-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CoeJtPV3WoWxVBIjvRH15mlZfJgqoVfu2wLW5OsIDmxjfnNA7wS45M6SAMk06YBi XXzW04MpuCbhHxXaYnRqIg== 0000950124-05-006238.txt : 20051108 0000950124-05-006238.hdr.sgml : 20051108 20051108134555 ACCESSION NUMBER: 0000950124-05-006238 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051108 DATE AS OF CHANGE: 20051108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYNTEL INC CENTRAL INDEX KEY: 0001040426 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 382312018 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22903 FILM NUMBER: 051185715 BUSINESS ADDRESS: STREET 1: 525 EAST BIG BEAVER ROAD STREET 2: SUITE 300 CITY: TROY STATE: MI ZIP: 48083 BUSINESS PHONE: 2486193524 MAIL ADDRESS: STREET 1: 525 EAST BIG BEAVER ROAD STREET 2: SUITE 300 CITY: TROY STATE: MI ZIP: 48083 10-Q 1 k99360e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED SEPTEMBER 30, 2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2005 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to _____________ Commission file number 0-22903 SYNTEL, INC. (Exact Name of Registrant as Specified in Its Charter) Michigan 38-2312018 (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.)
525 E. Big Beaver Road, Suite 300, Troy, Michigan 48083 (Address of Principal Executive Offices) (Zip Code)
(248) 619-2800 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes X No ----- ----- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes No X ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, no par value: 40,877,364 shares issued and outstanding as of October 31, 2005. 1 SYNTEL, INC. INDEX
Page ---- Part I Financial Information Item 1 Financial Statements Condensed Consolidated Statements of Income 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Cash Flows 5 Notes to the Condensed Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3 Quantitative and Qualitative Disclosures about Market Risk 21 Item 4 Controls and Procedures 22 Part II Other Information 23 Signatures 24 Exhibit - 1997 Stock Option and Incentive Plan, (Amended & Restated) 26 Exhibit - Incentive Restricted Stock Grant Agreement Under the Syntel, Inc. 1997 Stock Option And Incentive Plan 39 Exhibit - Consent of Independent Registered Public Accounting Firm 43 Exhibit - Certificate of Chief Executive Officer 44 Exhibit - Certificate of Chief Financial Officer 45 Exhibit - Certification of Chief Executive Officer and Chief Financial Officer 46
2 SYNTEL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------- 2005 2004 2005 2004 ------- ------- -------- -------- Net Revenues $58,501 $46,602 $163,910 $137,537 Cost of revenues 35,298 27,014 97,756 79,333 ------- ------- -------- -------- GROSS PROFIT 23,203 19,588 66,154 58,204 Selling, general and administrative expenses 10,533 8,850 32,397 26,511 ------- ------- -------- -------- Income from operations 12,670 10,738 33,757 31,693 Other income, principally interest 810 753 2,654 2,106 ------- ------- -------- -------- Income before income taxes 13,480 11,491 36,411 33,799 Provision for (benefits from) income taxes 1,741 (402) 5,992 3,179 ------- ------- -------- -------- Net income $11,739 $11,893 $ 30,419 $ 30,620 ======= ======= ======== ======== Dividend per share $ 0.06 $ 0.06 $ 1.68 $ 0.18 EARNINGS PER SHARE: Basic $ 0.29 $ 0.30 $ 0.75 $ 0.76 Diluted $ 0.29 $ 0.29 $ 0.75 $ 0.76 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 40,576 40,236 40,487 40,205 Diluted 40,669 40,335 40,588 40,486
The accompanying notes are an integral part of the condensed consolidated financial statements. 3 SYNTEL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 90,592 $109,142 Short term investments 27,865 58,899 Accounts receivable, net of allowances for doubtful accounts of $1,511 and $1,213 at September 30, 2005 and December 31, 2004, respectively 32,909 28,790 Revenue earned in excess of billings 9,045 4,390 Deferred income taxes and other current assets 9,836 5,891 -------- -------- Total current assets 170,247 207,112 Property and equipment 48,524 37,754 Less accumulated depreciation 24,499 21,290 -------- -------- Property and equipment, net 24,025 16,464 Goodwill 906 906 Deferred income taxes and other non current assets 755 2,486 -------- -------- TOTAL ASSETS $195,933 $226,968 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Current liabilities: Accounts payable $ 5,776 $ 2,394 Accrued payroll and related costs 16,463 13,963 Income taxes payable 6,361 6,290 Accrued liabilities 5,935 6,015 Deferred revenue 3,628 5,231 Dividends payable 2,454 2,433 -------- -------- Total current liabilities 40,617 36,326 SHAREHOLDERS' EQUITY Total shareholders' equity 155,316 190,642 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $195,933 $226,968 ======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements. 4 SYNTEL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 2005 2004 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 30,419 $ 30,620 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 3,407 2,194 Bad debts provision 500 -- Realized gains on sales of available-for-sale securities (392) (996) Deferred income taxes 1366 1,612 Stock warrants sales incentive -- 77 Compensation expense related to restricted stock 1,273 524 Changes in assets and liabilities: Accounts receivable and revenue earned in excess of billings, net (10,003) (2,844) Other current assets (3,609) (1,507) Accrued payroll and other liabilities 6,423 2,785 Deferred revenues (1,586) 503 -------- -------- Net cash provided by operating activities 27,798 32,967 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property and equipment expenditures (11,049) (8,213) Purchase of short term investments: Investments in mutual funds (3,184) (43,890) Investments in term deposits with banks (4,416) (7,071) Proceeds from sales of short term investments: Proceeds from sales of mutual funds 16,557 28,173 Maturities of term deposits with banks 22,682 7,394 -------- -------- Net cash provided by / (used in) investing activities 20,590 (23,607) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 2,527 2,933 Common stock repurchases (676) (1,479) Dividends paid (68,446) (7,252) -------- -------- Net cash used in financing activities (66,595) (5,798) -------- -------- Effect of foreign currency exchange rate changes on cash (343) (124) Net (decrease) / increase in cash and cash equivalents (18,550) 3,438 Cash and cash equivalents, beginning of period $109,142 $102,854 -------- -------- Cash and cash equivalents, end of period $ 90,592 $106,292 ======== ======== Non cash investing and financing activities: Dividend declared but unpaid $ 2,454 $ 2,433 Stock warrants -- 77 -------- -------- $ 2,454 $ 2,510 ======== ======== Cash paid for income taxes $ 6,234 $ 4,520 ======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements. 5 SYNTEL, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: The accompanying condensed consolidated financial statements of Syntel, Inc. (the "Company" or "Syntel") have been prepared by management, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position of Syntel and its subsidiaries as of September 30, 2005, the results of their operations for the three months and nine months period ended September 30, 2005 and September 30, 2004, and cash flows for the nine months ended September 30, 2005 and September 30, 2004. The year end condensed balance sheet as of December 31, 2004 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2004. Operating results for the nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. 2. PRINCIPLES OF CONSOLIDATION AND ORGANIZATION The consolidated financial statements include the accounts of Syntel, a Michigan corporation, its wholly owned subsidiaries, and a joint venture. All significant inter-company balances and transactions have been eliminated. The wholly owned subsidiaries of Syntel, Inc. are: - Syntel Limited ("Syntel India"), an Indian limited liability company formerly known as Syntel (India) Ltd.; - Syntel Singapore PTE., Ltd. ("Syntel Singapore"), a Singapore limited liability company; - Syntel Europe, Ltd. ("Syntel U.K."), a United Kingdom limited liability company; - Syntel Canada Inc. ("Syntel Canada"), an Ontario limited liability company; - Syntel Deutschland GmbH ("Syntel Germany"), a German limited liability company; - Syntel Hong Kong Ltd. ("Syntel Hong Kong"), a Hong Kong limited liability company; - Syntel (Australia) Pty. Limited ("Syntel Australia"), an Australian limited liability company; - Syntel Delaware LLC ("Syntel Delaware"), a Delaware limited liability company; - SkillBay LLC ("SkillBay"), a Michigan limited liability company; - Syntel (Mauritius) Limited ("Syntel Mauritius"), a Mauritius limited liability company; - Syntel Consulting Inc ("Syntel Consulting"), a Michigan corporation; and - Syntel Sterling BestShores (Mauritius) Limited ("SSBML"), a Mauritius limited liability company. - Syntel Worldwide (Mauritius) Limited ("Syntel Worldwide"), a Mauritius limited liability company. The formerly wholly owned subsidiary of Syntel Delaware LLC (as of December 31, 2004) that became a partially owned joint venture of Syntel Delaware LLC on February 1, 2005 is: - Syntel Solutions (Mauritius) Ltd. ("Syntel Solutions"), a Mauritius limited liability company. The wholly owned subsidiary of Syntel Solutions is: - Syntel Sourcing Pvt. Ltd. ("Syntel Sourcing"), an Indian limited liability company. The wholly owned subsidiaries of Syntel Mauritius are: - Syntel International Pvt. Ltd. ("Syntel International"), an Indian limited liability company; and - Syntel Global Pvt. Ltd. ("Syntel Global"), an Indian limited liability company. The wholly owned subsidiary of Syntel Sterling BestShores (Mauritius) Limited is: - Syntel Sterling BestShores Solutions Private Limited" ("SSBSPL"), an Indian limited liability company. 6 3. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates include, but are not limited to allowance for doubtful accounts, impairment of goodwill, contingencies and litigation, the recognition of revenues and profits based on the proportional performance method and potential tax liabilities. Actual results could differ from those estimates and assumptions used in the preparation of the accompanying financial statements. 4. REVENUE RECOGNITION The Company recognizes revenues from time and material contracts as the services are performed. Revenue from fixed-price applications management, maintenance and support engagements is recognized as earned which generally results in straight-line revenue recognition as services are performed continuously over the term of the engagement. Revenue on fixed-price, applications development and integration projects in the Company's application outsourcing and e-Business segments are measured using the proportional performance method of accounting. Performance is generally measured based upon the efforts incurred to date in relation to the total estimated efforts to the completion of the contract. The Company monitors estimates of total contract revenues and cost on a routine basis throughout the delivery period. The cumulative impact of any change in estimates of the contract revenues or costs is reflected in the period in which the changes become known. In the event that a loss is anticipated on a particular contract, provision is made for the estimated loss. The Company issues invoices related to fixed price contracts based on either the achievement of milestones during a project or other contractual terms. Differences between the timing of billings and the recognition of revenue based upon the proportional performance method of accounting are recorded as revenue earned in excess of billings or deferred revenue in the accompanying consolidated balance sheets. Revenues are reported net of sales incentives. Reimbursements of out-of-pocket expenses are included in revenue in accordance with Emerging Issues Task Force Consensus ("EITF") 01-14, "Income Statement Characterization of Reimbursement Received for 'Out of Pocket' Expenses Incurred". 5. CASH AND CASH EQUIVALENTS For the purpose of reporting Cash and Cash Equivalents, the Company considers all liquid investments purchased with an original maturity of three months or less to be cash equivalents. At September 30, 2005 and 2004, approximately $8.67 million and $24.5 million, respectively, represent corporate bonds and treasury notes held by Bank One, for which "AAA" rated letters of credit have been provided by the bank. The remaining amounts of cash and cash equivalents are invested in money market accounts with various banking and financial institutions. 6. STOCK WARRANTS SALES INCENTIVE In 2000, the Company agreed to grant to a significant customer performance warrants entitling the customer to purchase shares of Company stock. The issuance of the performance warrants is dependent upon the customer meeting performance milestones by purchasing specified minimum levels of services from the Company over a specified period. The Company has estimated that such performance milestones will not be met during the year. Accordingly, the Company has not accounted for these performance warrants. If and when the Company estimates that such performance milestones will be met, the sales incentive associated with the performance warrants will be recorded as a reduction of revenue. 7 7. COMPREHENSIVE INCOME Total Comprehensive Income for the three and nine months period ended September 30, 2005 and 2004 was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2005 2004 2005 2004 ------- ------- ------- ------- (in thousands) (in thousands) Net income $11,739 $11,893 $30,419 $30,620 Other comprehensive income - Unrealized Gain (loss) 164 9 353 (38) - Foreign currency translation adjustments (439) (201) (1,098) (1,492) ------- ------- ------- ------- Total comprehensive income $11,464 $11,701 $29,674 $29,090 ======= ======= ======= =======
8. EARNINGS PER SHARE Basic and diluted earnings per share are computed in accordance with Statement of Financial Accounting Standards ("SFAS") No, 128 "Earnings Per Share". Basic earnings per share are calculated by dividing net income by the weighted average number of shares outstanding during the applicable period. The Company has stock options, which are considered to be potentially dilutive to the basic earnings per share. Diluted earnings per share is calculated using the treasury stock method for the dilutive effect of shares which have been granted pursuant to the stock option plan, by dividing the net income by the weighted average number of shares outstanding during the period adjusted for these potentially dilutive options, except when the results would be anti-dilutive. The potential tax benefits on exercise of stock options is considered as additional proceeds while computing dilutive earnings per share using the treasury stock method. The following table summarizes the movement in the Capital Structure from June 30, 2005
NO. OF SHARES PARTICULARS (IN THOUSANDS) - ----------- -------------- Balance as on June 30, 2005 40,527 ADD: Shares issued on exercise of stock options & restricted stock 63 ------ Balance as on September 30, 2005 40,590 ------
The following table sets forth the computation of earnings per share.
