast Asia, many of whom are subsidiaries or
affiliates of its U.S. customers. Representative customers
of the Company, each of which provided revenue of at least
$100,000 during 2005, include:
FINANCIAL SERVICES
American Express
Bank One
Boston Financial Data Services
Credit Suisse
Deutsche Bank
First Data Merchant Services
General Motors Acceptance Corp.
Investors Bank and Trust Company
International Financial Data Services
Moodys Investor
Pioneer Investment Management
Reliance Money
State Street Corp.
Washington Mutual Bank
Wells Fargo
AUTOMOTIVE
DaimlerChrysler AG
Ford Motor Co.
Freightliner LLC
T-System
HEALTHCARE
Availity LLC
Blue Cross and Blue Shield
of North Carolina
First Health Services Corp
Health Care Associates
Humana, Inc.
McKesson
WellPoint, Inc.
RETAIL
Carillion Inc.
Lowes Companies, Inc.
PepsiCo Inc. Valhalla
INSURANCE
ACE INA Holdings
Allstate Insurance
American International Group
Ameriprise Insurance
CNA Commercial Lines
Unitrin
Stewart Landata Systems Inc.
Westfield Insurance
ZC Sterling
OTHER
American Greetings
Airlines Reporting Corp.
Brocade Communications Systems
DSMI
FedEx Corp.
Hewlett-Packard
Jeppesen Sanderson, Inc.
MeadWestvaco
MetaSolve, Inc.
Oracle Corporation
Symantec
Tektronix, Inc.
The NewsMarket
Thomas Cook
Viskase Companies, Inc.
45
The Companys top five customers accounted for 51% of the
total revenues in the nine months ended September 30, 2006,
up from 42% of its total revenues in the nine months ended
September 30, 2005. Moreover, the Companys top ten
customers accounted for 70% of the total revenues in the nine
months ended September 30, 2006 as compared to 63% in the
nine months ended September 30, 2005.
For the years ended December 31, 2005, 2004, and 2003, the
Companys top ten customers accounted for approximately
65%, 61% and 64% of the Companys revenues, respectively.
For the year ended December 31, 2005 one customer
contributed revenues in excess of 10% of total consolidated
revenues. The Companys three largest customers in 2005
were American Express, Humana Inc and DaimlerChrysler AG
contributing approximately 16%, 8% and 8%, respectively, of the
total revenues. The Companys largest customer for 2005,
2004 and 2003 was American Express, accounting for approximately
16% of the total revenues for each of the years ended
December 31, 2005, 2004 and 2003, respectively. The
Companys largest customer for the nine months ended
September 30, 2006 was American Express, accounting for
approximately 18% of the total revenues for that period.
Sales and
Marketing
The Company markets and sells its services directly through its
professional salespeople and senior management operating
principally from the Companys offices in Santa Clara,
California; Phoenix, Arizona; Schaumburg, Illinois; Dallas,
Texas; Minneapolis, Minnesota; New York, New York; Troy,
Michigan; Cary, North Carolina; Nashville, Tennessee; Natick,
Massachusetts; London, England; Hong Kong; Stuttgart, Germany
and Singapore. The sales staff is aligned by industry vertical,
with each salesperson authorized to pursue Applications
Outsourcing, BPO,
e-Business
and, to a much lesser degree, TeamSourcing opportunities. The
sales team is supported, as required, by technical expertise and
subject matter experts from the Companys delivery teams.
The sales cycle for Applications Outsourcing engagements ranges
from six to twelve months, depending on the complexity of the
engagement. Due to this longer sales cycle, Applications
Outsourcing sales executives follow an integrated sales process
for the development of engagement proposals and solutions, and
receive ongoing input from the Companys technical
services, delivery, finance and legal departments throughout the
sales process. The Applications Outsourcing sales process also
typically involves a greater number of customer personnel at
more senior levels of management than the TeamSourcing sales
process.
Competition
The IT services industry is intensely competitive, highly
fragmented and subject to rapid change and evolving industry
standards. The Company competes with a variety of companies,
depending on the IT services it offers. The Companys
primary competitors include systems integration firms,
application software companies, professional services groups of
computer equipment companies, and contract programming
companies. The Companys most direct competitors include
Cognizant, Infosys Technologies, Tata Consultancy Services and
Wipro which utilize an integrated
on-site/offshore
business model comparable to that used by the Company. The
Company also competes with large IT service providers with
greater resources, such as Accenture, Electronic Data Systems,
IBM Global Services and Keane. The Company is also seeing
increased competition from non-Indian sources such as China,
Eastern Europe and the Philippines. In addition, the Company
competes with numerous smaller local companies in the various
geographic markets in which the Company operates. Many of the
Companys customers choose to work with more than one IT
services provider, and contract with an individual provider to
work on specific engagements that best match that
providers expertise.
46
Facilities
The Companys headquarters and principal administrative,
sales and marketing, and system development operations are
located in approximately 14,600 square feet of leased space
in Troy, Michigan. The Company occupies these premises under a
lease expiring in March 2007. The Company has a
telecommunications hub located in approximately
3,200 square feet of leased space in Cary, North Carolina,
under a lease, which expires July 31, 2010. The Company
also leases office facilities in Santa Clara, California;
Phoenix, Arizona; Schaumburg, Illinois; Dallas, Texas;
Minneapolis, Minnesota; New York, New York; Nashville,
Tennessee; Natick, Massachusetts; Berkshire, England; Stuttgart,
Germany and Singapore.
The Companys Global Development Centers located in: Pune,
Mumbai and Chennai, India and a Support Center located at Cary,
North Carolina support the Companys Global Delivery
Service.
In January 2001, the Company acquired 40 acres of land at
the cost of approximately $1.0 million for construction of
a
state-of-the-art
development and training campus in Pune, India. Phase 1 of
the construction was completed in August 2006 which
included an office building for 950 seats, a food court and
hotel. When fully completed, the facility will cover over
1 million square feet and have capacity for
9,000 seats. It will be both a customer and employee
focused facility, including such amenities as training
facilities, cafeteria and fitness center. In addition, Syntel
leases two facilities in Pune, India consisting of approximately
63,490 square feet.
The Mumbai, India Global Development Center, which employed,
including onsite deputations outside Mumbai, 3,404 persons as of
September 30, 2006, serves as the hub of the Companys
Indian operations. This Global Development Center provides
substantial resource depth to meet customer needs around the
world, low-cost service delivery, a
24-hour
customer assistance center and development of technical
solutions and expertise. Mumbai also serves as the principal
recruiting and training center for the Company. The Mumbai
Center has been in operation for over a decade and has a
capacity of approximately 3,299 people including BPO operations.
The Chennai Training and Global Development Center employed,
including onsite deputations outside Chennai, 1,359 persons as
of September 30, 2006. The Chennai facility has a capacity
of approximately 1,513 persons. The Company has 28 acres of
land in an Information Technology Park in Chennai, India.
Syntel leases approximately 88,642 square feet of office
space in Mumbai, India, under ten leases expiring on various
dates ranging between March 1, 2007 and October 31,
2011. These facilities house IT professionals, as well as its
senior management, finance and accounts, administrative
personnel, human resources, recruiting and sales and marketing
functions.
For facilitating its BPO operations, Syntel has leased
113,325 square feet of office space in Mumbai, India under
four leases expiring on dates ranging between February 1,
2008 and January 31, 2011.
Syntel leases approximately 122,408 square feet of office
space in Chennai, India, under three leases expiring on dates
ranging between April 1, 2007 and March 31, 2009, all
subject to the Companys option to renew for additional
periods.
The Company believes that space availability in Mumbai and
Chennai will accommodate short-term facility requirements and
the new campus in Pune will enable the Company to meet offshore
growth requirements for the next several years.
Human
Resources
The Company believes that its human resources are its most
valuable asset. As of September 30, 2006, Syntel had 7,506
total full time employees and its worldwide billable headcount
consisted of 5,130 consultants providing professional
services to Syntels customers
47
A majority of the Companys professional employees have a
Bachelor of Science degree or its equivalent, or higher degrees
in computer science, engineering disciplines, management,
finance and other areas. Their experience level ranges from
entry-level programmers to engagement managers and senior
consultants with over 20 years of IT experience. The
Company has personnel who are experienced in mainframe,
client/server and open systems technologies, and proficient in a
variety of computer programming languages, software tools,
database management systems, networks, processes, methodologies,
techniques and standards.
The Company has implemented a management structure and human
resources organization intended to maximize the Companys
ability to efficiently expand its professional staff. Although
the Company believes that it has the capability to meet its
anticipated future needs for IT professionals through its
established recruiting and training programs, there can be no
assurance that the Company will be able to hire, train or retain
qualified IT professionals in sufficient numbers to meet
anticipated staffing needs.
Recruiting. The Company has developed a
recruiting methodology and organization, which is a core
competency. The Company has significantly expanded its
international-based recruiting team, with recruiters in Mumbai,
Chennai, Hyderabad, Bangalore and Pune, India, to recruit for
the Companys global requirements. The Company also has a
recruiting team based in the U.S., which recruits primarily
across the U.S. The Company uses a standardized global
selection process that includes written tests, interviews and
reference checks.
Among the Companys other recruiting techniques are the
placement of advertisements on its own web site and popular job
boards, in newspapers and trade magazines, providing bonuses to
its employees who refer qualified applicants, participating in
job fairs and recruiting on university campuses. In addition,
the Company has developed a proprietary database of talent
hosted on the Internet, which is an automated tool for managing
all phases of recruiting. This system enhances the ability of
the Companys recruiters to select appropriate candidates
and can distribute resumes directly to the recruiters.
Training. The Company uses a number of
established training delivery mechanisms in its efforts to
provide a consistent and reliable source for qualified IT
professionals.
Syntel also maintains an Internet-based global Computer-Based
Training (CBT) program with over 200 training courses from which
Syntel employees can select to enhance and develop their skills.
The CBT topics cover the latest client/server topics including
Object Oriented Programming, local-area and wide-area
networking,
E-commerce,
various Microsoft products, and Web-based solutions in addition
to management and related developmental areas.
The Company continued to re-skill a significant percentage of
the consulting base during the last year in the latest advanced
software platforms, including J2EE, Object Oriented, C++,
C-Sharp, .NET, RMI CORBA, SAP, PeopleSoft, ETL, Datastage,
Ab-initio, Informatica and Microstrategy.
Since 1998, the Company has operated a Project Manager Training
program. The objective of the program is to develop certified
project managers to ensure consistent and quality delivery of
the Companys engagements on a worldwide basis. The 12 to
18 month program consists of lecture style classroom work,
computer-based training and-on-the-job apprenticeships. The
program trains students on industry best practices
as well as Syntel specific methods and processes. Program
participants must receive certification from the Project
Management Institute (PMI) before receiving Syntel branded
certification.
The Company has been accepted as a Microsoft Certified Solution
Partner and sponsors the Microsoft Certification Program and
provides opportunities for cross training of its professionals
in emerging technologies at its various development centers.
Support and Retention. The Company seeks to
provide meaningful support to its employees which the Company
believes leads to improved employee retention and better quality
services to its customers. A
48
significant percentage of the Companys employees have been
recruited from outside the U.S. and relocated to the
U.S. This has resulted in the need to provide a higher
level of initial support to its employees than is common for
U.S.-based
employees. As a result of these activities, Syntel has developed
a significant knowledge base in making foreign professionals
comfortable and quickly productive in the U.S. and Europe. The
Company also conducts regular career planning sessions with its
employees, and seeks to meet their career goals over a long-term
planning horizon.
As part of its retention strategy, the Company strives to
provide a competitive compensation and benefits package,
including relocation reimbursement and support, health
insurance,
24-hour
on-call nurse consulting, a 401(k) plan, life insurance, dental
options, a vision eye-care program, long-term disability
coverage, short-term disability options, tuition subsidy plan
and a health club reimbursement program. Since its initial
public offering in 1997, the Company has offered a stock option
program, and during 2004 and 2005, the Company issued incentive
restricted stock to its non-employee directors and some
employees as well as to some employees of its subsidiaries.
Legal
Proceedings
While the Company is a party to ordinary routine litigation
incidental to the business, the Company is not currently a party
to any material pending legal proceedings.
49
MANAGEMENT
The directors and executive officers of the Company, their ages,
and the position or office held by each, are as follows:
|
|
|
|
|
|
|
Directors and Executive Officers
|
|
Age
|
|
Position
|
|
Bharat Desai
|
|
|
53
|
|
|
Director and Chairman, President
and Chief Executive Officer
|
Paritosh K. Choksi
|
|
|
53
|
|
|
Director
|
Paul R. Donovan
|
|
|
60
|
|
|
Director
|
George R. Mrkonic, Jr.
|
|
|
54
|
|
|
Director
|
Vasant Raval
|
|
|
66
|
|
|
Director
|
Neerja Sethi
|
|
|
51
|
|
|
Director and Vice President,
Corporate Affairs
|
James Swayzee
|
|
|
58
|
|
|
Director
|
Keshav Murugesh
|
|
|
43
|
|
|
Chief Operating Officer
|
Arvind Godbole
|
|
|
49
|
|
|
Interim Chief Financial Officer
|
Daniel M. Moore
|
|
|
52
|
|
|
Chief Administrative Officer,
General Counsel and Secretary
|
Rakesh Khanna
|
|
|
44
|
|
|
President, Business
Unit Banking and Finance
|
Vinod Swami
|
|
|
44
|
|
|
Sr. Vice President, Global Sales
|
R.S. Ramdas
|
|
|
51
|
|
|
Sr. Vice President,
Finance & Corporate Services
|
Srikanth Karra
|
|
|
42
|
|
|
Vice President, Global HR
|
Lakshmanan Chidambaram
|
|
|
41
|
|
|
Vice President, Sales
|
A biographical description of the directors and executive
officers of the Company are as follows:
Bharat Desai, age 53, is a co-founder of Syntel and
has served as its Chairman of the Board, President and Chief
Executive Officer and as a director since February 1999. He has
served as its President and Chief Executive Officer and as a
director since its formation in 1980. Mr. Desai is the
spouse of Ms. Sethi.
Paritosh K. Choksi, age 53, is Executive Vice
President, Chief Operating Officer and Chief Financial Officer
and a director of ATEL Capital Group, a financial services
management company, and has served in those capacities since
April 2001. From May 1999 to April 2001, Mr. Choksi was
Chief Financial Officer, Senior Vice President and a director of
ATEL Capital Group. Mr. Choksi has been a director of
Syntel since August 1997. Mr. Choksi has also been named
the Lead Director on the Board of Directors and in that capacity
chairs the Board of Directors in the absence of the Chairperson
of the Board and also chairs the executive sessions of the
independent members of the Board of Directors.
Paul R. Donovan, age 60, currently retired, served
from October 1999 to September 2005 as an Executive Vice
President and CIO, Information Technology, with ING Americas, a
financial services company offering banking, insurance and asset
management services. Mr. Donovan has been a director of
Syntel since March 2006.
George R. Mrkonic, Jr., age 54, currently retired,
served as the Vice Chairman of Borders Group, Inc., a retailer
of books, music and educational entertainment media products
headquartered in Ann Arbor, Michigan from December 1994 until
January 2002, and served as a director of Borders Group, Inc.,
from August 1994 until January 2005. Mr. Mrkonic is also a
director of (i) Nashua Corporation, a manufacturer of
specialty imaging products and services to industrial and
commercial customers to meet various print application needs,
(ii) Guitar Center, Inc., the nations leading
retailer of guitars, amplifiers, percussion instruments,
keyboards and pro-audio and recording equipment and
(iii) Brinker International, Inc., the parent company of a
diverse portfolio of casual dining restaurant concepts.
Mr. Mrkonic has been a director of Syntel since August 1997.
Vasant Raval, age 66, has been a Professor and Chair
of the Department of Accounting at Creighton University since
2001. Mr. Raval joined the faculty of Creighton University
in 1981 and has served as
50
Professor of Accounting and Associate Dean and Director of
Graduate Programs at the College of Business Administration.
Mr. Raval is also a director of InfoUSA, Inc., a provider
of business and consumer information products, database
marketing services, data processing services and sales and
marketing solutions. Mr. Raval has been a director of
Syntel since January 2004.
Neerja Sethi, age 51, is a co-founder of Syntel and
has served as a Vice President and a director since
Syntels formation in 1980. Ms. Sethi is the spouse of
Mr. Desai.
James Swayzee, age 58, has more than 30 years
of experience in management consulting, business development,
sales & marketing management and innovation sourcing
across Europe and the US. Most recently, he served as a partner
in the Pharmaceutical and Medical Products practice at Accenture
in New York. Prior to that, he spent 12 years in various
management roles at Eli Lilly & Co., the last of which
was as Director of Corporate Business Development, where he had
responsibility for establishing new business ventures in Europe,
Africa and the US. For the eight years preceding Eli Lilly,
Mr. Swayzee was a management consultant with Booz,
Allen & Hamilton in Paris and New York.
Keshav Murugesh, age 43, was appointed as Chief Operating
Officer of the Company in October 2004. Mr. Murugesh joined
the Company as Chief Financial Officer in May 2002 and continued
as Acting Chief Financial Officer until his successor, Revathy
Ashok, was appointed. Prior to joining Syntel, Mr. Murugesh
served as Vice President Finance at ITC Infotech Ltd from
October 2000 to May 2002. Prior to this assignment,
Mr. Murugesh served as Finance Head, Information Systems
Business from August 1999 to September 2000 at ITC Ltd, India.
Arvind Godbole, age 49, was appointed Interim Chief
Financial Officer on June 1, 2006. He has been with the
Company as Corporate Controller since March 2001 and has also
been a member of the Procurement Team along with his usual
functions as a controller. From 1998 to 2001, Mr. Godbole
was Deputy General Manager Finance with Wockhardt
Ltd., a pharmaceutical company listed on the major stock
exchanges in India, where he was responsible for accounts, audit
and tax planning.
Daniel M. Moore, age 52, has served the Company as Chief
Administrative Officer, Secretary and General Counsel since
August 1998.
Rakesh Khanna, age 44, was appointed as
Banking & Finance Business Unit President with the
Company in July 2005. Prior to joining Syntel, Mr. Khanna
served in senior management at IFLEX Solutions Ltd., a company
specializing in software products and services for banks and
financial service institutions, from September 1996 to July 2005.
Vinod Swami, age 44, joined the Company in June 1993 and
was appointed as Senior Vice President and Head of Sales,
Automotive, Healthcare and Diversified Businesses in February
2006. Mr. Swami previously served as Vice President, Global
Sales, from February 2005 to February 2006, Vice President,
Strategic Sales from December 2002 to February 2005 and in
various sales positions prior to December 2002.
R.S. Ramdas, age 51, was appointed as Senior Vice
President, Finance and Corporate Services in January 2006 and
became a member of the leadership team in February 2006.
Mr. Ramdas served as Vice President of Syntel from March
2004 to January 2006 and has served with Syntel since 1990 in
various positions including heading corporate tax, treasury,
internal audit, global procurement and various other functions.
Srikanth Karra, age 42, was appointed as
Syntels Vice President Global Human Resources
in March 2005. Prior to joining Syntel, Mr. Karra served as
HR Head for India and Global Leader for Staffing and
Relationship Development at GE Capital International Services, a
global diversified financial services company, from 2001 to 2005.
Lakshmanan Chidambaram, age 41, was appointed as
Head of Sales, Banking and Financial Services and Insurance
Business units in February 2006. Mr. Chidambaram joined
Syntel in 2001 and has served in a variety of sales positions.
51
REPORTS
ON CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and
Procedures. Based on their evaluation of the
Companys disclosure controls and procedures as of the end
of the period covered by this Report as well as mirror
certifications from senior management, the Companys
Chairman, President and Chief Executive Officer and Chief
Financial Officer have concluded that the Companys
disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange
Act of 1934 (the Exchange Act) is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms and
are operating in an effective manner. There have been no changes
in the Companys internal controls over financial reporting
(as defined in
Rule 13a-15(f)
under the Exchange Act) during the last quarter that materially
affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.
Disclosure Controls and Internal
Controls. Disclosure Controls are procedures
designed to ensure that information required to be disclosed in
our reports filed under the Exchange Act, such as this Report,
is recorded, processed, summarized and reported within the time
periods specified in the U.S. Securities and Exchange
Commissions (the SEC) rules and forms. Disclosure Controls
are also designed to ensure that such information is accumulated
and communicated to our management, including the CEO and Acting
CFO, as appropriate to allow timely decisions regarding required
disclosure. Internal Controls are procedures designed to provide
reasonable assurance that (1) our transactions are properly
authorized; (2) our assets are safeguarded against
unauthorized or improper use; and (3) our transactions are
properly recorded and reported, all to permit the preparation of
our financial statements in conformity with generally accepted
accounting principles.
Limitations on the Effectiveness of
Controls. The Companys management,
including the CEO and Acting CFO, does not expect that our
Disclosure Controls or our Internal Controls will prevent all
error and all fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives
will be met. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if
any, within the company have been detected. Further, the design
of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. The design of any system of
controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all
potential future conditions. Over time, controls may become
inadequate because of changes in conditions or deterioration in
the degree of compliance with its policies or procedures.
Scope of the Controls Evaluation. In the
course of the Controls Evaluation, we sought to identify data
errors, control problems or acts of fraud and confirm that
appropriate corrective actions, including process improvements,
were being undertaken. Our Internal Controls are also evaluated
on an ongoing basis by our Internal Audit Department and by
other personnel in our organization. The overall goals of these
various evaluation activities are to monitor our Disclosure
Controls and our Internal Controls, and to modify them as
necessary; our intent is to maintain the Disclosure Controls and
the Internal Controls as dynamic systems that change as
conditions warrant.
Among other matters, we sought in our evaluation to determine
whether there were any significant deficiencies or
material weaknesses in the companys Internal
Controls, and whether the company had identified any acts of
fraud involving personnel with a significant role in the
companys Internal Controls. This information was important
both for the Controls Evaluation generally, and because the
Rule 13a-14
Certifications of the CEO and CFO require that the CEO and CFO
disclose that information to our Boards Audit Committee
and our independent auditors. We also sought to deal with other
controls matters in the Controls Evaluation, and in each case if
a problem was identified, we considered what revision,
improvement
and/or
correction to make in accordance with our ongoing procedures.
Conclusions. Based upon the Controls
Evaluation, our CEO and CFO have concluded that as of
December 31, 2005, our disclosure controls and procedures
are effective to ensure that material information
52
relating to Syntel and its consolidated subsidiaries is made
known to management, including the CEO and CFO, particularly
during the period when our periodic reports are being prepared,
and that our Internal Controls are effective to provide
reasonable assurance that our financial statements are fairly
presented in conformity with generally accepted accounting
principles.
Managements
Annual Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f).
