Satyam Computer Services Limited
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934
For the quarter ended June 30, 2006
Commission File Number 001-15190
Satyam Computer Services Limited
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrants name into English)
Republic of India
(Jurisdiction of incorporation or organization)
Satyam Technology Center
Bahadurpally Village
Qutbullapur Mandal,
R.R.District 500855
Hyderabad, Andhra Pradesh
India
(91) 40-5523-3505
(Address of principal executive offices)
Indicate by check mark whether the Registrant files or will file annual reports under cover of
Form 20-F or Form 40-F.
Form 20-F þ Form 40-F o
Indicate by check mark whether the Registrant by furnishing the information contained in this
Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under
the Securities Exchange Act of 1934. Yes o No þ
If Yes is marked, indicate below the file number assigned to Registrant- in connection with
Rule 12g3-2(b) : Not applicable. The Company is incorporating by reference, the information and
exhibits set forth in this Form 6-K into its registration statement on Form S-8 (Registration No.
333-13772).
TABLE OF CONTENTS
Currency of Presentation and Certain Defined Terms
Unless otherwise stated in this Quarterly Report or unless the context otherwise requires,
references herein to we, our, us, Satyam and our company are to Satyam Computer Services
Limited and its consolidated subsidiaries and other consolidated entities.
In this Quarterly Report, references to US, Dollars or the United States are to the
United States of America, its territories and its possessions. References to India are to the
Republic of India. References to $, Dollars or U.S. dollars are to the legal currency of the
United States, and references to Rs., rupees or Indian rupees are to the legal currency of
India. References to a particular fiscal year are to our fiscal year ended March 31 of such year.
For your convenience, this Quarterly Report contains translations of some Indian rupee amounts
into U.S. dollars which should not be construed as a representation that those Indian rupee or U.S.
dollar amounts could have been, or could be, converted into U.S. dollars or Indian rupees, as the
case may be, at any particular rate, the rate stated below, or at all.
Except as otherwise stated in this Quarterly Report, all translations from Indian rupees to
U.S. dollars contained in this Quarterly Report have been based on the noon buying rate in the City
of New York on June 30, 2006 for cable transfers in Indian rupees as certified for customs purposes
by the Federal Reserve Bank of New York. The noon buying rate on June 30, 2006 was Rs.45.87 per
$1.00.
Information contained in our websites, including our corporate website, www.satyam.com, is not
part of this Quarterly Report.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
IN ADDITION TO HISTORICAL INFORMATION, THIS QUARTERLY REPORT CONTAINS 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. THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE
SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
REFLECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION ENTITLED RISK FACTORS AND ELSEWHERE IN
THIS QUARTERLY REPORT. YOU ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH REFLECT MANAGEMENTS ANALYSIS ONLY AS OF THE DATE OF THIS QUARTERLY REPORT. IN
ADDITION, YOU SHOULD CAREFULLY REVIEW THE OTHER INFORMATION IN THIS QUARTERLY REPORT AND IN OUR
PERIODIC REPORTS AND OTHER DOCUMENTS FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE
COMMISSION (THE SEC) FROM TIME TO TIME. OUR FILINGS WITH THE SEC ARE AVAILABLE ON ITS WEBSITE
WWW.SEC.GOV.
PART I
FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
Please see Exhibit 99.6 under Item 6 of this Form 6-K for our unaudited U.S. GAAP consolidated
financial statements for the three months ended June 30, 2006.
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Item 2. |
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Operating and financial review and prospects |
We are a global IT solutions provider, offering a comprehensive range of IT services to
our customers, including application development and maintenance services, consulting and
enterprise business solutions extended engineering solutions, infrastructure management services.
We also offer BPO services through our wholly-owned subsidiary, Nipuna. We are the fourth largest
Indian IT software and services company, based on the amount of export revenues generated during
our fiscal year ended March 31, 2006. Our total revenues for fiscal 2006 were $1,096.3 million and
over the past three fiscal years our revenues have grown at a compound annual growth rate of
33.7%.
On May 12, 2005, we acquired a 75% interest in Citisoft Plc or Citisoft, a specialist
business and systems consulting firm that has focused on the investment management industry since
1986. Citisoft is a UK-based firm, with operating presences in London, Boston and New York. On
June 29, 2006, we exercised the call option and acquired the remaining 25% equity interest in
Citisoft, making Citisoft our wholly-owned subsidiary from that date. The operating results of
Citisoft are evaluated by the management under IT services segment.
We believe customers are increasingly demanding full-service IT providers that have expertise
in both existing systems and new technologies, access to a large pool of highly-skilled technical
personnel and the ability to service customers globally at competitive rates. To meet these
requirements, we offer our customers an integrated global delivery model, which we refer to as the
Right Sourcing Model, to provide flexible delivery alternatives to our customers through our
offshore centers located in India, offsite centers which we have established in our major markets,
nearshore centers located geographically near our customers premises and through our onsite teams
operating at our customers premises. In addition, we use the expertise resident in our focused
industry groups to provide specialized services and solutions to our customers in the
manufacturing, banking and financial services, insurance, TIMES, healthcare, retail and
transportation industries.
Our revenues and profitability have grown rapidly in recent years. Our total revenues
increased by 31.1% to $322.5 million during the three months ended June 30, 2006, as compared to
$246.0 million during the three months ended June 30, 2005. Our net income grew to $75.5 million
during the three months ended June 30, 2006 from $42.3 million during the three months ended June
30, 2005. Our revenue and profitability growth is attributable to a number of factors related to
the expansion of our business, including increase in the volume of projects completed for our
widening customer base, increase in our associate numbers, increased growth in our consulting and
enterprise business solutions business and a strengthening of our customer base in North America
and Europe. Our growth has continued despite increasing pressure for higher wages for our
associates coupled with pressure for lower prices for our customers. In the three months ended June
30, 2006 and fiscal 2006, our five largest customers accounted for 21.7% and 24.2% respectively, of
our total revenues. As of June 30, 2006, we had 29,843 employees (including employees of our
subsidiaries), whom we refer to as associates, worldwide as compared to 28,624 associates as of
March 31, 2006. With our continuing geographical expansion we now have offshore facilities in India
and
overseas facilities located in Australia, Canada, China, Hungary, Japan, Malaysia, Singapore,
United Arab Emirates,
United Kingdom and United States. We also have sales and marketing offices located in
Canada, Germany, Italy, the Netherlands, Spain, Sweden, United Kingdom and United States and sales
and marketing offices in the rest of the world.
The executive management evaluates Satyams operating segments based on the following
two-business groups:
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IT services: We provide a comprehensive range of IT services,
including application development and maintenance, consulting and
enterprise business solutions, extended engineering solutions, and
infrastructure management services. We seek to be the single service
provider capable of servicing all of our customers IT requirements.
Our consulting and enterprise business solutions includes services in
the area of enterprise resource planning, customer relationship
management and supply chain management, data warehousing and business
intelligence, knowledge management, document management and enterprise
application integration. We also assist our customers in making their
existing computing systems accessible over the Internet. The segment
information includes the results of Citisoft and Knowledge Dynamics
which were acquired during the last year. |
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BPO: We provide outsourced BPO services in areas such as human
resources, finance and accounting, customer care (such as voice, email
and chat) besides also providing industry-specific transaction
processing services. We target our BPO services at the insurance,
healthcare, banking and financial services, transportation, tourism,
manufacturing, automotive, telecommunications, media, utilities and
retail industries. Revenues from this business segment currently do
not constitute a significant proportion of our total revenues;
however, we anticipate that this proportion will increase over time.
Our BPO services are offered through our wholly-owned subsidiary,
Nipuna. As part of the investor rights and securities subscription
agreements which we have entered into with Nipunas two other
investors, we have agreed not to compete with Nipuna. Pursuant to
these agreements, we and our affiliates are restricted from engaging
in activities that are or could directly or indirectly be competitive
with the business of Nipuna. Such activities include among others
providing BPO, soliciting existing or prospective customers of Nipuna
to obtain the services offered by Nipuna from other service providers
and investing in companies engaged in the same or similar business as
Nipuna. These non-compete restrictions apply until the investors
redeem all of their preference shares in Nipuna or their equity
interest in Nipuna falls below 5% after an initial public offering. |
Revenues
We generate revenues through fees for professional services rendered in our two
segments, namely, IT services and BPO services.