THREE MONTHS ENDED SEPTEMBER 30, ----------------------------------------------------------------- 2005 2004 ------------------------------- ------------------------------- Weighted Average Earnings per Weighted Average Earnings per Shares Shares Shares Share ---------------- ------------ ---------------- ------------ (in thousands, except per share earnings) Basic earnings per share 40,576 $0.29 40,236 $ 0.30 Potential dilutive effect of stock options outstanding 93 -- 99 (0.01) ------ ----- ------ ------ DILUTED EARNINGS PER SHARE 40,669 $0.29 40,335 $ 0.29 ====== ===== ====== ======
8
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------------------------------------- 2005 2004 ------------------------------- ------------------------------- Weighted Average Earnings per Weighted Average Earnings per Shares Shares Shares Share ---------------- ------------ ---------------- ------------ (in thousands, except per share earnings) Basic earnings per share 40,487 $0.75 40,205 $0.76 Potential dilutive effect of stock options outstanding 101 -- 281 -- ------ ----- ------ ----- DILUTED EARNINGS PER SHARE 40,588 $0.75 40,486 $0.76 ====== ===== ====== =====
9. SEGMENT REPORTING The Company is organized geographically and by business segment. For management purposes, the Company is primarily organized on a worldwide basis into four business segments: - Applications Outsourcing - e-Business - TeamSourcing; and - Business Process Outsourcing (BPO) These segments are the basis on which the Company reports its primary segment information to management. Management allocates all corporate expenses among the segments. No balance sheet/identifiable assets data is presented since the Company does not segregate its assets by segment. Financial data for each segment for the three months and nine months period ended September 30, 2005 and 2004 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------- 2005 2004 2005 2004 ------- ------- -------- -------- (in thousands) (in thousands) REVENUES: Applications Outsourcing $43,872 $36,706 $124,725 $104,898 e-Business 7,946 6,143 22,687 22,654 TeamSourcing 4,727 3,308 12,279 8,802 BPO 1,956 445 4,219 1,183 ------- ------- -------- -------- $58,501 $46,602 $163,910 $137,537 ------- ------- -------- -------- GROSS PROFIT: Applications Outsourcing $18,443 $16,013 $ 52,224 $ 45,720 e-Business 2,253 2,309 7,547 8,798 TeamSourcing 1,286 1,085 3,596 3,166 BPO 1,221 181 2,787 520 ------- ------- -------- -------- 23,203 19,588 66,154 58,204 Selling, general and administrative expenses 10,533 8,850 32,397 26,511 ------- ------- -------- -------- Income from operations $12,670 $10,738 $ 33,757 $ 31,693 ------- ------- -------- --------
9 During the three months ended September 30, 2005 and 2004, American Express Corp. contributed revenues in excess of 10% of total consolidated revenues. Revenue from this customer was $8.9 million during the three months ended September 30, 2005, contributing approximately 15.3% of total consolidated revenues, as compared to $7.9 million during the three months ended September 30, 2004, contributing approximately 17.0% of total consolidated revenues. During the nine months ended September 30, 2005 and 2004, American Express Corp. contributed revenues in excess of 10% of total consolidated revenues. Revenue from this customer was $24.3 million during the nine months ended September 30, 2005, contributing approximately 14.8% of total consolidated revenues, as compared to $21.9 million during the nine months ended September 30, 2004, contributing approximately 15.9% of total consolidated revenues. 10. GEOGRAPHIC INFORMATION Customers of the Company are primarily located in the United States. Net revenues and net income (loss) were attributed to each geographic location as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 2005 2004 2005 2004 -------- -------- -------- -------- (in thousands) (in thousands) NET REVENUES North America, primarily United States $ 52,542 $ 42,090 $147,029 $123,086 India 29,880 24,050 84,313 64,755 UK 3,138 3,081 9,612 10,475 Far East, primarily Singapore, Mauritius 592 410 1,352 1,174 Germany 439 569 1,270 2,383 Inter-company revenue elimination (primarily India) (28,090) (23,598) (79,666) (64,336) -------- -------- -------- -------- TOTAL REVENUE $ 58,501 $ 46,602 $163,910 $137,537 ======== ======== ======== ======== NET INCOME/(LOSS) North America, primarily United States $ 4,188 $ 3,625 $ 9,142 $ 8,608 India 6,755 7,861 19,779 20,198 UK 506 371 1,516 1,436 Far East, primarily Singapore, Mauritius 84 108 124 184 Germany 206 (72) (142) 194 -------- -------- -------- -------- INCOME/(LOSS) AFTER INCOME TAXES $ 11,739 $ 11,893 $ 30,419 $ 30,620 ======== ======== ======== ========
10 11. INCOME TAXES The following table accounts for the differences between the federal statutory tax rate of 35% and the Company's overall effective tax rate :
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2005 2004 2005 2004 ------- ------- ------- ------- (in thousands) (in thousands) Income before income taxes $13,480 $11,491 $36,411 $33,799 Statutory provision 35.0% 35.0% 35.0% 35.0% State taxes, net of federal benefit 1.3% 0.9% 1.3% 1.0% Tax-free investment income 0.0% (0.4%) (0.2%) (0.5%) Foreign effective tax rates different from US statutory rate (16.6%) (23.8%) (17.1%) (19.5%) Tax Reserves (19.1%) (15.2%) (7.1%) (5.2%) Valuation Allowance 12.3% 0.0% 4.6% 0.0% Other, net 0.0% 0.0% 0.0% (1.4%) ------- ------- ------- ------- EFFECTIVE INCOME TAX RATE 12.9% (3.5%) 16.5% 9.4% ======= ======= ======= =======
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. 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, 2005 and September 30, 2004, the effective income tax rate was 12.9% and (3.5)% respectively. During the nine months ended September 30, 2005 and 2004, the effective income tax rate was 16.5% and 9.4%, respectively. The tax rates for the three months and nine months ended September 30, 2005 is impacted by reversal of tax reserve of $2.6 million and provison for valuation allowance of $1.7 million. During the three and nine months ended September 30, 2004 the tax rate was impacted by reversal of tax reserve of $1.7 million, tax credit of $0.5 million in Syntel India and the research and development tax credit of $0.5 million in Syntel Inc. Syntel India has not provided for disputed Indian income tax liabilities amounting to $2.6 million for the financial years 1995-96 to 2001-02. Syntel India has obtained an opinion from one independent legal counsel (a former Chief Justice of the Supreme Court of India) for the financial year 1998-99 and two opinions from another independent legal counsel (also a former Chief Justice of the Supreme Court of India) for the financial years 1995-96, 1996-97, 1997-98, 1999-2000 and 2000-01 and for subsequent periods to date, which support Syntel India's stand in this matter. Syntel India had filed an appeal with the Commissioner of Income Tax (Appeals) for the financial year 1998-99 and received a favorable decision. A similar appeal filed by Syntel India with the Commissioner of Income Tax (Appeals) for the financial year 1999-2000 was however dismissed in March 2004. Syntel India has appealed this decision with the Income Tax Appellate Tribunal. Syntel India has since also received orders for appeals filed with the Commissioner of Income Tax (Appeals) against the demands raised in March 2004 by the Income Tax Officer for similar matters relating to the financial years 1995-96, 1996-97, 1997-98 and 2000-01 and received a favorable decision for 1995-96 and the contention of Syntel India was partially upheld for the other three years. Syntel India has gone into further appeal with the Income Tax Appellate Tribunal for the amounts not allowed by the Commissioner of Income Tax (Appeals). The Income Tax Department has appealed the favorable decisions for 1995-96 and 1998-99 and the partially favorable decisions for the other years with the Income Tax Appellate Tribunal. Further, Syntel India has not provided for disputed income tax liabilities aggregating to $0.06 million for financial years 1999-00 to 2001-02, against which Syntel India had filed or is in the process of filing appeals or petitions with the 11 Commissioner of Income Tax (Appeals). All the above tax exposures involve complex issues and may need an extended period to resolve the issues with the Indian income tax authorities. Management, after consultation with legal counsel, believes that the resolution of the above matters will not have a material adverse effect on the Company's financial position. UNDISTRIBUTED EARNINGS OF FOREIGN SUBSIDIARIES The Company intends to use accumulated and future earnings of foreign subsidiaries to expand operations outside the United States and accordingly undistributed earnings of foreign subsidiaries are considered to be indefinitely reinvested outside the United States and no provision for U. S. federal and state income tax or applicable dividend distribution tax has been provided thereon. However, the American Jobs Creation Act of 2004 enacted on October 22, 2004 ("the Jobs Act") provides a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing 85 percent dividends received, as a deduction, for certain dividends from controlled foreign corporations that occur prior to December 31, 2005. The Company is evaluating the potential effects of the Jobs Act and foreign laws that might affect any such repatriation. Subject to the completion of evaluation and the operating results of Company's controlled foreign corporations, the Company will be eligible to repatriate, subject to the appropriate withholding taxes thereon, some amount between $0 and $ 143 million, which if repatriated under the Jobs Act, would result into accrual of taxes between $ 0 to $25 million, which includes taxes payable on distribution of dividend under foreign laws. If the Company determines to repatriate all undistributed repatriable earnings of controlled foreign corporations as of September 30, 2005 (without considering the Jobs Act provisions), the Company would have accrued taxes of approximately $58.9 million. The Company's current outlook does not reflect the impact of tax and other charges or benefits, related to repatriation currently under evaluation, as mentioned above. 12 12. STOCK BASED COMPENSATION As permitted by SFAS No. 123, the Company has elected to measure stock based compensation cost using the intrinsic value method, in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and has adopted the disclosure requirements of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123". Had the fair value of each stock option granted been determined consistent with the methodology of SFAS No. 123, "Accounting for Stock Based Compensation", the pro forma impact on the Company's net income and earnings per share is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 2005 2004 2005 2004 ------- ------- ------- ------- (in thousands) (in thousands) NET INCOME Net income, as reported $11,739 $11,833 $30,419 $30,620 Stock based compensation expenses recognized in statement of income, net of tax 290 304 1,111 425 Stock based compensation expenses determined under the fair value method, net of tax (327) (290) (1,419) (1,352) ------- ------- ------- ------- PRO FORMA NET INCOME $11,702 $11,907 $30,111 $29,693 ------- ------- ------- ------- EARNINGS PER SHARE, PRO FORMA Basic earnings per share $ 0.29 $ 0.30 $ 0.74 $ 0.74 Diluted earnings per share $ 0.29 $ 0.30 $ 0.74 $ 0.73 EARNINGS PER SHARE AS REPORTED Basic earnings per share $ 0.29 $ 0.30 $ 0.75 $ 0.76 Diluted earnings per share $ 0.29 $ 0.29 $ 0.75 $ 0.76 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 40,576 40,236 40,487 40,205 Diluted 40,669 40,335 40,588 40,486 Estimated fair value of option granted $ 3.21 $ 5.42 $ 3.21 $ 5.42
Under SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for grants:
AS ON SEPTEMBER 30, ------------------- 2005 2004 ----- ----- Assumptions Risk free interest rate 4.19% 3.48% Expected life 5 5 Expected volatility 69.01% 72.76% Expected dividend yield 8.93% 1.45%
RESTRICTED STOCK: On different dates during the quarter ended June 30, 2004 the Company issued 319,300 shares of incentive restricted stock to its non-employee directors and some employees as well as to some employees of its subsidiaries. The stocks were granted to employees for their future services as a retention tool at a zero exercise price, with the restrictions on transferability lapsing with regard to 10%, 20%, 30%, and 40% of the shares issued on or after the first, second, third and fourth anniversary of the grant dates, respectively. On different dates during the nine months ended September 30, 2005 the Company issued additional 51,500 shares of 13 incentive restricted stock to its employees as well as to some employees of its subsidiaries. The stocks were granted to employees for their future services as a retention tool at a zero exercise price, with the restrictions on transferability lapsing with regard to incremental 25% of the shares issued on or after the first, second, third and fourth anniversary of the grant dates, respectively. Based upon the market value on the grant dates, the Company recorded $5.83 million during the quarter ended June 30, 2004 and $0.84 million during the nine months ended September 30, 2005 of unearned compensation included as a separate component of shareholders equity to be expensed over the four year's service period on a straight line basis. During the year ended December 31, 2004, the Company reversed $0.40 million of unearned compensation towards forfeiture of restricted stock on account of termination of employees and expensed $0.83 million as compensation cost on account of these stock grants. During the three and nine months ended September 30, 2005, the Company reversed $0.25 million and $1.03 million, respectively, of unearned compensation towards forfeiture of restricted stock on account of termination of employees and expensed $0.32 million and $0.81 million, respectively, as compensation cost on account of these stock grants. The recipients are also eligible for dividends declared on their restricted stock. The dividends paid or accrued on shares of unvested restricted stock are charged to compensation cost. For the year ended December 31, 2004, the Company recorded $0.05 million as compensation cost for dividends paid or accrued on shares of unvested restricted stock. For the three and nine months ended September 30, 2005, the Company recorded $0.02 million and $0.46 million, respectively, as compensation cost for dividends paid or accrued on shares of unvested restricted stock. For the restricted stock issued during the nine months ended September 30, 2005 the dividend will be accrued and paid subject to the same restriction as the restriction on transferability. 13. PROVISION FOR UNUTILIZED LEAVE During the three months ended June 30, 2005 Syntel India had changed its leave policy, resulting in a reduction of the maximum permissible accumulation of unutilized leave from 150 days to 60 days. The balance exceeding maximum permissible accumulation is compulsorily encashed at basic salary. Accordingly an amount of $0.51 million was paid at basic salary and $0.88 million was reversed being the difference between the basic salary and gross compensation rates. 14. RECLASSIFICATION Certain prior period amounts have been reclassified to conform with the current period presentation. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SYNTEL INC. AND SUBSIDIARIES RESULTS OF OPERATIONS REVENUES. The Company's revenues consist of fees derived from its Applications Outsourcing, e-Business, TeamSourcing and Business Process Outsourcing business segments. Net revenues in the three months ended September 30, 2005 increased to $58.5 million from $46.6 million in the three months ended September 30, 2004, representing a 25.5% increase. Further, revenues have increased primarily consequent to our increased workforce. Information technology offshoring is a growing trend with increasing numbers of multi-national corporations aggressively outsourcing their applications development or business processes to vendors with an offshore presence. Syntel has benefited from this trend. Also the Company's Client Partner Program has enabled better relationships with key customers leading to continued growth in business. Worldwide billable headcount, including personnel employed by Syntel India, Syntel Singapore, Syntel U.K., and Syntel Germany as of September 30, 2005 increased by 31% to 3,847 employees as compared to 2,939 employees as of September 30, 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 revenues per offshore billable resource are generally lower as compared to an on-site based resource. As of September 30, 2005, the Company had approximately 64.2% of its billable workforce in India as compared to 57.2% as of September 30, 2004. The Company's top five customers accounted for 44.5% of the total revenues in the three months ended September 30, 2005, up from 41.7% of its total revenues in the three months ended September 30, 2004. Moreover, the Company's top 10 customers accounted for 64.4% of the total revenues in the three months ended September 30, 2005 as compared to 61.9% in the three months ended September 30, 2004. APPLICATIONS OUTSOURCING REVENUES. Applications Outsourcing revenues increased to $43.9 million for the three months ended September 30, 2005, or 75.0% of total revenues, from $36.7 million, or 78.8% of total revenues for the three months ended September 30, 2004. The $7.2 million increase was attributable primarily to revenues from new engagements contributing $20.8 million largely offset by $13.6 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, 2005 increased to $124.7 million, or 76.1% of total revenues, from $104.9 million or 76.3% of total revenues for the nine months ended September 30, 2004. The $19.8 million increase for nine months ended September 30, 2005 was attributable principally to revenues from new engagements, contributing approximately $48.2 million, largely offset by $28.4 million in lost revenues as a result of project completion and net reduction in revenues from existing projects. APPLICATIONS OUTSOURCING COST OF REVENUES. Cost of revenues consists of costs directly associated with billable consultants in the US 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 58.0% of total Applications Outsourcing revenues for the three months ended September 30, 2005, from 56.4% for the three months ended September 30, 2004. The 1.6 percentage point increase in cost of revenues, as a percent of revenues for the three months ended September 30, 2005 was attributable primarily, due to increased offshore headcount. Cost of revenues for the nine months ended September 30, 2005 increased to 58.1% of total Applications Outsourcing revenues, from 56.4% for the nine months ended September 30, 2004. The 1.7 percentage point increase in cost of revenues, as a percent of revenues for the nine months ended September 30, 2005 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 0.2 percentage points, the salary revision, effective April 1, 2005, in India, contributing an increase of 0.8 percentage points, visa filing expenses contributing an increase of 0.8 percentage points and increase in offshore headcount contributing an increase of 0.5 percentage points. These increases were partially offset by a 0.6 percentage point decrease due to write back of leave accruals, related to the change in leave policy in India. E-BUSINESS REVENUES. e-Business revenues increased to $7.9 million for the three months ended September 30, 2005, or 13.6% of total revenues, from $6.1 million, or 13.2% of revenues for the three months ended September 30, 2004. The $1.8 million increase was attributable primarily to revenues from new engagements and net increase in revenues from existing projects contributing $3.6 million largely offset by $1.8 million in lost revenues as a result of project 15 completion. The revenues for the nine months ended September 30, 2005 increased to $22.7 million, or 13.8% of total revenues, from $22.6 million or 16.5% of total revenues for the nine months ended September 30, 2004. The $0.1 million increase for nine months ended September 30, 2005 was attributable principally to revenues from new engagements, contributing approximately $6.8 million, largely offset by $6.7 million in lost revenues as a result of project completion and net reduction in revenues from existing projects. E-BUSINESS COST OF REVENUES. e-Business cost of revenues consists of costs directly associated with billable consultants in the US and offshore, including salaries, payroll taxes, benefits, relocation costs, immigration costs, finder's fees, trainee compensation, and travel. e-Business cost of revenues increased to 71.6% of total e-Business revenues for the three months ended September 30, 2005, from 62.4% for the three months ended September 30, 2004. The 9.2 percentage point increase in cost of revenues as a percent of revenues for the three months ended September 30, 2005 is principally attributable to lower utilization of the resources caused by increased hiring and training at offshore. Cost of revenues for the nine months ended September 30, 2005 increased to 66.7% of total e-Business revenues, from 61.2% for the nine months ended September 30, 2004. The 5.5 percentage point increase in cost of revenues, as a percent of revenues for the nine months ended September 30, 2005, 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 to $4.7 million for the three months ended September 30, 2005, or 8.1% of total revenues, from $3.3 million, or 7.1% of total revenues for the three months ended September 30, 2004. The $1.4 million increase 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 and net increase in revenues from existing projects contributing $2.4 million largely offset by $1.0 million in lost revenues as a result of project completion. The revenues for the nine months ended September 30, 2005 increased to $12.3 million, or 7.5% of total revenues, from $8.8 million or 6.4% of total revenues for the nine months ended September 30, 2004. The $3.5 million increase for nine months ended September 30, 2005 was attributable principally to revenues from new engagements and net increase in revenues from existing projects contributing approximately $4.8 million, largely offset by $1.3 million in lost revenues as a result of project completion. TEAMSOURCING COST OF REVENUES. TeamSourcing cost of revenues consists of costs directly associated with billable consultants in the US, including salaries, payroll taxes, benefits, relocation costs, immigration costs, finder's fees, trainee compensation, and travel. TeamSourcing cost of revenues increased to 72.8% of TeamSourcing revenues for the three months ended September 30, 2005, from 67.2% for the three months ended September 30, 2004. Cost of revenues for the nine months ended September 30, 2005 increased to 70.7% of total TeamSourcing revenues, from 64.0% for the nine months ended September 30, 2004. These increases in cost of revenues, as a percent of total TeamSourcing revenues were attributable primarily to the higher cost TeamSourcing placements partially offset 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 $1.9 million or 3.3% of total revenues for the three months ended September 30, 2005 as against $0.4 million or 1.0% for the three months ended September 30, 2004. The revenues for the nine months ended September 30, 2005 increased to $4.2 million, or 2.6% of the total revenues, from $1.2 million, or 0.9% of the total revenues for the nine months ended September 30, 2004. Both $1.5 million and $3.0 million increase in the three and nine months period ended September 30, 2005 were primarily due the increased billable headcount. Also, as of February 1, 2005, the Company signed a joint venture agreement with a large banking instituition which helped it to ramp up its business in the BPO segment. 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, 2005 decreased to 37.6% of BPO revenues, from 59.3% for the three months ended September 30, 2004. Cost of revenues for the nine months ended September 30, 2005 decreased to 33.9% of BPO revenues, from 56.0% for the nine months ended September 30, 2004. Both the 21.7% and 22.1% decrease in cost of revenues, as a percent of total BPO revenues was attributable primarily to better utilization of resources. 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; 16 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, 2005 were $10.5 million or 18.0% of total revenues, compared to $8.9 million or 19.0% of total revenues for the three months ended September 30, 2004. This 1.0 percentage point decrease in selling, general, and administrative expenses as a percentage of revenue is primarily due to increases in revenue in the three months ended September 30, 2005 as against the three months ended September 30, 2004, which resulted in an approximately 3.9 percentage point decrease, largely offset by an increase in recruiting expenses of $0.2 million, depreciation of $0.5 million towards the BPO offices at the Hiranandani, Mumbai and the Pune facilities in India, an increase in travel expenses of $0.1 million, provision for doubtful debts of $0.5 million, and office expenses of $0.3 million, which resulted in an approximately 2.9 percentage point increase. Selling, general, and administrative costs for the nine months ended September 30, 2005 were $32.4 million or 19.8% of total revenues, compared to $26.5 million or 19.3% of total revenues for the nine months ended September 30, 2004. Selling, general, and administrative costs for the nine months ended September 30, 2005 include an 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. After removing the impact of these two items, selling, general and administrative expenses were 19.5% and 19.3% of total revenues for the nine months ended September 30, 2005 and 2004 respectively. This 0.2 percentage point increase in selling, general and administrative expenses as a percentage of revenue is primarily due to an increase in ; compensation costs of $0.7 million in the USA and India, travel expenses of 0.6 million, depreciation of $1.2 million and rent of $0.4 million towards the BPO offices at the Hiranandani, Mumbai and the Pune facilities in India, consulting charges of $0.6 million, legal expenses of $0.2 million, recruiting expenses of $0.3 million, provision for doubtful debts of $0.5 million, office expenses of $0.8 million and telecommunication expenses of $0.1 million which resulted in an approximately 3.3 percentage point increase, partially offset by, increase in revenue in the nine months ended September 30, 2005 as against the nine months ended September 30, 2004, which resulted in an approximately 3.1 percentage point decrease. 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, 2005 and September 30, 2004, the effective income tax rate was 12.9% and (3.5)% respectively. During the nine months ended September 30, 2005 and 2004, the effective income tax rate was 16.5% and 9.4%, respectively. The tax rates for the three months and nine months ended September 30, 2005 is impacted by reversal of tax reserve of $2.6 million and provison for valuation allowance of $1.7 million. During the three and nine months ended September 30, 2004 the tax rate was impacted by reversal of tax reserve of $1.7 million, tax credit of $0.5 million in Syntel India and the research and development tax credit of $0.5 million in Syntel Inc. LIQUIDITY AND CAPITAL RESOURCES The Company generally has financed its working capital needs through operations. The Company's cash and cash equivalents consist primarily of certificates of deposit, corporate bonds and treasury notes. These amounts are held by various banking institutions including US-based and India-based banks. Net cash generated by operating activities was $27.8 million for the nine months ended September 30, 2005, compared to $32.9 million for the nine months ended September 30, 2004. The number of days sales outstanding in net accounts receivable was approximately 65 days and 66 days as of September 30, 2005 and September 30, 2004, respectively. The decrease in the number of day's sales outstanding in net accounts receivable was due to relatively higher collections 17 during the nine months ended September 30, 2005. Net cash provided by investing activities was $20.6 million for the nine months ended September 30, 2005, consisting principally of $39.2 million for the sale of short term investments partially offset by $11.0 million of capital expenditures, consisting principally of capital work in progress, including capital advances towards construction of a Global Development Center at Pune, India, PCs and communications equipment and the purchase of short term investments of $7.6 million. Net cash used in investing activities was $23.6 million for the nine months ended September 30, 2004, consisting principally of $51.0 million for the purchase of short term investments and $8.2 million for capital expenditures, consisting principally of PCs and communications equipment partially offset by the sale of short term investments of $35.6 million. 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 was $5.8 million for the nine months ended September 30, 2004, consisting principally of $7.2 million in dividends paid out and $1.5 million in common stock repurchases, partially offset by $2.9 million of proceeds from the issuance of shares under the Company's employee stock option plan and employee stock purchase plan. The Company has a line of credit with Bank One, which provides for borrowings up to $15.0 million. The line of credit has been renewed and now expires on August 31, 2006. The line of credit contains covenants restricting the Company from, among other things, incurring additional debt, issuing guarantees and creating liens on the Company's property, without the prior consent of the bank. The line of credit also requires the Company to maintain certain tangible net worth levels and leverage ratios. 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. Borrowing under the line of credit bears 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) a negotiated rate plus 1.25%. No borrowings were outstanding at September 30, 2005 and 2004. 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. CRITICAL ACCOUNTING POLICIES We believe the following critical accounting policy, among others, affects the more significant judgments and estimates used in the preparation of our consolidated financial statements. The Company has discussed this critical accounting policy and the estimates with the Audit Committee of the Board of Directors. REVENUE RECOGNITION. Revenue recognition is the most significant accounting policy for the Company. The Company recognizes revenue from time and material contracts as services are performed. During the three months ended September 30, 2005 and 2004, revenues from time and material contracts constituted 51.2% and 45.6% 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, 2005 and 2004, revenues from fixed price application management and support engagements constituted 29.0% and 35.7% 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 18 months ended September 30, 2005 and 2004, revenues from fixed price development contracts constituted 19.8% and 18.8% of total revenues, respectively. SIGNIFICANT ACCOUNTING ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and judgments 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 it's 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 RESERVES FOR TAX CONTINGENCIES. The Company records provisions for income taxes based on enacted tax laws and rates in the various taxing jurisdictions in which it operates. In determining the tax provisions, the Company 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, 2005 and September 30, 2004, the effective income tax rate was 12.9% and (3.5)%, 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. FORWARD LOOKING STATEMENTS / RISK FACTORS Certain information and statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this report, including the allowance for doubtful accounts, contingencies and litigation, potential tax liabilities, interest rate or foreign currency risks, and projections regarding our liquidity and capital resources, could be construed as forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements containing words such as "could", "expects", "may", "anticipates", "believes", "estimates", "plans", and similar expressions. In addition, the Company or persons acting on its behalf may, from time to time, publish other forward looking statements. Such forward looking statements are based on management's estimates, assumptions and projections and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in the forward looking statements. 