Under the supervision and with the participation of our
management, including our chief executive officer and chief
financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation under the framework
in Internal Control Integrated Framework, our
management concluded that our internal control over financial
reporting was effective as of December 31, 2005 and meets
the criteria of the Internal Control-Integrated Framework.
Crowe Chizek and Company LLC, an independent registered public
accounting firm, has audited the consolidated financial
statements of Syntel, Inc. and its subsidiaries as of
December 31, 2005 and for the year then ended included in
this Registration Statement and also incorporated by reference
to Syntels Annual Report on
Form 10-K
and, as part of its audit, has issued its report, included
herein and also incorporated by reference to Syntels
Annual Report on
Form 10-K,
(1) on our managements assessment of the
effectiveness of our internal controls over financial reporting
and (2) on the effectiveness of our internal control over
financial reporting.
Changes in Internal Controls Over Financial Reporting. From the
date of the Controls Evaluation to the date of this Report,
there have been no significant changes in Internal Controls or
in other factors that could significantly affect Internal
Controls.
Interim
Report on Controls
Evaluation of Disclosure Controls and
Procedures. Based on their evaluation of the
Companys disclosure controls and procedures as of
September 30, 2006 as well as mirror certifications from
senior management, the Companys Chairman, President and
Chief Executive Officer and Acting Chief Financial Officer have
concluded that the Companys disclosure controls and
procedures are designed to ensure that information required to
be disclosed by the Company in the reports that it files or
submits under the Securities Exchange Act of 1934 (the Exchange
Act) is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange
Commissions rules and forms and are operating in an
effective manner. There have been no changes in the
Companys internal controls over financial reporting (as
defined in
Rule 13a-15(f)
under the Exchange Act) during the last quarter that materially
affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.
Conclusions. Based upon the Controls
Evaluation, our CEO and Acting CFO have concluded that as of
September 30, 2006 our disclosure controls and procedures
are effective to ensure that material information relating to
Syntel and its consolidated subsidiaries is made known to
management, including the CEO and Acting CFO, particularly
during the period when our periodic reports are being prepared,
and that our Internal Controls are effective to provide
reasonable assurance that our financial statements are fairly
presented in conformity with generally accepted accounting
principles in the United States of America.
53
SELLING
SHAREHOLDERS; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS
The following table provides information about the beneficial
ownership of Syntels common stock by (i) any person
or entity known by the management of Syntel to have been the
beneficial owner of more than five percent of Syntels
outstanding common stock as of November 30, 2006,
(ii) the nominees, present directors, and named executive
officers of Syntel, and (iii) by all directors and
executive officers of Syntel as a group.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned (Assuming
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
No Exercise of
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Shares
|
|
|
the Over
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Beneficially
|
|
|
Allotment Option)
|
|
|
|
Beneficially
|
|
|
Sold in the
|
|
|
Owned After
|
|
|
Before the
|
|
|
After the
|
|
Name and Address
|
|
Owned(1)
|
|
|
Offering
|
|
|
the Offering
|
|
|
Offering
|
|
|
Offering
|
|
|
Bharat Desai
|
|
|
22,088,242
|
(2)
|
|
|
|
|
|
|
|
|
|
|
53.90
|
%
|
|
|
|
|
525 East Big Beaver Road,
Suite 300
Troy, Michigan 48083
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
Neerja Sethi Irrevocable
Trust Dtd
2/28/97 I
|
|
|
4,659,346
|
(3)
|
|
|
|
|
|
|
|
|
|
|
11.40
|
%
|
|
|
|
|
525 East Big Beaver Road,
Suite 300
Troy, Michigan 48083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neerja Sethi Irrevocable
Trust Dtd
2/28/97 II
|
|
|
4,659,346
|
(3)
|
|
|
|
|
|
|
|
|
|
|
11.40
|
%
|
|
|
|
|
525 East Big Beaver Road,
Suite 300
Troy, Michigan 48083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Parashar Ranade
|
|
|
9,618,692
|
(4)
|
|
|
|
|
|
|
|
|
|
|
23.50
|
%
|
|
|
|
|
1500 Bay Road, Apt. 764
Miami Beach, Florida 33139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Neerja Sethi
|
|
|
10,458,408
|
(5)
|
|
|
|
|
|
|
|
|
|
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25.50
|
%
|
|
|
|
|
525 East Big Beaver Road,
Suite 300
Troy, Michigan 48083
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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Paritosh K. Choksi
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|
|
51,611
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(6)
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|
|
|
|
|
|
|
|
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*
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|
|
|
*
|
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Paul R. Donovan
|
|
|
13,123
|
(6)
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|
|
|
|
|
|
|
|
|
|
*
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|
|
|
*
|
|
Daniel M. Moore
|
|
|
6,000
|
(6)
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|
|
|
|
|
|
|
|
|
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*
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|
|
|
*
|
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George R. Mrkonic, Jr.
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|
|
29,120
|
(6)
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Keshav Murugesh
|
|
|
106,750
|
(6)
|
|
|
|
|
|
|
|
|
|
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*
|
|
|
|
*
|
|
Vasant Raval
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|
|
7,880
|
(6)
|
|
|
|
|
|
|
|
|
|
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*
|
|
|
|
*
|
|
Vinod Swami
|
|
|
29,012
|
(6)
|
|
|
|
|
|
|
|
|
|
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*
|
|
|
|
*
|
|
James Swayzee
|
|
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6,966
|
(6)
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
All Directors and Executive
Officers as a group (17 persons)
|
|
|
32,889,765
|
(6)
|
|
|
|
|
|
|
|
|
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79.80
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%
|
|
|
|
|
All Other Shareholders
|
|
|
8,304,506
|
|
|
|
|
|
|
|
|
|
|
|
20.20
|
%
|
|
|
|
|
Total Diluted
Shares Outstanding
|
|
|
41,111,416
|
|
|
|
41,111,416
|
|
|
|
|
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
* |
|
Less than 1%. |
|
(1) |
|
For the purpose of this table, a person or group is deemed to
have beneficial ownership of any shares as of a
given date which such person has voting power, investment power
or has the right to acquire voting power or investment power
within 60 days after such date. For purposes of computing
the percentage of outstanding shares held by each person or
group of persons named above on a given date, any security which
such person or persons has the right to acquire within
60 days after such date is deemed to be outstanding, but is
not deemed to be outstanding for the purpose of computing the
percentage of ownership of any other person. Except as otherwise
noted, each beneficial owner of more |
54
|
|
|
|
|
than five percent of Syntels common stock and each
director and executive officer has sole voting and investment
power over the shares reported. With respect to the restricted
common stock of Syntel shown as owned by certain executive
officers, the executive officers have voting power but no
investment power. |
|
(2) |
|
Mr. Desai holds shared voting and dispositive power for the
(a) 4,659,346 shares held by the Neerja Sethi
Irrevocable Trust Dtd 2/28/97 I,
(b) 4,659,346 shares held by the Neerja Sethi
Irrevocable Trust Dtd 2/28/97 II,
(c) 75,000 shares held by the Neerja Sethi Irrevocable
Trust Dtd 5/17/97 V, (d) 75,000 shares held
by the Neerja Sethi Irrevocable Trust Dtd 5/17/97 VI,
of which trusts Mr. Desai is a co-trustee with
Mr. Ranade, and (e) 1,800 shares held in several
educational trusts for the benefit of other individuals, of
which trusts Mr. Desai is a trustee. Mr. Desai
disclaims beneficial ownership of shares held by these trusts. |
|
(3) |
|
These shares are also included under both
Messrs. Desais and Ranades ownership as they
are
co-trustees
for these trusts and share voting and dispositive power for
these shares of common stock. |
|
(4) |
|
Mr. Ranade holds shared voting and dispositive power for
(a) 4,659,346 shares held by the Neerja Sethi
Irrevocable Trust Dtd 2/28/97 I,
(b) 4,659,346 shares held by the Neerja Sethi
Irrevocable Trust Dtd 2/28/97 II,
(c) 75,000 shares held by the Neerja Sethi Irrevocable
Trust Dtd 5/17/97 V, (d) 75,000 shares held
by the Neerja Sethi Irrevocable Trust Dtd 5/17/97 VI,
(e) 75,000 shares held by the Bharat Desai Irrevocable
Trust Dtd 5/17/97 III, and (f) 75,000 shares
held by the Bharat Desai Irrevocable Trust Dtd
5/17/97 IV, of which trusts Mr. Ranade is a
co-trustee. Mr. Ranade disclaims beneficial ownership of
shares held by these trusts. |
|
(5) |
|
Ms. Sethi holds shared voting and dispositive power for the
(a) 75,000 shares held by the Bharat Desai Irrevocable
Trust Dtd 5/17/97 III, (b) 75,000 shares
held by the Bharat Desai Irrevocable
Dtd 5/17/97 IV,
of which trust Ms. Sethi is a co-trustee with
Mr. Ranade, and (c) 6,250 shares held in several
educational trusts for the benefit of other individuals, of
which Ms. Sethi is a trustee. Ms. Sethi disclaims
beneficial ownership of shares held by these trusts and of the
shares held by her spouse, Mr. Desai. |
|
(6) |
|
The number of shares shown in the table includes the following
number of shares which the person specified may acquire within
60 days by exercising options which were unexercised on
November 30, 2006: Paritosh K. Choksi, 15,000; Keshav
Murugesh, 39,000; Vinod Swami, 13,000; and all directors and
executive officers as a group, 83,900. The number of shares
shown in the table includes the following number of shares which
are represented by shares of restricted Common Stock which are
not vested: Paritosh K. Choksi, 2,391; Paul R. Donovan, 8,123;
Daniel M. Moore, 1,875; George R. Mrkonic, Jr., 2,778;
Keshav Murugesh, 64,500; Vasant Raval, 2,778; Vinod Swami,
11,950; James Swayzee, 4,466; and all directors and executive
officers as a group, 159,841. |
55
DESCRIPTION
OF CAPITAL STOCK
Syntels authorized capital stock consists of
100,000,000 shares of common stock and
5,000,000 shares of Preferred Stock. As of
September 30, 2006, there were no shares of Syntel
Preferred Stock outstanding and 41,046,929 shares of common
stock outstanding, excluding (i) 239,610 shares of common
stock issuable upon exercise of outstanding stock options; and
(ii) 2,100,767 shares available for future grants or
issuance under stock option plans and our employee stock
purchase plan. The following description of Syntels
capital stock is a summary and is qualified in its entirety by
the provisions of Syntels Articles of Incorporation
(Articles) and Bylaws.
Common
Stock
Subject to the rights of any holder of Preferred Stock, each
holder of Syntels common stock is entitled to one vote per
share held of record on all matters submitted to a vote of
shareholders, including the election of directors. Holders of
Syntels common stock are entitled to receive dividends if
declared by Syntels Board of Directors, and upon
liquidation to share in the net assets of Syntel pro rata in
accordance with such shareholders holdings. The common
stock has no preemptive, redemption, conversion or subscription
rights, and all outstanding shares of common stock are, and the
shares of common stock offered by this prospectus will be, duly
authorized, validly issued and fully paid and nonassessable.
Preferred
Stock
The Articles authorize the issuance of one or more series of
Preferred Stock. The Board of Directors has the power, without
further action by the shareholders, to divide any and all shares
of Preferred Stock into series and to fix and determine the
relative rights and preferences of the Preferred Stock, such as
the designation of series and the number of shares constituting
such series, dividend rights, redemption and sinking fund
provisions, liquidation and dissolution preferences, conversion
or exchange rights and voting rights, if any. Issuances of
Preferred Stock by the Board of Directors may result in such
shares having senior dividend
and/or
liquidation preferences to the holders of shares of common stock
and may dilute the voting rights of such holders. Issuances of
Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate
purposes, could, among other things, adversely affect the voting
rights of holders of common stock. In addition, the issuance of
Preferred Stock could make it more difficult for a third party
to acquire a majority of the outstanding voting stock.
Accordingly, the issuance of Preferred Stock may be used as an
anti-takeover device without further action on the
part of the shareholders of the Company. Syntel has no present
plans to issue any shares of Preferred Stock.
Certain
Provisions of the Articles and Bylaws
Indemnification. Syntels Articles and
Bylaws provide that its directors and officers will be
indemnified by Syntel to the fullest extent authorized by
Michigan law against all expenses and liabilities reasonably
incurred in connection with service for or on behalf of the
Company.
Limitation of Liability. The Articles provide
that directors of Syntel will not be personally liable for
monetary damages to the Company for certain breaches of their
fiduciary duty as directors, unless they violated their duty of
loyalty to Syntel or its shareholders, acted in bad faith,
knowingly or intentionally violated the law, authorized illegal
dividends or redemptions or derived an improper personal benefit
from their actions as directors. This provision would have no
effect on the availability of equitable remedies or nonmonetary
relief, such an injunction or rescission for breach of the duty
of care. In addition, the provision applies only to claims
against a director arising out of his role as a director and not
in any other capacity (such as an officer or employee of
Syntel). Further, liability of a director for violations of the
federal securities laws will not be limited by this provision.
Removal for Cause. Syntels Bylaws
provide that members of the Board of Directors may be removed by
a majority of the outstanding shares of common stock only for
cause at a special meeting called for such purpose.
56
Special Meetings; Advance
Notice. Syntels Bylaws reserve the
authority to call a special shareholders meeting to the
Board of Directors, the Chairman of the Board or the President.
In addition, the Bylaws provide that the President or Secretary
at the written request of shareholders holding a majority of the
outstanding shares shall call a special shareholders
meeting. The Bylaws also establish the following advance notice
procedure for the nomination of candidates for election as
directors, as well as for other shareholder proposals to be
considered at annual shareholders meetings. Notice of
shareholder proposals and director nominations must be given
timely in writing to the Secretary of the Company. Such notice,
to be timely, must be received at the principal executive
offices of the Company not less than 60 days nor more than
90 days prior to the first anniversary of the preceding
years annual meeting; however, in the event that the date
of the annual meeting is advanced by more than 30 days or
delayed by more than 60 days from such anniversary date,
notice by the shareholder to be timely must be so delivered not
earlier than the 90th day prior to such annual meeting and
not later than the close of business on the later of the
60th day prior to such annual meeting or the 10th day
following the day on which public announcement of the date of
such meeting is first made.
Business
Combinations and Change of Control
Syntel is not currently subject to the Michigan Fair
Price statute, Chapter 7A of the Michigan Business
Corporation Act (Michigan Act); however, the Companys
Board of Directors may elect by resolution to subject Syntel to
the provisions of Chapter 7A. Chapter 7A of the Michigan
Act provides that a business combination subject to
Chapter 7A between a covered Michigan corporation or any of
its subsidiaries and a beneficial owner of shares entitled to
10% or more of the voting power of such corporation generally
requires the affirmative vote of not less than 90% of the votes
of each class of stock entitled to vote, and not less than two
thirds of the votes of each class of stock entitled to vote
(excluding voting shares owned by such 10% or more owner),
voting as a separate class. These requirements do not apply if
(1) the corporations board of directors approves the
transaction before the 10% or more owner becomes such or
(2) the transaction satisfies certain fairness standards,
certain other conditions are met and the 10% or more owner has
been such for at least five years. Chapter 7A business
combinations include, among other transactions, mergers,
significant asset transfers, certain disproportionate issuances
of shares to an interested shareholder, certain
reclassifications and recapitalizations disproportionately
favorable to such shareholder, and the adoption of a plan of
liquidation or dissolution in which such a shareholder would
receive anything other than cash. Chapter 7A does not
restrict the purchase of shares from other shareholders in the
open market, through private transactions or acquired through a
tender offer.
Syntels Bylaws expressly provide that the Company is
subject to Chapter 7B of the Michigan Act. Chapter 7B of
the Michigan Act provides that, unless a corporations
articles of incorporation or bylaws provide that Chapter 7B
does not apply, control shares of a corporation
acquired in a control share acquisition have no voting rights
except as granted by the shareholders of the corporation.
Control shares are outstanding shares which, when
added to shares previously owned by a shareholder, increase such
shareholders voting power, acting alone or in a group, to
exceed three separate thresholds of the outstanding shares:
(1) one-fifth or more but less than one-third,
(2) one-third or more but less than a majority, or
(3) a majority of the shares entitled to vote for the
election of directors. To confer voting rights, a control share
acquisition must be approved by the affirmative vote of a
majority of the votes cast by holders of all shares entitled to
vote, excluding shares owned by the acquiror and certain
officers and employee directors. However, no such approval is
required for gifts or other transactions not involving
consideration, for a merger to which the corporation is a party
or for certain other transactions described in Chapter 7B.
Although control shares include, for the purpose of determining
whether the thresholds have been met, shares beneficially owned
by persons acting as a group, the formation of a group does not
constitute a control share acquisition of shares held by members
of the group.
Chapter 7B of the Michigan Act applies to Michigan
corporations which, like Syntel, have 100 or more shareholders
of record, their principal place of business or substantial
assets in Michigan and at least one of the following
characteristics: (a) more than 10% of their shares are
owned of record by Michigan residents; (b) more than 10% of
their shareholders of record are Michigan residents; or
(c) 10,000 of their shareholders of record are Michigan
residents.
Transfer
Agent
Computershare Investor Services, LLC of Chicago, Illinois is the
Transfer Agent for the common stock.
57
MATERIAL
UNITED STATES FEDERAL TAX CONSEQUENCES
FOR
NON-UNITED
STATES SHAREHOLDERS
This is a general summary of material United States Federal
income and estate tax considerations with respect to your
acquisition, ownership and disposition of Syntels common
stock if you are a beneficial owner of shares other than:
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a citizen or resident of the United States;
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a corporation, or other entity taxable as a corporation created
or organized in, or under the laws of, the United States or any
political subdivision of the United States;
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an estate, the income of which is subject to United States
Federal income taxation regardless of its source;
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a trust, if a court within the United States is able to exercise
primary supervision over the administration of the trust and one
or more United States persons have the authority to control all
substantial decisions of the trust; or
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a trust that existed on August 20, 1996, was treated as a
United States person on August 19, 1996, and elected to be
treated as a United States person.
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This summary does not address all of the United States Federal
income and estate tax considerations that may be relevant to you
in light of your particular circumstances or if you are a
beneficial owner subject to special treatment under United
States Federal income tax laws (such as a controlled
foreign corporation, passive foreign investment
company, company that accumulates earnings to avoid United
States Federal income tax, foreign tax-exempt organization,
financial institution, broker or dealer in securities or former
United States citizen or resident). This summary does not
discuss any aspect of state, local or
non-United
States taxation. This summary is based on current provisions of
the Internal Revenue Code of 1986, as amended (Code), Treasury
regulations, judicial opinions, published positions of the
United States Internal Revenue Service (IRS) and all other
applicable authorities, all of which are subject to change,
possibly with retroactive effect. This summary is not intended
as tax advice.
If a partnership holds Syntels common stock, the tax
treatment of a partner will generally depend on the status of
the partner and the activities of the partnership. If you are a
partner of a partnership holding Syntels common stock, you
should consult your tax advisor.
WE URGE PROSPECTIVE
NON-UNITED
STATES SHAREHOLDERS TO CONSULT THEIR TAX ADVISORS REGARDING THE
UNITED STATES FEDERAL, STATE, LOCAL AND
NON-UNITED
STATES INCOME, ESTATE AND OTHER TAX CONSIDERATIONS OF ACQUIRING,
HOLDING AND DISPOSING OF SHARES OF COMMON STOCK.
Dividends
In general, any distributions Syntel makes to you with respect
to your shares of common stock that constitute dividends for
United States Federal income tax purposes will be subject to
United States withholding tax at a rate of 30% of the gross
amount, unless you are eligible for a reduced rate of
withholding tax under an applicable income tax treaty and you
provide proper certification of your eligibility for such
reduced rate (usually on an IRS
Form W-8BEN).
A distribution will constitute a dividend for United States
Federal income tax purposes to the extent of the Companys
current or accumulated earnings and profits as determined under
the Code. Any distribution not constituting a dividend will be
treated first as reducing your basis in your shares of common
stock and, to the extent it exceeds your basis, as gain from the
disposition of your shares of common stock.
Dividends Syntel pays to you that are effectively connected with
your conduct of a trade or business within the United States
(and, if certain income tax treaties apply, are attributable to
a United States permanent establishment maintained by you)
generally will not be subject to United States withholding tax
if you comply with applicable certification and disclosure
requirements. Instead, such dividends generally
58
will be subject to United States Federal income tax, net of
certain deductions, at the same graduated individual or
corporate rates applicable to United States persons. If you are
a corporation, effectively connected income may also be subject
to a branch profits tax at a rate of 30% (or such
lower rate as may be specified by an applicable income tax
treaty). Dividends that are effectively connected with your
conduct of a trade or business but that under an applicable
income tax treaty are not attributable to a United States
permanent establishment maintained by you may be eligible for a
reduced rate of United States withholding tax under such treaty,
provided you comply with certification and disclosure
requirements necessary to obtain treaty benefits.
Sale or
Other Disposition of Common Stock
You generally will not be subject to United States Federal
income tax on any gain realized upon the sale or other
disposition of your shares of Syntels common stock unless:
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the gain is effectively connected with your conduct of a trade
or business within the United States (and, under certain income
tax treaties, is attributable to a United States permanent
establishment you maintain);
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you are an individual, you hold your shares of common stock as
capital assets, you are present in the United States for
183 days or more in the taxable year of disposition and you
meet other conditions, and you are not eligible for relief under
an applicable income tax treaty; or
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we are or have been a United States real property holding
corporation for United States Federal income tax purposes
(which we believe we are not and have never been, and do not
anticipate we will become) and you hold or have held, directly
or indirectly, at any time within the shorter of the five-year
period preceding disposition or your holding period for your
shares of common stock, more than 5% of Syntels common
stock.
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Gain that is effectively connected with your conduct of a trade
or business within the United States generally will be subject
to United States Federal income tax, net of certain deductions,
at the same rates applicable to United States persons. If you
are a corporation, the branch profits tax mentioned above also
may apply to such effectively connected gain. If the gain from
the sale or disposition of your shares is effectively connected
with your conduct of a trade or business in the United States
but under an applicable income tax treaty is not attributable to
a permanent establishment you maintain in the United States,
your gain may be exempt from United States tax under the treaty.
If you are described in the second bullet point above, you
generally will be subject to United States Federal income tax at
a rate of 30% on the gain realized, although the gain may be
offset by some United States source capital losses realized
during the same taxable year.
Information
Reporting and Backup Withholding
Syntel must report annually to the IRS the amount of dividends
or other distributions the Company pays to you on your shares of
common stock and the amount of tax it withholds on these
distributions regardless of whether withholding is required. The
IRS may make copies of the information returns reporting those
dividends and amounts withheld available to the tax authorities
in the country in which you reside pursuant to the provisions of
an applicable income tax treaty or exchange of information
treaty.
The United States imposes a backup withholding tax on dividends
and certain other types of payments to United States persons.