The following table sets forth the total revenues (excluding inter-segment revenues) for our
business segments for the three months ended June 30, 2006 and 2005:
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Three months ended June 30, |
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2006 |
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2005 |
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(unaudited) |
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(unaudited) |
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Segment |
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Amount |
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% |
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Amount |
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% |
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(in millions, except percentages) |
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IT services |
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$ |
316.2 |
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98.0 |
% |
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$ |
244.1 |
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99.2 |
% |
BPO |
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6.3 |
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2.0 |
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1.9 |
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0.8 |
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Total |
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$ |
322.5 |
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100.0 |
% |
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$ |
246.0 |
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100.0 |
% |
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We discuss below the components of our IT services revenues by technology
type, contract type, offshore or onshore designation, top customers and customer geography:
Revenues by technology
The vast majority of our revenues are generated from our various IT service offerings. The
following table presents our IT services revenues (excluding inter-segment revenues) by type of
service offering for the periods indicated:
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Three months ended June 30, |
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2006 |
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2005 |
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(unaudited) |
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(unaudited) |
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Technology type |
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Amount |
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% |
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Amount |
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% |
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(in millions, except percentages) |
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Application development and maintenance services |
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$ |
152.4 |
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48.2 |
% |
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$ |
124.3 |
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50.9 |
% |
Consulting and enterprise business solutions |
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129.2 |
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40.9 |
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93.0 |
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38.1 |
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Extended engineering solutions |
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18.3 |
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5.7 |
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16.8 |
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6.9 |
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Infrastructure management services |
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16.3 |
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5.2 |
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10.0 |
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4.1 |
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Total |
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$ |
316.2 |
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100.0 |
% |
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$ |
244.1 |
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100.0 |
% |
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Revenues by contract type
Our IT services are provided on a time-and-material basis or on a fixed-price
basis. Revenues from IT services provided on a time-and-material basis are recognized in the
period that the services are performed. Revenues from IT services provided on a fixed-price basis
are recognized under the percentage of completion method of accounting and are recorded when we
can reasonably estimate the time period to complete the work. The percentage of completion
estimates are subject to periodic revisions and the cumulative impact of any revision in the
estimates of the percentage of completion is reflected in the period in which the changes become
known to us. Although we have revised our project completion estimates from time to time, such
revisions have not materially affected our reported revenues to date. In recent years, we have
experienced some pricing pressure from our customers, which has had a negative impact on margins.
In response to current market trends, we are considering the viability of introducing
performance-based or variable-pricing contracts. In the near term, we expect that revenue from
fixed-price contracts will continue to increase as current market trends indicate a customer
preference towards fixed-price contracts.
The following table presents our IT services revenues (excluding
inter-segment revenues) by type of contract for the periods indicated:
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Three months ended June 30, |
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2006 |
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2005 |
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(unaudited) |
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(unaudited) |
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Contract type |
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Amount |
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% |
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Amount |
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% |
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(in millions, except percentages) |
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Time-and-material basis |
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$ |
170.4 |
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53.9 |
% |
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$ |
150.4 |
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61.6 |
% |
Fixed-price basis |
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145.8 |
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46.1 |
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93.7 |
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38.4 |
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Total |
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$ |
316.2 |
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100.0 |
% |
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$ |
244.1 |
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100.0 |
% |
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Revenues based on offshore and onsite/offsite
We provide our IT services through a combination of (i) offshore centers located throughout
India, (ii) teams working onsite at a customers location, (iii) nearshore centers located in
Canada, China and Hungary to service U.S.-based, Asia Pacific based and Europe based customers,
respectively, and (iv) offsite centers located in Australia, Canada, China, Hungary, Japan,
Malaysia, Singapore, United Arab Emirates, United Kingdom and United States. Offshore IT services
revenues consist of revenues earned both from IT services work conducted at our offshore centers
in India as well as onsite work conducted at customers premises which is related to offshore
work. Offshore IT services revenues do not include revenues from our offsite or nearshore centers
located outside of India or revenues from onsite work which is not related to any offshore work.
These later revenues are included in onsite/offsite revenues.
We generally charge higher rates and incur higher compensation expenses for work
performed by our onsite teams at our customers premises or at our offsite and nearshore centers,
as compared to work
performed at our offshore centers in India. Services performed by our onsite teams or at our
offsite centers
typically generate higher revenues per capita, but at a lower gross margin, than
the same amount of services performed at our offshore centers in India.
The following table presents our IT services revenues (excluding inter-segment revenues)
based on the location where services are performed for the periods indicated:
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Three months ended June 30, |
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2006 |
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2005 |
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(unaudited) |
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(unaudited) |
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Location |
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Amount |
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% |
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Amount |
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% |
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(in millions, except percentages) |
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Offshore |
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$ |
149.1 |
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47.2 |
% |
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$ |
106.9 |
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43.8 |
% |
Onsite/Offsite |
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167.1 |
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52.8 |
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137.2 |
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56.2 |
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Total |
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$ |
316.2 |
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100.0 |
% |
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$ |
244.1 |
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100.0 |
% |
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Revenues by top customers
Our top two customers accounted for 12.5% of our IT services revenues during the three
months ended June 30, 2006, as compared to 15.2% of IT services revenues during the three months
ended June 30, 2005. Our top five customers accounted for 22.2% of IT services revenues during
the three months ended June 30, 2006, as compared to 26.7% of IT services revenues during the
three months ended June 30, 2005.
Revenues based on customer location
We have experienced increasing volumes of business from customers located in North America
and Europe, attributable to both new customers and additional business from existing customers. We
expect that most of our revenues will be generated in North America followed by Europe in fiscal
2007.
The following table gives the composition of our IT services revenues (excluding
inter-segment revenues) based on the location of our customers for the periods indicated :
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Three months ended June 30, |
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2006 |
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2005 |
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(unaudited) |
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(unaudited) |
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Geographic location |
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Amount |
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% |
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Amount |
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% |
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(in millions, except percentages) |
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North America |
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$ |
205.8 |
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65.1 |
% |
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$ |
164.7 |
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67.5 |
% |
Europe |
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57.1 |
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18.1 |
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42.2 |
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17.3 |
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Japan |
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3.5 |
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1.1 |
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3.5 |
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1.4 |
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India |
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13.7 |
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4.3 |
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8.3 |
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3.4 |
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Rest of the world |
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36.1 |
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11.4 |
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25.4 |
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10.4 |
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Total |
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$ |
316.2 |
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100.0 |
% |
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$ |
244.1 |
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100.0 |
% |
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Expenses
Cost of revenues
Our cost of revenues consists primarily the compensation cost of technical staff,
depreciation on dedicated assets and system and application software costs, amortization of
intangibles, travel costs, data communication expenses and other expenses incurred that are
related to the generation of revenue.
The principal component of our cost of revenues is the wage cost of our technical associates.
Wage cost in India, including in the IT services industry, have historically been significantly
lower than wage cost in the United States and Europe for comparably skilled professionals.
However, as wages in India increase at a faster rate than in the United States, we may experience
increase in our costs of personnel, particularly project managers and other mid-level
professionals.
The utilization levels of our technical associates also affect our revenue and gross profits.
We calculate utilization levels on a monthly basis, based on the ratio of the actual number of
hours billed by technical associates in such month to the total number of billable hours. For
purposes of such calculation, we assume that an associate is 100.0% utilized if he or she works
157 hours per month. We manage utilization by monitoring project requirements and timetables. The
number of associates assigned to a project will vary
according to size, complexity, duration, and demands of the project. Associate utilization
levels for IT services were 85.0% and 81.6% during the three months ended June 30, 2006 and 2005
respectively. The
utilization levels for our technical associates have been increasing in recent
periods, mainly on account of new business and an increase in business from existing customers,
and we expect this trend to continue in the near future.