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 the following, which factors are more fully discussed in the Company's most recently filed Annual Report on Form 10-K and other SEC filings, in each case under the section entitled "Risk Factors": - Recruitment and Retention of IT Professionals - Government Regulation of Immigration - Variability of Quarterly Operating Results 19 - Customer Concentration; Risk of Termination - Exposure to Regulatory and General Economic Conditions in India - Intense Competition - Ability to Manage Growth - Fixed-Price Engagements - Potential Liability to Customers - Dependence on Key Personnel - Risks Related to Possible Acquisitions - Limited Intellectual Property Protection - Potential Anti-Outsourcing Legislation - Adverse Economic Conditions - Failure to Successfully Develop and Market New Products and Services - Benchmarking Provisions - Corporate Governance Issues - Telecom/Infrastructure Issues - Confidentiality Issues - New Facilities - Stock Option Accounting - Terrorist Activity, War or Natural Disasters - Instability and Currency Fluctuations The Company does not intend to update the forward looking statements or risk factors to reflect future events or circumstances. RECENT ACCOUNTING PRONOUNCEMENTS On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS No. 123(R)), which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB No. 25 and amends SFAS No. 95, "Statement of Cash Flows." Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options and issuances under employee stock purchase plans, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative under the new standard. In accordance with the Securities and Exchange Commission's amendment in April 2005 of the compliance dates of SFAS No. 123(R), Syntel must adopt SFAS No. 123(R) on January 1, 2006. Early adoption is permitted in periods in which financial statements have not yet been issued. Syntel expects to adopt SFAS No. 123(R) on January 1, 2006. SFAS No. 123(R) allows for two transition methods. The basic difference between the two methods is that the modified-prospective transition method does not require restatement of prior periods, whereas the modified-retrospective transition method will require restatement. As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB No. 25's intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options or stock issuances under the employee stock purchase plan. Although the full impact of Syntel's adoption of SFAS No. 123(R)'s fair value method has not yet been determined, the Company expects that it will have a significant impact on its results of operations. The disclosure of pro forma net income and earnings per share as if the Company had recognized compensation cost for share-based payments under SFAS No. 123 for the three months and nine months ended September 30, 2005 and 2004 is not necessarily indicative of the potential impact of recognizing compensation cost for share based payments under SFAS No. 123(R) in future periods. The potential impact of adopting SFAS No. 123(R) is dependent on levels of share-based payments granted, the specific option pricing model utilized to determine fair value and the transition methodology selected. 20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are exposed to the impact of interest rate changes and foreign currency fluctuations. INTEREST RATE RISK We consider investments purchased with an original or remaining maturity of less than three months at date of purchase to be cash equivalents. The following table summarizes our cash and cash equivalents and short term investments:
SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------ (in thousands) ASSETS Cash and cash equivalents $ 90,592 $109,142 Short term Investments 27,865 58,899 -------- -------- TOTAL $118,457 $168,041 ======== ========
Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. Our investments are in high-quality Indian Mutual Funds and, by policy, limit the amount of credit exposure to any one issuer. At any time, changes in interest rates could have an impact on interest earnings for our investment portfolio. We protect and preserve our invested funds by limiting default, market and reinvestment risk. Investments in interest earning instruments carry a degree of interest rate risk. Floating rate securities may produce less income than expected if there is a decline in interest rates. Due in part to these factors, our future investment income may fall short of expectations, or we may suffer a loss in principal if we are forced to sell securities that have declined in market value due to changes in interest rates as stated above. FOREIGN CURRENCY RISK Our sales are primarily sourced in the United States and our subsidiary in the United Kingdom and are mostly denominated in U.S. dollars or UK pounds respectively. Our foreign subsidiaries incur most of their expenses in the local currency. Accordingly, all foreign subsidiaries use the local currency as their functional currency. Our business is subject to risks typical of an international business, including, but not limited to differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially adversely impacted by changes in these or other factors. The risk is partially mitigated as the Company has sufficient resources in the respective local currencies to meet immediate requirements. We are also exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations. During the three months ended September 30, 2005, the Indian rupee has depreciated, against U.S. dollar, by 0.5% as compared to the three months ended June 30, 2005. The impact of this rupee depreciation positively impacted our gross margin by 10 basis points, operating income by 12 basis points and net income by 12 basis points, each as a percentage of revenue. The Indian rupee denominated cost of revenues and selling, general and administrative expense was 31.8% and 30.7%, respectively, which did not have a material impact on the operating results of the company. Although the Company cannot predict future movement in interest rates or fluctuations in foreign currency rates, the Company does not currently anticipate that interest rate risk or foreign currency risk will have a material impact. 21 ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation of the Company's disclosure controls and procedures as of September 30, 2005 as well as mirror certifications from senior management, the Company's Chairman, President and Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and are operating in an effective manner. There have been no changes in the Company's internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the last quarter that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. DISCLOSURE CONTROLS AND INTERNAL CONTROLS. Disclosure Controls are procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this Report, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission's (the SEC) rules and forms. Disclosure Controls are also designed to ensure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal Controls are procedures designed to provide reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles. LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. The Company's management, including the CEO and CFO, does not expect that our Disclosure Controls or our Internal Controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with its policies or procedures. SCOPE OF THE CONTROLS EVALUATION. In the course of the Controls Evaluation, we sought to identify data errors, control problems or acts of fraud and confirm that appropriate corrective actions, including process improvements, were being undertaken. Our Internal Controls are also evaluated on an ongoing basis by our Internal Audit Department and by other personnel in our organization. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and our Internal Controls, and to modify them as necessary; our intent is to maintain the Disclosure Controls and the Internal Controls as dynamic systems that change as conditions warrant. Among other matters, we sought in our evaluation to determine whether there were any "significant deficiencies" or "material weaknesses" in the Company's Internal Controls, and whether the company had identified any acts of fraud involving personnel with a significant role in the Company's Internal Controls. This information was important both for the Controls Evaluation generally, and because the Rule 13a-14 Certifications of the CEO and CFO require that the CEO and CFO disclose that information to our Board's Audit Committee and our independent auditors. We also sought to deal with other controls matters in the Controls Evaluation, and in each case if a problem was identified, we considered what revision, improvement and/or correction to make in accordance with our ongoing procedures. Conclusions. Based upon the Controls Evaluation, our CEO and CFO have concluded that as of September 30, 2005 our disclosure controls and procedures are effective to ensure that material information relating to Syntel and its consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared, and that our Internal Controls are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles in the United States of America. 22 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. While the Company is a party to ordinary routine litigation incidental to its business, the Company is not a party to any material pending legal proceedings. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. There have been reports in the India media on Monday, November 7, 2005 and Tuesday November 8, 2005, including the Economic Times referring to a company official as having made forward-looking comments with respect to employee headcount levels for 2005 and 2006, certain real estate investments, future India expansion, capacity plans, capital investments, and a long-term growth vision. These references were not intended to and do not represent company guidance. The Company's position on forward-looking expectations should be limited to comments made on the company's news release and third quarter earnings call on October 27, 2005. ITEM 6. EXHIBITS. Exhibits
Exhibit No. Description - ----------- ----------- 1 1997 Stock Option and Incentive Plan, (Amended and Restated). 2 Incentive Restricted Stock Grant Agreement (Amended and Restated). 3 Consent of Independent Registered Public Accounting Firm 4 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. 5 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. 6 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.
23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SYNTEL, INC. Date November 8, 2005 /s/ Bharat Desai ---------------------------------------- Bharat Desai, Chairman, President and Chief Executive Officer Date November 8, 2005 /s/ Revathy Ashok ---------------------------------------- Revathy Ashok, Chief Financial Officer 24 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.1 1997 Stock Option and Incentive Plan, (Amended and Restated). 10.2 Incentive Restricted Stock Grant Agreement (Amended and Restated). 10.3 Consent of Independent Registered Public Accounting Firm 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. 32 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.
25 EX-10.1 2 k99360exv10w1.txt 1997 STOCK OPTION AND INCENTIVE PLAN, (AMENDED AND RESTATED) EXHIBIT 10.1 SYNTEL, INC. 1997 STOCK OPTION AND INCENTIVE PLAN (AMENDED AND RESTATED) I. GENERAL PROVISIONS 1.1 ESTABLISHMENT. On April 1, 1997, the Board of Directors ("Board") of Syntel, Inc. ("Corporation") adopted the 1997 Stock Option and Incentive Plan ("Plan"), which was approved by the shareholders of the Corporation on April 1, 1997. This Plan is further amended and restated as of August 11, 1997, May 23, 2000, and May 2, 2005. 1.2 PURPOSE. The purpose of the Plan is (i) to promote the best interests of the Corporation and its shareholders by encouraging Employees and non-employee directors of the Corporation and its Subsidiaries to acquire an ownership interest in the Corporation through Options, Stock Appreciation Rights, Restricted Stock, Performance Share Awards and Annual Incentive Awards, thus identifying their interests with those of shareholders, and (ii) to enhance the ability of the Corporation to attract and retain qualified Employees and non-employee directors. It is the further purpose of the Plan to permit the granting of Nonqualified Stock Options, Stock Appreciation Rights and Annual Incentive Awards that will constitute performance based compensation, as described in Section 162(m) of the Code, and regulations promulgated thereunder. 1.3 DEFINITIONS. As used in this Plan, the following terms have the meaning described below: (A) "AGREEMENT" means the written agreement that sets forth the terms of a Participant's Option, Stock Appreciation Right, Restricted Stock Grant, Performance Share Award or Annual Incentive Award. (B) "ANNUAL INCENTIVE AWARD" means an award that is granted in accordance with Article VI of the Plan. (C) "BOARD" means the Board of Directors of the Corporation. (D) "CHANGE IN CONTROL" means the occurrence of any of the following events: (i) the acquisition of ownership by a person, firm or corporation, or a group acting in concert, of fifty-one percent, or more, of the outstanding Common Stock of the Corporation in a single transaction or a series of related transactions within a one-year period; (ii) a sale of all or substantially all of the assets of the Corporation to any person, firm or corporation; or (iii) a merger or similar transaction between the Corporation and another entity if shareholders of the Corporation do not own a majority of the voting stock of the corporation surviving the transaction and a majority in value of the total outstanding stock of such surviving corporation after the transaction; provided, however, that any such event involving any of the current shareholders of the Corporation as of the date of adoption of this Plan by the Board (or any entity at any time controlled by any such shareholder or shareholders) shall not be included within the meaning of "Change in Control." (E) "CHANGE IN POSITION" means, with respect to any Participant: (i) such Participant's involuntary termination of employment; or (ii) a significant reduction in such Participant's duties, responsibilities, compensation and/or fringe benefits, or the assignment to such Participant of duties inconsistent with his position (all as in effect immediately prior to a Change in Control), whether or not such Participant voluntarily terminates employment as a result thereof. (F) "CODE" means the Internal Revenue Code of 1986, as amended. (G) "COMMITTEE" means the Compensation Committee of the Corporation, which shall be comprised of two or more members of the Board. (H) "COMMON STOCK" means shares of the Corporation's authorized common stock. 