You will not be subject to backup withholding tax on dividends
you receive on your shares of Syntels common stock if you
provide proper certification (usually on an IRS
Form W-8BEN)
of your status as a
non-United
States person or if you are a corporation or one of several
types of entities and organizations that qualify for exemption
(an exempt recipient).
Information reporting and backup withholding generally are not
required with respect to the amount of any proceeds from the
sale of your shares of Syntels common stock outside the
United States through a foreign office of a foreign broker that
does not have certain specified connections to the United
States. However, if you sell your shares of common stock through
a United States broker or the United States
59
office of a foreign broker, the broker will be required to
report the amount of proceeds paid to you to the IRS and also
backup withhold on that amount unless you provide appropriate
certification (usually on an IRS
Form W-8BEN)
to the broker of your status as a
non-United
States person or you are an exempt recipient. Information
reporting (and backup withholding if the appropriate
certification is not provided) also apply if you sell your
shares of common stock through a foreign broker deriving more
than a specified percentage of its income from United States
sources or having certain other connections to the United States.
Any amounts withheld with respect to your shares of Syntel
common stock under the backup withholding rules will be refunded
to you or credited against your United States Federal income tax
liability, if any, by the IRS if the required information is
furnished in a timely manner.
Estate
Tax
Syntel common stock owned or treated as owned by an individual
who is not a citizen or resident (as defined for United States
Federal estate tax purposes) of the United States at the time of
his or her death will be included in the individuals gross
estate for United States Federal estate tax purposes and
therefore may be subject to United States Federal estate tax
unless an applicable estate tax treaty provides otherwise.
Recently enacted legislation reduces the maximum Federal estate
tax rate over an
8-year
period beginning in 2002 and eliminates the tax for estates of
decedents dying after December 31, 2009. In the absence of
renewal legislation, these amendments will expire and the
Federal estate tax provisions in effect immediately prior to
2002 will be restored for estates of decedents dying after
December 31, 2010.
60
UNDERWRITING
Under the terms and subject to the conditions contained in an
underwriting agreement
dated ,
2006, the selling shareholders have agreed to sell to the
underwriters named below, for whom Credit Suisse Securities
(USA) LLC and Deutsche Bank Securities Inc. are acting as
representatives, the following respective numbers of shares of
common stock:
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Number of
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Underwriter
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Shares
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Credit Suisse Securities (USA) LLC
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Deutsche Bank Securities Inc.
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Jefferies & Company,
Inc.
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Janney Montgomery Scott LLC
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Total
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3,000,000
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The underwriting agreement provides that the underwriters are
obligated to purchase all the shares of common stock in the
offering if any are purchased, other than those shares covered
by the over-allotment option described below. The underwriting
agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be
increased or the offering may be terminated.
The selling shareholders have granted to the underwriters a
30-day
option to purchase on a pro rata basis up to 450,000 additional
shares at the public offering price less the underwriting
discounts and commissions. The option may be exercised only to
cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock at
the public offering price on the cover page of this prospectus
and to selling group members at that price less a selling
concession of $ per share.
The underwriters and selling group members may allow a discount
of $ per share on sales to
other broker/dealers. After the public offering the
representatives may change the public offering price and
concession and discount to broker/dealers.
The following table summarizes the compensation the selling
shareholders will pay and estimated expenses payable by the
selling shareholders:
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Per Share
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Total
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Without
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With
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Without
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With
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Over-Allotment
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Over-Allotment
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Over-Allotment
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Over-Allotment
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Underwriting Discounts and
Commissions paid by the selling shareholders
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$
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$
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$
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$
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Expenses payable by the selling
shareholders
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$
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$
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$
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$
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The Company has agreed that it will not offer, sell, contract to
sell, pledge or otherwise dispose of, directly or indirectly, or
file with the Securities and Exchange Commission a registration
statement under the Securities Act relating to, any shares of
its common stock or securities convertible into or exchangeable
or exercisable for any shares of its common stock, or publicly
disclose the intention to make any offer, sale, pledge,
disposition or filing, without the prior written consent of
Credit Suisse Securities (USA) LLC and Deutsche Bank Securities
Inc. for a period of 90 days after the date of this
prospectus. However, in the event that either (1) during
the last 17 days of the
lock-up
period, the Company releases earnings results or material news
or a material event relating to the Company occurs or
(2) prior to the expiration of the
lock-up
period, the Company announces that it will release earnings
results during the
16-day
period beginning on the last day of the
lock-up
period, then in either case the expiration of the
lock-up
will be extended until the expiration of the
18-day
period beginning on the date of the release of the earnings
results or the occurrence of the material news or event, as
applicable, unless Credit Suisse Securities (USA) LLC and
Deutsche Bank Securities Inc. waive, in writing, such an
extension.
61
The selling shareholders and the Companys officers and
directors have agreed that they will not offer, sell, contract
to sell, pledge or otherwise dispose of, directly or indirectly,
any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of the Companys
common stock, enter into a transaction that would have the same
effect, or enter into any swap, hedge or other arrangement that
transfers, in whole or in part, any of the economic consequences
of ownership of the Companys common stock, whether any of
these transactions are to be settled by delivery of the
Companys common stock or other securities, in cash or
otherwise, or publicly disclose the intention to make any offer,
sale, pledge or disposition, or to enter into any transaction,
swap, hedge or other arrangement, without, in each case, the
prior written consent of Credit Suisse Securities (USA) LLC and
Deutsche Bank Securities Inc. for a period of 90 days after
the date of this prospectus. However, in the event that either
(1) during the last 17 days of the
lock-up
period, the Company releases earnings results or material news
or a material event relating to the Company occurs or
(2) prior to the expiration of the
lock-up
period, the Company announces that it will release earnings
results during the
16-day
period beginning on the last day of the
lock-up
period, then in either case the expiration of the
lock-up
will be extended until the expiration of the
18-day
period beginning on the date of the release of the earnings
results or the occurrence of the material news or event, as
applicable, unless Credit Suisse Securities (USA) LLC and
Deutsche Bank Securities Inc. waive, in writing, such an
extension.
The restrictions described in the preceding two paragraphs do
not apply to:
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the issuances of shares by the Company pursuant to the
conversion or exchange of convertible or exchangeable shares or
the exercise of warrants or options, in each case outstanding on
the date of this prospectus;
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grants of employee stock options by the Company pursuant to the
terms of a plan in effect on the date of this prospectus or
issuances of shares pursuant to the exercise of such options;
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issuances of shares pursuant to the Companys dividend
reinvestment plan;
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a transfer of shares by a person other than the Company to a
family member or trust, provided the transferee agrees to be
bound in writing by the terms set forth in the immediately
preceding paragraph prior to such transfer and no filing by any
party (donor, donee, transferor or transferee) under the
Securities Exchange Act of 1934 shall be required or shall be
voluntarily made in connection with such transfer (other than a
filing on a Form 5 made after the expiration of the
lock-up
period);
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shares transferred on or prior to December 31, 2006 by a
person other than the Company, as a bona fide gift or gifts,
whether to charitable organizations or otherwise, provided that
the donee or donees thereof agree to be bound in writing by the
restrictions set forth in the immediately preceding paragraph
and no filing by any party (donor, donee, transferor or
transferee) under the Securities Exchange Act of 1934 shall be
required or shall be voluntarily made in connection with such
transfer (other than filings pursuant to Section 13(d) or
13(g) of the Exchange Act or on Forms 3, 4 or 5 made on or
prior to January 5, 2007 or after the expiration of the
lock-up
period); or
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shares transferred on or prior to December 31, 2006 by a
person other than the Company, to any foundation, trust,
partnership or limited liability company for the direct or
indirect benefit of the undersigned or the immediate family of
the undersigned, provided that the foundation, the trustee of
the trust, the partnership or the limited liability company, as
the case may be, agrees to be bound in writing by the
restrictions set forth in the immediately preceding paragraph,
any such transfer shall not involve a disposition for value and
no filing by any party (transferor, transferee, foundation,
trust, trustee, partnership or limited liability company) under
the Securities Exchange Act of 1934 shall be required or shall
be voluntarily made in connection with such transfer (other than
filings pursuant to Section 13(d) or 13(g) of the Exchange
Act or on Forms, 3, 4 or 5, in each case made on or prior to
January 5, 2007 or after the expiration of the
lock-up
period.
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The Company and the selling shareholders have agreed to
indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments that the underwriters
may be required to make in that respect.
The Companys common stock is listed on The NASDAQ Global
Select Market under the symbol SYNT.
In connection with the offering the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate
covering transactions and penalty bids in accordance with
Regulation M under the Securities Exchange Act of 1934 (the
Exchange Act).
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Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
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Over-allotment involves sales by the underwriters of shares in
excess of the number of shares the underwriters are obligated to
purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short
position. In a covered short position, the number of shares
over-allotted by the underwriters is not greater than the number
of shares that they may purchase in the over-allotment option.
In a naked short position, the number of shares involved is
greater than the number of shares in the over-allotment option.
The underwriters may close out any covered short position by
either exercising their over-allotment option
and/or
purchasing shares in the open market.
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Syndicate covering transactions involve purchases of the common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In
determining the source of shares to close out the short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through
the over-allotment option. If the underwriters sell more shares
than could be covered by the over-allotment option, a naked
short position, the position can only be closed out by buying
shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there could
be downward pressure on the price of the shares in the open
market after pricing that could adversely affect investors who
purchase in the offering.
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Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
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In passive market making, market makers in the common stock who
are underwriters or prospective underwriters may, subject to
limitations, make bids for or purchases of our common stock
until the time, if any, at which a stabilizing bid is made.
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These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of the common stock. As a result
the price of the Companys common stock may be higher than
the price that might otherwise exist in the open market. These
transactions may be effected on The NASDAQ Global Select Market
or otherwise and, if commenced, may be discontinued at any time.
A prospectus in electronic format may be made available on the
web sites maintained by one or more of the underwriters, or
selling group members, if any, participating in this offering
and one or more of the underwriters participating in this
offering may distribute prospectuses electronically. The
representatives may agree to allocate a number of shares to
underwriters and selling group members for sale to their online
brokerage account holders. Internet distributions will be
allocated by the underwriters and selling group members that
will make internet distributions on the same basis as other
allocations.
The shares of common stock are offered for sale in those
jurisdictions in the United States, Europe, Asia and elsewhere
where it is lawful to make such offers.
63
Each of the underwriters has represented and agreed that it has
not offered, sold or delivered and will not offer, sell or
deliver any of the shares of common stock directly or
indirectly, or distribute this prospectus or any accompanying
prospectus or any other offering material relating to the shares
of common stock, in or from any jurisdiction except under
circumstances that will result in compliance with the applicable
laws and regulations thereof and that will not impose any
obligations on us except as set forth in the underwriting
agreement.
European
Economic Area
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a
Relevant Member State), each Underwriter represents
and agrees that with effect from and including the date on which
the Prospectus Directive is implemented in that Relevant Member
State (the Relevant Implementation Date) it has not
made and will not make an offer of Securities to the public in
that Relevant Member State prior to the publication of a
prospectus in relation to the Securities which has been approved
by the competent authority in that Relevant Member State or,
where appropriate, approved in another Relevant Member State and
notified to the competent authority in that Relevant Member
State, all in accordance with the Prospectus Directive, except
that it may, with effect from and including the Relevant
Implementation Date, make an offer of Securities to the public
in that Relevant Member State at any time,
(a) to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the last
financial year; (2) a total balance sheet of more than
43,000,000 and (3) an annual net turnover of more
than 50,000,000, as shown in its last annual or
consolidated accounts;
(c) to fewer than 100 natural or legal persons (other than
qualified investors as defined in the Prospectus Directive)
subject to obtaining the prior consent of the manager for any
such offer; or
(d) in any other circumstances which do not require the
publication by the Issuer of a prospectus pursuant to
Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an
offer of Shares to the public in relation to any
Shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the Shares to be offered so as to enable an
investor to decide to purchase or subscribe the Shares, as the
same may be varied in that Member State by any measure
implementing the Prospectus Directive in that Member State and
the expression Prospectus Directive means Directive
2003/71/EC and includes any relevant implementing measure in
each Relevant Member State.
Notice to
Investors in the United Kingdom
Each of the underwriters severally represents, warrants and
agrees as follows:
(a) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of section 21 of FSMA) to persons who
have professional experience in matters relating to investments
falling with Article 19(5) of the Financial Services and
Markets Act 2000 (Financial Promotion) Order 2005 or in
circumstances in which section 21 of FSMA does not apply to
the company; and;
(b) it has complied with, and will comply with all
applicable provisions of FSMA with respect to anything done by
it in relation to the common stock in, from or otherwise
involving the United Kingdom.
64
Notice to
Investors in Japan
The underwriters will not offer or sell any of the
Companys common stock directly or indirectly in Japan or
to, or for the benefit of any Japanese person or to others, for
re-offering or re-sale directly or indirectly in Japan or to any
Japanese person, except in each case pursuant to an exemption
from the registration requirements of, and otherwise in
compliance with, the Securities and Exchange Law of Japan and
any other applicable laws and regulations of Japan. For purposes
of this paragraph, Japanese person means any person
resident in Japan, including any corporation or other entity
organized under the laws of Japan.
65
NOTICE TO
CANADIAN RESIDENTS
Resale
Restrictions
The distribution of the common stock in Canada is being made
only on a private placement basis exempt from the requirement
that we and the selling shareholders prepare and file a
prospectus with the securities regulatory authorities in each
province where trades of common stock are made. Any resale of
the common stock in Canada must be made under applicable
securities laws which will vary depending on the relevant
jurisdiction, and which may require resales to be made under
available statutory exemptions or under a discretionary
exemption granted by the applicable Canadian securities
regulatory authority. Purchasers are advised to seek legal
advice prior to any resale of the common stock.
Representations
of Purchasers
By purchasing common stock in Canada and accepting a purchase
confirmation a purchaser is representing to us, the selling
shareholders and the dealer from whom the purchase confirmation
is received that:
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the purchaser is entitled under applicable provincial securities
laws to purchase the common stock without the benefit of a
prospectus qualified under those securities laws,
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where required by law, that the purchaser is purchasing as
principal and not as agent,
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the purchaser has reviewed the text above under Resale
Restrictions, and
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the purchaser acknowledges and consents to the provision of
specified information concerning its purchase of the common
stock to the regulatory authority that by law is entitled to
collect the information.
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Further details concerning the legal authority for this
information is available on request.
Rights of
Action Ontario Purchasers Only
Under Ontario securities legislation, certain purchasers who
purchase a security offered by this prospectus during the period
of distribution will have a statutory right of action for
damages, or while still the owner of the shares, for rescission
against us and the selling shareholders in the event that this
prospectus contains a misrepresentation without regard to
whether the purchaser relied on the misrepresentation. The right
of action for damages is exercisable not later than the earlier
of 180 days from the date the purchaser first had knowledge
of the facts giving rise to the cause of action and three years
from the date on which payment is made for the shares. The right
of action for rescission is exercisable not later than
180 days from the date on which payment is made for the
shares. If a purchaser elects to exercise the right of action
for rescission, the purchaser will have no right of action for
damages against us or the selling shareholders. In no case will
the amount recoverable in any action exceed the price at which
the shares were offered to the purchaser and if the purchaser is
shown to have purchased the securities with knowledge of the
misrepresentation, we and the selling shareholders will have no
liability. In the case of an action for damages, we and the
selling shareholders will not be liable for all or any portion
of the damages that are proven to not represent the depreciation
in value of the shares as a result of the misrepresentation
relied upon. These rights are in addition to, and without
derogation from, any other rights or remedies available at law
to an Ontario purchaser. The foregoing is a summary of the
rights available to an Ontario purchaser. Ontario purchasers
should refer to the complete text of the relevant statutory
provisions.
66
Enforcement
of Legal Rights
All of our directors and officers as well as the experts named
herein and the selling shareholders may be located outside of
Canada and, as a result, it may not be possible for Canadian
purchasers to effect service of process within Canada upon us or
those persons. All or a substantial portion of our assets and
the assets of those persons may be located outside of Canada
and, as a result, it may not be possible to satisfy a judgment
against us or those persons in Canada or to enforce a judgment
obtained in Canadian courts against us or those persons outside
of Canada.
Taxation
and Eligibility for Investment
Canadian purchasers of common stock should consult their own
legal and tax advisors with respect to the tax consequences of
an investment in the common stock in their particular
circumstances and about the eligibility of the common stock for
investment by the purchaser under relevant Canadian legislation.
67
LEGAL
MATTERS
The validity of the shares of common stock offered hereby will
be passed upon for Syntel and for the selling shareholders by
Dykema Gossett PLLC. The underwriters have been represented in
connection with this offering by Cravath, Swaine &
Moore LLP.
EXPERTS
The consolidated financial statements of Syntel and its
subsidiaries as of December 31, 2005 and 2004 and for the
years then ended and managements report on the
effectiveness of internal control over financial reporting,
included in this prospectus and incorporated by reference to
Syntels Annual Report on
Form 10-K
for the year ended December 31, 2005, have been audited by
Crowe Chizek and Company LLC, independent registered public
accounting firm, as stated in their reports appearing herein,
and have been so included in reliance upon the reports of such
firm given upon their authority as experts in accounting and
auditing.
The consolidated statements of income, shareholders equity
and cash-flows of Syntel and its subsidiaries for the year
ending December 31, 2003 appearing in this prospectus and
registration statement have been audited by Ernst &
Young LLP, independent registered public accounting firm, as set
forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority
of such firm as experts in accounting and auditing.
AVAILABLE
INFORMATION AND INCORPORATION OF INFORMATION BY
REFERENCE
Syntel is required to file annual, quarterly and current
reports, proxy statements and other information with the SEC.
You may read and copy any document the Company files at the
SECs Public Reference Room located at Station Place, 100
F. Street, N.E., Washington, D.C. 20549. You may also
receive copies of the documents, upon payment of a duplicating
fee, by writing to the SECs Public Reference Room in
Washington, D.C. and other locations. Please call the SEC at
1-800-SEC-0330
for further information on the Public Reference Room.
Syntels SEC filings are also available to the public from
commercial document retrieval services, at the Companys
website (www.syntelinc.com) and at the SECs website
(www.sec.gov). Information on Syntels website is
not incorporated into this prospectus or the Companys
other SEC filings and is not a part of this prospectus or those
other filings.
You may also request a copy of our filings with the SEC, or any
of the agreements or other documents that are exhibits to those
filings, at no cost, by writing or telephoning us at the
following address or telephone number:
Investor Relations
Syntel, Inc.
525 East Big Beaver Road, Suite 300
Troy, Michigan 48083
(248) 619-2800
The SEC allows Syntel to incorporate by reference
the information it files with the SEC. This permits Syntel to
disclose important information to you by referencing these filed
documents. Any information referenced in this way is considered
part of this prospectus, and any information filed with the SEC
subsequent to this prospectus prior to termination of this
offering will automatically update and supersede this
information. Syntel incorporates by reference in this prospectus
the documents listed below and any future filings made with the
SEC under Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act:
|
|
|
|
|
Annual Report on
Form 10-K
for the year ended December 31, 2005;
|
|
|
|
Quarterly Reports on
Form 10-Q
for the quarters ended March 31, 2006, June 30, 2006
and September 30, 2006; and
|
68
|
|
|
|
|
Current reports on Form 8-K filed on March 17, 2006,
June 1, 2006, June 7, 2006, July 7, 2006,
August 15, 2006, August 21, 2006 and December 11,
2006.
|
Any statement contained in a document incorporated by reference
in this registration statement will be considered to be modified
or superseded for purposes of this prospectus to the extent that
a statement contained in this registration statement or in any
subsequently filed document that is incorporated by reference
modifies or supersedes such statement. Any statement that is
modified or superseded will not, except as so modified or
superseded, constitute a part of this prospectus.
You should rely only on the information incorporated by
reference or provided in this prospectus. Neither the Company
nor the selling shareholders have authorized anyone else to
provide you with different information. The Company has not, and
the selling shareholders have not, authorized anyone to provide
you with information different from that contained in this
prospectus.
69
SYNTEL,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
Page(s)
|
|
Annual Financial
Statements
|
|
|
|
|
Reports of Independent
Registered Public Accounting Firm
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
|
|
Consolidated Financial
Statements
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
F-9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
|
|
|
|
|
F-34
|
|
|
|
|
F-35
|
|
|
|
|
F-36
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Syntel, Inc.
Troy, Michigan
We have audited the accompanying consolidated balance sheets of
Syntel, Inc. and its subsidiaries as of December 31, 2005
and 2004 and the related consolidated statements of income,
shareholders equity and cash flows for each of the two
years in the period ended December 31, 2005. These
financial statements are the responsibility of the
Companys 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 consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Syntel, Inc. and its subsidiaries as of
December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the two years in the
period ended December 31, 2005 in conformity with United
States generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Syntel, Inc.s internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 8, 2006
expressed an unqualified opinion thereon.
/s/ Crowe Chizek and Company LLC
Fort Wayne, Indiana
March 8, 2006
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Syntel, Inc.
Troy, Michigan
We have audited managements assessment, included within
this Form S-3 Registration Statement as Managements
Report on Internal Control Over Financial Reporting, that
Syntel, Inc. maintained effective internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Syntel, Incs. management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of the companys internal
control over financial reporting based on our audit.
We conducted our audit 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 effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Syntel, Inc.
maintained effective internal control over financial reporting
as of December 31, 2005, is fairly stated, in all material
respects, based on criteria established in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
Also in our opinion, Syntel, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2005, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Syntel, Inc. as of
December 31, 2005 and 2004, and the related consolidated
statements of income, shareholders equity, and cash flows
for each of the two years in the period ended December 31,
2005, and our report dated March 8, 2006 expressed an
unqualified opinion on those consolidated financial statements.
/s/ Crowe Chizek and Company LLC
Fort Wayne, Indiana
March 8, 2006
F-3
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Syntel, Inc.