Selling, general and administrative expenses
Selling, general and administrative expenses generally include the compensation costs of
sales, management and administrative personnel, travel costs, advertising, business promotion,
depreciation on assets, rent, repairs, electricity and other general expenses not attributable to
cost of revenues.
Subsidiaries
As of June 30, 2006, we have five wholly-owned subsidiaries, Nipuna Services Ltd., or
Nipuna, Satyam Technologies Inc., or STI, Satyam Computer Services (Shanghai) Company Limited, or
Satyam Shanghai, Citisoft Plc, or Citisoft and Knowledge Dynamics Pte Ltd, or Knowledge Dynamics.
These five subsidiaries have been consolidated in our consolidated financial statements as of June
30, 2006.
Citisoft
On May 12, 2005, Satyam Computer Services acquired a 75% interest in Citisoft Plc or Citisoft,
a specialist business and systems consulting firm located in the United Kingdom that has focused on
the investment management industry since 1986. The results of Citisofts operations have been
consolidated by Satyam Computer Services from the consummation date of May 12, 2005. The
acquisition has been accounted for by following the purchase method of accounting.
The consideration for the 75% equity interest in Citisoft amounted to $17.4 million comprising
of an initial consideration of $14.3 million (including direct acquisition costs of $0.9 million)
and deferred consideration (non-contingent) of $3.1 million. The deferred consideration accounted
for as part of the purchase consideration, has been paid during the three months ended June 30,
2006. Satyam Computer Services is also required to pay a maximum earn out consideration amounting
to $3.9 million on April 30, 2007 based on achievement of targeted revenues and profits. The
earn-out consideration will be accounted for as purchase consideration when the contingency is
resolved.
Satyam Computer Services is also required to fund an Employee Benefit Trust (EBT) formed by
Citisoft for the purpose of providing additional incentive to employees to contribute to the
success of Citisoft. Satyam is required to fund a maximum of $3.4 million and $1.7 million on
April 30, 2007 and 2008 respectively, based on achievement of targeted revenues and profits. As of
June 30, 2006 Satyam Computer Services has accrued $1.9 million as a current liability and
recognized in the statement of income as part of cost of revenues.
The purchase consideration for acquisition of 75% interest has been allocated to the
assets acquired and liabilities assumed as of the date of acquisition based on managements
estimates and a valuation done by an independent valuer in accordance with Statement of Financial
Accounting Standards No. 141, Business Combinations. The goodwill has been allocated to the IT
services segment. The purchase price allocation is as follows:
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US$ in millions |
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Purchase price
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$ |
17.4 |
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Allocated to: |
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Net current assets
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$ |
2.2 |
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Tangible assets
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0.3 |
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Customer Contracts related intangibles
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0.8 |
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Customer relationship related intangibles
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5.4 |
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Trade name
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0.7 |
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Goodwill
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10.3 |
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Deferred tax liability
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(2.3 |
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Total
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$ |
17.4 |
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On June 29, 2006, Satyam Computer Services exercised the call option and acquired the
remaining 25% equity interest for a deferred consideration of $5.9 million and a maximum earn-out
consideration of $6.5 million based on achievement of targeted revenues and profits.
The purchase consideration for the 25% interest has been allocated to the assets acquired and
liabilities assumed as of the date of acquisition, on a preliminary basis based on managements
estimates. The finalization of the purchase price allocation, which is expected to be completed
within one year from the date of the acquisition, may result in certain adjustments to the purchase
price allocation. The preliminary allocation of the purchase price resulted in goodwill of $3.9
million and $1.8 million of intangible assets, which are subject to amortization. The goodwill has
been allocated to the IT services segment.
Knowledge Dynamics
On July 21 2005, Satyam Computer Services announced its intention to acquire 100% of the
shares of Knowledge Dynamics Pte Ltd, Singapore, (Knowledge Dynamics), a leading data
warehousing and business intelligence solutions provider. The transaction was consummated on
October 1, 2005, the date of transfer of shares to Satyam Computer Services. The acquisition has
been accounted for by following the purchase method of accounting.
The consideration for this acquisition amounted to $3.3 million comprising of initial
consideration of $1.8 million (including direct acquisition costs of $11 thousand) and deferred
consideration of $1.5 million. The total deferred consideration for the acquisition of $1.5
million has been accounted for as part of the purchase consideration out of which $0.8 million has
been paid during the three months ended June 30, 2006 and $0.7 million as current liability in the
balance sheet. Satyam Computer Services is also required to pay a maximum earn-out consideration
amounting to $1.1 million and $1.1 million on April 30, 2007 and 2008 respectively based on the
achievement of targeted revenues and profits. The earn-out consideration will be accounted for as
purchase consideration when the contingency is resolved.
The purchase consideration has been allocated to the assets acquired and liabilities assumed
as of the date of acquisition based on managements estimates and a valuation done by an
independent valuer in accordance with Statement of Financial Accounting Standards No. 141,
Business Combinations. The goodwill has been allocated to the IT services segment. The purchase
price allocation is as follows:
|
|
|
|
|
|
|
US$ in millions |
|
Purchase price |
|
|
$3.3 |
|
|
|
|
|
|
Allocated to: |
|
|
|
|
Net current assets |
|
|
$0.5 |
|
Customer
Contracts and Related Relationships |
|
|
1.0 |
|
Trade name |
|
|
0.1 |
|
Goodwill |
|
|
2.1 |
|
Deferred tax liability |
|
|
(0.4 |
) |
|
|
|
|
|
Total |
|
|
$3.3 |
|
|
|
|
|
|
Associate Sify
On November 7, 2005, we offered to sell an aggregate of 11,182,600 equity shares,
representing our entire investment of 31.6% of the outstanding equity shares of Sify. The sale
transaction was consummated on November 9, 2005 at a sale price of $5.60 per equity share
aggregating to $62.3 million.
We accounted for our share of equity in earnings/(losses) of Sify under the equity
method of accounting up to November 9, 2005. The excess of sale proceeds (net of transaction
costs) over the carrying value of investment in Sify as on the date of sale amounting to $43.6
million has been recognized as gain in the statement of income during year ended March 31, 2006.
Income Taxes
The statutory corporate income tax rate in India is currently 30.0%. This tax rate is
presently subject to a 10.0% surcharge. The amount of tax and surcharge payable is further subject
to a 2.0% education cess, resulting in an effective tax rate of
33.66%. The provision for foreign
taxes is due to income taxes payable in overseas tax jurisdictions by our offsite, nearshore and
onsite centers, principally in the United States. We benefit from tax incentives provided to
software entities as an exemption from payment of Indian corporate income taxes until the earlier
of fiscal 2009 or 10 consecutive years of operations of software development facilities designated
as Software Technology Parks, or STP units. The benefits of this tax incentive have historically
resulted in our effective tax rate being well below statutory rates. The exemption is expected to
expire between fiscal 2006 and fiscal 2010. The exemption for two of our STP units in Hyderabad
expired during fiscal 2006 and the exemption for one of our STP units in Bangalore expired in the
three months ended June 30, 2006. We also earn certain other foreign income and domestic income,
which are taxable irrespective of the tax holiday as stated above.
Our subsidiaries are subject to income taxes of the countries in which they operate. Our
subsidiaries operating loss carried forward for tax purposes amounted to approximately $24.2
million as of June 30, 2006, which is available as an offset against future taxable income of such
entities. These carried forward amounts expire at various dates primarily over eight to twenty
years. Realization is dependent on such subsidiaries generating sufficient taxable income prior to
expiration of the loss carried forward. A valuation allowance is established attributable to
deferred tax assets and losses carried forward in subsidiaries where, based on available evidence,
it is more likely than not that they will not be realized. Currently, a full valuation allowance
has been made for such losses.
