As filed with the Securities and Exchange Commission on January 3, 2007

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

FORM S-3/A

AMENDMENT NO. 1

TO

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

 

 

525 East Big Beaver Road Suite 300
Troy, Michigan 48083
(248) 619-2800
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

 

Bharat Desai
Chairman and Chief Executive Officer
525 East Big Beaver Road Suite 300
Troy, Michigan 48083
(248) 619-2800
(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

 

 

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   _ _ .

 

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

 

 

 

 

 

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

	•	Applications Outsourcing, consisting of outsourcing services for ongoing management, development and maintenance of business applications.
	•	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. Syntel’s primary BPO focus is in the financial services, healthcare and insurance sectors.
	•	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.
	•	TeamSourcing, consisting of professional IT consulting services.

The Offering

 

Common stock offered by the selling shareholder		3,000,000 shares.

 

Common stock outstanding		41,092,272

 

Use of proceeds		We will not receive any proceeds from the sale of our common stock by the selling shareholder in this offering.

 

Dividend policy		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.”
Nasdaq Global Select Market symbol		SYNT
Risk Factors		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.

	•	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
	•	2,100,767 shares available for future grants or issuance under our stock option plans.

														Nine Months Ended
		Year Ended December 31,												September 30,
		2005				2004				2003				2006				2005
		(In thousands, except per share data)
STATEMENT OF INCOME DATA
Net revenues		$	226,189			$	186,573			$	179,507			$	197,123			$	163,910
Cost of revenues			135,043				107,120				101,699				123,267				97,756
Gross profit			91,146				79,453				77,808				73,856				66,154
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
Other income, principally interest			4,592				3,773				3,168				3,525				2,654
Income before income taxes			50,821				46,227				53,580				42,082				36,411
Provision for income taxes			20,500				5,253				13,242				4,443				5,992
Income before loss from equity investments			30,321				40,974				40,338				37,639				30,419
Loss from equity investment			—				—				34				—				—
Net income		$	30,321			$	40,974			$	40,304			$	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			$	0.92			$	0.75
Diluted		$	0.75			$	1.01			$	0.99			$	0.92			$	0.75
Weighted average common shares outstanding:
Basic			40,528				40,216				39,609				40,783				40,487
Diluted			40,651				40,469				40,797				41,038				40,588

 

		December 31,												September 30,
		2005				2004				2003				2006				2005
		(In thousands, except headcount data)
BALANCE SHEET DATA
Working capital		$	120,866			$	170,786			$	142,207			$	98,063			$	129,630
Total assets			198,161				226,968				185,198				174,673				195,933
Total current liabilities			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

 

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,

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 Company’s 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 client’s 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 43%, 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:

 

 

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 Technologies, Tata Consultancy Services and Wipro Technologies. 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 Technologies 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 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 client’s 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 Company’s 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 43%, 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.

Many of our engagements involve IT services that are critical to the operations of our clients’ businesses. Any failure or inability to meet a client’s 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, 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.

 

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; Identeon ^tm ; 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 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 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, management’s assessment of the effectiveness of internal control over financial reporting under Section 404. Management’s assessment of internal control 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 management’s 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 management’s 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, including any facilities on the land acquired by the Company that is in an Information Technology Park located in Chennai, India, 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 Board’s 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 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 management’s 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.

 

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:

 

 

 

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:

 

 

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 shareholder, 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:

 

 

 

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 and declared additional special dividends in 2003, 2005 and 2006, 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:

 

 

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 management’s estimates, assumptions and projections and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in the forward-looking statements. 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:

 

 

For a more detailed discussion of certain risks associated with the Company’s 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.

USE OF PROCEEDS

 

We will not receive any of the proceeds from shares of common stock sold by our selling shareholder.

CAPITALIZATION

 

The following table sets forth the Company’s capitalization as of September 30, 2006.

 

 

The table set forth above is based on shares of common stock outstanding as of September 30, 2006. This table excludes:

 

 

As of December 28, 2006, there were 41,092,272 shares of common stock outstanding, held by approximately 634 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 29, 2006 was $26.80 per share.

 

 

 

 

The Board of Directors has declared a quarterly dividend of $0.06 per share during each quarter of the Company’s 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 Syntel’s Board of Directors and will depend on, among other things, the Company’s 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.

 

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 Company’s 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 “Management’s 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.

 

 

Overview

 

Syntel is a worldwide provider of IT and outsourcing services to Global 2000 companies. The Company’s 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 Company’s 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:

 

 

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 client’s 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

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, Syntel’s professional services typically are provided at the customer’s 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 Company’s dependence on TeamSourcing engagements has decreased significantly.

 

The Company’s 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 Syntel’s U.S. workforce (11% of Syntel’s worldwide workforce) worked under H-1B visas (permitting temporary residence while employed in the U.S.) and another 16% of the Company’s U.S. workforce (5% of the Company’s 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 Company’s 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 Company’s 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 Company’s 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.