We have audited the accompanying consolidated statements of
income, shareholders equity and cash flows of Syntel, Inc.
and Subsidiaries (the Company) for the year ended
December 31, 2003. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, Syntel,Inc.s
consolidated results of operations and cash flows for the year
ended December 31, 2003 in conformity with
U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Detroit, Michigan
February 20, 2004
F-4
SYNTEL,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
99,390
|
|
|
$
|
109,142
|
|
Short term investments
|
|
|
21,083
|
|
|
|
58,899
|
|
Accounts receivable, net of
allowance for doubtful accounts of $2,575 and $1,213 at
December 31, 2005 and December 31, 2004, respectively
|
|
|
27,907
|
|
|
|
28,790
|
|
Revenue earned in excess of
billings
|
|
|
8,366
|
|
|
|
4,390
|
|
Deferred income taxes and other
current assets
|
|
|
10,003
|
|
|
|
5,891
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
166,749
|
|
|
|
207,112
|
|
Property and equipment
|
|
|
54,690
|
|
|
|
37,754
|
|
Less accumulated depreciation and
amortization
|
|
|
25,504
|
|
|
|
21,290
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
29,186
|
|
|
|
16,464
|
|
Goodwill
|
|
|
906
|
|
|
|
906
|
|
Deferred income taxes and other
non current assets
|
|
|
1,320
|
|
|
|
2,486
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
198,161
|
|
|
$
|
226,968
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,890
|
|
|
$
|
2,394
|
|
Accrued payroll and related costs
|
|
|
15,906
|
|
|
|
13,963
|
|
Income taxes payable
|
|
|
9,809
|
|
|
|
6,290
|
|
Accrued liabilities
|
|
|
7,446
|
|
|
|
6,015
|
|
Deferred revenue
|
|
|
3,356
|
|
|
|
5,231
|
|
Dividends payable
|
|
|
2,476
|
|
|
|
2,433
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
45,883
|
|
|
|
36,326
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Common Stock, no par value per
share, 100,000,000 shares authorized; 40,679,481 and
40,256,825 shares issued and outstanding at
December 31, 2005 and December 31, 2004, respectively
|
|
|
1
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
60,460
|
|
|
|
57,185
|
|
Restricted stock 268,630 and
296,900 shares issued and outstanding at December 31,
2005 and December 31, 2004, respectively
|
|
|
1,942
|
|
|
|
828
|
|
Accumulated other comprehensive
income
|
|
|
853
|
|
|
|
3,466
|
|
Retained earnings
|
|
|
89,022
|
|
|
|
129,162
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
152,278
|
|
|
|
190,642
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders Equity
|
|
$
|
198,161
|
|
|
$
|
226,968
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
SYNTEL,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenues
|
|
$
|
226,189
|
|
|
$
|
186,573
|
|
|
$
|
179,507
|
|
Cost of revenues
|
|
|
135,043
|
|
|
|
107,120
|
|
|
|
101,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
91,146
|
|
|
|
79,453
|
|
|
|
77,808
|
|
Selling, general and
administrative expenses
|
|
|
44,917
|
|
|
|
36,999
|
|
|
|
28,278
|
|
Reduction in reserve requirements
applicable to Metier transaction
|
|
|
|
|
|
|
|
|
|
|
(882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
46,229
|
|
|
|
42,454
|
|
|
|
50,412
|
|
Other income, principally interest
|
|
|
4,592
|
|
|
|
3,773
|
|
|
|
3,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
50,821
|
|
|
|
46,227
|
|
|
|
53,580
|
|
Provision for income taxes
|
|
|
20,500
|
|
|
|
5,253
|
|
|
|
13,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before loss from equity
investments
|
|
|
30,321
|
|
|
|
40,974
|
|
|
|
40,338
|
|
Loss from equity investment
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
30,321
|
|
|
$
|
40,974
|
|
|
$
|
40,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Per Share
|
|
$
|
1.74
|
|
|
$
|
0.24
|
|
|
$
|
1.37
|
|
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.75
|
|
|
$
|
1.02
|
|
|
$
|
1.02
|
|
Diluted
|
|
$
|
0.75
|
|
|
$
|
1.01
|
|
|
$
|
0.99
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
40,528
|
|
|
|
40,216
|
|
|
|
39,609
|
|
Diluted
|
|
|
40,651
|
|
|
|
40,469
|
|
|
|
40,797
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
SYNTEL,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Restricted Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Unrealized
|
|
|
Currency
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Gain
|
|
|
Translation
|
|
|
Equity
|
|
|
|
(In thousands, except per share data)
|
|
|
Balance, January 1,
2003
|
|
|
39,068
|
|
|
$
|
1
|
|
|
|
|
|
|
$
|
|
|
|
$
|
43,184
|
|
|
$
|
112,175
|
|
|
$
|
677
|
|
|
$
|
(1,193
|
)
|
|
$
|
154,844
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,304
|
|
|
|
|
|
|
|
|
|
|
|
40,304
|
|
Unrealized gain on investments, net
of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136
|
|
|
|
|
|
|
|
136
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,899
|
|
|
|
1,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,304
|
|
|
|
136
|
|
|
|
1,899
|
|
|
|
42,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock repurchases
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(160
|
)
|
Employee stock purchase plan
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
696
|
|
Exercised stock options
|
|
|
687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,842
|
|
Tax benefit on stock options
exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,699
|
|
Warrants issued as sales incentive
converted into common stock
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,777
|
|
Dividends, $1.37 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54,661
|
)
|
|
|
|
|
|
|
|
|
|
|
(54,661
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2003
|
|
|
40,016
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
54,038
|
|
|
|
97,848
|
|
|
|
813
|
|
|
|
706
|
|
|
|
153,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,974
|
|
|
|
|
|
|
|
|
|
|
|
40,974
|
|
Unrealized (loss) on investments,
net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(267
|
)
|
|
|
|
|
|
|
(267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,214
|
|
|
|
2,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,974
|
|
|
|
(267
|
)
|
|
|
2,214
|
|
|
|
42,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock repurchases
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,479
|
)
|
Employee stock purchase plan
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,021
|
|
Exercised stock options
|
|
|
265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,118
|
|
Tax benefit on stock options
exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,410
|
|
Restricted Stock
|
|
|
|
|
|
|
|
|
|
|
319
|
|
|
|
5,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,838
|
|
Forfeiture of restricted stock
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
(410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(410
|
)
|
Unearned compensation related to
restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,600
|
)
|
Warrants issued as sales incentive
converted into common stock
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
Dividends, $0.24 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,660
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2004
|
|
|
40,257
|
|
|
|
1
|
|
|
|
297
|
|
|
|
828
|
|
|
|
57,185
|
|
|
|
129,162
|
|
|
|
546
|
|
|
|
2,920
|
|
|
|
190,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,321
|
|
|
|
|
|
|
|
|
|
|
|
30,321
|
|
Unrealized gain on investments, net
of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70
|
)
|
|
|
|
|
|
|
(70
|
)
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,543
|
)
|
|
|
(2,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,321
|
|
|
|
(70
|
)
|
|
|
(2,543
|
)
|
|
|
27,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock repurchases
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(676
|
)
|
Employee stock purchase plan
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
945
|
|
Exercised stock options
|
|
|
362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,472
|
|
Tax benefit on stock options
exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
534
|
|
Restricted Stock
|
|
|
32
|
|
|
|
|
|
|
|
55
|
|
|
|
891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
891
|
|
Forfeiture of restricted stock
|
|
|
|
|
|
|
|
|
|
|
(84
|
)
|
|
|
(1,208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,208
|
)
|
Unearned compensation related to
restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,431
|
|
Dividends, $1.74 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70,461
|
)
|
|
|
|
|
|
|
|
|
|
|
(70,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2005
|
|
|
40,679
|
|
|
$
|
1
|
|
|
|
268
|
|
|
$
|
1,942
|
|
|
$
|
60,460
|
|
|
$
|
89,022
|
|
|
$
|
476
|
|
|
$
|
377
|
|
|
$
|
152,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
SYNTEL,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Cash Flows From Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
30,321
|
|
|
$
|
40,974
|
|
|
$
|
40,304
|
|
Adjustments to reconcile net income
to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,852
|
|
|
|
3,024
|
|
|
|
2,522
|
|
Bad debt provisions/(credits)
|
|
|
1,564
|
|
|
|
400
|
|
|
|
(493
|
)
|
Reduction in reserve requirements
applicable to the Metier transaction
|
|
|
|
|
|
|
|
|
|
|
(882
|
)
|
Realized gains on sales of short
term investments
|
|
|
(1,383
|
)
|
|
|
(2,049
|
)
|
|
|
(1,015
|
)
|
Deferred income taxes
|
|
|
890
|
|
|
|
1,101
|
|
|
|
3,940
|
|
Stock warrants sales incentive
|
|
|
|
|
|
|
77
|
|
|
|
1,777
|
|
Compensation expense related to
restricted stock
|
|
|
1,596
|
|
|
|
884
|
|
|
|
|
|
Loss on equity investments
|
|
|
|
|
|
|
|
|
|
|
34
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and revenue
earned in excess of billing, net
|
|
|
(6,446
|
)
|
|
|
(469
|
)
|
|
|
(5,836
|
)
|
Other current assets
|
|
|
(4,191
|
)
|
|
|
(300
|
)
|
|
|
232
|
|
Accrued payroll and other
liabilities
|
|
|
11,155
|
|
|
|
4,046
|
|
|
|
4,411
|
|
Deferred revenues
|
|
|
(1,921
|
)
|
|
|
783
|
|
|
|
(851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
36,437
|
|
|
|
48,471
|
|
|
|
44,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment expenditures
|
|
|
(16,392
|
)
|
|
|
(12,017
|
)
|
|
|
(4,226
|
)
|
Equity and other investments
|
|
|
|
|
|
|
|
|
|
|
223
|
|
Purchase of short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in mutual funds
|
|
|
(23,484
|
)
|
|
|
(72,825
|
)
|
|
|
(52,313
|
)
|
Investments in term deposits with
banks
|
|
|
(4,434
|
)
|
|
|
(21,516
|
)
|
|
|
|
|
Proceeds from sales of short term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of mutual funds
|
|
|
43,255
|
|
|
|
65,866
|
|
|
|
33,924
|
|
Maturities of term deposits with
banks
|
|
|
22,682
|
|
|
|
7,394
|
|
|
|
2,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in)
investing activities
|
|
|
21,627
|
|
|
|
(33,098
|
)
|
|
|
(20,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of
common stock
|
|
|
3,417
|
|
|
|
3,140
|
|
|
|
6,538
|
|
Common stock repurchases
|
|
|
(676
|
)
|
|
|
(1,479
|
)
|
|
|
(160
|
)
|
Dividends paid
|
|
|
(70,901
|
)
|
|
|
(9,685
|
)
|
|
|
(52,260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(68,160
|
)
|
|
|
(8,024
|
)
|
|
|
(45,882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange
rate changes on cash
|
|
|
344
|
|
|
|
(1,061
|
)
|
|
|
(170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
(9,752
|
)
|
|
|
6,288
|
|
|
|
(22,140
|
)
|
Cash and cash equivalents,
beginning of year
|
|
|
109,142
|
|
|
|
102,854
|
|
|
|
124,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
year
|
|
$
|
99,390
|
|
|
$
|
109,142
|
|
|
$
|
102,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared but unpaid
|
|
$
|
2,476
|
|
|
$
|
2,433
|
|
|
$
|
2,401
|
|
Stock warrants
|
|
|
|
|
|
|
77
|
|
|
|
|
|
Cash paid for income taxes
|
|
|
19,134
|
|
|
|
5,543
|
|
|
|
5,582
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-8
SYNTEL,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Syntel, Inc. and Subsidiaries (individually and collectively
Syntel or the Company) provide
information technology services such as programming, systems
integration, outsourcing and overall project management. The
Company provides services to customers primarily in the
financial, manufacturing, healthcare, transportation, retail,
and information/communication industries, as well as to
government entities. The Companys reportable operating
segments consist of Applications Outsourcing,
e-Business,
TeamSourcing and Business Process Outsourcing (BPO).
Through Applications Outsourcing, the Company provides
higher-value outsourcing services for ongoing management,
development and maintenance of customers business
applications. In most Application Outsourcing engagements, the
Company assumes responsibility for the management of customer
development and support functions. These services may be
provided on either a
time-and-material
basis or on a fixed price basis.
Through
e-Business,
the Company provides development and implementation services for
a number of emerging and rapidly growing high technology
applications, including Web development, Data Warehousing,
e-commerce,
CRM, SAP and Oracle, as well as partnership arrangements with
leading software firms, to provide installation services to
their respective customers. These services may be provided on
either a
time-and-material
basis or on a fixed price basis, in which the Company assumes
responsibility for management of the engagement.
Through TeamSourcing, the Company provides professional
information technology consulting services directly to customers
on a staff augmentation basis. TeamSourcing services include
systems specification, design, development, implementation and
maintenance of complex information technology applications
involving diverse computer hardware, software, data and
networking technologies and practices. TeamSourcing consultants,
whether working individually or as a team of professionals,
generally receive direct supervision from the customers
management staff. TeamSourcing services are generally invoiced
on a time and material basis.
Through BPO, Syntel provides outsourced solutions for a
clients business processes, providing them with the
advantage of a low cost position and process enhancement through
optimal use of technology. Syntel uses a proprietary tool called
Identeontm
to assist with strategic assessments of business processes and
identifying the right ones for outsourcing.
|
|
2.
|
Summary
of Certain Significant Accounting Policies
|
Principles
of Consolidation
The consolidated financial statements include the accounts of
Syntel, Inc. (Syntel), a Michigan corporation, its
wholly owned subsidiaries, and a joint venture. All significant
inter-company balances and transactions have been eliminated.
The wholly owned subsidiaries of Syntel, Inc. are:
|
|
|
|
|
Syntel Limited (Syntel India), an Indian limited
liability company formerly known as Syntel (India) Ltd.;
|
|
|
|
Syntel Singapore PTE., Ltd. (Syntel Singapore), a
Singapore limited liability company;
|
|
|
|
Syntel Europe, Ltd. (Syntel U.K.), a United Kingdom
limited liability company;
|
|
|
|
Syntel Canada Inc. (Syntel Canada), an Ontario
limited liability company;
|
|
|
|
Syntel Deutschland GmbH (Syntel Germany), a German
limited liability company;
|
F-9
|
|
|
SYNTEL, INC. AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Syntel Hong Kong Ltd. (Syntel Hong Kong), a Hong
Kong limited liability company;
|
|
|
|
Syntel (Australia) Pty. Limited (Syntel Australia),
an Australian limited liability company;
|
|
|
|
Syntel Delaware LLC (Syntel Delaware), a Delaware
limited liability company;
|
|
|
|
SkillBay LLC (SkillBay), a Michigan limited
liability company;
|
|
|
|
Syntel (Mauritius) Limited (Syntel Mauritius), a
Mauritius limited liability company;
|
|
|
|
Syntel Consulting Inc (Syntel Consulting), a
Michigan limited liability company;
|
|
|
|
Syntel Sterling BestShores (Mauritius) Limited
(SSBML), a Mauritius limited liability
company; and
|
|
|
|
Syntel Worldwide (Mauritius) Limited (Syntel
Worldwide), a Mauritius limited liability company.
|
The formerly wholly owned subsidiary of Syntel Delaware LLC (as
of December 31, 2004) that became a partially owned
joint venture of Syntel Delaware LLC on February 1, 2005 is:
|
|
|
|
|
Syntel Solutions (Mauritius) Ltd. (Syntel
Solutions), a Mauritius limited liability company.
|
The wholly owned subsidiary of Syntel Solutions is:
|
|
|
|
|
Syntel Sourcing Pvt. Ltd. (Syntel Sourcing), an
Indian limited liability company.
|
The wholly owned subsidiaries of Syntel Mauritius are:
|
|
|
|
|
Syntel International Pvt. Ltd. (Syntel
International), an Indian limited liability
company; and
|
|
|
|
Syntel Global Pvt. Ltd. (Syntel Global), an Indian
limited liability company.
|
The wholly owned subsidiary of Syntel Sterling BestShores
(Mauritius) Limited is:
|
|
|
|
|
Syntel Sterling BestShores Solutions Private Limited
(SSBSPL), an Indian limited liability company.
|
Revenue
Recognition
The Company recognizes revenues from time and material contracts
as the services are performed.
Revenue from fixed-price applications 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.
Revenue on fixed-price, applications development and integration
projects in the Companys application outsourcing and
e-Business
segments are 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 to 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 changes become 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 consolidated
balance sheets.
F-10
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenues are reported net of sales incentives.
Reimbursements of
out-of-pocket
expenses are included in revenue in accordance with Emerging
Issues Task Force Consensus (EITF)
01-14,
Income Statement Characterization of Reimbursement
Received for Out of Pocket Expenses Incurred.
Cash
and Cash Equivalents
For the purpose of reporting Cash and Cash Equivalents, the
Company considers all liquid investments purchased with an
original maturity of three months or less to be cash
equivalents. At December 31, 2005 and 2004, approximately
$60.8 million and $29.1 million respectively,
represent corporate bonds and treasury notes held by JP Morgan
Chase Bank NA. The remaining amounts of cash and cash
equivalents are invested in money market accounts with various
banking and financial institutions.
Fair
Value of Financial Instruments
The fair values of the Companys current assets and current
liabilities approximate their carrying values because of their
short maturities. Such financial instruments are classified as
current and are expected to be liquidated within the next
twelve months.
Concentration
of Credit Risks
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of investments
and accounts receivable. Cash on deposit is held with financial
institutions with high credit standings. The Company has cash
deposited with financial institutions that, at times, may exceed
the federally insured limits.
Our customer base consists primarily of Global
2000 companies and accordingly our accounts receivable is
not exposed to significant credit risk. The Company establishes
an allowance for doubtful accounts as a provision for known and
inherent collection risks related to its accounts receivable.
The estimation of the provision is primarily based on our
assessment of the probable collection from specific customer
accounts, the aging of the accounts receivable, analysis of
credit data, bad debt write-offs, and other known factors.
Short
Term Investments
The Companys short-term investments consist of short-term
mutual funds, which have been classified as
available-for-sale
and are carried at estimated fair value. Fair value is
determined based on quoted market prices. Unrealized gains and
losses, net of taxes, on
available-for-sale
securities are reported as a separate component of accumulated
other comprehensive income (loss) in shareholders equity.
Net realized gains or losses resulting from the sale of these
investments, and losses resulting from decline in fair values of
these investments that are other than temporary declines, are
included in other income. The cost of securities sold is
determined on the weighted average method.
Investments include Term deposits with original maturity
exceeding three months and whose maturity date is within one
year from the date of the balance sheet.
Long-Lived
Assets (Other Than Goodwill)
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company
reviews its long-lived assets (other than goodwill) for
impairment whenever events or changes in circumstances indicate
that the carrying amount of
F-11
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
an asset may not be recoverable. When factors indicate that such
costs should be evaluated for possible impairment, we assess the
recoverability of the long-lived assets (other than goodwill) by
comparing the estimated undiscounted cash flows associated with
the related asset or group of assets against their respective
carrying amounts. The amount of an impairment charge if any, is
calculated based on the excess of the carrying amount over the
fair value of those assets. Management believes no assets were
impaired at December 31, 2005.
Other
Income
Other income includes interest and dividend income, gains and
losses from sale of securities and other investments.
Property
and Equipment
Property and equipment are stated at cost. Maintenance and
repairs are charged to expense when incurred. Depreciation is
computed primarily using the straight-line method over the
estimated useful lives as follows:
|
|
|
|
|
|
|
Years
|
|
|
Computer equipment and software
|
|
|
3
|
|
Furniture, fixtures and other
equipment
|
|
|
7
|
|
Vehicles
|
|
|
3
|
|
Leasehold improvements
|
|
|
Life of lease
|
|
Leasehold land
|
|
|
Life of lease
|
|
Depreciation expense for the years ended December 31, 2005,
2004 and 2003 was $4.9 million, $3.1 million and
$2.5 million, respectively.
Goodwill
Effective January 1, 2002 the Company adopted
SFAS No. 142 Goodwill and Other Intangible
Assets. In accordance with SFAS No. 142,
goodwill is no longer amortized but is evaluated for impairment
at least annually.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Such estimates
include, but are not limited to allowance for doubtful accounts,
impairment of long-lived assets and goodwill, contingencies and
litigation, the recognition of revenues and profits based on the
proportional performance method and potential tax liabilities.
Actual results could differ from those estimates and assumptions
used in the preparation of the accompanying financial statements.
During 2005, the Company has reversed $2.6 million of the
accrual for income taxes related to the year 2001 and credited
it to the current years income tax provision. In
determining the tax provisions, the Company also provides for
tax contingencies based on the Companys assessment of
future regulatory reviews of filed tax returns. Such reserves,
which are recorded in income taxes payable, are based on
managements estimates and accordingly are subject to
revision based on additional information. The
F-12
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
portion of the reserve that is no longer required for any
particular tax year, is credited to the current years
income tax provision.
In addition, during 2005 the Company has reversed
$0.9 million related to the payroll tax provision and
provided for a valuation allowance of $1.6 million
attributable to certain deferred tax assets.
During 2005, the Company provided $1.6 million towards
allowance for doubtful accounts. At December 31, 2005 the
allowance for doubtful accounts was $2.6 million. These
estimates are based on managements assessment of the
probable collection from specific customer accounts, the aging
of accounts receivable, analysis of credit data, bad debt
write-offs, and other known factors.
The revision in estimates during 2005 had an after-tax impact of
increasing the diluted earnings per share for the year ended
December 31, 2005 by $0.01 per share.
During 2004, the Company reversed $1.7 million of the
accrual for income taxes related to the year 2000 and credited
it to the current years income tax provision. In
determining the tax provisions, the Company also provides for
tax contingencies based on the Companys assessment of
future regulatory reviews of filed tax returns. Such reserves,
which are recorded in income taxes payable, are based on
managements estimates and accordingly are subject to
revision based on additional information. The portion of the
reserve no longer required for any particular tax year, is
credited to the current years income tax provision.
In addition, during 2004 Syntel India accounted for a credit of
approximately $0.5 million with respect of US branch profit
taxes related to prior periods up to June 30, 2004.
The revision in estimates during 2004 above had an after tax
impact of increasing the diluted earnings per share for the year
ended December 31, 2004 by $0.05 per share.
During 2003, in connection with settlements and other changes in
estimates for underlying litigation and related legal costs, the
Company reduced its accrued liabilities and Metier related
liabilities by $2.9 million, net of amounts paid. The
Company also reduced its allowance for doubtful accounts by
$0.5 million primarily on account of the successful
collection of overdue debts. Also, in 2003 management revised
its estimate of 2002 bonus compensation and reversed
$0.8 million of previously recorded accruals. The revision
in estimates during 2003 had an after tax impact of increasing
the diluted earnings per share for the year ended
December 31, 2003 by $0.06 per share.
Foreign
Currency Translation
The financial statements of the Companys foreign
subsidiaries use the currency of the primary economic
environment in which they operate as its functional currency.
Revenues, costs and expenses of the foreign subsidiaries are
translated to U.S. dollars at average period exchange
rates. Assets and liabilities are translated to
U.S. dollars at period-end exchange rates with the effects
of these cumulative translation adjustments being reported as a
separate component of accumulated other comprehensive income in
shareholders equity. Transaction gains and losses, are
reflected within Selling, general and administrative
expenses in the consolidated statements of income, for the
years presented and were not material.
Earnings
Per Share
Basic and diluted earnings per share are computed in accordance
with SFAS No. 128 Earnings Per Share.
Basic earnings per share are calculated by dividing net income
by the weighted average number of shares outstanding during the
applicable period.