Results of Operations
The following table sets forth operating data in dollars and as a percentage of
revenues for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
2006 |
|
|
|
|
|
2005 |
|
|
Statement of Operations data: |
|
Amount |
|
% |
|
Amount |
|
% |
|
|
(unaudited) |
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|
(in millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IT services
|
|
$ |
316.3 |
|
|
|
98.1 |
% |
|
$ |
244.1 |
|
|
|
99.2 |
% |
BPO
|
|
|
8.0 |
|
|
|
2.5 |
|
|
|
3.3 |
|
|
|
1.3 |
|
Inter-segment
|
|
|
(1.8 |
) |
|
|
(0.6 |
) |
|
|
(1.4 |
) |
|
|
(0.5 |
) |
|
|
|
Total revenues
|
|
|
322.5 |
|
|
|
100.0 |
|
|
|
246.0 |
|
|
|
100.0 |
|
|
|
|
Cost of revenues: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IT services
|
|
|
(201.5 |
) |
|
|
(62.5 |
) |
|
|
(156.8 |
) |
|
|
(63.3 |
) |
BPO
|
|
|
(5.8 |
) |
|
|
(1.8 |
) |
|
|
(3.7 |
) |
|
|
(1.0 |
) |
Inter-segment
|
|
|
1.8 |
|
|
|
0.6 |
|
|
|
1.4 |
|
|
|
0.4 |
|
|
|
|
Total cost of revenues
|
|
|
(205.5 |
) |
|
|
(63.7 |
) |
|
|
(159.1 |
) |
|
|
(63.9 |
) |
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IT services
|
|
|
114.8 |
|
|
|
35.6 |
|
|
|
87.3 |
|
|
|
35.9 |
|
BPO
|
|
|
2.2 |
|
|
|
0.7 |
|
|
|
(0.4 |
) |
|
|
0.3 |
|
Inter-segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
Total gross profit
|
|
|
117.0 |
|
|
|
36.3 |
|
|
|
86.9 |
|
|
|
36.1 |
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IT services
|
|
|
(47.7 |
) |
|
|
(14.8 |
) |
|
|
(38.4 |
) |
|
|
(14.3 |
) |
BPO
|
|
|
(2.4 |
) |
|
|
(0.7 |
) |
|
|
(2.4 |
) |
|
|
(1.4 |
) |
Inter-segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
Total selling, general and administrative expenses
|
|
|
(50.1 |
) |
|
|
(15.5 |
) |
|
|
(40.8 |
) |
|
|
(15.7 |
) |
|
|
|
Operating income/(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IT services
|
|
|
67.1 |
|
|
|
20.8 |
|
|
|
48.9 |
|
|
|
21.7 |
|
BPO
|
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
(2.8 |
) |
|
|
(1.2 |
) |
Inter-segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income/(loss)
|
|
|
66.9 |
|
|
|
20.7 |
|
|
|
46.1 |
|
|
|
20.5 |
|
|
|
|
Interest income
|
|
|
6.5 |
|
|
|
2.0 |
|
|
|
6.4 |
|
|
|
2.8 |
|
Interest expense
|
|
|
(0.6 |
) |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
Gain/ (loss) on foreign exchange transactions
|
|
|
14.7 |
|
|
|
4.6 |
|
|
|
(2.7 |
) |
|
|
(0.6 |
) |
Other income/(expense), net
|
|
|
(4.9 |
) |
|
|
(1.5 |
) |
|
|
1.5 |
|
|
|
0.0 |
|
Income before income taxes and equity in earnings/(losses)
of associated companies
|
|
|
82.6 |
|
|
|
25.6 |
|
|
|
51.2 |
|
|
|
22.7 |
|
Income taxes
|
|
|
(7.3 |
) |
|
|
(2.2 |
) |
|
|
(8.4 |
) |
|
|
(3.2 |
) |
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings/(losses) of associated companies, net of
taxes
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
(0.5 |
) |
|
|
(0.1 |
) |
|
|
|
Net income/(loss)
|
|
$ |
75.5 |
|
|
|
23.4 |
|
|
$ |
42.3 |
|
|
|
19.4 |
|
|
|
|
Depreciation
|
|
$ |
7.9 |
|
|
|
2.4 |
|
|
$ |
7.1 |
|
|
|
3.2 |
|
Stock-based compensation
|
|
|
3.6 |
|
|
|
1.1 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
|
(1) |
|
Inclusive of stock-based compensation expenses of $3.4 million and $Nil
million for the three months ended June 30, 2006 and 2005 respectively, in the IT services
segments. |
|
(2) |
|
Inclusive of stock-based compensation expenses of $0.2 million and $0.1 million
for the three months ended June 30, 2006 and 2005 respectively, in the IT services
segments. |
Comparison of results for the three months ended June 30, 2006 and June 30, 2005.
Revenues. Our revenues increased by 31.1% to $322.5 million during the three months
ended June 30 2006 from $246.0 million during the three
months ended June 30, 2005. This revenue
growth of $76.5 million during the three months ended June 30, 2006 was primarily the result of an
increase in business both from existing customers and new customers. Revenues from existing
customers increased by 23.4% to $274.5 million during the three months ended June 30, 2006 from
$222.5 million during the three months ended June 30, 2005. Revenues from new customers increased
by 93.1% to $41.7 million during the three months ended June 30, 2006 from $21.6 million during
the three months ended June 30, 2005. We added 34 and 31 customers including Nil and 4 from the
Fortune Global 500 and Fortune U.S. 500 list during the three months ended June 30, 2006 and 2005,
respectively.
During the three months ended June 30, 2006, revenues (IT services excluding inter-segment
revenues) from consulting and enterprise business solutions has grown by $36.2 million, revenues
from application development and maintenance has increased by $28.1 million, followed by extended
engineering solutions and infrastructure management services, which grew by $1.5 million and $6.3
million respectively. In terms of percentage growth during the three months ended June 30, 2006
over the three months ended June 30, 2005, revenues from consulting and enterprise solutions has
grown by 38.9%, application development and maintenance services has grown by 22.6%, extended
engineering solutions and infrastructure management services have grown by 8.9% and 63.0%
respectively.
Revenues from IT services (excluding inter-segment revenues) provided on a time-and-materials
basis decreased to 53.9% during the three months ended June 30, 2006 from 61.6% during the three
months ended June 30, 2005. Revenues from IT services provided on a fixed-price basis increased
to 46.1% during the three months ended June 30, 2006 from 38.4% during the three months ended June
30, 2005. The increase during the three months ended June 30, 2006 for fixed-price contracts is
primarily due to the shift in customer preference regarding type of contracts from
time-and-material to fixed-price.
The onsite revenues increased as a result of new engagements in consulting and enterprise
business solutions during the three months ended June 30, 2006, and the need for extensive
interactions with customers in the early stages of new engagements to understand their business
needs and create the relevant processes before we move the appropriate portion of the work
offshore.
Of the total increase of $76.5 million in total revenue during the three months ended June
30, 2006, $42.3 million increased in North America followed by $17.7 million in Europe, $10.8
million in rest of the world, $5.6 million in India and $0.1 million in Japan. Our increased
business in North America and Europe was due to new customers and additional business from
existing customers.
Cost of Revenues. Cost of revenues increased by 29.2% to $205.5 million during the three
months ended June 30, 2006 from $159.1 million during the three months ended June 30, 2005. Cost
of revenues represented 63.7% of revenues during the three months ended June 30, 2006 and 64.7%
during the three months ended June 30, 2005. This increase by $46.4 million was attributable
primarily to increases in associate compensation and benefits expenses, traveling expenses,
communication expenses, depreciation and other expenses, attributable largely to an overall
increase in our business during this period. Associate compensation and benefits expenses
increased by 22.0% to $157.0 million, or 48.7% of revenues during the three months ended June 30,
2006 from $128.7 million, or 52.3% of revenues during the three months ended June 30, 2005. The
increase in the associate compensation and benefits is due to: (i) increase in the total number of
technical associates by 7,338 to 27,850 during the three months ended June 30, 2006 from 20,512;
(ii) increase in number of onsite technical associates by 1,335 to 5,741 during the three months
ended June 30, 2006 from 4,396 for which we pay a higher compensation and (iii) increase of
approximately $0.3 million of the funding to Citisoft Employee Benefit Trust accounted as
compensation expense relating to employees of Citisoft. Traveling expenses increased by 64.2% to
$15.6 million, or 4.8% of revenues, during the three months ended June 30, 2006 from $9.5 million
or 3.8% of revenues, during the three months ended June 30, 2005. This increase was primarily due
to increase in the number of travels resulting from increase in the number of technical
associates. Communication expenses increased by 17.9% to $3.3 million or 1.0% of revenues during
the three months ended June 30, 2006 from $2.8 million, or 1.1% of revenues during the three
months ended June 30, 2005. This increase was primarily due to increase in number of locations of
operations, both in India and abroad. Other expenses comprised mainly of rent, power and fuel and
maintenance expenses. Other expenses increased by 59.8% to $19.5 million, or 6.1% of revenues,
during the
three months ended June 30, 2006 from $12.2 million, or 5.0% of revenues during the
three months ended June 30, 2005. Depreciation expense increased 13.3% to $6.8 million, or 2.1% of
revenues, during the three months ended June 30, 2006 from $6.0 million, or 2.4% of revenues
during the three months ended June 30, 2005. Stock-compensation expenses increased to $3.4
million, or 1.1% of revenues, during the three months ended June 30, 2006 from $Nil million during
the three months ended June 30, 2005. The increase was due to adoption of SFAS 123R.