 

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:

 

Results of Operations for Period Ended September 30, 2006

 

Revenues.   The Company’s 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 Company’s 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 Company’s 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 Company’s 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, finder’s 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

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, finder’s 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, finder’s 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, finder’s fees, trainee compensation and travel. Cost of

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 Company’s 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 Company’s assessment of future regulatory reviews of filed tax

returns. Such reserves, which are recorded in income taxes payable, are based on management’s estimates and accordingly are subject to revision based on additional information.

 

The provision for income tax contingencies no longer required for any particular tax year is credited to the current period’s 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 Company’s 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, finder’s 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

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, finder’s 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, finder’s 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, finder’s fees, trainee compensation and travel. Cost of revenues for the year ended 2005 decreased to 37.8% of the segment’s 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 Company’s 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 Company’s 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.

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, finder’s 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.

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, finder’s 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, finder’s 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, finder’s fees, trainee compensation, travel and consumables, as well as dedicated connectivity charges. The BPO segment cost of revenues was 53.3% of the segment’s 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 Company’s 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.

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 Company’s 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.

 

 

 

 

The Company’s 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 Company’s 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.

 

As of April 1, 2006, three of the Company’s 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 Company’s assessment of future regulatory reviews of filed tax returns. Such reserves, which are recorded in income taxes payable, are based on management’s estimates and accordingly are subject to revision based on additional information. The provision no longer required for any particular tax year, is credited to the current period’s income tax expenses. Conversely, in the event of a future tax examination, 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

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 India’s 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 India’s 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). Furthermore, in December 2006, Syntel India received an assessment order from the Indian Income Tax authorities for the financial year 2003-04 for $2.85 million. Syntel India is in the process of filing an appeal against this order.

 

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 India’s 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.

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.

 

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 Company’s 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 Company’s 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 bank’s 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 Company’s currently anticipated cash requirements for at least the next 12 months.

 

The following table sets forth the Company’s known contractual obligations as of December 31, 2005:

 

 

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.

Critical Accounting Policies

 

The Company believes the following critical accounting policy, among others, affects the more significant judgments and estimates used in the preparation of the Company’s 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.

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 Company’s assessment of future regulatory reviews of filed tax returns. Such reserves, which are recorded in income taxes payable, are based on management’s estimates and accordingly are subject to revision based on additional information. The provision no longer required for any particular tax year is credited to the current period’s income tax 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 Company’s 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 Company’s financial position, results of operations and liquidity and its related disclosures.

 

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. Syntel’s 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 Company’s 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 Company’s Global Delivery Service provides Syntel with flexibility to deliver to each customer a unique mix of services on-site at the customer’s location, off-site at Syntel’s 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. The Company seeks to develop long-term relationships with its customers so as to become a trusted business partner and enable it to expand its 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 Company’s 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 Syntel’s 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.

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 customer’s 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 organization’s IT budget constraints. In today’s environment, large organizations are increasingly finding that full facilities management outsourcing providers who own and manage an organization’s 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.

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 Syntel’s 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 customer’s location, off-site at Syntel’s 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 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 Centers employed 3,055 persons as of September 30, 2006 and have a capacity of approximately 3,299 people. The Pune Global Development Centers employ 1,429 people and have a capacity of approximately 1,887 people. The Chennai Global Development Centers employed 1,131 persons as of September 30, 2006 and have 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. Syntel has acquired an additional 37 acres of land that is adjacent to this campus. It has also acquired approximately 29 acres of land in an Information Technology Park in Chennai, India. This area of land has been designated as a Special Economic Zone by the government of India.

 

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 Syntel’s high rate of repeat business. At engagement initiation, Syntel’s 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 customer’s 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. Syntel’s industry expertise can be leveraged to assist other clients in the same industry, thereby improving quality and the value of its services. The Company’s domain expertise extends to multiple verticals, with particular strength in financial services, insurance, and healthcare. For the nine months ended September 30, 2006, the Company’s 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. Syntel’s 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.

 

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 Syntel’s “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.   Syntel has historically performed approximately half of its services on a fixed-price, fixed-timeframe basis, which the Company believes aligns its objectives with those of its clients. The Company delivers solutions for both enterprise-wide and departmental initiatives on a fixed-price, fixed-timeframe basis using its proprietary tools and methodologies. The Company believes its ability to offer fixed-price, fixed-timeframe process is an important competitive differentiator that allows the Company and its clients to better understand clients’ business needs, and to design, develop, integrate and implement solutions that address those needs.

 

Business Strategy

 

The Company’s 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 Company’s 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 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 Company’s 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 Company’s 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 Company’s 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, Hewlett-Packard, IBM, Informatica, Microstrategy, Oracle, SAP, Serden Technologies and TIBCO, among others. The alliances provide a strong software implementation strategy for the customer, combining the partner’s software with Syntel’s 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

 

Syntel’s Global Delivery Service gives the Company the flexibility and resources to perform services on-site at the customer’s location, off-site at the Company’s U.S. locations and offshore at the Company’s 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 customer’s location, the Company is able to gain comprehensive knowledge concerning the customer’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s sales, solutions and delivery