F-13
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has stock options, which are considered to be
potentially dilutive to the basic earnings per share. Diluted
earnings per share is calculated using the treasury stock method
for the dilutive effect of shares which have been granted
pursuant to the stock option plan, by dividing the net income by
the weighted average number of shares outstanding during the
period adjusted for these potentially dilutive options, except
when the results would be anti-dilutive. The potential tax
benefits on exercise of stock options is considered as
additional proceeds while computing dilutive earnings per share
using the treasury stock method.
Employee
Benefits
The Company maintains a 401(k) retirement plan that covers all
regular employees on Syntels U.S. payroll. Eligible
employees may contribute up to 15% of their compensation,
subject to certain limitations, to the retirement plans. The
Company may make contributions to the plans at the discretion of
our Board of Directors; however, through December 31, 2005,
no contributions have been made.
Eligible employees of the Company receive benefits under the
Provident Fund (PF), which is a defined contribution
plan. Both the employee and the Company make monthly
contributions equal to a specified percentage of the covered
employees salary. The Company has no further obligations
under the plan beyond its monthly contributions. These
contributions are made to the fund administered and managed by
the Government of India. The Companys monthly
contributions are charged to income in the period they are
incurred.
In accordance with the Payment of Gratuity Act, 1972 of India,
the Indian subsidiary provides for gratuity, a defined
retirement benefit plan (the Gratuity Plan) covering
eligible employees. The Gratuity Plan provides a lump sum
payment to vested employees at retirement, death, incapacitation
or termination of employment, based on the respective
employees salary and the tenure of employment. Liabilities
with regard to the Gratuity Plan are determined by actuarial
valuation and are charged to income in the period determined.
The Gratuity Plan is a non-funded plan. The amounts accrued
under this plan are $1.1 million and $0.7 million as
of December 31, 2005 and 2004, respectively, and are
included within Accrued payroll and related costs.
Vacation
Pay
The accrual for unutilized leave balance is determined for the
entire available leave balance standing to the credit of the
employees at period-end. The leave balance eligible for
carry-forward is valued at gross compensation rates and eligible
for compulsory encashment at basic compensation rates.
Stock
Based Compensation
As permitted by SFAS No. 123, Accounting for
Stock-Based Compensation, the Company has elected to
measure stock based compensation cost using the intrinsic value
method, in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees and has
adopted the disclosure requirements of SFAS No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure, an amendment of FASB Statement
No. 123. Had the fair value of each stock option
granted been
F-14
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
determined consistent with the methodology of
SFAS No. 123, the pro forma impact on the
Companys net income and earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data)
|
|
|
Net income as reported
|
|
$
|
30,321
|
|
|
$
|
40,974
|
|
|
$
|
40,304
|
|
Add, stock-based compensation
expenses recognized in statement of income, net of tax
|
|
|
1,384
|
|
|
|
713
|
|
|
|
|
|
Deduct, stock-based compensation
expense determined under the fair value method, net of tax
|
|
|
(1,704
|
)
|
|
|
(1,642
|
)
|
|
|
(1,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
30,001
|
|
|
$
|
40,045
|
|
|
$
|
39,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share as reported
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.75
|
|
|
$
|
1.02
|
|
|
$
|
1.02
|
|
Diluted
|
|
|
0.75
|
|
|
|
1.01
|
|
|
|
0.99
|
|
Earnings per share, pro forma
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.74
|
|
|
$
|
1.00
|
|
|
$
|
0.99
|
|
Diluted
|
|
|
0.74
|
|
|
|
0.99
|
|
|
|
0.96
|
|
Weighted average common shares
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
40,528
|
|
|
|
40,216
|
|
|
|
39,609
|
|
Diluted
|
|
|
40,651
|
|
|
|
40,469
|
|
|
|
40,797
|
|
Estimated fair value of options
granted
|
|
$
|
2.36
|
|
|
$
|
5.78
|
|
|
$
|
5.61
|
|
Under SFAS No. 123, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions for grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Risk free interest rate
|
|
|
4.60
|
%
|
|
|
3.72
|
%
|
|
|
3.35
|
%
|
Expected life
|
|
|
5 years
|
|
|
|
5 years
|
|
|
|
5 years
|
|
Expected volatility
|
|
|
68.08
|
%
|
|
|
71.94
|
%
|
|
|
75.80
|
%
|
Expected dividend yield
|
|
|
8.35
|
%
|
|
|
1.37
|
%
|
|
|
0.97
|
%
|
Income
Taxes
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which the temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax laws
is recognized in income in the period that includes the
enactment date.
Provision
for Unutilized Leave
During the year ended December 31, 2005, Syntel Limited has
changed its leave policy, resulting in a reduction of the
maximum permissible accumulation of unutilized leave from
150 days to 60 days. The balance exceeding the maximum
permissible accumulation is compulsorily encashed at basic
salary. Accordingly, an amount of $0.51 million was paid at
basic salary and $1.14 million representing the difference
between the basic salary and gross compensation rates was
reversed.
F-15
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The gross charge for unutilized earned leave was
$0.23 million, $1.4 million and $0.9 million for
the years ended December 31, 2005, 2004 and 2003
respectively.
The amounts accrued for unutilized earned leave are
$3.7 million and $4.4 million as of December 31,
2005 and December 31, 2004, respectively, and are included
within Accrued payroll and related costs.
Recently
Issued Accounting Standards
During December 2004, the Financial Accounting Standards Board
issued SFAS No. 123R, Share-Based Payment
(SFAS 123R), which requires companies to measure and
recognize compensation expense for all stock-based payments at
fair value. Stock-based payments include stock option grants and
other transactions under Company stock plans. The Company grants
options to purchase common stock to some of its employees and
directors under various plans at prices equal to the market
value of the stock on the dates the options were granted. The
Company is required to adopt SFAS 123R by the first quarter
of fiscal 2006. The Company will use the modified prospective
application transition method and estimates that the adoption of
SFAS No. 123R for share-based awards issued to
employees will not have a significant impact on its statement of
income or financial position for 2006. This estimate is based
upon various assumptions, including an estimate of the number of
share-based awards that will be granted, cancelled or expired
during 2006, as well as the Companys future stock prices.
These assumptions are highly subjective and changes in these
assumptions could significantly affect the Companys
estimate.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections
(SFAS No. 154), which replaces APB Opinion
No. 120, Accounting Changes, and
SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements. SFAS No. 154
changes the requirements for accounting and reporting a change
in accounting principle, and applies to all voluntary changes in
accounting principles, as well as changes required by an
accounting pronouncement in the unusual instance it does not
include specific transition provisions. Specifically,
SFAS No. 154 requires retrospective application to
prior periods financial statements, unless it is
impracticable to determine the period-specific effects or the
cumulative effect of the change. When it is impracticable to
determine the effects of the change, the new accounting
principle must be applied to the balances of assets and
liabilities as of the beginning of the earliest period for which
retrospective application is practicable and a corresponding
adjustment must be made to the opening balance of retained
earnings for that period rather than being reported in an income
statement. When it is impracticable to determine the cumulative
effect of the change, the new principle must be applied as if it
were adopted prospectively from the earliest date practicable.
SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005. SFAS No. 154 does not change
the transition provisions of any existing pronouncements. The
Company has evaluated the impact of SFAS No. 154 and
does not expect the adoption of this statement to have a
significant impact on its consolidated statement of income or
financial condition. The Company will apply
SFAS No. 154 in future periods, when applicable.
Metier,
Inc.
During 1999, the Company acquired substantially all the business
and assets of Metier, Inc. The consideration for the Metier
acquisition in 1999 included a $1.6 million dollar payment
to the Metier shareholders, which was to be made in April 2000,
and 300,000 shares of Syntel Common Stock, which were to be
issued in September 2000. During 2000, the Company entered into
litigation with the former shareholders of Metier and
consequently, the $1.6 million dollar payment was not made
and the 300,000 shares were not issued. In April 2002, the
Company reached a resolution with the Metier shareholders
wherein the $1.6 million dollar payment was not made, the
300,000 shares were not issued and
F-16
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Company paid $2.3 million in settlement and legal
costs. Additionally, during the last quarter of 2002, the
Company also settled certain of the Metier related and other
litigation and in connection with these settlements, the Company
reversed an accrual of approximately $5.7 million of the
accrued Metier liability during 2002 having an earnings per
share impact of $0.08 per share. The final settlements
relating to the Metier liability were made during the third
quarter of 2003 and accordingly, the remaining accrual of
approximately $0.9 million was also reversed.
|
|
4.
|
Short
Term Investments
|
Short term investments included the following at
December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Investments in mutual funds at
carrying value
|
|
$
|
16,814
|
|
|
$
|
36,106
|
|
Term deposits with banks
|
|
|
4,269
|
|
|
|
22,793
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,083
|
|
|
$
|
58,899
|
|
|
|
|
|
|
|
|
|
|
Information related to investments in mutual funds (primarily
Indian Mutual Funds) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Cost
|
|
$
|
16,275
|
|
|
$
|
35,456
|
|
|
$
|
25,220
|
|
Unrealized gain, net
|
|
|
539
|
|
|
|
650
|
|
|
|
917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value
|
|
$
|
16,814
|
|
|
$
|
36,106
|
|
|
$
|
26,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains
|
|
$
|
1,383
|
|
|
$
|
2,049
|
|
|
$
|
1,015
|
|
Gross realized losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds on sale of short term
investments
|
|
|
43,255
|
|
|
|
65,866
|
|
|
|
33,924
|
|
Purchase of short term investments
|
|
|
23,484
|
|
|
|
72,825
|
|
|
|
52,313
|
|
Investment in term deposits with banks included the following at
December 31, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Cost
|
|
$
|
4,269
|
|
|
$
|
22,793
|
|
|
$
|
7,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of term deposits
|
|
$
|
22,682
|
|
|
$
|
7,394
|
|
|
$
|
2,162
|
|
Purchase of term deposits
|
|
|
4,434
|
|
|
|
21,516
|
|
|
|
|
|
|
|
5.
|
Stock
Warrants Sales Incentive
|
During 2002, the Company granted to a significant customer
immediately exercisable warrants entitling the customer to
purchase 322,210 shares of the Companys stock at an
exercise price of $7.25 per share. The stated exercise
price was based upon the customer achieving a specified minimum
level of purchases of services (the Performance
Milestone) from the Company over a specified performance
period that ended on October 16, 2003. The customer
exercised the warrant in February 2003 and received
209,739 shares in a cashless exercise.
The customer earned the sales incentive as they met the
performance milestone over the specified performance period that
ended on October 16, 2003.
F-17
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In accordance with EITF
01-09,
Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the Vendors Products, the
Company has recorded the value of sales incentive as a reduction
of revenues, to the extent of revenues earned up to
October 16, 2003.
The measurement of the sales incentive, which previously was
based on the market value of the Companys stock at each
period end, was finalized based on sale of the shares in quarter
ended September 30, 2003 by the customer at an average sale
price of $22.31. Accordingly, the final value of the sales
incentive was $4.7 million. Cumulatively, the Company had
recorded $2.9 million of the sales incentive as a reduction
of revenue up to December 31, 2002. The remaining sales
incentive of $1.8 million was recorded during the year 2003.
The Company has also granted the same customer certain
additional performance warrants at significantly higher
performance milestones. The Company has estimated that such
higher performance milestones will not be met. Accordingly, the
Company has not accounted for these performance warrants. If and
when the Company estimates that such higher performance
milestones will be met, the sales incentive associated with the
performance warrants will be recorded as a reduction of revenue.
|
|
6.
|
Revenue
Earned in Excess of Billings and Deferred Revenue
|
Revenue earned in excess of billings consists of:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Unbilled revenue for time and
material projects
|
|
$
|
3,027
|
|
|
$
|
2,144
|
|
Unbilled revenue for fixed price
projects
|
|
|
5,339
|
|
|
|
2,246
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,366
|
|
|
$
|
4,390
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue consists of:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Deferred revenue on uncompleted
fixed price development contracts
|
|
$
|
3,087
|
|
|
$
|
4,123
|
|
Advance billing on application
management and support contracts
|
|
|
195
|
|
|
|
1,025
|
|
Other deferred revenue
|
|
|
74
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,356
|
|
|
$
|
5,231
|
|
|
|
|
|
|
|
|
|
|
F-18
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
Property
and Equipment
|
Property and equipment at December 31, 2005 and 2004 is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Computer equipment and software
|
|
$
|
21,387
|
|
|
$
|
17,651
|
|
Furniture, fixtures &
other equipment
|
|
|
11,947
|
|
|
|
9,966
|
|
Vehicles
|
|
|
1,050
|
|
|
|
1,032
|
|
Leasehold improvements
|
|
|
1,765
|
|
|
|
1,499
|
|
Leasehold land
|
|
|
1,828
|
|
|
|
1,856
|
|
Capital advances/work in progress
|
|
|
16,713
|
|
|
|
5,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,690
|
|
|
|
37,754
|
|
Less accumulated depreciation and
amortization
|
|
|
25,504
|
|
|
|
21,290
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,186
|
|
|
$
|
16,464
|
|
|
|
|
|
|
|
|
|
|
The Company has a line of credit with JP Morgan Chase Bank NA,
which provides for borrowings up to $15.0 million
($20.0 million at December 31, 2004). The line of
credit has been renewed and amended and now expires on
August 31, 2006. The line of credit has a
sub-limit of
$5.0 million for letters of credit, which bear a fee of
1% per annum of the face value of each standby letter of
credit issued. Borrowings under the line of credit bear interest
at (i) a formula approximating the Eurodollar rate plus the
applicable margin of 1.25%, (ii) the banks prime rate
minus 1.0% or (iii) negotiated rate plus 1.25%. There were
no outstanding borrowings at December 31, 2005 and 2004.
The Company leases certain facilities and equipment under
operating leases. Current operating lease obligations are
expected to be renewed or replaced upon expiration. Future
minimum lease payments under all non-cancelable leases expiring
beyond one year as of December 31, 2005 are as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2006
|
|
$
|
2,667
|
|
2007
|
|
|
2,240
|
|
2008
|
|
|
1,794
|
|
2009
|
|
|
1,720
|
|
2010
|
|
|
1,454
|
|
Thereafter
|
|
|
113
|
|
|
|
|
|
|
|
|
$
|
9,988
|
|
|
|
|
|
|
Total rent expense amounted to approximately $2.9 million;
$2.2 million and $2.6 million for the years ended
December 31, 2005, 2004 and 2003, respectively.
F-19
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income before income taxes for the Companys U.S. and
foreign operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
U. S.
|
|
$
|
18,410
|
|
|
$
|
12,147
|
|
|
$
|
15,168
|
|
Foreign
|
|
|
32,523
|
|
|
|
34,080
|
|
|
|
38,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,933
|
|
|
$
|
46,227
|
|
|
$
|
53,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
7,382
|
|
|
$
|
1,672
|
|
|
$
|
3,947
|
|
State
|
|
|
1,346
|
|
|
|
305
|
|
|
|
720
|
|
Foreign
|
|
|
10,882
|
|
|
|
2,175
|
|
|
|
4,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
19,610
|
|
|
|
4,152
|
|
|
|
9,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
931
|
|
|
|
221
|
|
|
|
3,332
|
|
State
|
|
|
170
|
|
|
|
40
|
|
|
|
608
|
|
Foreign
|
|
|
(211
|
)
|
|
|
840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision (benefit)
|
|
|
890
|
|
|
|
1,101
|
|
|
|
3,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
20,500
|
|
|
$
|
5,253
|
|
|
$
|
13,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the net deferred tax asset are as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Impairment of investments and
capitalized development costs
|
|
$
|
1,814
|
|
|
$
|
1,814
|
|
Valuation Allowance
|
|
|
(1,664
|
)
|
|
|
|
|
Property, plant and equipment
|
|
|
71
|
|
|
|
149
|
|
Accrued expenses and allowances
|
|
|
2,235
|
|
|
|
1,717
|
|
Advanced billing receipts
|
|
|
835
|
|
|
|
602
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
3,291
|
|
|
|
4,282
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities Provision
for branch tax on dividend equivalent in India
|
|
|
(1,089
|
)
|
|
|
(1,183
|
)
|
Provision for tax on unrealized
gains in India
|
|
|
(63
|
)
|
|
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(1,152
|
)
|
|
|
(1,285
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
2,139
|
|
|
$
|
2,997
|
|
|
|
|
|
|
|
|
|
|
F-20
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Balance sheet classification of the net deferred tax asset is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Deferred tax asset, current
|
|
$
|
2,139
|
|
|
$
|
1,895
|
|
Deferred tax asset, non-current
|
|
|
|
|
|
|
1,102
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,139
|
|
|
$
|
2,997
|
|
|
|
|
|
|
|
|
|
|
During 2001, the Company had recorded deferred tax assets
related to tax benefits on write-off of certain investments. In
2005 the company has created a valuation allowance of
$1.7 million against these deferred tax assets, as these
tax benefits are not expected to be recognized.
Syntels software development centers/units are located in
Mumbai, Chennai and Pune. Units in Mumbai are located in a
Special Economic Zone (SEZ), the unit at Chennai is 100% Export
Oriented Unit (EOU) and units at Pune are registered with
Software Technologies Park of India (STPI). Under the Indian
Income Tax Act, 1961 (the Act), 100% EOUs at
Chennai, units registered with STPI at Pune and certain units
located in SEZ are eligible for an exemption from payment of
corporate income taxes for up to 10 years of operations on
the profits generated from these undertakings or March 31,
2009, whichever is earlier. Certain units located in SEZ are
eligible for 100% exemption from payment of corporate taxes for
the first 5 years of operation and a 50% exemption for the
next 5 years.
Effective April 1, 2003 one of the Companys Software
Development Units has ceased to enjoy the above-mentioned tax
exemption. Another development unit ceased to enjoy the tax
exemption on April 1, 2005. Provision for Indian Income Tax
is made only in respect of business profits generated from these
software development units, to the extent they are not covered
by the above exemptions and on income from investments and
interest income.
The benefit of the tax Holiday granted by the Indian authorities
was $11 million, $7.6 million and $9.1 million
for the years 2005, 2004 and 2003, respectively.
The American Jobs Creation Act of 2004 provided a special
one-time favorable effective federal tax rate for
U.S.-based
organizations. The Company repatriated cash dividends of
$61.0 million during 2005 out of the retained earnings of
its controlled foreign subsidiary, Syntel Limited, to the
U.S. in accordance with the Act. The Company recorded a tax
charge of approximately $12.3 million, including
U.S. Federal and state taxes and the Indian dividend
distribution tax under the Indian Income Tax laws, during the
fourth quarter of 2005. Proceeds from these extra ordinary
dividends are required to be invested in the United States for
specific purposes permitted under Act pursuant to an approved
written domestic reinvestment plan. As of December 31,
2005, the Company has invested approximately $42.5 million
towards permitted investments under the Act against this extra
ordinary dividend pursuant to an approved Domestic reinvestment
plan.
The Company intends to use remaining accumulated and future
earnings of foreign subsidiaries to expand operations outside
the United States and accordingly undistributed earnings of
foreign subsidiaries are considered to be indefinitely
reinvested outside the United States and no provision for
U.S. federal and state income tax or applicable dividend
distribution tax has been provided thereon.
If the company determines to repatriate all undistributed
repatriable earnings of foreign subsidiaries as of
December 31, 2005, the company would have accrued taxes of
approximately $34.1 million.
F-21
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table accounts for the differences between the
actual tax provision and the amounts obtained by applying the
statutory U.S. federal income tax rate of 35% to income
before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
2003
|
|
|
|
|
(In thousands)
|
|
|
|
Income before income taxes
|
|
$
|
50,933
|
|
|
|
$
|
46,227
|
|
|
|
$
|
53,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory provision
|
|
|
35.0
|
|
%
|
|
|
35.0
|
|
%
|
|
|
35.0
|
|
%
|
State taxes, net of federal benefit
|
|
|
1.3
|
|
%
|
|
|
1.0
|
|
%
|
|
|
1.0
|
|
%
|
Tax-free investment income
|
|
|
(0.2
|
)
|
%
|
|
|
(0.4
|
)
|
%
|
|
|
(0.6
|
)
|
%
|
Foreign effective tax rates
different from US Statutory Rate
|
|
|
(18.3
|
)
|
%
|
|
|
(19.3
|
)
|
%
|
|
|
(16.4
|
)
|
%
|
Tax reserves
|
|
|
(5.0
|
)
|
%
|
|
|
(3.8
|
)
|
%
|
|
|
5.7
|
|
%
|
Valuation Allowance
|
|
|
3.2
|
|
%
|
|
|
0.0
|
|
%
|
|
|
0.0
|
|
%
|
Tax on Repatriation
|
|
|
24.2
|
|
%
|
|
|
0.0
|
|
%
|
|
|
0.0
|
|
%
|
Other, net
|
|
|
0.0
|
|
%
|
|
|
(1.1
|
)
|
%
|
|
|
0.0
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Provision
|
|
|
40.2
|
|
%
|
|
|
11.4
|
|
%
|
|
|
24.7
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 also
provides for tax contingencies based on the Companys
assessment of future regulatory reviews of filed tax returns.
Such reserves, which are recorded in income taxes payable, are
based on managements 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 periods income tax expenses. Conversely, in the
event of a future tax examination, if the Company does not
prevail on certain tax positions taken in filed returns the tax
expense related thereto will be recognized in the period in
which examiners position is determined to be final.
During the year ended December 31, 2005, 2004 and 2003, the
effective income tax rate was 40.2%, 11.4% and 24.7%,
respectively. The tax rate for the year ended December 31,
2005 is impacted by reversal of tax reserve of
$2.6 million, provision for valuation allowance of
$1.7 million and the tax related to the repatriation of
$12.3 million. Without the above, the effective tax rate
for the year ended December 31, 2005 would have been 17.8%.
During year ended December 31, 2004 the tax rate was
impacted by reversal of tax reserve of $1.7 million, tax
credit of $0.5 million in Syntel India and the research and
development tax credit of $0.5 million in Syntel Inc.
Without the above, the effective income tax rate during the year
ended December 31, 2004 would have been 17.3%. During year
ended December 31, 2003, the tax rate was impacted by
provision of tax reserve of $3.1 million. Without the
above, the effective income tax rate during the year ended
December 31, 2003 would have been 19%. The tax rate
continues to be positively impacted by the combined effects of
offshore transition and reduced onsite profitability.
Syntel India has not provided for disputed Indian income tax
liabilities amounting to $2.51 million for the financial
years
1995-96 to
2001-02.
Syntel India has obtained an opinion from one independent legal
counsel (a former Chief Justice of the Supreme Court of India)
for the financial year
1998-99 and
opinions from another independent legal counsel (also a former
Chief Justice of the Supreme Court of India) for the financial
years
1995-96,
1996-97,
1997-98,
1999-2000
and 2000-01
and for subsequent periods to date, which support Syntel
Indias position in this matter.