Selling, general and administrative expenses. Selling, general and administrative
expenses increased 23.1% to $50.1 million during the three months ended June 30, 2006 from $40.7
million during the three months ended June 30, 2005. Selling, general and administrative expenses
represented 15.5% of revenues during the three months ended June 30,
2006 and 16.6% of revenues during the three months ended June 30, 2005. This increase of $9.4
million during the three months ended June 30, 2006 was a result primarily of increase in
associate compensation and benefits for non-technical associates, communication expenses,
traveling expenses and sales and marketing expenses. Associate compensation and benefits increased
by 14.0% to $26.8 million, or 8.3% of revenues, during the three months ended June 30, 2006 as
compared to $23.5 million or 9.6% of revenues during the three months ended June 30, 2005
primarily on account of increase in number of non-technical associates by 211 to 1,993 as of June
30, 2006 from 1,782 as of June 30, 2005. Communication expenses increased by 28.6% to $1.8 million
or 0.6% of revenues during the three months ended June 30, 2006 as compared to $1.4 million or
0.6% of revenues during the three months ended June 30, 2005. Traveling expenses increased by
51.2% to $6.2 million or 1.9% of revenues during the three months ended June 30, 2006 from $4.1
million or 1.7% of revenues during the three months ended June 30, 2005. Traveling expenses
increased primarily due to increase in travels by our non-technical associates. Professional
charges increased by 52.2% to $3.5 million or 1.0% of revenues during the three months ended June
30, 2006 from $2.3 million or 0.9% of revenues during the three months ended June 30, 2005.
Stock-based compensation expense increased by 100.0% to $0.2 million during the three months ended
June 30, 2006 from $0.1 million during the three months ended June 30, 2005. Marketing expenses
increased by 44.0% to $3.6 million or 1.1% of revenues during the three months ended June 30, 2006
from $2.5 million or 1.0% of revenues during the three months ended June 30, 2005. Other expenses
comprised primarily of rent, power and fuel and maintenance expenses. Other expenses increased by
21.1% to $6.9 million or 2.1% of revenues during the three months ended June 30, 2006 from $5.7
million, or 2.3% of revenues during the three months ended June 30, 2005.
Operating income. Our operating income was $66.9 million during the three months
ended June 30, 2006, representing an increase of 45.1% over the operating income of $46.1 million
during the three months ended June 30, 2005. As a percentage of revenues, operating income
increased to 20.7% during the three months ended June 30, 2006, from 18.7% during the three months
ended June 30, 2005. This increase in operating income as a percentage of revenue was due to (i)
decrease in the associate compensation and benefits expenses to 57.0% of revenue during the three
months ended June 30, 2006 from 61.9% of revenues, during the three months ended June 30, 2005
(ii) decrease in the communication expenses to 1.6% revenues during the three months ended June
30, 2006 from 1.7% of revenues during the three months ended June 30, 2005 (iii) decrease in the
depreciation expenses to 2.4% of revenues during the three months ended June 30, 2006 from 2.9% of
revenues during the three months ended June 30, 2005 and (iv) offset by increase in the traveling,
stock-compensation due to adoption of SFAS 123R, and other expenses as a percentage of
revenues.
Interest income. Interest income increased to $6.5 million during the three months
ended June 30, 2006 representing an increase of 1.6% from $6.4 million during the three months
ended June 30, 2005, primarily due to additional bank deposits during the period.
Gain/(loss) on foreign exchange transactions. During the three months ended June 30,
2006 and the three months ended June 30, 2005, 77.9% and 81.2% respectively, of our revenues were
generated in U.S. dollars. The average exchange rate of Indian rupee to U.S. dollar during the
three months ended June 30, 2006 was Rs. 45.30 against Rs. 43.53 during the three months ended
June 30, 2005. As at June 30, 2006, the Indian rupee depreciated to Rs. 45.87 against 43.51 at
June 30, 2005. As at June 30, 2006, the Indian rupee depreciated to Rs. 45.87 against Rs. 44.48 as
at March 31, 2006. As at June 30, 2005, the Indian rupee appreciated to Rs. 43.51 against Rs.
43.62 as at March 31, 2005. As a result of these fluctuations in exchange rates during the three
months ended June 30, 2006 and June 30, 2005, gain on foreign exchange transactions
was $14.7
million during the three months ended June 30, 2006 as compared to a loss of $2.7 million during
the three months ended June 30, 2005.
Other income/(expenses), net. Other income/ (expenses), net were $(4.9) million during the three
months ended June 30, 2006, as compared to other income /(expenses), net were $1.5 million during
the three months ended June 30, 2005. The decrease in the other income is primarily on account of
loss on forward and options contracts amounting to $(4.7) million during the three months ended
June 30, 2006 as compared to a gain of $1.7 million during the three months ended June 30, 2005.
The loss in forward and option contracts is because of rupee depreciation from Rs 44.48 as on
March 31, 2006 to Rs 45.87 as on June 30, 2006.
Income taxes. Income taxes were $7.3 million during the three months ended June 30,
2006, representing a decrease of 13.1% from $8.4 million during the three months ended June 30,
2005. the decrease in income taxes is primarily on account of decrease in income of foreign
branches which is offset by the expiry of tax exemption benefit for two of our STP units in
Hyderabad and one unit in Bangalore resulted in increase in income taxes by $1.7 million during
the three months ended June 30, 2006 as compared to $0.5 million during the three months ended
June 30, 2005.
Equity in earnings/(losses) of associated
companies, net of taxes. Equity in losses
of associated companies was $0.2 million during the three months ended June 30, 2006 as compared
to $0.5 million during the three months ended June 30, 2005.
Net income. As a result of the foregoing, our net income was $75.5 million during the
three months ended June 30, 2006, representing an increase of 78.5% over net income of $42.3
million during the three months ended June 30,
2005. As a percentage of total revenues, net income increased to 23.4% during the three months
ended June 30, 2006 from 17.2% during the three months ended June 30, 2005.
Liquidity and Capital Resources
Net cash provided by operating activities
Net cash provided by operating activities was $71.8 million and $30.8 million
during the three months ended June 30, 2006 and 2005, respectively.
During the three months ended June 30, 2006, non-cash adjustments to reconcile the $75.5
million net income to net cash used in operating activities consisted primarily of depreciation
and amortization expense of $8.1 million and increase in net accounts receivable and unbilled
revenues. Net accounts receivable and unbilled revenues increased by $17.1 million primarily as a
result of an increase in our revenues and increase in collection period. Accounts payable and
accrued expenses increased by $11.1 million primarily on account of provision for gratuity and
unutilized leave by $7.5 million.
During the three months ended June 30, 2005, non-cash adjustments to reconcile the $42.3
million net income to net cash used in operating activities consisted primarily of depreciation
and amortization expense of $7.2 million and increase in net accounts receivable and unbilled
revenues. Net accounts receivable and unbilled revenues increased by $23.4 million primarily as a
result of an increase in our revenues. Accounts payable and accrued expenses increased by $13.8
million primarily on account of accrued compensation and benefits of $9.0 million and increase in
taxes by $2.2 million.