26 (I) "CORPORATION" means Syntel, Inc., a Michigan corporation. (J) "DISABILITY" means total and permanent disability, as defined in Code Section 22(e). (K) "EMPLOYEE" means an individual who has an "employment relationship" with the Corporation or a Subsidiary, as defined in Treasury Regulation 1.421-7(h), and the term "employment" means employment with the Corporation, or a Subsidiary of the Corporation. (L) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time and any successor thereto. (M) "FAIR MARKET VALUE" means for purposes of determining the value of Common Stock on the Grant Date, the Stock Exchange closing price of the Corporation's Common Stock as reported in The Wall Street Journal (or as otherwise reported by such Stock Exchange) for the Grant Date. In the event that there were no Common Stock transactions on such date, the Fair Market Value shall be determined as of the immediately preceding date on which there were Common Stock transactions. Unless otherwise specified in the Plan, "Fair Market Value" for purposes of determining the value of Common Stock on the date of exercise means, the Stock Exchange closing price of the Corporation's Common Stock on the last date preceding the exercise on which there were Common Stock transactions. (N) "GRANT DATE" means the date on which the Committee authorizes an individual Option, Stock Appreciation Right, Restricted Stock grant, Performance Share Award or Annual Incentive Award, or such later date as shall be designated by the Committee. (O) "INCENTIVE STOCK OPTION" means an Option that is intended to meet the requirements of Section 422 of the Code. (P) "NONQUALIFIED STOCK OPTION" means an Option that is not intended to constitute an Incentive Stock Option. (Q) "OPTION" means either an Incentive Stock Option or a Nonqualified Stock Option. (R) "PARTICIPANT" means an Employee or non-employee director designated by the Committee to participate in the Plan. (S) "PERFORMANCE SHARE AWARD" means a performance share award that is granted in accordance with Article V of the plan. (T) "PLAN" means the Syntel, Inc. 1997 Stock Option and Incentive Plan, the terms of which are set forth herein, and amendments thereto. (U) "RESTRICTION PERIOD" means the period of time during which a Participant's Restricted Stock grant is subject to restrictions and is nontransferable. (V) "RESTRICTED STOCK" means Common Stock that is subject to restrictions. (W) "RETIREMENT" means termination of employment on or after the attainment of age 65. (X) "STOCK APPRECIATION RIGHT" means the right to receive a cash or Common Stock payment from the Corporation upon the surrender of a tandem Option, in accordance with Article III of the Plan. (Y) "STOCK EXCHANGE" means the principal national securities exchange on which the Common Stock is listed for trading or, if the Common Stock is not listed for trading on a national securities exchange, such other recognized trading market or quotation system upon which the largest number of shares of Common Stock has been traded in the aggregate during the last 20 days before a Grant Date or date on which an Option is exercised, whichever is applicable. 27 (Z) "SUBSIDIARY" means a corporation defined in Code Section 424(f). (AA) "VESTED" means the extent to which an Option or Stock Appreciation Right granted hereunder has become exercisable in accordance with this Plan and the terms of the respective Agreement pursuant to which such Option or Stock Appreciation Right was granted. 1.4 ADMINISTRATION. (A) The Plan shall be administered by the Committee. At all times it is intended that the directors appointed to serve on the Committee shall be "disinterested persons" (within the meaning of Rule 16b-3 promulgated under the Exchange Act) and "outside directors" (within the meaning of Code Section 162(m)); however, the mere fact that a Committee member shall fail to qualify under either of these requirements shall not invalidate any award made by the Committee if the award is otherwise validly made under the Plan. The members of the Committee shall be appointed by, and may be changed at any time and from time to time, at the discretion of the Board. (B) The Committee shall interpret the Plan, prescribe, amend, and rescind rules and regulations relating to the Plan, and make all other determinations necessary or advisable for its administration. The decision of the Committee on any question concerning the interpretation of the Plan or its administration with respect to any Option, Stock Appreciation Right, Restricted Stock grant, Performance Share Award or Annual Incentive Award granted under the Plan shall be final and binding upon all Participants. No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any grant or award hereunder. 1.5 PARTICIPANTS. Participants in the Plan shall be such Employees (including Employees who are directors) and non-employee directors of the Corporation and its Subsidiaries as the Committee in its sole discretion may select from time to time. The Committee may grant Options, Stock Appreciation Rights, Restricted Stock, Performance Share Awards and Annual Incentive Awards to an individual upon the condition that the individual become an Employee of the Corporation or of a Subsidiary, provided that the Option, Stock Appreciation Right, Restricted Stock, Performance Share Award or Annual Incentive Award shall be deemed to be granted only on the date that the individual becomes an Employee. 1.6 STOCK. The Corporation has reserved 8,000,000 shares of the Corporation's Common Stock for issuance under the Plan. Shares subject to any unexercised portion of a terminated, cancelled or expired Option, Stock Appreciation Right, Restricted Stock grant or Performance Share Award granted hereunder, and pursuant to which a Participant never acquired benefits of ownership, including payment of a stock dividend (but excluding voting rights), may again be subjected to grants and awards under the Plan, but shares surrendered pursuant to the exercise of a Stock Appreciation Right are not available for future grants and awards. All provisions in this Section 1.6 shall be adjusted, as applicable, in accordance with Article VIII. II. STOCK OPTIONS 2.1 GRANT OF OPTIONS. The Committee, at any time and from time to time, subject to Section 9.8, may grant Options to such Employees and for such number of shares of Common Stock (whole or fractional) as it shall designate. Provided, however, that no Employee may be granted Options and Stock Appreciation Rights during any one fiscal year to purchase more than 100,000 shares of Common Stock. Any Participant may hold more than one Option under the Plan and any other Plan of the Corporation or Subsidiary. The Committee shall determine the general terms and conditions of exercise, including any applicable vesting requirements, which shall be set forth in a Participant's Option Agreement. No Option granted hereunder may be exercised after the tenth anniversary of the Grant Date. The Committee may designate any Option granted as either an Incentive Stock Option or a Nonqualified Stock Option, or the Committee may designate a portion of an Option as an Incentive Stock Option or a Nonqualified Stock Option. At the discretion of the Committee, an Option may be granted in tandem with a Stock Appreciation Right. Nonqualified Stock Options are intended to satisfy the requirements of Code Section 162(m) and the regulations promulgated hereunder. 2.2 INCENTIVE STOCK OPTIONS. Any Option intended to constitute an Incentive Stock Option shall comply with the requirements of this Section 2.2 No Incentive Stock Option shall be granted with an exercise price below the Fair Market Value of Common Stock on the Grant Date or with an exercise term that extends beyond 10 years from the Grant Date. An Incentive Stock Option shall not be granted to any Participant who owns (within the meaning of Code Section 424(d)) stock of the Corporation or any Subsidiary possessing more than 10% of the total combined voting power of all classes of stock of 28 the Corporation or a Subsidiary unless, at the Grant Date, the exercise price for the Option is at least 110% of the Fair Market Value of the shares subject to the Option and the Option, by its terms, is not exercisable more than 5 years after the Grant Date. The aggregate Fair Market Value of the underlying Common Stock (determined at the Grant Date) as to which Incentive Stock Options granted under the Plan (including a plan of a Subsidiary) may first be exercised by a Participant in any one calendar year shall not exceed $100,000. To the extent that an Option intended to constitute an Incentive Stock Option shall violate the foregoing $100,000 limitation (or any other limitation set forth in Code Section 422), the portion of the Option that exceeds the $100,000 limitation (or violates any other Code Section 422 limitation) shall be deemed to constitute a Nonqualified Stock Option. 2.3 OPTION PRICE. The Committee shall determine the per share exercise price for each Option granted under the Plan. The Committee, at its discretion, may grant Nonqualified Stock Options with an exercise price below 100% of the Fair Market Value of Common Stock on the Grant Date. The foregoing notwithstanding, no Incentive Stock Option shall be granted with an exercise price below the Fair Market Value of Common Stock on the Grant Date. Neither the Committee nor the Board shall amend any outstanding Options to reduce the exercise price thereof. 2.4 PAYMENT FOR OPTION SHARES. (A) The purchase price for shares of Common Stock to be acquired upon exercise of an Option granted hereunder shall be paid in full in cash or by personal check, bank draft or money order at the time of exercise; provided, however, that in lieu of such form of payment a Participant may pay such purchase price in whole or in part by tendering shares of Common Stock, which are freely owned and held by the Participant independent of any restrictions, hypothecations or other encumbrances, duly endorsed for transfer (or with duly executed stock powers attached), or in any combination of the above. Shares of Common Stock surrendered upon exercise shall be valued at the Stock Exchange closing price for the Corporation's Common Stock on the day prior to exercise, as reported in The Wall Street Journal (or as otherwise reported by such Stock Exchange), and the certificate(s) for such shares, duly endorsed for transfer or accompanied by appropriate stock powers, shall be surrendered to the Corporation. Participants who are subject to short swing profit restrictions under the Exchange Act and who exercise an Option by tendering previously-acquired shares shall do so only in accordance with the provisions of Rule 16b-3 of the Exchange Act. (B) At the discretion of the Committee, as set forth in a Participant's Option Agreement, any Option granted hereunder may be deemed exercised by delivery to the Corporation of a properly executed exercise notice, acceptable to the Corporation, together with irrevocable instructions to the Participant's broker to deliver to the Corporation sufficient cash to pay the exercise price and any applicable income and employment withholding taxes, in accordance with a written agreement between the Corporation and the brokerage firm ("cashless exercise procedure"). III. STOCK APPRECIATION RIGHTS 3.1 GRANT OF STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may be granted, held and exercised in such form as set by the Committee on an individual basis. A Stock Appreciation Right may be granted to a Participant with respect to such number of shares of Common Stock of the Corporation as the Committee may determine. The number of shares covered by the Stock Appreciation Right shall not exceed the number of shares of stock which the Participant could purchase upon the exercise of the related Option. Stock Appreciation Rights are intended to satisfy the requirements of Code Section 162(m) and the regulations promulgated thereunder. 3.2 EXERCISE OF STOCK APPRECIATION RIGHTS. A Stock Appreciation Right shall be deemed exercised upon receipt by the Corporation of written notice of exercise from the Participant. Except as permitted under Rule 16b-3, notice of exercise of a Stock Appreciation Right by a participant subject to the insider trading restrictions of Section 16(b) of the Securities Exchange Act of 1934, shall be limited to the period beginning on the third day following the release of the Corporation's quarterly or annual summary of earnings and ending on the 12th business day after such release. The exercise term of each Stock Appreciation Right shall be limited to 10 years from its Grant Date or such earlier period as set by the related Option. A Stock Appreciation Right shall be exercisable only at such times and in such amounts as the related Option may be exercised. A Stock Appreciation Right granted to a Participant subject to the insider trading restrictions shall not be exercisable in whole or part during the first six months of its term, unless the Participant dies or becomes disabled during such six-month period. 3.3 STOCK APPRECIATION RIGHT ENTITLEMENT. 29 (A) Upon exercise of a Stock Appreciation Right, a Participant shall be entitled to payment from the Corporation, in cash, shares, or partly in each (as determined by the Committee in accordance with any applicable terms of the Agreement), of an amount equal to the difference between-- (1) the Fair Market Value of the number of shares subject to the Stock Appreciation Right on the exercise date, and (2) the Option price of the associated Option multiplied by the number of shares available under the Option. (B) Notwithstanding paragraph (a) of this Section, upon exercise of a Stock Appreciation Right the Participant shall be required to surrender the associated Option. 3.4 MAXIMUM STOCK APPRECIATION RIGHT AMOUNT PER SHARE. The Committee may, at its sole discretion, establish (at the time of grant) a maximum amount per share which shall be payable upon the exercise of a Stock Appreciation Right, expressed as a dollar amount or as a percentage or multiple of the Option price of a related Option. IV. RESTRICTED STOCK 4.1 GRANT OF RESTRICTED STOCK. Subject to the terms and conditions of the Plan, the Committee, at any time and from time to time, may grant shares of Restricted Stock under this Plan to such Employees and in such amounts as it shall determine. 4.2 RESTRICTED STOCK AGREEMENT. Each grant of Restricted Stock shall be evidenced by a Restricted Stock Agreement that shall specify the terms of the restrictions, including the restriction period, or periods, the number of Restricted Stock shares subject to the grant, and such other provisions, including performance goals, as the Committee shall determine. 4.3 TRANSFERABILITY. Except as provided in this Article IV of the Plan, the shares of Restricted Stock granted hereunder may not be transferred, pledged, assigned, or otherwise alienated or hypothecated until the termination of the applicable Restriction Period or for such period of time as shall be established by the Committee and as shall be specified in the Restricted Stock Agreement, or upon the earlier satisfaction of other conditions as specified by the Committee in its sole discretion and as set forth in the Restricted Stock Agreement. All rights with respect to the Restricted Stock granted to an Employee shall be exercisable during a Participant's lifetime only by the Participant or the Participant's legal representative. 4.4 OTHER RESTRICTIONS. The Committee shall impose such other restrictions on any shares of Restricted Stock granted under the Plan as it may deem advisable including, without limitation, restrictions under applicable Federal or State securities laws, and may legend the certificates representing Restricted Stock to give appropriate notice of such restrictions. 4.5 CERTIFICATE LEGEND. In addition to any legends placed on certificates pursuant to Sections 4.3 and 4.4, each certificate representing shares of Restricted Stock shall bear the following legend: The sale or other transfer of the shares of stock represented by this certificate, whether voluntary, involuntary or by operation of law, is subject to certain restrictions on transfer set forth in the Syntel, Inc. 1997 Stock Option and Incentive Plan ("Plan"), rules and administrative guidelines adopted pursuant to such Plan and a Restricted Stock Agreement dated ____________________. A copy of the Plan, such rules and such Restricted Stock Agreement may be obtained from the General Counsel of Syntel, Inc. 4.6 REMOVAL OF RESTRICTIONS. Except as otherwise provided in this Article IV of the Plan, and subject to applicable federal and state securities laws, shares covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after the last day of the Restriction Period. Once the shares are released from the restrictions, the Participant shall be entitled to have the legend required by Section 4.5 of the Plan removed from the applicable Common Stock certificate. Provided further, the Committee shall have the discretion to waive the applicable Restriction Period with respect to all or any part of a Restricted Stock grant. 4.7 VOTING RIGHTS. During the Restriction Period, Participants holding shares of Restricted Stock granted hereunder may exercise full voting rights with respect to the Restricted Stock. 