Syntel India had filed an appeal with the Commissioner of Income
Tax (Appeals) for the financial year
1998-99 and
received a favorable decision. A similar appeal filed by Syntel
India with the Commissioner of Income Tax (Appeals) for the
financial year
1999-2000
was however dismissed in March
F-22
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2004. Syntel India has appealed this decision with the Income
Tax Appellate Tribunal. Syntel India has since also received
orders for appeals filed with the Commissioner of Income Tax
(Appeals) against the demands raised in March 2004 by the Income
Tax Officer for similar matters relating to the financial years
1995-96,
1996-97,
1997-98 and
2000-01 and
received a favorable decision for
1995-96 and
the contention of Syntel India was partially upheld for the
other three years. Syntel India has gone into further appeal
with the Income Tax Appellate Tribunal for the amounts not
allowed by the Commissioner of Income Tax (Appeals). The Income
Tax Department has appealed the favorable decisions for
1995-96 and
1998-99 and
the partially favorable decisions for the other years with the
Income Tax Appellate Tribunal.
Syntel India has also not provided for other disputed Indian
income tax liabilities aggregating to $4.40 million against
which Syntel India has filed or is in the process of filing
appeals with the Commissioner of Income Tax (Appeals). Syntel
India has obtained opinions from independent legal counsels,
which support Syntel Indias position in this matter.
Further, Syntel India has not provided for disputed income tax
liabilities aggregating to $0.10 million, for which Syntel
India has filed or is in the process of filing appeals or
petitions.
All the above tax exposures involve complex issues and may need
an extended period to resolve the issues with the Indian income
tax authorities. Management, after consultation with legal
counsel, believes that the resolution of the above matters will
not have a material adverse effect on the Companys
financial position.
Tax
Credit
During the year ended December 31, 2004, the provision for
income tax was reduced by research and development tax credits
claimed. The tax credits relate to increased qualified
expenditures for software development. The Company completed a
review of such qualified expenditures and filed refund claims
for the tax years ended December 31, 1999, 2000, 2001 and
2002. The appropriate tax benefit for these years has been
recorded currently in conjunction with the completion of the
review. This tax credit had a positive impact of
$0.5 million on taxes.
In addition, during the year ended December 31, 2004,
Syntel India has accounted for a credit of approximately
$0.5 million in respect of US branch profit taxes related
to prior periods up to June 30, 2004 and also reclassified
in the balance sheet $1.0 million from Income taxes payable
to deferred tax liability.
The reconciliation of earnings per share computations for the
years 2005, 2004, and 2003 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
Per
|
|
|
|
|
|
Per
|
|
|
|
Shares
|
|
|
Share
|
|
|
Shares
|
|
|
Share
|
|
|
Shares
|
|
|
Share
|
|
|
|
(In thousands, except per share data)
|
|
|
Basic earnings per share(1)
|
|
|
40,528
|
|
|
$
|
0.75
|
|
|
|
40,216
|
|
|
$
|
1.02
|
|
|
|
39,609
|
|
|
$
|
1.02
|
|
Potential dilutive effect of stock
options and warrants outstanding
|
|
|
123
|
|
|
|
(0.00
|
)
|
|
|
253
|
|
|
|
(0.01
|
)
|
|
|
1,188
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,651
|
|
|
$
|
0.75
|
|
|
|
40,469
|
|
|
$
|
1.01
|
|
|
|
40,797
|
|
|
$
|
0.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents weighted average number of common shares. |
F-23
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2005, 2004 and 2003, stock options to
purchase 66,700, 135,700 and 44,500 shares of Common Stock,
respectively, at a weighted average price per share of $24.55,
$24.13 and $25.00 respectively, were outstanding but were not
included in the computation of diluted earnings per share. The
options exercise price was greater than the average market
price of the common shares and was anti-dilutive.
The Board of Directors at its meeting on March 3, 2005
declared a special dividend of $1.50 per share payable to
Syntel shareholders of record at the close of business on
March 14, 2005. The dividend was paid on March 31,
2005.
The shareholders of record as of December 31, 2004 have
been paid $0.06 per share on January 14, 2005.
The Board of Directors at its meeting in July 2003 declared a
one-time special dividend of $1.25 per share payable to
Syntel shareholders of record at the close of business on
August 29, 2003, which was paid on September 12, 2003.
In addition, the Board of Directors at the same meeting approved
the initiation of quarterly cash dividends. The initial dividend
rate will be $0.06 per share per quarter.
Per share dividends paid in 2005, 2004 and 2003 were $1.74,
$0.24 and $1.31 respectively.
|
|
13.
|
Stock
Compensation Plans
|
The Company established a stock option plan in 1997 under which
3 million shares of Common Stock were reserved for
issuance. The dates on which granted options are first
exercisable are determined by the Compensation Committee of the
Board of Directors, but generally vest over a four-year period
from the date of grant. The term of any option may not exceed
ten years from the date of grant.
For certain options granted during 1997, the exercise price was
less than the fair value of the Companys stock on the date
of grant and, accordingly, compensation expense is being
recognized over the vesting period for such difference. For the
options granted thereafter, the Company grants the options at
the fair market value on the date of grant of the options. The
Company applies APB Opinion No. 25 and related
interpretations in accounting for this plan. In accordance with
APB Opinion No. 25, no compensation cost would need to be
recognized for the options granted post 1998 as the exercise
price equaled the fair value of the shares on the date of the
grant.
F-24
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock option activity during the years ended December 31,
2005, 2004 and 2003 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
|
|
of Shares
|
|
|
Price
|
|
|
Shares under option
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2003
|
|
|
2,338,474
|
|
|
$
|
9.07
|
|
Activity during 2003
|
|
|
|
|
|
|
|
|
Granted, price equals fair value
|
|
|
273,250
|
|
|
|
18.90
|
|
Exercised
|
|
|
694,858
|
|
|
|
8.39
|
|
Forfeited
|
|
|
587,127
|
|
|
|
11.55
|
|
Expired
|
|
|
14,329
|
|
|
|
10.92
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2003
|
|
|
1,315,410
|
|
|
|
10.33
|
|
Activity during 2004
|
|
|
|
|
|
|
|
|
Granted, price equals fair value
|
|
|
85,711
|
|
|
|
25.33
|
|
Exercised
|
|
|
264,613
|
|
|
|
8.01
|
|
Forfeited
|
|
|
247,352
|
|
|
|
15.95
|
|
Expired
|
|
|
5,833
|
|
|
|
7.74
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2004
|
|
|
883,323
|
|
|
|
10.93
|
|
Activity during 2005
|
|
|
|
|
|
|
|
|
Granted, price equals fair value
|
|
|
1,500
|
|
|
|
16.33
|
|
Exercised
|
|
|
360,740
|
|
|
|
6.85
|
|
Forfeited
|
|
|
68,400
|
|
|
|
22.38
|
|
Expired
|
|
|
17,432
|
|
|
|
16.84
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31,2005
|
|
|
438,251
|
|
|
$
|
12.28
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2003
|
|
|
379,672
|
|
|
$
|
7.94
|
|
Exercisable, December 31, 2004
|
|
|
400,830
|
|
|
$
|
8.38
|
|
Exercisable, December 31, 2005
|
|
|
302,651
|
|
|
$
|
9.52
|
|
|
|
|
|
|
|
|
|
|
F-25
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables sets forth details of options outstanding
and exercisable at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Life (years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$3.3191 - $6.6380
|
|
|
111,922
|
|
|
|
4.40
|
|
|
$
|
5.02
|
|
|
|
111,922
|
|
|
$
|
5.02
|
|
$6.6381 - $9.9570
|
|
|
69,536
|
|
|
|
4.30
|
|
|
|
8.35
|
|
|
|
69,536
|
|
|
|
8.35
|
|
$9.9571 - $13.2760
|
|
|
62,468
|
|
|
|
5.40
|
|
|
|
11.64
|
|
|
|
45,293
|
|
|
|
11.41
|
|
$13.2761 - $16.5950
|
|
|
125,025
|
|
|
|
6.60
|
|
|
|
14.61
|
|
|
|
62,400
|
|
|
|
14.47
|
|
$16.5951 - $19.9140
|
|
|
2,600
|
|
|
|
6.30
|
|
|
|
18.55
|
|
|
|
1,800
|
|
|
|
18.44
|
|
$19.9141 - $23.2330
|
|
|
17,700
|
|
|
|
8.10
|
|
|
|
21.15
|
|
|
|
2,100
|
|
|
|
21.28
|
|
$23.2331 - $26.5520
|
|
|
31,500
|
|
|
|
8.00
|
|
|
|
24.40
|
|
|
|
7,850
|
|
|
|
24.28
|
|
$26.5521 - $29.8710
|
|
|
17,500
|
|
|
|
4.50
|
|
|
|
28.25
|
|
|
|
1,750
|
|
|
|
28.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
438,251
|
|
|
|
5.60
|
|
|
$
|
12.28
|
|
|
|
302,651
|
|
|
$
|
9.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has an employee stock purchase plan, which provides
for employees to purchase pre-established amounts of the
Companys Common Stock as determined by the compensation
committee. The price at which employees may purchase Common
Stock is set by the compensation committee as not less than the
lesser of 85% of the fair market value of the Common Stock on
the NASDAQ National Market on the first day of the purchase
period or 85% of the fair market value of the Common Stock on
the last day of the purchase period. The Company has reserved
1.5 million shares of Common Stock for issuance under the
Companys employee stock purchase plan. Under the terms of
the plan, eligible employees may elect to have up to 5% of their
regular base earnings withheld to purchase company stock, with a
maximum contribution value, which may not exceed $21,250 for
each calendar year in which a purchase period occurs. As of
December 31, 2005 and 2004 the Company has
$0.4 million and $0.5 million, respectively of
employee withholdings, included in accrued payroll and related
costs in the balance sheet to be used to purchase company stock.
As of December 31, 2005 and 2004, 785,968 and
848,899 shares of Common Stock were available under the
plan.
Restricted
Stock:
On different dates during the quarter ended June 30, 2004
the Company issued 319,300 shares of incentive restricted
stock to its non-employee directors and some employees as well
as to some employees of its subsidiaries. The shares were
granted to employees for their future services as a retention
tool at a zero exercise price, with the restrictions on
transferability lapsing with regard to 10%, 20%, 30%, and 40% of
the shares issued on or after the first, second, third and
fourth anniversary of the grant dates, respectively.
On different dates during the year ended December 31, 2005
the Company issued additional 54,806 shares of incentive
restricted stock to its non-employee directors and some
employees as well as to some employees of its subsidiaries. The
shares were granted to employees for their future services as a
retention tool at a zero exercise price, with the restrictions
on transferability lapsing with regard to incremental 25% of the
shares issued on or after the first, second, third and fourth
anniversary of the grant dates, respectively.
Based upon the market value on the grant dates, the Company
recorded $5.84 million during the quarter ended
June 30, 2004 and $0.89 million during the year ended
December 31, 2005 of unearned compensation included as a
separate component of shareholders equity to be expensed
over the four-year
F-26
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
service period on a straight line basis. During the years ended
December 31, 2005 and 2004, the Company reversed
$1.21 million and $0.41 million, respectively, of
unearned compensation towards forfeiture of restricted stock on
account of termination of employees and expensed
$1.59 million and $0.83 million, respectively, as
compensation cost on account of these stock grants.
The recipients are also eligible for dividends declared on their
restricted stock. The dividends paid on shares of unvested
restricted stock are charged to compensation cost. For the years
ended December 31, 2005 and 2004, the Company recorded
$0.48 million and $0.05 million, respectively, as
compensation cost for dividends paid on shares of unvested
restricted stock.
For the restricted stock issued during the year ended
December 31, 2005 the dividend will be accrued and paid
subject to the same restriction as the restriction on
transferability.
14. Commitments &
Contingencies
Syntels subsidiaries have commitments for capital
expenditures (net of advances) of $2.9 million primarily
related to the technology Campus being constructed at Pune,
India, as of December 31, 2005.
The Company and its subsidiaries are parties to litigation and
claims, which have arisen, in the normal course of their
activities. Although the amount of the Companys ultimate
liability, if any, with respect to these matters cannot be
determined with reasonable certainty, management, after
consultation with legal counsel, believes that the resolution of
such matters will not have a material adverse effect upon the
Companys consolidated financial position.
Syntel Indias operations are carried out from their
development centers/units in Mumbai forming part of a Special
Economic Zone (SEZ) and in Chennai and Pune, which are
registered under the Software Technology Parks (STP) scheme.
Under these schemes the registered units have export
obligations, which are based on the formula provided by the
notifications/circulars issued by the STP and SEZ authorities
from time to time. The consequence of not meeting the above
commitments would be a retroactive levy of import duty on items
previously imported duty free for these units. Additionally the
respective authorities have rights to levy penalties for any
defaults on a
case-by-case
basis. The Company is confident of meeting these obligations.
|
|
15.
|
Employee
Benefit Plans
|
Provident Fund Contribution expense recognized by Syntel
India was $0.66 million; $0.5 million and
$0.2 million for the years ended December 31, 2005,
2004 and 2003, respectively.
Expense recognized by Syntel India under the Gratuity Plan was
$0.47 million; $0.02 million and $0.3 million for
the years ended December 31, 2005, 2004 and 2003,
respectively.
F-27
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
16.
|
Allowances
for Doubtful Accounts
|
The movement in the allowance for doubtful accounts for the
years ended December 31, 2005, 2004 and 2003 is summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of year
|
|
$
|
1,213
|
|
|
$
|
809
|
|
|
$
|
3,551
|
|
Provisions (reductions), net
|
|
|
1,564
|
|
|
|
400
|
|
|
|
(493
|
)
|
Write-offs
|
|
|
(202
|
)
|
|
|
(27
|
)
|
|
|
(2,267
|
)
|
Others
|
|
|
|
|
|
|
31
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
2,575
|
|
|
$
|
1,213
|
|
|
$
|
809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has adopted SFAS No. 131,
Disclosures about Segments of an Enterprises and Related
Information, which requires reporting information about
operating segments in annual financial statements. It has also
established standards for related disclosures about its business
segments and geographic areas. Operating segments are defined as
components of an enterprise about which separate financial
information is available. This information is reviewed and
evaluated regularly by the management, in deciding how to
allocate resources and in assessing the performance.
The Company is organized geographically and by business segment.
For management purpose, the Company is primarily organized on a
worldwide basis into four business segments:
|
|
|
|
|
Application outsourcing,
|
|
|
|
e-Business,
|
|
|
|
TeamSourcing; and
|
|
|
|
Business Process outsourcing (BPO).
|
These segments are the basis on which the Company reports its
primary segment information to management.
Through Application Outsourcing, the Company provides
higher-value applications management services for ongoing
management, development and maintenance of customers
business applications.
Through
e-Business,
the Company provides development and implementation services for
a number of emerging and rapidly growing high technology
applications, including Web development, Data Warehousing,
e-commerce,
CRM, Oracle, and SAP; as well as partnership agreements with
software providers.
Through TeamSourcing, the Company provides professional
information technology consulting services directly to customers
on a staff augmentation basis. TeamSourcing services include
systems specification, design, development, implementation and
maintenance of complex information technology applications
involving diverse computer hardware, software, data and
networking technologies and practices.
Through BPO, Syntel provides outsourced solutions for a
clients business processes, providing them with the
advantage of a low cost position and process enhancement through
optimal use of technology. Syntel uses a proprietary tool called
Identeontm
to assist with strategic assessments of business processes and
identifying the right ones for outsourcing.
F-28
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The accounting policies of the segments are the same as those
presented in Note - 2. Management allocates all
corporate expenses to the segments. No balance
sheet/identifiable assets data is presented since the Company
does not segregate its assets by segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications Outsourcing
|
|
$
|
171,331
|
|
|
$
|
143,007
|
|
|
$
|
136,424
|
|
e-Business
|
|
|
31,210
|
|
|
|
29,249
|
|
|
|
33,795
|
|
TeamSourcing
|
|
|
16,953
|
|
|
|
12,480
|
|
|
|
9,288
|
|
BPO
|
|
|
6,695
|
|
|
|
1,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226,189
|
|
|
|
186,573
|
|
|
|
179,507
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications Outsourcing
|
|
|
72,411
|
|
|
|
62,696
|
|
|
|
62,282
|
|
e-Business
|
|
|
9,687
|
|
|
|
11,302
|
|
|
|
14,389
|
|
TeamSourcing
|
|
|
4,886
|
|
|
|
4,598
|
|
|
|
1,137
|
|
BPO
|
|
|
4,162
|
|
|
|
857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,146
|
|
|
|
79,453
|
|
|
|
77,808
|
|
Selling, general and
administrative expenses
|
|
|
44,917
|
|
|
|
36,999
|
|
|
|
28,278
|
|
Reduction in reserve requirements
for Metier transaction
|
|
|
|
|
|
|
|
|
|
|
(882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
$
|
46,229
|
|
|
$
|
42,454
|
|
|
$
|
50,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys largest customer in 2005, 2004 and 2003 was
American Express, which was the only customer who accounted for
revenues in excess of 10% of total consolidated revenues.
Revenue from this customer was approximately $36.2 million,
$29.4 million and $28.8 million, contributing
approximately 16%, 16% and 16% of total consolidated revenues
during 2005, 2004 and 2003, respectively. At December 31,
2005 and 2004 accounts receivable, from this customer were
$1.1 million and $1.5 respectively. All revenue from this
customer was generated in the Applications Outsourcing segment.
F-29
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
18.
|
Geographic
Information
|
Customers of the Company are primarily situated in the United
States. Net revenues and net income (loss) from each geographic
location were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
North America, primarily United
States
|
|
$
|
205,376
|
|
|
$
|
167,240
|
|
|
$
|
163,121
|
|
India
|
|
|
113,571
|
|
|
|
90,230
|
|
|
|
71,823
|
|
UK
|
|
|
12,119
|
|
|
|
13,410
|
|
|
|
15,303
|
|
Far East, primarily Singapore
|
|
|
1,090
|
|
|
|
1,501
|
|
|
|
907
|
|
Germany
|
|
|
1,540
|
|
|
|
2,692
|
|
|
|
720
|
|
Mauritius
|
|
|
931
|
|
|
|
|
|
|
|
|
|
Inter-company revenue elimination
(primarily India)
|
|
|
(108,438
|
)
|
|
|
(88,500
|
)
|
|
|
(72,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
226,189
|
|
|
$
|
186,573
|
|
|
$
|
179,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
North America, primarily United
States
|
|
$
|
9,394
|
|
|
$
|
10,459
|
|
|
$
|
6,650
|
|
India
|
|
|
19,737
|
|
|
|
28,831
|
|
|
|
33,168
|
|
UK
|
|
|
1,667
|
|
|
|
1,732
|
|
|
|
895
|
|
Far East, primarily Singapore
|
|
|
27
|
|
|
|
194
|
|
|
|
(114
|
)
|
Germany
|
|
|
(472
|
)
|
|
|
(242
|
)
|
|
|
(295
|
)
|
Mauritius
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
30,321
|
|
|
$
|
40,974
|
|
|
$
|
40,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets, December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
North America, primarily United
States
|
|
$
|
107,143
|
|
|
$
|
110,613
|
|
|
$
|
99,740
|
|
India
|
|
|
58,815
|
|
|
|
106,014
|
|
|
|
75,754
|
|
UK
|
|
|
10,019
|
|
|
|
8,892
|
|
|
|
9,015
|
|
Far East, primarily Singapore
|
|
|
555
|
|
|
|
560
|
|
|
|
80
|
|
Germany
|
|
|
1,136
|
|
|
|
889
|
|
|
|
609
|
|
Mauritius
|
|
|
20,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
198,161
|
|
|
$
|
226,968
|
|
|
$
|
185,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
19.
|
Selected
Quarterly Financial Data (Unaudited)
|
Selected financial data by calendar quarter were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Full Year
|
|
|
|
(In thousands, except per share data)
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
50,732
|
|
|
$
|
54,677
|
|
|
$
|
58,501
|
|
|
$
|
62,279
|
|
|
$
|
226,189
|
|
Cost of revenues
|
|
|
29,704
|
|
|
|
32,754
|
|
|
|
35,298
|
|
|
|
37,287
|
|
|
|
135,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
21,028
|
|
|
|
21,923
|
|
|
|
23,203
|
|
|
|
24,992
|
|
|
|
91,146
|
|
Selling, general and
administrative expenses
|
|
|
11,165
|
|
|
|
10,699
|
|
|
|
10,533
|
|
|
|
12,520
|
|
|
|
44,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
9,863
|
|
|
|
11,224
|
|
|
|
12,670
|
|
|
|
12,472
|
|
|
|
46,229
|
|
Other income, principally interest
|
|
|
1,136
|
|
|
|
708
|
|
|
|
810
|
|
|
|
1,938
|
|
|
|
4,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
10,999
|
|
|
|
11,932
|
|
|
|
13,480
|
|
|
|
14,410
|
|
|
|
50,821
|
|
Provision for income taxes
|
|
|
2,005
|
|
|
|
2,246
|
|
|
|
1,741
|
|
|
|
14,508
|
|
|
|
20,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,994
|
|
|
$
|
9,686
|
|
|
$
|
11,739
|
|
|
$
|
(98
|
)
|
|
$
|
30,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, diluted(a)
|
|
$
|
0.22
|
|
|
$
|
0.24
|
|
|
$
|
0.29
|
|
|
$
|
0.00
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding, diluted
|
|
|
40,526
|
|
|
|
40,570
|
|
|
|
40,669
|
|
|
|
40,838
|
|
|
|
40,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
45,089
|
|
|
$
|
45,846
|
|
|
$
|
46,602
|
|
|
$
|
49,036
|
|
|
$
|
186,573
|
|
Cost of revenues
|
|
|
26,085
|
|
|
|
26,234
|
|
|
|
27,014
|
|
|
|
27,787
|
|
|
|
107,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
19,004
|
|
|
|
19,612
|
|
|
|
19,588
|
|
|
|
21,249
|
|
|
|
79,453
|
|
Selling, general and
administrative expenses
|
|
|
8,839
|
|
|
|
8,822
|
|
|
|
8,850
|
|
|
|
10,488
|
|
|
|
36,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
10,165
|
|
|
|
10,790
|
|
|
|
10,738
|
|
|
|
10,761
|
|
|
|
42,454
|
|
Other income, principally interest
|
|
|
996
|
|
|
|
357
|
|
|
|
753
|
|
|
|
1,667
|
|
|
|
3,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
11,161
|
|
|
|
11,147
|
|
|
|
11,491
|
|
|
|
12,428
|
|
|
|
46,227
|
|
Provision for (benefit from)
income taxes
|
|
|
1,839
|
|
|
|
1,742
|
|
|
|
(402
|
)
|
|
|
2,074
|
|
|
|
5,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,322
|
|
|
$
|
9,405
|
|
|
$
|
11,893
|
|
|
$
|
10,354
|
|
|
$
|
40,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, diluted(a)
|
|
$
|
0.23
|
|
|
$
|
0.23
|
|
|
$
|
0.29
|
|
|
$
|
0.26
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding, diluted
|
|
|
40,614
|
|
|
|
40,510
|
|
|
|
40,355
|
|
|
|
40,416
|
|
|
|
40,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a) |
|
Earnings per share for the quarter are computed independently
and may not equal the earnings per share computed for the total
year. |
F-31
INTRODUCTION
TO THE INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements of Syntel, Inc.
and subsidiaries, have been prepared without audit, pursuant to
the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United
States have been condensed or omitted pursuant to such rules and
regulations. We believe that the disclosures are adequate to
make the information presented not misleading when read in
conjunction with the consolidated financial statements and the
notes thereto included in our Annual Report on
Form 10-K,
as filed with the Securities Exchange and Commission, for the
year ended December 31, 2005.