Net cash used in investing activities
Net cash used in investing activities was $17.8 million and $23.2 million during the three
months ended June 30, 2006 and 2005, respectively.
Net cash used in investing activities during the three months ended June 30, 2006 decreased
by $5.4 million to $17.8 million from $23.2 million during the three months ended June 30,
2005. This decrease in net cash used in investing activities was primarily due to acquisition of
Citisoft during the three months ended June 30, 2005 amounting to $11.9 million, offset by (i)
increase in purchases of premises, plant and equipment to $13.9 million during the three months
ended June 30, 2006 from $11.4 million during the three months ended June 30, 2005 due to purchase
of premises and equipment, primarily infrastructure, computers
and other equipment associated with
the expansion of new facilities at Bangalore, Chennai, Hyderabad and Visakhapatnam.
Net cash provided by/ (used in)
financing activities
Net cash provided by financing activities was $13.4 million and $11.7 million during the
three months ended June 30, 2006 and 2005, respectively.
During the three months ended June 30, 2006, $13.4 million was raised from financing
activities. We received cash from issuance of associate stock options of $10.2 million, $0.5
million from short term debt by Nipuna and $3.0 million from long term debts by Nipuna. We used
cash in repayment of loans amounting to $0.5 million.
During the three months ended June 30, 2005, $11.8 million was raised from financing
activities, primarily from issuance of associate stock options of $8.5 million and $4.4 million was
raised from proceeds from long term debts by our subsidiary. Our subsidiary used cash in repayment
of a short-term loan amounting to $1.2 million.
As of June 30, 2006, we had cash and cash equivalents of $352.7 million, rupee denominated
loans from the Satyam Associate Trust of $1.3 million secured by our shares held by the Satyam
Associate Trust, U.S. dollar denominated loans of Nipuna amounting to $18.6 million and other
outstanding loans of $2.8 million with maturities ranging from one to three years. As of June 30,
2006, we had an unused working capital line of credit of $4.7 million from banks and unused
non-funded lines of credit of $4.5 million from banks.
The following table describes our outstanding credit facilities as of June
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
Interest |
|
Computation |
Loan Type |
|
Lenders |
|
outstanding |
|
(per annum) |
|
method |
|
|
(dollars in millions) |
|
Rupee loan of Satyam Associates Trust |
|
Cholamandalam |
|
$ |
1.3 |
|
|
10.25% |
|
Fixed |
Working capital term loan |
|
BNP Paribas |
|
|
8.1 |
|
|
6 month LIBOR +0.95% |
|
Floating |
External commercial borrowing |
|
BNP Paribas |
|
|
10.5 |
|
|
6 month LIBOR +0.95% |
|
Floating |
Export packing credit |
|
BNP Paribas |
|
|
4.5 |
|
|
6 month LIBOR +0.25% |
|
Floating |
Other loans |
|
Various other parties |
|
|
2.8 |
|
|
3.0%-14.5% |
|
Fixed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
27.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We anticipate capital expenditures of approximately $75.0 million during fiscal 2007,
principally to finance construction of new facilities in our offshore centers, expand facilities
in offshore centers in India and establish offsite centers outside India. We believe that existing
cash and cash equivalents and funds generated from operations will be sufficient to meet these
requirements. However, we may significantly alter our proposed capital expenditures plans and
accordingly, may require additional financing to meet our requirements. In either case, we cannot
assure you that additional financing will be available at all or, if available, that such
financing will be obtained on terms favorable to us or that any additional financing will not be
dilutive to our shareholders.
We have guaranteed payment of all sums payable by Nipuna to its two strategic investors,
Olympus Capital and Intel Capital, upon redemption of the $20 million preference shares in Nipuna
held by them. These preference shares are to be mandatorily redeemed or converted into equity
shares no later than June 2006, if Nipuna achieves certain targets for revenues and profits by
March 31, 2006. If these targeted revenues and profits are not achieved along with other
triggering events, the investors have an option to either redeem the preference shares or convert
them. Although certain triggering events for early redemption as per the agreement have occurred
during the period January 2004 to December 2004, the investors waived their right of early
redemption. Further Nipuna has not achieved the targeted revenues and profits upto March 31, 2006.
If not earlier converted, these preference shares are redeemable on maturity in June 2007 at a
redemption premium, which could range between 7.5% to 13.5% per annum. As of June 30, 2006,
discussions for redemption/conversion of preference shares are in progress between Satyam
management and the Investors.
In addition, depending upon certain triggering events, we may be required to subscribe to
US$20 million in convertible debentures of Nipuna which would be convertible upon the election of
Nipuna into ordinary shares at any time. On January 6, 2005, Nipuna obtained approval from a bank
for long-term borrowings up
to US$20 million with an interest of 0.95% above a six-month LIBOR.
Satyam Computer Services has given a corporate guarantee to the bank for this borrowing. As per
the terms of the facility, Nipuna was required to draw the funds prior to September 30, 2005 and
Nipuna has received a further extension upto September 30, 2006. The borrowing is repayable in 3
years from each draw down of the borrowing. As of June 30, 2006, Nipuna has availed $18.6 million
under the above arrangement. We expect that we will not be required to subscribe to the
convertible debenture described above
The following table sets forth our contractual obligations and commitments to make future
payments as of June 30, 2006. The following table excludes our accounts payable, accrued operating
expenses and other current liabilities which are payable in normal course of operations.
We believe that the conversion of the Nipuna preference shares is more probable than
redemption and therefore have not included such redemption and the redemption premium payable, if
redeemed as per the terms of the agreement, in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due as at June 30, 2006, |
|
|
|
Within
1 |
|
1-3 |
|
3-5 |
|
After 5 |
|
Total |
|
|
year |
|
years |
|
years |
|
years |
|
|
|
|
(dollars in millions) |
|
Long-term debt |
|
$ |
2.5 |
|
|
$ |
1.6 |
|
|
$ |
18.6 |
|
|
|
|
|
|
$ |
22.7 |
|
Operating leases |
|
|
3.7 |
|
|
|
2.4 |
|
|
|
0.5 |
|
|
|
0.4 |
|
|
|
7.0 |
|
Unconditional purchase obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other commercial commitments |
|
|
33.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33.6 |
|
Bank guarantees |
|
|
4.7 |
|
|
|
1.1 |
|
|
|
4.5 |
|
|
|
2.4 |
|
|
|
12.7 |
|
Letters of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gratuity Plan |
|
|
1.5 |
|
|
|
3.8 |
|
|
|
8.0 |
|
|
|
9.8 |
|
|
|
23.1 |
|
Citisoft deferred, earn-out
consideration and EBT funding
(1) |
|
|
13.0 |
|
|
|
8.7 |
|
|
|
|
|
|
|
|
|
|
|
21.7 |
|
Knowledge Dynamics deferred and
earn-out consideration
(2) |
|
|
1.9 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
3.1 |
|
|
|
|
Total contractual cash obligations. |
|
$ |
60.9 |
|
|
$ |
18.8 |
|
|
$ |
31.6 |
|
|
$ |
12.6 |
|
|
$ |
123.9 |
|
|
|
|
|
|
|
(1)The earn-out consideration and the further funding of EBT are based on fulfillment of
certain conditions. |
|
(2)Earn-out consideration of Knowledge Dynamics is based on certain
conditions. |
Based on past performance and current expectations, we believe that our cash and cash
equivalents, short-term investments, and cash generated from operations will satisfy our working
capital needs, capital expenditures, investment requirements, stock repurchases, commitments, and
other liquidity requirements associated with our existing operations through at least the next 12
months. In addition, there are no transactions, arrangements, and other relationships with
unconsolidated entities or other persons that are reasonably likely to materially affect liquidity
or the availability of our requirements for capital resources.