30 4.8 DIVIDENDS AND OTHER DISTRIBUTIONS. Any dividend or other distribution shares declared with respect to the Restricted Stock shall be accrued and paid only after the restrictions on the shares of Restricted Stock lapse. 4.9 RESTRICTED STOCK AWARDS GRANTED UNDER CODE SECTION 162(M). The Committee, at its discretion, may designate certain Restricted Stock Awards as granted pursuant to Code Section 162(m). Such Restricted Stock Awards must comply with the following additional requirements, which override any other provision set forth in this Article IV: (A) Each Code Section 162(m) Restricted Stock Award shall be based upon pre-established, objective performance goals that are intended to satisfy the performance-based compensation requirements of Code Section 162(m) and the regulations promulgated thereunder. Further, at the discretion of the Committee, a Restricted Stock Award also may be subject to goals and restrictions in addition to the performance requirements. (B) Each Code Section 162(m) Restricted Stock Award shall be based upon the attainment of specified levels of Corporation or Subsidiary performance during a specified performance period, as measured by any or all of the following: earnings (as measured by net income, net income per share, operating income or operating income per share), sales growth and market capitalization. (C) For each designated performance period, the Committee shall (i) select those Employees who shall be eligible to receive a Restricted Stock Award, (ii) determine the performance period, which may be a one to three fiscal year period, (iii) determine the target levels of Corporation or Subsidiary performance, and (iv) determine the number of shares subject to a Restricted Stock Award to be paid to each selected Employee. The Committee shall make the foregoing determinations prior to the commencement of services to which a Restricted Stock Award relates (or within the permissible time-period established under Code Section 162(m)) and while the outcome of the performance goals and targets is uncertain. (D) For each performance period, the Committee shall certify, in writing: (i) if the Corporation has attained the performance targets, and (ii) the number of shares pursuant to the Restricted Stock Award that are to become freely transferable. The Committee shall have no discretion to waive all or part of the conditions, goals and restrictions applicable to the receipt of full or partial payment of a Restricted Stock Award. (E) Any dividends paid during the Restriction Period automatically shall be reinvested on behalf of the Employee in additional shares of Restricted Stock under the Plan, and such additional shares shall be subject to the same performance goals and restrictions as the other shares under the Restricted Stock Award. No shares under a Code Section 162(m) Restricted Stock Award shall become transferable until the Committee certifies in writing that the performance goals and restrictions have been satisfied. (F) No Employee, in any one fiscal year of the Company, shall be granted a Code Section 162(m) Restricted Stock Award for more THAN 25,000 shares of Common Stock. (G) Except as provided in this Article IV of the Plan, the shares pursuant to a Restricted Stock Award granted hereunder may not be transferred, pledged, assigned, or otherwise alienated or hypothecated until the applicable performance targets and other restrictions are satisfied, as shall be certified in writing by the Committee. All rights with respect to a Performance Share Award granted hereunder shall apply only to such Employee or the Employee's legal representative. (H) Except as otherwise provided in this Article IV of the Plan, and subject to applicable federal and state securities laws, shares covered by each Restricted Stock Award made under the Plan shall become freely transferable by the Employee after the Committee has certified that the applicable performance targets and restrictions have been satisfied. Once the shares are released from the restrictions, the Employee shall be entitled to have the legend required by Section 4.5 of the Plan removed from the applicable Common Stock certificate. V. PERFORMANCE SHARE AWARDS 5.1 GRANT OF PERFORMANCE SHARE AWARDS. The Committee, at its discretion, may grant Performance Share Awards to Employees of the Corporation and its Subsidiaries and may determine, on an individual or group basis, the performance goals to be attained pursuant to each Performance Share Award. 31 5.2 TERMS OF PERFORMANCE SHARE AWARDS. In general, Performance Share Awards shall consist of rights to receive cash, Common Stock or a combination of each, if designated performance goals are achieved. The terms of a Participant's Performance Share Award shall be set forth in his individual Performance Share Agreement. Each Agreement shall specify the performance goals applicable to a particular Employee or group of Employees, the period over which the targeted goals are to be attained, the payment schedule if the goals are attained, and any other terms, conditions and restrictions applicable to an individual Performance Share Award and not inconsistent with the provisions of the Plan. The Committee, at its discretion, may waive all or part of the conditions, goals and restrictions applicable to the receipt of full or partial payment of a Performance Share Award. 5.3 PERFORMANCE SHARE AWARDS GRANTED UNDER CODE SECTION 162(M). The Committee, at its discretion, may designate certain Performance Share Awards as granted pursuant to Code Section 162(m). Such Performance Share Awards must comply with the following additional requirements, which override any other provision set forth in this Article V: (A) The Committee, at its discretion, may grant Code Section 162(m) Performance Share Awards based upon pre-established, objective performance goals that are intended to satisfy the performance-based compensation requirements of Code Section 162(m) and the regulations promulgated thereunder. Further, at the discretion of the Committee, a Performance Share Award also may be subject to goals and restrictions in addition to the performance requirements. (B) Each Code Section 162(m) Performance Share Award shall be based upon the attainment of specified levels of Corporation or Subsidiary performance during a specified performance period, as measured by any or all of the following: earnings (as measured by net income, net income per share, operating income or operating income per share), sales growth and market capitalization. (C) For each designated performance period, the Committee shall (i) select those Employees who shall be eligible to receive a Code Section 162(m) Performance Share Award, (ii) determine the performance period, which may be a one to three fiscal year period, (iii) determine the target levels of Corporation or Subsidiary performance, and (iv) determine the Performance Share Award to be paid to each selected Employee. The Committee shall make the foregoing determinations prior to the commencement of services to which a Performance Share Award relates (or within the permissible time-period established under Code Section 162(m)) and while the outcome of the performance goals and targets is uncertain. (D) For each performance period, the Committee shall certify, in writing: (i) if the Corporation has attained the performance targets, and (ii) the cash or number of shares (or combination thereof) pursuant to the Performance Share Award that shall be paid to each selected Employee (or the number of shares that are to become freely transferable, if a Performance Share Award is granted subject to attainment of the designated performance goals). The Committee, may not waive all or part of the conditions, goals and restrictions applicable to the receipt of full or partial payment of a Performance Share Award. (E) Code Section 162(m) Performance Share Awards may be granted in two different forms, at the discretion of the Committee. Under one form, the Employee shall receive a Performance Share Award that consists of a legended certificate of Common Stock, restricted from transfer prior to the satisfaction of the designated performance goals and restrictions, as determined by the Committee and specified in the Employee's Performance Share Agreement. Prior to satisfaction of the performance goals and restrictions, the Employee shall be entitled to vote the Performance Shares. Further, any dividends paid on such shares during the performance/restriction period automatically shall be reinvested on behalf of the Employee in additional Performance Shares under the Plan, and such additional shares shall be subject to the same performance goals and restrictions as the other shares under the Performance Share Award. No shares under a Performance Share Award shall become transferable until the Committee certifies in writing that the performance goals and restrictions have been satisfied. (F) Under the second form, the Employee shall receive a Performance Share Agreement from the Committee that specifies the performance goals and restrictions that must be satisfied before the Company shall issue the payment, which may be cash, a designated number of shares of Common Stock or a combination of the two. Any certificate for shares under such form of Performance Share Award shall be issued only after the Committee certifies in writing that the performance goals and restrictions have been satisfied. 32 (G) No Employee, in any one fiscal year of the Company, shall be granted a Performance Share Award to receive more than 25,000 shares of Common Stock. (H) Except as provided in this Article V of the Plan, the shares pursuant to a Performance Share Award granted hereunder may not be transferred, pledged, assigned, or otherwise alienated or hypothecated until the applicable performance targets and other restrictions are satisfied, as shall be certified in writing by the Committee. All rights with respect to a Performance Share Award granted hereunder shall apply only to such Employee or the Employee's legal representative. (I) In addition to any legends placed on certificates pursuant to paragraph (h), each certificate representing shares under a Performance Share Award shall bear the following legend: The sale or other transfer of the shares of stock represented by this certificate, whether voluntary, involuntary or by operation of law, is subject to certain restrictions on transfer set forth in the Syntel, Inc. 1997 Stock Option and Incentive Plan ("Plan"), rules and administrative guidelines adopted pursuant to such Plan and a Performance Share Agreement dated ______________. A copy of the Plan, such rules and such Performance Share Agreement may be obtained from the General Counsel of Syntel, Inc. (J) Except as otherwise provided in this Article V of the Plan, and subject to applicable federal and state securities laws, shares covered by each Performance Share Award made under the Plan shall become freely transferable by the Employee after the Committee has certified that the applicable performance targets and restrictions have been satisfied. Once the shares are released from the restrictions, the Employee shall be entitled to have the legend required by paragraph (i) removed from the applicable Common Stock certificate. VI. ANNUAL INCENTIVE AWARDS 6.1 GRANT OF ANNUAL INCENTIVE AWARDS. (A) The Committee, at its discretion, may grant Annual Incentive Awards to such Employees as it may designate from time to time. Annual Incentive Awards shall be based upon pre-established, objective performance goals that are intended to satisfy the performance-based compensation requirements of Code Section 162(m) and the regulations promulgated thereunder. (B) The determination of Annual Incentive Awards for a given year shall be based upon the attainment of specified levels of Corporation or Subsidiary performance as measured by any or all of the following: earnings (as measured by net income, net income per share, operating income or operating income per share), sales growth and market capitalization. (C) For each fiscal year of the Corporation, the Committee shall (i) select those Employees who shall be eligible to receive an Annual Incentive Award, (ii) determine the performance period, which may be a one to three fiscal year period, (iii) determine target levels of Corporation performance, and (iv) determine the level of Annual Incentive Award to be paid to each selected Employee upon the achievement of each performance level as provided below. The Committee shall make the foregoing determinations prior to the commencement of services to which an Annual Incentive Award relates (or within the permissible time-period established under Code Section 162(m)) and while the outcome of the performance goals and targets is uncertain. 6.2 ATTAINMENT OF PERFORMANCE TARGETS. (A) For each fiscal year, the Committee shall certify, in writing: (i) the degree to which the Corporation has attained the performance targets, and (ii) the amount of the Annual Incentive Award to be paid to each selected Employee. (B) Notwithstanding anything to the contrary herein, the Committee may, in its discretion, reduce any Annual Incentive Award based on such factors as may be determined by the Committee, including, without limitation, a determination by the Committee that such a reduction is appropriate: (i) in light of pay practices of competitors; or (ii) in light of the Corporation's, a subsidiary's, or an selected Employee's performance relative to competitors and/or performance with respect to the Corporation's strategic business goals. 33 6.3 PAYMENT OF ANNUAL INCENTIVE AWARDS. An Annual Incentive Award shall be paid only if (i) the Corporation achieves at least the threshold performance level; and (ii) the Committee makes the certification described in Section 6.2. 6.4 ANNUAL INCENTIVE AWARD PAYMENT FORMS. (A) Annual Incentive Awards shall be paid in cash and/or shares of Common Stock of the Corporation, at the discretion of the Committee. Payments shall be made within 30 days following (i) a certification by the Committee that the performance targets were attained, and (ii) a determination by the Committee that the amount of an Annual Incentive Award shall not be decreased in accordance with Section 6.2. The aggregate maximum Annual Incentive Award that may be earned by any Participant on behalf of any one fiscal year (calculated as of the last day of the fiscal year for which the Annual Incentive Award is earned) may not exceed the lesser of two (2) times the Participant's base salary for the fiscal year or $1,000,000. (B) The amount of an Annual Incentive Award to be paid upon the attainment of each targeted level of performance shall equal a percentage of each Participant's base salary for the fiscal year, as determined by the Committee. VIII. TERMINATION OF EMPLOYMENT 7.1. OPTIONS AND STOCK APPRECIATION RIGHTS. (A) If, prior to the date that an Option or Stock Appreciation Right first becomes Vested, a Participant's employment is terminated for any reason (other than as provided in Section 8.2, after a Change in Control), the Participant's right to exercise the Option or Stock Appreciation Right shall terminate and all rights thereunder shall cease. (B) If, on or after the date that an Option or Stock Appreciation Right first becomes Vested, a Participant's employment is terminated for any reason other than death or Disability, the Participant shall have the right, within the earlier of (i) the expiration of the Option or Stock Appreciation Right, and (ii) three months after termination of employment, to exercise the Option or Stock Appreciation Right to the extent that it was exercisable and unexercised on the date of the Participant's termination of employment, subject to any other limitation on the exercise of the Option or Stock Appreciation Right in effect on the date of exercise. The Committee may designate in a Participant's Agreement that an Option or Stock Appreciation Right shall terminate at an earlier time than set forth above. (C) If, on or after the date that an Option or Stock Appreciation Right first becomes Vested, a Participant dies while an Option or Stock Appreciation Right is still exercisable, the person or persons to whom the Option or Stock Appreciation Right shall have been transferred by will or by the laws of descent and distribution, shall have the right within the exercise period specified in the Participant's