The financial information presented reflects all adjustments
(consisting of normal recurring adjustments) which are, in our
opinion, necessary for a fair presentation of the results of
operations and cash flows and statements of financial position
for the interim periods presented. These results are not
necessarily indicative of a full years results of
operations.
F-32
SYNTEL,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2006
|
|
|
December 31,
|
|
|
|
(Unaudited)
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37,212
|
|
|
$
|
99,390
|
|
Short term investments
|
|
|
38,579
|
|
|
|
21,083
|
|
Accounts receivable, net of
allowances for doubtful accounts of $2,578 and $2,575 at
September 30, 2006 and December 31, 2005, respectively
|
|
|
40,491
|
|
|
|
27,907
|
|
Revenue earned in excess of
billings
|
|
|
9,052
|
|
|
|
8,366
|
|
Deferred income taxes and other
current assets
|
|
|
12,496
|
|
|
|
10,003
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
137,830
|
|
|
|
166,749
|
|
Property and equipment
|
|
|
62,869
|
|
|
|
54,690
|
|
Less accumulated depreciation and
amortization
|
|
|
29,223
|
|
|
|
25,504
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
33,646
|
|
|
|
29,186
|
|
Goodwill
|
|
|
906
|
|
|
|
906
|
|
Deferred income taxes and other
non current assets
|
|
|
2,291
|
|
|
|
1,320
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
174,673
|
|
|
$
|
198,161
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,088
|
|
|
$
|
6,890
|
|
Accrued payroll and related costs
|
|
|
17,033
|
|
|
|
15,906
|
|
Income taxes payable
|
|
|
3,363
|
|
|
|
9,809
|
|
Accrued liabilities
|
|
|
7,720
|
|
|
|
7,446
|
|
Deferred revenue
|
|
|
4,121
|
|
|
|
3,356
|
|
Dividends payable
|
|
|
2,442
|
|
|
|
2,476
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
39,767
|
|
|
|
45,883
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
134,906
|
|
|
|
152,278
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders Equity
|
|
$
|
174,673
|
|
|
$
|
198,161
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
F-33
SYNTEL,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share data)
|
|
|
Net revenues
|
|
$
|
69,217
|
|
|
$
|
58,501
|
|
|
$
|
197,123
|
|
|
$
|
163,910
|
|
Cost of revenues
|
|
|
42,635
|
|
|
|
35,298
|
|
|
|
123,267
|
|
|
|
97,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
26,582
|
|
|
|
23,203
|
|
|
|
73,856
|
|
|
|
66,154
|
|
Selling, general and
administrative expenses
|
|
|
13,056
|
|
|
|
10,533
|
|
|
|
35,299
|
|
|
|
32,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
13,526
|
|
|
|
12,670
|
|
|
|
38,557
|
|
|
|
33,757
|
|
Other income, principally interest
|
|
|
1,298
|
|
|
|
810
|
|
|
|
3,525
|
|
|
|
2,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income
taxes
|
|
|
14,824
|
|
|
|
13,480
|
|
|
|
42,082
|
|
|
|
36,411
|
|
Provision for income taxes
|
|
|
293
|
|
|
|
1,741
|
|
|
|
4,443
|
|
|
|
5,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14,531
|
|
|
$
|
11,739
|
|
|
$
|
37,639
|
|
|
$
|
30,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend per share
|
|
$
|
1.31
|
|
|
$
|
0.06
|
|
|
$
|
1.43
|
|
|
$
|
1.68
|
|
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.36
|
|
|
$
|
0.29
|
|
|
$
|
0.92
|
|
|
$
|
0.75
|
|
Diluted
|
|
$
|
0.35
|
|
|
$
|
0.29
|
|
|
$
|
0.92
|
|
|
$
|
0.75
|
|
Weighted Average Common
Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
40,865
|
|
|
|
40,576
|
|
|
|
40,783
|
|
|
|
40,487
|
|
Diluted
|
|
|
41,123
|
|
|
|
40,669
|
|
|
|
41,038
|
|
|
|
40,588
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
F-34
SYNTEL,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
37,639
|
|
|
$
|
30,419
|
|
Adjustments to reconcile net
income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,302
|
|
|
|
3,407
|
|
Bad debt provisions/(credits)
|
|
|
0
|
|
|
|
500
|
|
Realized gains on sales of short
term investments
|
|
|
(284
|
)
|
|
|
(392
|
)
|
Deferred income taxes
|
|
|
1,085
|
|
|
|
1,366
|
|
Compensation expense related to
restricted stock
|
|
|
1,366
|
|
|
|
1,273
|
|
Share based compensation expense
|
|
|
528
|
|
|
|
0
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable and revenue
earned in excess of billings, net
|
|
|
(11,965
|
)
|
|
|
(10,003
|
)
|
Other current assets
|
|
|
(4,709
|
)
|
|
|
(3,609
|
)
|
Accrued payroll and other
liabilities
|
|
|
(6,175
|
)
|
|
|
6,423
|
|
Deferred revenues
|
|
|
(1,087
|
)
|
|
|
(1,586
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
20,700
|
|
|
|
27,798
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
Property and equipment expenditures
|
|
|
(9,351
|
)
|
|
|
(11,049
|
)
|
Purchase of short term investments:
|
|
|
|
|
|
|
|
|
Investments in mutual funds
|
|
|
(39,993
|
)
|
|
|
(3,184
|
)
|
Investments in term deposits with
banks
|
|
|
(56,953
|
)
|
|
|
(4,416
|
)
|
Proceeds from sales of short term
investments:
|
|
|
|
|
|
|
|
|
Proceeds from sales of mutual funds
|
|
|
42,893
|
|
|
|
16,557
|
|
Maturities of term deposits with
banks
|
|
|
36,256
|
|
|
|
22,682
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)/provided by
investing activities
|
|
|
(27,148
|
)
|
|
|
20,590
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of
common stock
|
|
|
1,604
|
|
|
|
2,527
|
|
Common stock repurchases
|
|
|
|
|
|
|
(676
|
)
|
Dividends paid
|
|
|
(58,632
|
)
|
|
|
(68,446
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(57,028
|
)
|
|
|
(66,595
|
)
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency
exchange rate changes on cash
|
|
|
1,298
|
|
|
|
(343
|
)
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
(62,178
|
)
|
|
|
(18,550
|
)
|
Cash and cash equivalents,
beginning of period
|
|
|
99,390
|
|
|
|
109,142
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
37,212
|
|
|
$
|
90,592
|
|
|
|
|
|
|
|
|
|
|
Non cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
Cash dividends declared but unpaid
|
|
$
|
2,442
|
|
|
$
|
2,446
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
10,417
|
|
|
$
|
5,737
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statements.
F-35
SYNTEL,
INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Basis of
Presentation:
|
The accompanying condensed consolidated financial statements of
Syntel, Inc. (the Company or Syntel)
have been prepared by management, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of
management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments, consisting of
normal recurring adjustments, necessary to present fairly the
financial position of Syntel and its subsidiaries as of
September 30, 2006, the results of their operations for the
three month and nine month periods ended September 30, 2006
and 2005, and cash flows for the nine months ended
September 30, 2006 and 2005. The year end condensed balance
sheet as of December 31, 2005 was derived from audited
financial statements but does not include all disclosures
required by accounting principles generally accepted in the
United States. For further information, refer to the
consolidated financial statements and footnotes thereto included
in the Companys annual report on
Form 10-K
for the year ended December 31, 2005.
Operating results for the nine months ended September 30,
2006 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2006.
|
|
2.
|
Principles
of Consolidation and Organization
|
The consolidated financial statements include the accounts of
Syntel, Inc. (Syntel), a Michigan corporation, its
wholly owned subsidiaries, and a joint venture. All significant
inter-company balances and transactions have been eliminated.
The wholly owned subsidiaries of Syntel, Inc. are:
|
|
|
|
|
Syntel Limited (Syntel India), an Indian limited
liability company formerly known as Syntel (India) Ltd.;
|
|
|
|
Syntel Singapore PTE. Ltd. (Syntel Singapore), a
Singapore limited liability company;
|
|
|
|
Syntel Europe, Ltd. (Syntel U.K.), a United Kingdom
limited liability company;
|
|
|
|
Syntel Canada Inc. (Syntel Canada), an Ontario
limited liability company;
|
|
|
|
Syntel Deutschland GmbH (Syntel Germany), a German
limited liability company;
|
|
|
|
Syntel Hong Kong Ltd. (Syntel Hong Kong), a Hong
Kong limited liability company;
|
|
|
|
Syntel (Australia) Pty. Limited (Syntel Australia),
an Australian limited liability company;
|
|
|
|
Syntel Delaware LLC (Syntel Delaware), a Delaware
limited liability company;
|
|
|
|
SkillBay LLC (SkillBay), a Michigan limited
liability company;
|
|
|
|
Syntel (Mauritius) Limited (Syntel Mauritius), a
Mauritius limited liability company;
|
|
|
|
Syntel Consulting Inc (Syntel Consulting), a
Michigan corporation;
|
|
|
|
Syntel Sterling BestShores (Mauritius) Limited
(SSBML), a Mauritius limited liability
company; and
|
|
|
|
Syntel Worldwide (Mauritius) Limited (Syntel
Worldwide), a Mauritius limited liability company.
|
F-36
SYNTEL,
INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The formerly wholly owned subsidiary of Syntel Delaware (as of
December 31, 2004) that became a partially owned joint
venture of Syntel Delaware LLC on February 1, 2005 is:
|
|
|
|
|
State Street Syntel Services (Mauritius) Ltd.
(SSSSML), a Mauritius limited liability company
formerly known as Syntel Solutions (Mauritius) Ltd.
|
The wholly owned subsidiary of SSSSML is:
|
|
|
|
|
Syntel Sourcing Pvt. Ltd. (Syntel Sourcing), an
Indian limited liability company.
|
The wholly owned subsidiaries of Syntel Mauritius are:
|
|
|
|
|
Syntel International Pvt. Ltd. (Syntel
International), an Indian limited liability
company; and
|
|
|
|
Syntel Global Pvt. Ltd. (Syntel Global), an Indian
limited liability company.
|
The wholly owned subsidiary of SSBML is:
|
|
|
|
|
Syntel Sterling BestShores Solutions Private Limited
(SSBSPL), an Indian limited liability company.
|
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Such estimates
include, but are not limited to allowance for doubtful accounts,
impairment of long-lived assets and goodwill, contingencies and
litigation, the recognition of revenues and profits based on the
proportional performance method and potential tax liabilities.
Actual results could differ from those estimates and assumptions
used in the preparation of the accompanying financial statements.
The Company recognizes revenues from time and material contracts
as the services are performed.
Revenue from fixed-price applications 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.
Revenue on fixed-price, applications development and integration
projects in the Companys application outsourcing and
e-Business
segments are 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 to 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 changes become 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 consolidated
balance sheets.
Revenues are reported net of sales incentives.
F-37
SYNTEL,
INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Reimbursements of
out-of-pocket
expenses are included in revenue in accordance with Emerging
Issues Task Force Consensus
(EITF) 01-14,
Income Statement Characterization of Reimbursement
Received for Out of Pocket Expenses Incurred.
|
|
5.
|
Cash and
Cash Equivalents
|
For the purpose of reporting Cash and Cash Equivalents, the
Company considers all liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
At September 30, 2006 and December 31, 2005,
approximately $6.6 million and $60.8 million,
respectively, represent corporate bonds and treasury notes held
by JP Morgan Chase Bank NA. The remaining amounts of cash
and cash equivalents are invested in money market accounts with
various banking and financial institutions.
|
|
6.
|
Stock
Warrants Sales Incentive
|
In 2000, the Company agreed to grant to a significant customer
performance warrants entitling the customer to purchase shares
of Company stock. The issuance of the performance warrants is
dependent upon the customer meeting performance milestones by
purchasing specified minimum levels of services from the Company
over a specified period. The Company has estimated that such
performance milestones will not be met during the year.
Accordingly, the Company has not accounted for these performance
warrants. If and when the Company estimates that such
performance milestones will be met, the sales incentive
associated with the performance warrants will be recorded as a
reduction of revenue.
Total Comprehensive Income for the three and nine months ended
September 30, 2006 and 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
14,531
|
|
|
$
|
11,739
|
|
|
$
|
37,639
|
|
|
$
|
30,419
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss)
|
|
|
505
|
|
|
|
164
|
|
|
|
1,298
|
|
|
|
353
|
|
Foreign currency translation
adjustments
|
|
|
36
|
|
|
|
(439
|
)
|
|
|
(1,460
|
)
|
|
|
(1,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
15,072
|
|
|
$
|
11,464
|
|
|
$
|
37,477
|
|
|
$
|
29,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share are computed in accordance
with Statement of Financial Accounting Standards
(SFAS) No 128 Earnings Per Share.
Basic earnings per share are calculated by dividing net income
by the weighted average number of shares outstanding during the
applicable period.
The Company has stock options, which are considered to be
potentially dilutive to the basic earnings per share. Diluted
earnings per share is calculated using the treasury stock method
for the dilutive effect of shares which have been granted
pursuant to the stock option plan, by dividing the net income by
the weighted average number of shares outstanding during the
period adjusted for these potentially dilutive options, except
when the results would be anti-dilutive. The potential tax
benefits on exercise of stock
F-38
SYNTEL,
INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
options is considered as additional proceeds while computing
dilutive earnings per share using the treasury stock method.
The following table summarizes the movement in the Capital
Structure from June 30, 2006
|
|
|
|
|
|
|
No. of Shares
|
|
|
|
(In thousands)
|
|
|
Particulars
|
|
|
|
|
Balance as on June 30, 2006
|
|
|
40,839
|
|
Add:
|
|
|
|
|
Shares issued on exercise of stock
options and restricted stock
|
|
|
73
|
|
|
|
|
|
|
Balance as on September 30,
2006
|
|
|
40,912
|
|
|
|
|
|
|
The following table sets forth the computation of earnings per
share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Earnings
|
|
|
Average
|
|
|
Earnings
|
|
|
|
Shares
|
|
|
per Shares
|
|
|
Shares
|
|
|
per Share
|
|
|
|
(In thousands, except per share earnings)
|
|
|
Basic earnings per share
|
|
|
40,865
|
|
|
$
|
0.36
|
|
|
|
40,576
|
|
|
$
|
0.29
|
|
Potential dilutive effect of stock
options outstanding
|
|
|
258
|
|
|
|
(0.01
|
)
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share
|
|
|
41,123
|
|
|
$
|
0.35
|
|
|
|
40,669
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Earnings
|
|
|
Average
|
|
|
Earnings
|
|
|
|
Shares
|
|
|
per Shares
|
|
|
Shares
|
|
|
per Share
|
|
|
|
(In thousands, except per share earnings)
|
|
|
Basic earnings per share
|
|
|
40,783
|
|
|
$
|
0.92
|
|
|
|
40,487
|
|
|
$
|
0.75
|
|
Potential dilutive effect of stock
options outstanding
|
|
|
255
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share
|
|
|
41,038
|
|
|
$
|
0.92
|
|
|
|
40,588
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is organized geographically and by business segment.
For management purposes, the Company is primarily organized on a
worldwide basis into four business segments:
|
|
|
|
|
Applications Outsourcing;
|
|
|
|
e-Business;
|
|
|
|
TeamSourcing; and
|
|
|
|
Business Process Outsourcing (BPO).
|
F-39
SYNTEL,
INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
These segments are the basis on which the Company reports its
primary segment information to management. Management allocates
all corporate expenses among the segments. No balance
sheet/identifiable assets data is presented since the Company
does not segregate its assets by segment. Financial data for
each segment for the three month and nine month periods ended
September 30, 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications Outsourcing
|
|
$
|
49,394
|
|
|
$
|
43,872
|
|
|
$
|
142,433
|
|
|
$
|
124,725
|
|
e-Business
|
|
|
9,929
|
|
|
|
7,946
|
|
|
|
27,885
|
|
|
|
22,687
|
|
TeamSourcing
|
|
|
4,235
|
|
|
|
4,727
|
|
|
|
13,460
|
|
|
|
12,279
|
|
BPO
|
|
|
5,659
|
|
|
|
1,956
|
|
|
|
13,345
|
|
|
|
4,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,217
|
|
|
|
58,501
|
|
|
|
197,123
|
|
|
|
163,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applications Outsourcing
|
|
|
18,286
|
|
|
|
18,443
|
|
|
|
53,592
|
|
|
|
52,224
|
|
e-Business
|
|
|
3,149
|
|
|
|
2,253
|
|
|
|
7,336
|
|
|
|
7,547
|
|
TeamSourcing
|
|
|
1,760
|
|
|
|
1,286
|
|
|
|
4,937
|
|
|
|
3,596
|
|
BPO
|
|
|
3,387
|
|
|
|
1,221
|
|
|
|
7,991
|
|
|
|
2,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,582
|
|
|
|
23,203
|
|
|
|
73,856
|
|
|
|
66,154
|
|
Selling, general and
administrative expenses
|
|
|
13,056
|
|
|
|
10,533
|
|
|
|
35,299
|
|
|
|
32,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
13,526
|
|
|
$
|
12,670
|
|
|
$
|
38,557
|
|
|
$
|
33,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2006 and 2005,
American Express Corp. contributed revenues in excess of 10% of
total consolidated revenues. Revenue from this customer was
$35.6 million during the nine months ended
September 30, 2006, contributing approximately 18% of total
consolidated revenues, as compared to $24.3 million during
the nine months ended September 30, 2005, contributing
approximately 14.8% of total consolidated revenues. At
September 30, 2006 and December 31, 2005, accounts
receivable from this customer were $3.8 million and
$1.1 million respectively.
F-40
SYNTEL,
INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Geographic
Information
|
Customers of the Company are primarily located in the United
States. Net revenues and net income (loss) were attributed to
each geographic location as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America, primarily United
States
|
|
$
|
65,967
|
|
|
$
|
52,542
|
|
|
$
|
188,558
|
|
|
$
|
147,029
|
|
India
|
|
|
34,641
|
|
|
|
29,880
|
|
|
|
98,252
|
|
|
|
84,313
|
|
UK
|
|
|
3,186
|
|
|
|
3,138
|
|
|
|
8,341
|
|
|
|
9,612
|
|
Far East, primarily Singapore
|
|
|
1,375
|
|
|
|
592
|
|
|
|
3,107
|
|
|
|
1,352
|
|
Germany
|
|
|
85
|
|
|
|
439
|
|
|
|
538
|
|
|
|
1,270
|
|
Inter-company revenue elimination
(primarily India)
|
|
|
(36,037
|
)
|
|
|
(28,090
|
)
|
|
|
(101,673
|
)
|
|
|
(79,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
69,217
|
|
|
$
|
58,501
|
|
|
$
|
197,123
|
|
|
$
|
163,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income/(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America, primarily United
States
|
|
$
|
5,369
|
|
|
$
|
4,188
|
|
|
$
|
10,775
|
|
|
$
|
9,142
|
|
India
|
|
|
9,449
|
|
|
|
6,755
|
|
|
|
26,340
|
|
|
|
19,779
|
|
UK
|
|
|
245
|
|
|
|
506
|
|
|
|
1,058
|
|
|
|
1,516
|
|
Far East, primarily Singapore
|
|
|
(402
|
)
|
|
|
84
|
|
|
|
(379
|
)
|
|
|
124
|
|
Germany
|
|
|
(130
|
)
|
|
|
206
|
|
|
|
(155
|
)
|
|
|
(142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(Loss) After Income Taxes
|
|
$
|
14,531
|
|
|
$
|
11,739
|
|
|
$
|
37,639
|
|
|
$
|
30,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table accounts for the differences between the
federal statutory tax rate of 35% and the Companys overall
effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Income before income taxes
|
|
$
|
14,824
|
|
|
$
|
13,480
|
|
|
$
|
42,082
|
|
|
$
|
36,411
|
|
Statutory provision
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
|
|
1.1
|
%
|
|
|
1.3
|
%
|
|
|
1.1
|
%
|
|
|
1.3
|
%
|
Tax-free investment income
|
|
|
(0.7
|
)%
|
|
|
0.0
|
%
|
|
|
(0.7
|
)%
|
|
|
(0.2
|
)%
|
Foreign effective tax rates
different from US statutory rate
|
|
|
(33.4
|
)%
|
|
|
(23.4
|
)%
|
|
|
(24.8
|
)%
|
|
|
(19.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Income Tax Rate
|
|
|
2.0
|
%
|
|
|
12.9
|
%
|
|
|
10.6
|
%
|
|
|
16.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 also
provides for tax contingencies based on the Companys
assessment of future regulatory reviews of filed tax returns.
Such reserves, which are recorded in income taxes payable, are
based on managements estimates and accordingly
F-41
SYNTEL,
INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
are subject to revision based on additional information. The
provision no longer required for any particular tax year, is
credited to the current periods income tax expenses.
The provision for income tax contingencies no longer required
for any particular tax year is credited to the current
periods income tax expenses. During the three months ended
September 30, 2006 and September 30, 2005, the
effective income tax rate was 2% and 12.9% respectively. During
the nine months ended September 30, 2006 and
September 30, 2005, the effective income tax rate was 10.6%
and 16.5% respectively. The tax rates for the three months and
nine months ended September 30, 2006 is impacted by
reversal of tax reserve of $2.0 million. The tax rates for
the three months and nine months ended September 30, 2005
were impacted by the reversal of a tax reserve of
$2.6 million and a provision for valuation allowance of
$1.7 million attributable to certain deferred tax benefits,
on the write-off of certain investments in 2001, which are not
expected to be materialized.
Syntel India has not provided for disputed Indian income tax
liabilities amounting to $2.46 million for the financial
years
1995-96 to
2001-02.
Syntel India has obtained an opinion from one independent legal
counsel (a former Chief Justice of the Supreme Court of India)
for the financial year
1998-99 and
two opinions from another independent legal counsel (also a
former Chief Justice of the Supreme Court of India) for the
financial years
1995-96 to
1997-98 and
1999-2000 to
2001-02,
which support Syntel Indias position in this matter.