Stock-based Compensation
Effective April 1, 2006, Satyam adopted the fair value recognition provisions of Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS
123R). Prior to the adoption of SFAS 123R, Satyam recognized stock-based compensation using the
intrinsic value-based method of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations including Financial Accounting Standards
Board (FASB) Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation an interpretation of APB Opinion No. 25, issued in March 2000 to account for its
employee stock-based compensation plan. Satyam has therefore adopted the pro-forma disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation and SFAS 148, Accounting
for Stock-Based Compensation Transition and Disclosure, an amendment of FASB Statement No. 123.
Pursuant to SFAS No. 123, all equity instruments issued to non-employees are accounted for based on
the fair value of the consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable. In March 2005, the Securities and Exchange Commission (the
SEC) issued Staff Accounting Bulletin No.107 (SAB 107) regarding the SECs interpretation of
SFAS 123R and the valuation of share-based payments for public companies. Satyam has applied the
provisions of SAB 107 in its adoption of SFAS 123R.
Satyam adopted SFAS 123R using the modified prospective transition method, which required the
application of the accounting standard as of April 1, 2006, the first day of Satyams fiscal year
2007. Under this transition method, stock-based compensation expensed for the three months ended
June 30, 2006
includes a) compensation expense for all stock-based compensation awards granted
prior to, but not yet vested as of April 1, 2006, based on the grant-date fair value estimated in
accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
(SFAS 123) and b) Stock-based compensation expenses for all stock-based compensation awards
granted after April 1, 2006 is based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123R. In accordance with the modified prospective transition method, Satyams
Consolidated Financial Statements for the prior periods have not been restated to reflect, and do
not include, the impact of SFAS 123R.
We have three associate stock option plans: our Associated Stock Option Plan, or ASOP,
established in May 1998; our Associated Stock Option Plan B, or ASOP B, established in May 1999;
and our Associated Stock Option Plan ADS, or ASOP ADS, established in May 1999. We also have the
Employee Stock Option Plan, or ESOP, established by Nipuna in April 2004.
Satyams Consolidated Financial Statements as of and for the three months ended June 30, 2006
reflect the impact of SFAS 123R. In accordance with the modified prospective transition method,
Satyams Consolidated Financial Statements for the prior periods have not been restated to reflect,
and do not include, the impact of SFAS 123R. As required by SFAS 123(R), management has made an
estimate of expected forfeitures and is recognizing compensation costs only for those equity awards
expected to vest. There was no cumulative effect of initially adopting SFAS 123(R). During the
three months ended June 30, 2006, Satyam recorded stock-based compensation related to stock options
of US$3.6 million on graded vesting basis for all unvested options granted prior to and options
granted after the adoption of SFAS 123(R).
The fair value of each option award is estimated on the date of grant using the Black Scholes
option-pricing model that using the weighted-average assumptions in the following table. Satyams
expected term represents the period that the Companys stock based awards are expected to be
outstanding and was determined based on historical experience. The fair values of stock-based
payments were valued using a volatility factor based on the Satyams historical stock prices. The
Black Scholes option-pricing model calls for a single expected dividend yield as an input. The
risk-free interest rate is based on the applicable rates of government securities in effect at the
time of grant. When estimating forfeitures, Satyam considers voluntary termination behavior.
Estimated forfeiture rates are trued-up to actual forfeiture results as the stock-based awards
vest.
ASOP
In May 1998, Satyam Computer Services established its Associate Stock Option Plan (the ASOP
plan), which provided for the issue of 13,000,000 shares, as adjusted to eligible associates.
Satyam Computer Services issued warrants to purchase these shares to a controlled associate
welfare trust called the Satyam Associate Trust (the SC-Trust). In December 1999 the SC- Trust
exercised all its warrants to purchase Satyam Computer Services shares prior to the stock split
using the proceeds obtained from bank loans. As and when the SC- Trust issues warrants to eligible
associates, the difference between the market price and the exercise price is accounted as
deferred stock based compensation and amortized over the vesting period. The warrants vest
immediately or vest over a period ranging
from two to three years, depending on the associates length of service and performance. Upon
vesting, associates have 30 days in which to exercise these warrants. As of June 30, 2006,
warrants (net of lapsed and cancelled) to purchase 11,849,860 equity shares have been granted to
associates pursuant to ASOP since inception.
ASOP B
In April 2000, Satyam Computer Services established its Associate Stock Option Plan B (the
ASOP B) and reserved warrants for 41,727,140 shares to be issued to eligible associates with the
intention to issue the warrants at the market price of the underlying equity shares on the date of
the grant. These warrants vest over a period ranging from two to four years, starting with 20% in
second year, 30% in the third year and 50% in the fourth year. Upon vesting, associates have 5
years to exercise these warrants. As of June 30, 2006, options (net of lapsed and cancelled) to
purchase 30,669,025 equity shares have been granted to associates under this plan since inception.
ASOP ADS
In May 2000, Satyam Computer Services established its Associate Stock Option Plan (ADS) (the
ASOP (ADS)) to be administered by the Administrator of the ASOP (ADS) which is a committee
appointed by the Board of Directors of Satyam Computer Services and reserved 2,574,665 ADSs
(5,149,330 shares) to be issued to eligible associates with the intention to issue the warrants at
a price per option which is not less than 90% of the value of one ADS as reported on NYSE on the
date of grant converted into Indian Rupees at the rate of exchange prevalent on the grant date.
These warrants vest over a period of 1-10 years from the grant date. As of June 30, 2006, warrants
(net of lapsed and cancelled) for 1,657,775 ADSs representing 3,315,550 equity shares have been
granted to associates under the ASOP ADS since inception.
Nipuna ESOP
In April 2004, Nipuna established its Employee Stock Option Plan (the ESOP). As per the
ESOP, the options were granted at fair value as determined by an independent valuer as on the date
of the grant and hence no compensation cost has been recognized. These options vest starting with
33.33% at the end of the second year, 33.33% at the end of the third year and remaining 33.34% at
the end of the fourth year from the date of grant.
Effects of Inflation
India has experienced relatively high rates of inflation in the past however it has not had a
significant effect on our results of operations and financial condition to date.
Exchange Rates
The following table sets forth, for each of the months indicated, information concerning the
number of Indian rupees for which one U.S. dollar could be exchanged based on the average of the
noon buying rate in the City of New York on the last day of each month during each of such months
for cable transfers in Indian rupees as certified for customs purposes by the Federal Reserve Bank
of New York:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month |
|
Month end |
|
Average |
|
High |
|
Low |
|
|
|
(Rupees) |
|
April-05 |
|
|
43.48 |
|
|
|
43.64 |
|
|
|
43.72 |
|
|
|
43.48 |
|
May-05 |
|
|
43.62 |
|
|
|
43.41 |
|
|
|
43.62 |
|
|
|
43.21 |
|
June-05 |
|
|
43.51 |
|
|
|
43.52 |
|
|
|
43.71 |
|
|
|
43.44 |
|
July-05 |
|
|
43.40 |
|
|
|
43.43 |
|
|
|
43.59 |
|
|
|
43.05 |
|
August-05 |
|
|
44.00 |
|
|
|
43.55 |
|
|
|
44.00 |
|
|
|
43.36 |
|
September-05 |
|
|
43.94 |
|
|
|
43.85 |
|
|
|
43.98 |
|
|
|
43.75 |
|
October-05 |
|
|
45.09 |
|
|
|
44.76 |
|
|
|
45.11 |
|
|
|
44.00 |
|
November-05 |
|
|
45.87 |
|
|
|
45.63 |
|
|
|
45.87 |
|
|
|
45.02 |
|
December-05 |
|
|
44.95 |
|
|
|
45.56 |
|
|
|
46.26 |
|
|
|
44.94 |
|
January-06 |
|
|
43.96 |
|
|
|
44.20 |
|
|
|
44.92 |
|
|
|
43.89 |
|
February-06 |
|
|
44.21 |
|
|
|
44.23 |
|
|
|
44.54 |
|
|
|
44.10 |
|
March-06 |
|
|
44.48 |
|
|
|
44.34 |
|
|
|
44.58 |
|
|
|
44.09 |
|
April-06 |
|
|
44.86 |
|
|
|
44.82 |
|
|
|
45.09 |
|
|
|
44.39 |
|
May-06 |
|
|
46.22 |
|
|
|
45.20 |
|
|
|
46.22 |
|
|
|
44.69 |
|
June-06 |
|
|
45.87 |
|
|
|
45.89 |
|
|
|
46.25 |
|
|
|
45.50 |
|
|
Risk Management Policy
Our functional currency is the Indian rupee, however we transact a major portion of our
business in U.S. dollars and other currencies and accordingly face foreign currency exposure from
our sales in the United States and elsewhere and from our purchases from overseas suppliers in
U.S. dollars and other currencies. Accordingly, we are exposed to substantial risk on account of
adverse currency movements in global foreign exchange markets. The exchange rate
between the rupee and the U.S. dollar has changed substantially in recent years and may
fluctuate substantially in the future.