Agreement to exercise the Option or Stock Appreciation Right to the extent that it was exercisable and unexercised on the Participant's date of death, subject to any other limitation on exercise in effect on the date of exercise. Provided, however, that the beneficial tax treatment of an Incentive Stock Option may be forfeited if the Option is exercised more than one year after a Participant's date of death. (D) If, on or after the date that an Option or Stock Appreciation Right first becomes Vested, a Participant terminates employment due to Disability, the Participant shall have the right, within the exercise period specified in the Participant's Agreement to exercise the Option or Stock Appreciation Right to the extent that it was exercisable and unexercised on the date of the Participant's termination of employment, subject to any other limitation on the exercise of the Option or Stock Appreciation Right in effect on the date of exercise. If the Participant dies after termination of employment while the Option or Stock Appreciation Right is still exercisable, the Option or Stock Appreciation Right shall be exercisable in accordance with the terms of paragraph (c) above. (E) The Committee, at the time of a Participant's termination of employment, may accelerate a Participant's right to exercise an Option or extend the exercise period of an Option or Stock Appreciation Right; provided, however that the extension of the exercise period for an Incentive Stock Option may cause such Option to forfeit its preferential tax treatment. (F) Shares subject to Options and Stock Appreciation Rights that are not exercised in accordance with the provisions of (a) through (e) above shall expire and be forfeited by the Participant as of their expiration date and shall become available for new grants and awards under the Plan as of such date. 34 7.2 RESTRICTED STOCK. If a Participant terminates employment for any reason (other than as provided in Section 8.2, after a Change in Control), the Participant's shares of Restricted Stock still subject to the Restriction Period automatically shall expire and be forfeited by the Participant and, subject to Section 1.6, shall be available for new grants and awards under the Plan as of such termination date; provided, however, that the Committee, in its sole discretion, may waive the restrictions remaining on any or all shares of Restricted Stock and add such new restrictions to such shares of Restricted Stock as it deems appropriate. Notwithstanding the foregoing, the Committee shall not waive any restrictions on a Code Section 162(m) Restricted Stock Award, but the Committee may include a provision in an Employee's Code Section 162(m) Restricted Stock Agreement stating that upon the Employee's termination of employment due to (i) death, (ii) Disability, or (iii) involuntary termination by the Company without cause prior to the attainment of the associated performance goals and the termination of the Restriction Period, that the performance goals and restrictions shall be deemed to have been satisfied on a pro rata basis, so that the number of shares that become freely transferable shall be based on the Employee's full number of months of employment during the Restriction Period, and the Employee shall forfeit the remaining shares and his rights to such forfeited shares shall terminate in full. 7.3 PERFORMANCE SHARES. Performance Share Awards shall expire and be forfeited by a Participant upon the Participant's termination of employment for any reason (other than as provided in Section 8.2, after a Change in Control), and such shares shall be available for new grants and awards under the Plan as of such termination date; provided, however, that the Committee, in its discretion, may waive all or part of the conditions, goals and restrictions applicable to the receipt of full or partial payment of a Performance Share Award. Notwithstanding the foregoing, the Committee shall not waive any restrictions on a Code Section 162(m) Performance Share Award, but the Committee may include a provision in an Employee's Code Section 162(m) Performance Share Agreement stating that upon the Employee's termination of employment due to (i) death, (ii) Disability, or (iii) involuntary termination by the Company without cause prior to the attainment of the associated performance goals and restrictions, that the performance goals and restrictions shall be deemed to have been satisfied on a pro rata basis, so that the number of shares that become freely transferable shall be based on the Employee's full number of months of employment during the employment period, and the Employee shall forfeit the remaining shares and his rights to such forfeited shares shall terminate in full. 7.4 ANNUAL INCENTIVE AWARDS. (A) A Participant who has been granted an Annual Incentive Award and terminates employment due to Retirement, Disability or death prior to the end of the Corporation's fiscal year shall be entitled to a prorated payment of the Annual Incentive Award, based on the number of full months of employment during the fiscal year. Any such prorated Annual Incentive Award shall be paid at the same time as regular Annual Incentive Awards or, in the event of the Participant's death, to the beneficiary designated by the Participant. (B) A Participant who has been granted an Annual Incentive Award and resigns or is terminated for any reason (other than Retirement, Disability or death), before the end of the Corporation's fiscal year for which the Annual Incentive Award is to be paid, shall forfeit the right to an Annual Incentive Award payment for that fiscal year. 7.5 OTHER PROVISIONS. The transfer of an Employee from one corporation to another among the Corporation and any of its Subsidiaries, or a leave of absence under the leave policy of the Corporation or any of its Subsidiaries shall not be a termination of employment for purposes of the Plan, unless a provision to the contrary is expressly stated by the Committee in a Participant's Agreement issued under the Plan. VIII. ADJUSTMENTS AND CHANGE IN CONTROL 8.1 ADJUSTMENTS. (A) The total amount of Common Stock for which Options, Stock Appreciation Rights, Restricted Stock, Performance Share Awards and Annual Incentive Awards may be issued under the Plan, and the number of shares subject to any such grants or awards (both as to the number of shares of Common Stock and the Option price), shall be adjusted pro rata for any increase or decrease in the number of outstanding shares of Common Stock resulting from payment of a stock dividend on Common Stock, a subdivision or combination of shares of Common Stock, or a reclassification of Common Stock. 35 (B) The foregoing adjustments shall be made by the Committee. Any such adjustment may provide for the elimination of any fractional share which might otherwise become subject to an Option, Stock Appreciation Right, Restricted Stock grant, Performance Share Award or Annual Incentive Award. 8.2 CHANGE IN CONTROL. Notwithstanding anything contained herein to the contrary, in the event of a Participant's Change in Position subsequent to a Change in Control, (i) any outstanding Option or Stock Appreciation Right granted to such Participant hereunder immediately shall become fully Vested and exercisable in full, regardless of any installment provision applicable to such Option or Stock Appreciation Right; (ii) the remaining Restriction Period on any Restricted Stock granted to such Participant hereunder immediately shall lapse and the shares shall become fully transferable, subject to any applicable federal or state securities laws; (iii) all performance goals and conditions shall be deemed to have been satisfied and all restrictions shall lapse on any outstanding Performance Share Awards granted to such Participant hereunder, and such Awards shall become payable in full; and (iv) for purposes of any Annual Incentive Awards granted to such Participant hereunder, the determination of whether the performance targets have been achieved shall be made as of the date of the Change in Control and payments due should become immediately payable. IX. MISCELLANEOUS 9.1 PARTIAL EXERCISE/FRACTIONAL SHARES. The Committee may permit, and shall establish procedures for, the partial exercise of Options and Stock Appreciation Rights granted under the Plan. No fractional shares shall be issued in connection with the exercise of a Stock Appreciation Right or payment of a Performance Share Award or Annual Incentive Award; instead, the Fair Market Value of the fractional shares shall be paid in cash, or at the discretion of the Committee, the number of shares shall be rounded down to the nearest whole number of shares and any fractional shares shall be disregarded. 9.2 RULE 16B-3 REQUIREMENTS. Notwithstanding any other provision of the Plan, the Committee may impose such conditions on the exercise of an Option or Stock Appreciation Right (including, without limitation, the right of the Committee to limit the time of exercise to specified periods), or the grant of Restricted Stock or the payment of a Performance Share Award or Annual Incentive Award, as may be required to satisfy the requirements of Rule 16b-3 of the Exchange Act. 9.3 RIGHTS PRIOR TO ISSUANCE OF SHARES. No Participant shall have any rights as a shareholder with respect to shares covered by an Option, Stock Appreciation Right, Restricted Stock grant, Performance Share Award or Annual Incentive Award until the issuance of a stock certificate for such shares. No adjustment shall be made for dividends or other rights with respect to such shares for which the record date is prior to the date the certificate is issued. 9.4 NON-ASSIGNABILITY. No Option, Stock Appreciation Right, Restricted Stock grant, Performance Share Award or Annual Incentive Award shall be transferable by a Participant except by will or the laws of descent and distribution. During the lifetime of a Participant, an Option or Stock Appreciation Right shall be exercised only by the Participant, except in the event of the Participant's Disability, in which case the Participant's legal guardian or the individual designated in the Participant's durable power of attorney may exercise the Option or Stock Appreciation Right. Any transferee of the Option or Stock Appreciation Right shall take the same subject to the terms and conditions of this Plan. No transfer of an Option, Stock Appreciation Right, Restricted Stock grant, Performance Share Award or Annual Incentive Award by will or the laws of descent and distribution shall be effective to bind the Corporation unless the Corporation shall have been furnished with written notice thereof and a copy of the will and/or such evidence as the Corporation may deem necessary to establish the validity of the transfer and the acceptance by the transferee or transferees of the terms and conditions of the Option, Stock Appreciation Right, Restricted Stock grant, Performance Share Award or Annual Incentive Award. 9.5. SECURITIES LAWS. (A) Anything to the contrary herein notwithstanding, the Corporation's obligation to sell and deliver Common Stock pursuant to the exercise of an Option or Stock Appreciation Right or deliver Common Stock pursuant to a Restricted Stock grant, Performance Share Award or Annual Incentive Award is subject to such compliance with federal and state laws, rules and regulations applying to the authorization, issuance or sale of securities as the Corporation deems necessary or advisable. The Corporation shall not be required to sell and deliver or issue Common Stock unless and until it receives satisfactory assurance that the issuance or transfer of such shares shall not violate any of the provisions of the Securities Act of 1933 or the Securities Exchange Act of 1934, or the rules and regulations of the Securities Exchange Commission promulgated thereunder or those of the Stock Exchange or any stock exchange on which the Common Stock 36 may be listed, the provisions of any state laws governing the sale of securities, or that there has been compliance with the provisions of such acts, rules, regulations and laws. (B) The Committee may impose such restrictions on any shares of Common Stock acquired pursuant to the exercise of an Option or Stock Appreciation Right or the grant of Restricted Stock or the payment of a Performance Share Award or Annual Incentive Award under the Plan as it may deem advisable, including, without limitation, restrictions (i) under applicable federal securities laws, (ii) under the requirements of the Stock Exchange or any other securities exchange, recognized trading market or quotation system upon which such shares of Common Stock are then listed or traded, and (iii) under any blue sky or state securities laws applicable to such shares. No shares shall be issued until counsel for the Corporation has determined that the Corporation has complied with all requirements under appropriate securities laws. 9.6 FOREIGN LAW RESTRICTIONS. Anything to the contrary herein notwithstanding, the Corporation's obligation to sell and deliver Common Stock pursuant to the exercise of an Option or Stock Appreciation Right or deliver Common Stock pursuant to a Restricted Stock grant, Performance Share Award or Annual Incentive Award is subject to compliance with the laws, rules and regulations of any foreign nation applying to the authorization, issuance or sale of securities, providing of compensation, transfer of currencies and other matters, as may apply to any Participant hereunder who is a resident of such foreign nation. To the extent that it shall be impermissible under such foreign laws for such a Participant to pay the exercise price for any Option granted under the Plan (to the extent Vested), the Committee may treat such Participant as being entitled instead to exercise additional Stock Appreciation Rights (to the extent not previously granted in tandem with such Option) which are of equivalent value to the Participant, as determined by comparing the Fair Market Value upon exercise of the number of shares subject to the Option (to the extent Vested), less the Option price of such shares. Further, to the extent that it shall be impermissible under such foreign laws for the Corporation to deliver Common Stock to any such Participant pursuant to any Option, Stock Appreciation Right, Restricted Stock grant, Performance Share Award or Annual Incentive Award granted under the Plan (to the extent Vested), the Committee may arrange for payment to the Participant of an equivalent amount of cash in lieu of such shares (less any amount otherwise payable by the Participant), in accordance with all applicable United States and foreign currency restrictions and regulations. To the extent that the Corporation is restricted in accordance with such foreign laws from delivering shares of Common Stock to Participants as would otherwise be provided for in this Plan, the Corporation shall be released from such obligation and shall not be subject to the claims of any Participant hereunder with respect thereto. 9.7 WITHHOLDING TAXES. (A) The Corporation shall have the right to withhold from a Participant's compensation or require a Participant to remit sufficient funds to satisfy applicable withholding for income and employment taxes upon the exercise of an Option or Stock Appreciation Right or the lapse of the Restriction Period on a Restricted Stock grant or the payment of a Performance Share Award or Annual Incentive Award. A Participant may make a written election to tender previously-acquired shares of Common Stock or have shares of stock withheld from the exercise, provided that the shares have an aggregate Fair Market Value sufficient to satisfy in whole or in part the applicable withholding taxes. The cashless exercise procedure of Section 2.4 may be utilized to satisfy the withholding requirements related to the exercise of an Option. At no point shall the Corporation withhold from the exercise of an Option more shares than are necessary to meet the established tax withholding requirements of federal, state and local obligations. (B) A Participant subject to the insider trading restrictions of Section 16(b) of the Exchange Act may use Common Stock to satisfy the applicable withholding requirements only if such disposition is approved in accordance with Rule 16b-3 of the Exchange Act. Any election by a Participant to utilize Common Stock for withholding purposes is further subject to the discretion of the Committee. 