Syntel India filed an appeal with the Commissioner of Income Tax
(Appeals) for the financial year
1998-99 and
received a favorable decision. The Income tax department
appealed this favorable decision with the Income Tax Appellate
Tribunal (ITAT). During the three months ended
June 30, 2006, the ITAT dismissed the appeal filed by the
Income tax department. The Income tax department has recourse to
file further appeal and hence there is no change in the relevant
provision for tax.
A similar appeal filed by Syntel India with the Commissioner of
Income Tax (Appeals) for the financial year
1999-2000
was however dismissed in March 2004. Syntel India has appealed
this decision with the Income Tax Appellate Tribunal. Syntel
India has since also received orders for appeals filed with the
Commissioner of Income Tax (Appeals) against the demands raised
in March 2004 by the Income Tax Officer for similar matters
relating to the financial years
1995-96 to
1997-98 and
2000-01 to
2001-02 and
has received a favorable decision for
1995-96 and
the contention of Syntel India was partially upheld for the
other years. Syntel India has gone into further appeal with the
Income Tax Appellate Tribunal for the amounts not allowed by the
Commissioner of Income Tax (Appeals). The Income Tax Department
has appealed the favorable decisions for
1995-96 and
1998-99 and
the partially favorable decisions for the other years with the
Income Tax Appellate Tribunal.
Syntel India has also not provided for other disputed Indian
income tax liabilities aggregating $4.32 million for the
financial years
2001-02 and
2002-03,
against which Syntel India has filed an appeal with the
Commissioner of Income Tax (Appeals). The contention of Syntel
India was partially upheld by the Commissioner of Income Tax
(Appeals) for the financial year
2001-02.
Syntel India has gone into further appeal with the ITAT for the
amounts not allowed by the Commissioner of Income Tax (Appeals).
The Income tax department has filed further appeal against the
relief granted to Syntel India by the Commissioner of Income Tax
(Appeals). The appeal for the financial year
2002-03 is
not yet decided. Syntel India has obtained opinions from
independent legal counsels, which support Syntel Indias
position in this matter.
Further, Syntel India has not provided for disputed income tax
liabilities aggregating to $0.10 million, for which Syntel
India has filed necessary appeals or petitions.
All the above tax exposures involve complex issues and may need
an extended period to resolve the issues with the Indian income
tax authorities. Management, after consultation with legal
counsel, believes
F-42
SYNTEL,
INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
that the resolution of the above matters will not have a
material adverse effect on the Companys financial position.
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.
The American Jobs Creation Act of 2004 provided a special
one-time favorable effective federal tax rate for
U.S.-based
organizations. The Company repatriated cash dividends of
$61.0 million during 2005 out of the retained earnings of
its controlled foreign subsidiary, Syntel India, to the
U.S. in accordance with the Act. The Company recorded a tax
charge of approximately $12.3 million, including
U.S. Federal and state taxes and the Indian dividend
distribution tax under the Indian Income Tax laws, during the
fourth quarter of 2005. Proceeds from these extraordinary
dividends are required to be invested in the United States for
specific purposes permitted under Act pursuant to an approved
written domestic reinvestment plan. As of June 30, 2006,
the Company had fully invested proceeds from these cash
dividends towards permitted investments under the Act.
If the Company determines to repatriate all undistributed
repatriable earnings of controlled foreign corporations as of
September 30, 2006, the Company would have accrued taxes of
approximately $44.5 million.
|
|
12.
|
Stock
Based Compensation
|
Share
Based Compensation:
The Company originally established a Stock Option and Incentive
Plan in 1997 (the 1997 Plan). On June 1, 2006
the Company adopted the Amended and Restated Stock Option and
Incentive Plan (the Stock Option Plan) which amended
and extended the 1997 Plan. Under the plans, a total of
8 million shares of Common Stock were reserved for
issuance. The dates on which options granted under Stock Option
Plan are first exercisable are determined by the Compensation
Committee of the Board of Directors, but generally vest over a
four-year period from the date of grant. The term of any option
may not exceed ten years from the date of grant.
For certain options granted during 1997, the exercise price was
less than the fair value of the Companys stock on the date
of grant and, accordingly, compensation expense is being
recognized over the vesting period for such difference. For the
options granted thereafter, the Company grants the options at
the fair market value on the date of grant of the options.
The shares issued upon the exercise of the options are generally
new share issues. In some instances the shares are issued out of
treasury stock purchased from the market.
On January 1, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment, (SFAS 123(R))
which requires the measurement and recognition of compensation
expense for all share-based payment awards made to employees and
directors including employee stock options and employee stock
purchases related to the Employee Stock Purchase Plan
(employee stock purchases) based on estimated fair
values. SFAS 123(R) supersedes the Companys previous
accounting under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees (APB 25) for periods beginning
in fiscal 2006.
F-43
SYNTEL,
INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company adopted SFAS 123(R) using the modified
prospective transition method, which requires the application of
the accounting standard as of January 1, 2006, the first
day of the Companys fiscal year 2006. The Companys
financial statements as of and for the three and nine months
ended September 30, 2006 reflect the impact of
SFAS 123(R). In accordance with the modified prospective
transition method, the Companys financial statements for
prior periods have not been restated to reflect, and do not
include, the impact of SFAS 123(R). Share-based
compensation expense recognized under SFAS 123(R) for the
three and nine months ended September 30, 2006 was
$0.97 million and $1.89 million, including charge for
restricted stock.
SFAS 123(R) requires companies to estimate the fair value
of share-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that
is ultimately expected to vest is recognized as expense over the
requisite service periods in the Companys Statement of
Income. Prior to the adoption of SFAS 123(R), the Company
accounted for stock-based awards to employees and directors
using the intrinsic value method in accordance with APB 25
as allowed under Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based
Compensation (SFAS 123).
Restricted
Stock
On different dates during the quarter ended June 30, 2004
the Company issued 319,300 shares of incentive restricted
stock to its non-employee directors and some employees as well
as to some employees of its subsidiaries. The shares were
granted to employees for their future services as a retention
tool at a zero exercise price, with the restrictions on
transferability lapsing with regard to 10%, 20%, 30%, and 40% of
the shares issued on or after the first, second, third and
fourth anniversary of the grant dates, respectively.
On different dates during the year ended December 31, 2005
and nine months ended September 30, 2006 the Company issued
54,806 and 14,036 shares, respectively, of incentive
restricted stock to its non-employee directors and some
employees as well as to some employees of its subsidiaries. The
shares were granted to employees for their future services as a
retention tool at a zero exercise price, with the restrictions
on transferability lapsing with regard to 25% of the shares
issued on or after the first, second, third and fourth
anniversary of the grant dates. Generally, the shares to
non-employee directors are granted for their future services
starting from the date of the annual meeting to the date of the
following annual meeting.
In addition to the shares of restricted stock described above,
on different dates during the quarter ended September 30,
2006 the Company issued another 54,500 shares of incentive
restricted stock to some employees as well as to some employees
of its subsidiaries. The shares were granted to employees for
their future services as a retention tool at a zero exercise
price, with the restrictions on transferability lapsing with
regard to 20% of the shares issued on or after the first,
second, third, fourth and fifth anniversary of the grant dates.
During the quarter ended September 30, 2006 the Company
issued 142,500 shares of performance restricted stock to
some employees as well as to some employees of its subsidiaries.
Each such performance restricted stock grant is divided in a
pre-defined proportion with the vesting (lifting of restriction)
of one portion based on the overall annual performance of the
Company and the vesting (lifting of restriction) of the other
portion based on the achievement of pre-defined long term goals
of the Company. These stocks will vest (have the restrictions
lifted) over a period of 5 years (at each anniversary) in
equal installments, subject to meeting the above pre-defined
criteria of overall annual performance and achievement of the
long term goal. The stock linked to overall annual performance
would lapse (revert to the Company) on non-achievement of the
overall annual performance in the given year. However the stock
linked to the achievement of the long term goal would roll over
into a common pool and would lapse only on the
non-achievement
of the long term goal on or prior to the end of fiscal year 2012.
F-44
SYNTEL,
INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Based upon the market value on the grant dates, the Company
recorded $5.84 million during the three months ended
June 30, 2004, $0.89 million during the year ended
December 31, 2005 and $0.01 million during the nine
months ended September 30, 2006 of unearned compensation
included as a separate component of shareholders equity to
be expensed over the service period on a straight line basis.
During the three months ended September 30, 2006 and 2005
the Company reversed $0.0 million and $0.25 million,
respectively, of unearned compensation towards forfeiture of
restricted stock on account of termination of employees and
expensed $0.51 million and $0.32 million, respectively
as compensation cost on account of these stock grants and during
the nine months ended September 30, 2006 and 2005, the
Company reversed $0.14 million and $1.03 million,
respectively, of unearned compensation towards forfeiture of
restricted stock on account of termination of employees and
expensed $0.94 million and $0.81 million,
respectively, as compensation cost on account of these stock
grants.
The recipients are also eligible for dividends declared on their
restricted stock. The dividends accrued or paid on shares of
unvested restricted stock are charged to compensation cost. For
the three months ended September 30, 2006 and 2005, the
Company recorded $0.39 million and $0.02 million,
respectively, and during the nine months ended
September 30, 2006 and 2005, the Company recorded
$0.41 million and $0.46 million, respectively, as
compensation cost for dividends paid on shares of unvested
restricted stock.
For the restricted stock issued during the year ended
December 31, 2005 and nine months ended September 30,
2006, the dividend will be accrued and paid subject to the same
restriction as the restriction on transferability.
Impact
of the Adoption of FAS 123(R)
We adopted FAS 123(R) using the modified prospective
transition method beginning January 1, 2006. Accordingly,
during the nine months ended September 30, 2006, we
recorded stock-based compensation expense for awards granted
prior to, but not yet vested, as of January 1, 2006, as if
the fair value method required for pro forma disclosure under
FAS 123 were in effect for expense recognition purposes,
adjusted for estimated forfeitures. As FAS 123(R) requires
that stock-based compensation expense be based on awards that
are ultimately expected to vest, stock-based compensation for
the nine months ended September 30, 2006 has been reduced
for estimated forfeitures. When estimating forfeitures, we
consider trends of actual option forfeitures. The impact on our
results of operations of recording stock-based compensation
(including impact of restricted stock) for the nine months ended
September 30, 2006 was as follows (in thousands):
|
|
|
|
|
Cost of revenues
|
|
$
|
783
|
|
Selling, general and
administrative expenses
|
|
|
1,111
|
|
|
|
|
|
|
|
|
$
|
1,894
|
|
|
|
|
|
|
Cash received from option exercises under all share-based
payment arrangements for the three months ended
September 30, 2006 and 2005, was $0.56 million and $
0.15 million, respectively and for the nine months ended
September 30, 2006 and 2005, the same was
$1.23 million and $1.92 million, respectively. New
shares were issued for all options exercised during the nine
months ended September 30, 2006. Prior to the adoption of
FAS 123(R), the intrinsic value of restricted stock were
recorded as unearned stock-based compensation as of
December 31, 2005. Upon the adoption of FAS 123(R) in
January 2006, the unearned stock-based compensation balance of
approximately $3.17 million was reclassified to
additional-paid-in-capital.
As of September 30, 2006, the estimated compensation cost
of non-vested options (excluding restricted stock) is
$0.18 million to be vested mainly over the next two years.
F-45
SYNTEL,
INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Valuation
Assumptions
We calculated the fair value of each option award on the date of
grant using the Black-Scholes option pricing model. The
following assumptions were used for each respective period:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Assumptions
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
4.53
|
%
|
|
|
4.19
|
%
|
Expected life
|
|
|
5.00
|
|
|
|
5.00
|
|
Expected volatility
|
|
|
47.81
|
%
|
|
|
69.01
|
%
|
Expected dividend yield
|
|
|
6.80
|
%
|
|
|
8.93
|
%
|
Our computation of expected volatility for the nine months ended
September 30, 2006 is based on a combination of historical
volatility from exercised options on our stock. Prior to 2006
also, our computation of expected volatility was based on
historical volatility. Our computation of expected life in 2006,
was determined based on historical experience of similar awards,
giving consideration to the contractual terms of the stock-based
awards, vesting schedules and expectations of future employee
behavior. The interest rate for periods within the contractual
life of the award is based on the U.S. Treasury yield curve
in effect at the time of grant.
Share-Based
Payment Award Activity
The following table summarizes activity under our equity
incentive plans for the nine months ended September 30,
2006 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(In Years)
|
|
|
Value
|
|
|
Outstanding at January 1, 2006
|
|
|
438,251
|
|
|
$
|
12.28
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
134,905
|
|
|
|
9.12
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
32,700
|
|
|
|
23.45
|
|
|
|
|
|
|
|
|
|
Expired/Cancelled
|
|
|
31,036
|
|
|
|
10.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
2006
|
|
|
239,610
|
|
|
$
|
12.67
|
|
|
|
5.25
|
|
|
$
|
2,292,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable at
September 30, 2006
|
|
|
196,110
|
|
|
$
|
11.28
|
|
|
|
4.89
|
|
|
$
|
2,117,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant-date fair value of options granted as
of September 30, 2006 and 2005 was $3.53 and $3.21,
respectively. The aggregate intrinsic value of options exercised
as on September 30, 2006 was $7.30 and fair value of shares
vested and outstanding as on September 30, 2006 was $4.66.
Pro
Forma Information for Periods Prior to the Adoption of
FAS 123(R)
Prior to the adoption of FAS No. 123(R), we provided
the disclosures required under FAS No. 123, as amended
by FAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosures.
Employee stock-based compensation expense recognized under
FAS 123(R) was not reflected in our results of operations
for the three and nine months ended September 30, 2005 for
employee stock option
F-46
SYNTEL,
INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
awards as all options were granted with an exercise price equal
to the market value of the underlying common stock on the date
of grant. Our ESPP was deemed non-compensatory under the
provisions of APB No. 25. Forfeitures of awards were
recognized as they occurred. Previously reported amounts have
not been restated.
The pro forma information for the three and nine months ended
September 30, 2005 was as follows (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2005
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
11,739
|
|
|
$
|
30,419
|
|
Stock based Compensation expense
recognized in statement of income, net of tax
|
|
|
290
|
|
|
|
1,111
|
|
Stock based compensation expense
determined under the fair value method, net of tax
|
|
|
(327
|
)
|
|
|
(1,419
|
)
|
|
|
|
|
|
|
|
|
|
Pro Forma Net Income
|
|
$
|
11,702
|
|
|
$
|
30,111
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share, Pro Forma
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.29
|
|
|
$
|
0.74
|
|
Diluted earnings per share
|
|
$
|
0.29
|
|
|
$
|
0.74
|
|
Earnings Per Share as Reported
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.29
|
|
|
$
|
0.75
|
|
Diluted earnings per share
|
|
$
|
0.29
|
|
|
$
|
0.75
|
|
Weighted Average
Shares Outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
40,576
|
|
|
|
40,487
|
|
Diluted
|
|
|
40,669
|
|
|
|
40,588
|
|
|
|
13.
|
Provision
for Unutilized Leave
|
During the year ended December 31, 2005 Syntel India
changed its leave policy, resulting in a reduction of the
maximum permissible accumulation of unutilized leave from
150 days to 60 days. The balance exceeding maximum
permissible accumulation is compulsorily encashed at basic
salary. Accordingly an amount of $0.51 million was paid at
basic salary and $1.14 million was reversed being the
difference between the basic salary and gross compensation rates.
The gross charge for unutilized earned leave was
$0.29 million and $0.41 million for the three months
ended September 30, 2006 and September 30, 2005,
respectively, and $1.45 million and $1.23 million for
the nine months ended September 30, 2006 and
September 30, 2005, respectively.
The amounts accrued for unutilized earned leave are
$4.81 million and $3.70 million as of
September 30, 2006 and December 31, 2005,
respectively, and are included within Accrued payroll and
related costs.
Certain prior period amounts have been reclassified to conform
with the current period presentation.
F-47
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
ITEM 14.
|
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION
|
The following table sets forth the expenses to be borne by the
selling shareholders in connection with the offerings described
in this registration statement. All such expenses other than the
SEC registration fee and the NASD filing fee are estimates.
|
|
|
|
|
SEC registration fee
|
|
$
|
9,823
|
|
NASD filing fee
|
|
|
9,680
|
|
Transfer agent expenses
|
|
|
*
|
|
Printing fees and expenses
|
|
|
*
|
|
Accounting fees and expenses
|
|
|
*
|
|
Legal fees
|
|
|
*
|
|
Miscellaneous
|
|
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
|
|
|
|
* |
To be completed by amendment.
|
|
|
ITEM 15.
|
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
|
Michigan
Business Corporation Act
Syntel is organized under the Michigan Business Corporation Act
(the Michigan Act) which, in general, empowers
Michigan corporations to indemnify a person who was or is a
party or is threatened to be made a party to a threatened,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative and whether formal or
informal, other than an action by or in the right of the
corporation, by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director,
officer, partner, trustee, employee, or agent of another foreign
or domestic corporation, partnership, joint venture, trust or
other enterprise, whether for profit or not, against expenses,
including attorneys fees, judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred in
connection with such action, suit or proceeding if the person
acted in good faith and in a manner reasonably believed to be in
or not opposed to the best interests of the corporation or its
shareholders and, with respect to a criminal action or
proceeding, if the person had no reasonable cause to believe his
or her conduct was unlawful.
The Michigan Act also empowers Michigan corporations to provide
similar indemnity to such a person for expenses, including
attorneys fees, and amounts paid in settlement actually
and reasonably incurred by the person in connection with actions
or suits by or in the right of the corporation if the person
acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the interests of the
corporation or its shareholders, except in respect of any claim,
issue or matter in which the person has been found liable to the
corporation, unless the court determines that the person is
fairly and reasonably entitled to indemnification in view of all
relevant circumstances, in which case indemnification is limited
to reasonable expenses incurred.
The Michigan Act further requires Syntel to indemnify officers
and directors whose defense on the merits or otherwise has been
successful.
The Michigan Act also permits a Michigan corporation to purchase
and maintain on behalf of a director, officer, employee or agent
of the corporation, or a person who is or was serving at the
request of the corporation as a director, officer, partner,
trustee, employee, or agent of another corporation, partnership,
joint venture, trust or other enterprise, insurance against
liabilities incurred in such capacities. Syntel has obtained a
policy of directors and officers liability insurance.
II-1
Articles
of Incorporation and Bylaws of the Company
Syntels Articles of Incorporation and Bylaws generally
require Syntel to indemnify officers and directors to the
fullest extent legally possible under the Michigan Act and
provide that similar indemnification may be afforded employees
and agents. The Articles and Bylaws further provide that the
right to indemnification and advancement of expenses is a
contract right.
The following is a list of all exhibits filed as a part of this
registration statement on
Form S-3.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibits
|
|
|
1
|
.1
|
|
Form of underwriting agreement
(filed by amendment)
|
|
4
|
.1
|
|
Registration Rights Agreement
(filed by amendment)
|
|
5
|
.1
|
|
Opinion of Dykema Gossett LLP
(filed herewith)
|
|
23
|
.1
|
|
Consent of Independent Registered
Public Accounting Firm Crowe Chizek and Company LLC
(filed herewith)
|
|
23
|
.2
|
|
Consent of Independent Registered
Public Accounting Firm Ernst & Young LLP
(filed herewith)
|
|
23
|
.3
|
|
Consent of Dykema Gossett LLP
(contained in Exhibit 5.1)
|
|
24
|
.1
|
|
Power of Attorney (included on
signature page of registration statement)
|
The undersigned registrant hereby undertakes:
(1) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act
of 1933, each filing of the registrants annual report
pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(2) The undersigned registrant hereby undertakes to deliver or
cause to be delivered with the prospectus, to each person to
whom the prospectus is sent or given, the latest annual report
to security holders that is incorporated by reference in the
prospectus and furnished pursuant to and meeting the
requirements of
Rule 14a-3
or
Rule 14c-3
under the Securities Exchange Act of 1934; and, where interim
financial information required to be presented by Article 3
of
Regulation S-X
is not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or
given, the latest quarterly report that is specifically
incorporated by reference in the prospectus to provide such
interim financial information.
(3) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant, pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on
Form S-3
and has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the
City of Troy, in the State of Michigan, on December 8, 2006.
SYNTEL, INC.
Daniel M. Moore
Chief Administrative Officer, General Counsel and Secretary
POWER OF
ATTORNEY
Each person whose signature appears below hereby appoints Keshav
Murugesh and Daniel M. Moore, and each of them acting alone, as
his or her true and lawful
attorneys-in-fact
and agents, with full power of substitution, for him or her and
in his or her name, in any and all capacities, to sign any or
all amendments (including post-effective amendments) to this
Registration Statement, including any additional registration
statements filed pursuant to Rule 462(b) of the Securities
Act of 1933, as amended, in connection with this offering filed
by Syntel, Inc. and to file the same with the Securities and
Exchange Commission, hereby ratifying and confirming all that
said
attorneys-in-fact
and agents, or either of them, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons
in the capacities indicated on December 8, 2006.
|
|
|
|
|
|
|
|
|
Title
|
|
/s/ Bharat
Desai
Bharat
Desai
|
|
Chairman, President and Chief
Executive Officer (Principal Executive Officer) and Director
|
|
|
|
/s/ Arvind
Godbole
Arvind
Godbole
|
|
Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
/s/ Neerja
Sethi
Neerja
Sethi
|
|
Vice President, Corporate Affairs
and Director
|
|
|
|
/s/ Paritosh
K. Choksi
Paritosh
K. Choksi
|
|
Director
|
|
|
|
/s/ George
R. Mrkonic,
Jr.
George
R. Mrkonic, Jr.
|
|
Director
|
|
|
|
/s/ Vasant
Raval
Vasant
Raval
|
|
Director
|
|
|
|
/s/ Paul
R. Donovan
Paul
R. Donovan
|
|
Director
|
|
|
|
/s/ James
Swayzee
James
Swayzee
|
|
Director
|
II-3
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
|
1
|
.1
|
|
Form of underwriting agreement
(filed by amendment)
|
|
4
|
.1
|
|
Registration Rights Agreement
(filed by amendment)
|
|
5
|
.1
|
|
Opinion of Dykema Gossett LLP
(filed herewith)
|
|
23
|
.1
|
|
Consent of Independent Registered
Public Accounting Firm Crowe Chizek and Company LLC
(filed herewith)
|
|
23
|
.2
|
|
Consent of Independent Registered
Public Accounting Firm Ernst & Young LLP
(filed herewith)
|
|
23
|
.3
|
|
Consent of Dykema Gossett LLP
(contained in Exhibit 5.1)
|
|
24
|
.1
|
|
Power of Attorney (included on
signature page of registration statement)
|