9.8 TERMINATION AND AMENDMENT. (A) The Board may terminate the Plan, or the granting of Options, Stock Appreciation Rights, Restricted Stock, Performance Share Awards or Annual Incentive Awards under the Plan, at any time. No new grants or awards shall be made under the Plan after the tenth anniversary of the adoption of this Plan by the Board, or approval by the shareholders, whichever is earlier, as noted in Section 1.1. (B) The Board may amend or modify the Plan at any time and from time to time, but no amendment or modification, without the approval of the shareholders of the Corporation, shall (i) materially increase the benefits 37 accruing to Participants under the Plan; (ii) increase the amount of Common Stock for which grants and awards may be made under the Plan, except as permitted under Sections 1.6 and 8.1; or (iii) change the provisions relating to the eligibility of individuals to whom grants and awards may be made under the Plan. (C) No amendment, modification, or termination of the Plan shall in any manner affect any Option, Stock Appreciation Right, Restricted Stock grant, Performance Share Award or Annual Incentive Award granted under the Plan without the consent of the Participant holding the Option, Stock Appreciation Right, Restricted Stock grant, Performance Share Award or Annual Incentive Award. 9.9 EFFECT ON EMPLOYMENT. Neither the adoption of the Plan nor the granting of any Option, Stock Appreciation Right, Restricted Stock, Performance Share Award or Annual Incentive Award pursuant to the Plan shall be deemed to create any right in any individual to be retained or continued in the employment of the Corporation or a Subsidiary. 9.10 USE OF PROCEEDS. The proceeds received from the sale of Common Stock pursuant to the Plan will be used for general corporate purposes of the Corporation. 9.11 APPROVAL OF PLAN. As noted in Section 1.1, the Plan has been approved by the shareholders of the Corporation within 12 months of adoption of the Plan by the Board, as required by Section 422 of the Code. IN WITNESS WHEREOF, this Amended and Restated 1997 Stock Option and Incentive Plan has been executed on behalf of the Corporation on the 3rd day of June, 2005. SYNTEL, INC. By: /s/ BHARAT DESAI ------------------------------------ Bharat Desai, President 38 EX-10.2 3 k99360exv10w2.txt INCENTIVE RESTRICTIVE STOCK GRANT AGREEMENT (AMENDED AND RESTATED) EXHIBIT 10.2 INCENTIVE RESTRICTED STOCK GRANT AGREEMENT UNDER THE SYNTEL, INC. 1997 STOCK OPTION AND INCENTIVE PLAN THIS INCENTIVE RESTRICTED STOCK GRANT AGREEMENT made this ____ day of _________, 200_ by and between Syntel, Inc., a Michigan corporation ("the Corporation"), and ___________________________________ (the "Grantee"). WITNESSETH: WHEREAS, the Grantee is now employed by the Corporation or a Subsidiary of the Corporation, and the Corporation desires to provide additional incentive to the Grantee, to encourage stock ownership by the Grantee, and to encourage the Grantee to remain in the employ of the Corporation or a Subsidiary, and as an inducement thereto, the Corporation has determined to grant to the Grantee a restricted stock grant pursuant to the Corporation's 1997 Stock Option and Incentive Plan, a copy of which is available to employees on the SyntraNet; NOW, THEREFORE, it is agreed between the parties as follows: 1. DEFINITIONS IN AGREEMENT. For purposes of this Agreement, certain words and phrases have the following definitions: (A) "CHANGE IN CONTROL" means, as defined in Section 1.3(d) of the Plan, the occurrence of any of the following events: (i) the acquisition of ownership by a person, firm or corporation, or a group acting in concert, of fifty-one percent, or more, of the outstanding Common Stock of the Corporation in a single transaction or a series of related transactions within a one-year period; (ii) a sale of all or substantially all of the assets of the Corporation to any person, firm or corporation; or (iii) a merger or similar transaction between the Corporation and another entity if shareholders of the Corporation do not own a majority of the voting stock of the corporation surviving the transaction and a majority in value of the total outstanding stock of such surviving corporation after the transaction; provided, however, that any such event involving any of the current shareholders of the Corporation as of the date of adoption of the Plan by the Board (or any entity at any time controlled by any such shareholder or shareholders) shall not be included within the meaning of "Change in Control." (B) "CHANGE IN POSITION" means, as defined in Section 1.3(e) of the Plan, with respect to the Grantee: (i) the Grantee's involuntary termination of employment; or (ii) a significant reduction in the Grantee's duties, responsibilities, compensation and/or fringe benefits, or the assignment to the Grantee of duties inconsistent with Grantee's position (all as in effect immediately prior to a Change in Control), whether or not the Grantee voluntarily terminates employment as a result thereof; (C) "CODE" means the Internal Revenue Code of 1986, as amended; (D) "COMMITTEE" means the Compensation Committee of the Corporation; (E) "COMMON STOCK" means the common stock of the Corporation; (F) "CORPORATION" means Syntel, Inc.; (G) "EMPLOYMENT" (whether or not capitalized) means employment with the Corporation or any Subsidiary of the Corporation; (H) "GRANT DATE" means the date of this Agreement as reflected above. (I) "PLAN" means the Corporation's 1997 Stock Option and Incentive Plan; 39 (J) "RESTRICTED STOCK" means Common Stock that is subject to restrictions, and (K) "RESTRICTION PERIOD" means the period of time during which a Grantee's Restricted Stock grant is subject to restrictions and is nontransferable. 2. GRANT OF RESTRICTED STOCK. Subject to the terms and conditions hereof, the Corporation hereby grants to the Grantee ______ shares of Restricted Stock as of the close of business on the Grant Date. 3. LAPSE OF RESTRICTION PERIOD. The Restriction Period lapses on or after the following anniversaries of the Grant Date of this Restricted Stock (or as otherwise noted) as to the following cumulative percentages of the shares covered by this Restricted Stock: On or after the first anniversary 25% On or after second anniversary 25% additional On or after third anniversary 25% additional On or after fourth anniversary 25% additional
In accordance with this schedule, on or after the fourth anniversary of the Grant Date, all restrictions on this Restricted Stock shall have lapsed; provided, however, that each of the foregoing anniversaries of the Grant Date shall be deemed automatically extended by the total period of time that the Grantee spends on unpaid leave(s) of absence between the Grant Date and each such anniversary. 4. CERTIFICATE LEGEND. Each certificate representing shares of Restricted Stock shall bear the following legend: The sale or other transfer of the shares of stock represented by this certificate, whether voluntary, involuntary or by operation of law, is subject to certain restrictions on transfer set forth in the Syntel, Inc. 1997 Stock Option and Incentive Plan ("Plan"), rules and administrative guidelines adopted pursuant to such Plan and a Restricted Stock Agreement dated . A copy of the Plan, such rules and such Restricted Stock Agreement may be obtained from the General Counsel of Syntel, Inc. 5. REMOVAL OF RESTRICTIONS. Except as otherwise provided in Article IV of the Plan, and subject to applicable federal and state securities laws, shares covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after the last day of the Restriction Period. Once the shares are released from the restrictions, the Participant shall be entitled to have the legend required by Section 4 of this Agreement removed from the applicable Common Stock certificate. 6. TERMINATION OF EMPLOYMENT. (A) If, prior to the date that this Restricted Stock shall first have part of the Restriction Period lapse, the Grantee's employment with the Corporation shall be terminated for any reason (other than as provided in paragraph (b) below, after a Change in Control), the Grantee's right to exercise this Restricted Stock shall terminate and all exercise rights hereunder shall cease. (B) In the event of the Grantee's Change in Position subsequent to a Change in Control, the Restriction Period for the Restricted Stock shall completely lapse. (C) Except as provided in paragraph (b) above, all Restricted Stock for which the applicable Restriction period has not lapsed as of termination of employment shall be canceled. (D) A leave of absence with the written consent of the Corporation, or a transfer of the Grantee from one corporation to another among the Corporation, its Parent and any of its Subsidiaries shall not be deemed to constitute a termination of employment for purposes of this Restricted Stock. 40 7. COMPLIANCE WITH SECURITIES LAWS. Anything to the contrary herein notwithstanding, the Corporation's obligation to deliver Restricted Stock under this Agreement is subject to such compliance with federal and state laws, rules and regulations applying to the authorization, issuance or sale of securities, and applicable stock exchange requirements, as the Corporation deems necessary or advisable. The Corporation shall not be required to deliver Restricted Stock pursuant hereto unless and until it receives satisfactory proof that the issuance or transfer of such shares will not violate any of the provisions of the Securities Act of 1933 or the Securities Exchange Act of 1934 or the rules and regulations of the Securities Exchange Commission promulgated thereunder, or the rules and regulations of any stock exchange on which the Corporation's securities are traded, or state law governing the sale of securities, or that there has been compliance with the provisions of such acts, rules, regulations and state laws. If the Grantee fails to accept delivery for all or any part of the number of shares specified by such notice upon tender of delivery thereof the Grantee's right to this Restricted Stock with respect to such undelivered shares may be terminated by the Corporation. 8. NON-ASSIGNABILITY. The shares of Restricted Stock granted hereunder may not be transferred, pledged, assigned, or otherwise alienated or hypothecated until the Restriction Period applicable to that Restricted Stock has lapsed. 9. WITHHOLDING. The Grantee hereby authorizes the Corporation to withhold from Grantee's compensation or agrees to tender the applicable amount to the Corporation to satisfy any requirements for withholding of income and employment taxes in connection with the exercise of the Restricted Stock granted hereby. 10. DISPUTES. As a condition to the granting of the Restricted Stock granted hereby, the Grantee and the Grantee's successors and assigns agree that any dispute or disagreement which shall arise under or as a result of this Agreement shall be determined by the Committee in its sole discretion and judgment and that any such determination and any interpretation by the Committee of the terms of this Agreement shall be final and shall be binding and conclusive for all purposes. 11. ADJUSTMENTS. In the event of any stock dividend, stock split, reclassification, merger, consolidation, or similar transaction affecting the shares covered by this Restricted Stock, the rights of the Grantee shall be as provided in Section 8.1 of the Plan and any adjustment therein provided shall be made in accordance with Section 8.1 of the Plan. 12. RIGHTS AS SHAREHOLDER. During the Restriction Period, Grantee may exercise full voting rights with respect to the Restricted Stock. Any dividend or other distribution shares declared with respect to the Restricted Stock shall be accrued and paid only after the restrictions on the shares of Restricted Stock lapse. 13. NOTICES. Every notice relating to this Agreement shall be in writing and if given by mail shall be given by registered or certified mail with return receipt requested. All notices to the Corporation shall be delivered to the Secretary of the Corporation at the Corporation's headquarters in Troy, Michigan, or addressed to the Secretary of the Corporation at 525 E. Big Beaver Road, Suite 300, Troy, MI 48083. All notices by the Corporation to the Grantee shall be delivered to the Grantee personally or addressed to the Grantee at the Grantee's last residence address as then contained in the records of the Corporation or such other address as the Grantee may designate. Either party by notice to the other may designate a different address to which notices shall addressed. Any notice given by the Corporation to the Grantee at the Grantee's last designated address shall be effective to bind any other person who shall acquire rights hereunder. 14. FOREIGN LAW RESTRICTIONS. Anything to the contrary herein notwithstanding, the Corporation's obligation to deliver Restricted Stock is subject to compliance with the laws, rules and regulations of any foreign nation applying to the authorization, issuance or sale of securities, providing of compensation, transfer of currencies and other matters, as may apply to the Grantee, if a resident of such foreign nation. To the extent that the Corporation is restricted in accordance with such foreign laws from delivering shares of Common Stock to the Grantee as would otherwise be provided for in this Plan, the Corporation shall be released from such obligation and shall not be subject to the claims of the Grantee hereunder with respect thereto. 15. GOVERNING LAW. This Agreement has been made in and shall be construed in accordance with the laws of the State of Michigan. 41 16. PROVISIONS OF PLAN CONTROLLING. The provisions hereof are subject to the terms and provisions of the Plan, a copy of which is available to employees on the SyntraNet. In the event of any conflict between the provisions of this Agreement and the provisions of the Plan, the provisions of the Plan shall control. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. SYNTEL, INC. By: --------------------------------- Daniel M. Moore, Chief Administrative Officer By: --------------------------------- Srikanth Karra, Vice President Global Human Resources , Grantee - ------------------------- 42 EX-10.3 4 k99360exv10w3.txt CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EXHIBIT 10.3 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement No. 333-49435 on Form S-8 of Syntel, Inc. of our reports dated March 3, 2005 with respect to the consolidated financial statements of Syntel, Inc., and management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which reports in this Annual Report on Form 10-K of Syntel, Inc. for the year ended December 31, 2004. /s/ Crowe Chizek & Company LLC Fort Wayne, Indiana November 2, 2005. 43 EX-31.1 5 k99360exv31w1.txt RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATIONS I, Bharat Desai, Chairman, President, and Chief Executive Officer of Syntel, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Syntel, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date November 8, 2005 /s/ Bharat Desai - ---------------------------------- Bharat Desai, Chairman, President, and Chief Executive Officer 44 EX-31.2 6 k99360exv31w2.txt RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATIONS I, Revathy Ashok, Chief Financial Officer of Syntel, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Syntel, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date November 8, 2005 /s/ Revathy Ashok - -------------------------------------- Revathy Ashok, Chief Financial Officer 45 EX-32 7 k99360exv32.txt SECTION 1350 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Syntel, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Bharat Desai, Chairman, President, and Chief Executive Officer of the Company and Revathy Ashok, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Bharat Desai - ------------------------------------- Bharat Desai Syntel, Inc. Chairman, President, and Chief Executive Officer November 8, 2005 /s/ Revathy Ashok - ------------------------------------- Revathy Ashok Syntel, Inc. Chief Financial Officer November 8, 2005 46 -----END PRIVACY-ENHANCED MESSAGE-----