We manage risk on account of foreign currency fluctuations through treasury operations. Our
risk management strategy is to identify risks we are exposed to, evaluate and measure those risks,
decide on
managing those risks, regular monitoring and reporting to management. The objective of
our risk management policy is to minimize risk arising from adverse currency movements by managing
the uncertainty and volatility of foreign exchange fluctuations by hedging the risk to achieve
greater predictability and stability. Our risk management policies are approved by senior
management and include implementing hedging strategies for foreign currency exposures,
specification of transaction limits; specifying authority and responsibility of the personnel
involved in executing, monitoring and controlling such transactions.
We enter into foreign exchange forward and options contracts to mitigate the risk of changes
in foreign exchange rates on cash flows denominated in U.S. dollars. We enter into foreign
exchange forward and options contracts where the counter party is generally a bank. We consider
the risks of non-performance by the counter party as non-material. These contracts mature between
one and nine months. These contracts do not qualify for hedge accounting under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended. Any derivative that is
either not a designated hedge, or is so designated but is ineffective per SFAS No. 133, is marked
to market and recognized in earnings.
The following tables give details in respect of our outstanding foreign exchange forward
and options contracts:
|
|
|
|
|
|
|
|
|
|
|
As at June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
Amount |
|
|
Amount |
|
|
|
(dollars in millions) |
|
Aggregate contracted principal amounts of contracts outstanding: |
|
|
|
|
|
|
|
|
Forward contracts |
|
$ |
74.0 |
|
|
$ |
114.0 |
|
Options contracts |
|
|
124.0 |
|
|
|
57.0 |
|
|
|
|
|
|
|
|
Total |
|
$ |
198.0 |
|
|
$ |
171.0 |
|
|
|
|
|
|
|
|
Gains/(loss) on outstanding contracts: |
|
|
|
|
|
|
|
|
Forward contracts |
|
$ |
(1.1 |
) |
|
$ |
1.1 |
|
Options contracts |
|
|
(4.6 |
) |
|
|
0.2 |
|
|
|
|
|
|
|
|
Total |
|
$ |
(5.7 |
) |
|
$ |
1.3 |
|
|
|
|
|
|
|
|
The outstanding foreign exchange forward and options contracts as of June 30, 2006
mature between one to thirteen months.
Gains/(losses) on foreign exchange forward and options contracts included under the head
other income/(expense) in the statement of income are as stated below:
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
Amount |
|
|
Amount |
|
|
|
(unaudited) |
|
|
(unaudited) |
|
|
|
(dollars in millions) |
|
Forward contracts |
|
$ |
(1.8 |
) |
|
$ |
0.9 |
|
Options contracts |
|
|
(3.1 |
) |
|
|
0.8 |
|
|
|
|
|
|
|
|
Total |
|
$ |
(4.9 |
) |
|
$ |
1.7 |
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
We currently do not engage in any off-balance sheet arrangements.
Foreign Currency Transactions/ Translation
During the three months ended June 30, 2006 and 2005, 77.9% and 81.2%, respectively, of our
total revenues were generated in U.S. dollars. A significant amount of our expenses were incurred
in Indian rupees and the balance was primarily incurred in U.S. dollars, European currencies and
Japanese yen. Our functional currency and the functional currency for our subsidiaries located in
India is the Indian rupee; however, U.S. dollar, Pound Sterling, Singapore Dollar and Renminbi are
the functional currencies of our foreign subsidiaries located in the United States, United
Kingdom, Singapore and China respectively. The translation of such foreign currencies into U.S.
dollars (our reporting currency) is performed for balance sheet accounts using current exchange
rates in effect at the balance sheet date and for revenue and expense accounts using monthly
simple average exchange rates prevailing during the reporting periods. Adjustments resulting from
the translation of functional currency financial statements to reporting currency are accumulated
and reported as other comprehensive income, a separate component of shareholders equity.
We expect that a majority of our revenues will continue to be generated in U.S. dollars for
the foreseeable future and that a significant portion of our expenses, including personnel costs
as well as capital and operating expenditures, will continue to be denominated in Indian rupees.
Consequently, our results of operations will be affected to the extent the rupee appreciates/
depreciates against the U.S. dollar.
The average exchange rate of rupee to U.S. dollar during the three months ended June 30, 2006
was Rs. 45.30 against Rs. 43.53 during the three months ended June 30, 2005. As at June 30, 2006,
the rupee depreciated to Rs. 45.87 against Rs. 44.48 as at March 31, 2006. As at June 30, 2005,
the rupee appreciated to Rs. 43.51 against Rs.43.62 as at March 31, 2005. As a result, gain on
foreign exchange transactions was $14.7 million during the three months ended June 30, 2006 as
compared to a loss of $2.7 million during the three months ended June 30, 2005 .
Risk Factors
Any investment in our ADSs involves a high degree of risk. You should carefully consider the
following information about these risks, together with the other information contained in this
Quarterly Report, before you decide to buy our ADSs. If any of the following risks actually occur,
our company could be seriously harmed. In any such case, the market price of our ADSs could
decline, and you may lose all or part of the money you paid to buy our ADSs.
Risks Related to Our Overall Operations
Our revenues and profitability are difficult to predict and can vary significantly from period to
period which could cause our share price to decline significantly.
Our revenues and profitability have grown rapidly in recent years and may fluctuate
significantly in the future from period to period. Therefore, we believe that period-to-period
comparisons of our results of operations are not necessarily meaningful and should not be relied
upon as an indication of our future performance. The quarterly fluctuation of revenues is primarily
because we derive our revenues from fees for services generated on a project-by-project basis. Our
projects vary in size, scope and duration. For example, we have some projects that employ several
people for only a few weeks and we have other projects that employ over 100 people for six months
or more. A customer that accounts for a significant portion of our revenue in a particular period
may not account for a similar portion of our revenue in future periods. In addition, customers may
cancel contracts or defer projects at any time for a number of different reasons. Furthermore,
increasing wage pressures, employee attrition, pressure on billing rates, the time and expense
needed to train and productively utilize new employees and changes in the proportion of services
rendered offshore can affect our profitability in any period. There are also a number of factors,
other than our performance, that are not within our control that could cause fluctuations in our
operating results from period to period. These include (i) the duration of tax holidays or tax
exemptions and the availability of other Government of India incentives; (ii) currency
fluctuations, particularly when the rupee appreciates in value against the U.S. dollar, since the
majority of our revenues are in U.S. dollars and a significant part of our costs are in rupees; and
(iii) other general economic and political factors. As a result, our revenues and our operating
results in a particular period are difficult to predict, may decline in comparison to corresponding
prior periods regardless of the strength of our business. If this were to occur, the share price of
our equity shares and our ADSs would likely decline significantly.
Any inability to manage our rapid growth could disrupt our business and reduce our profitability.
We have experienced significant growth in recent periods. Our total revenues for the three months
ended June 30, 2006 increased by 31.1% as compared to the three months ended June 30, 2005, and in
fiscal 2006 our total revenues increased by 38.1% as compared to fiscal 2005. As of June 30, 2006,
we had 29,843 associates, whom we refer to as associates, worldwide as compared to 22,294
associates as of June 30, 2005. In addition, we are continuing our geographical expansion. We have
offshore facilities in India and overseas facilities located in Australia, Canada, China, Hungary,
Japan, Malaysia, Singapore, United Arab Emirates, United Kingdom and United States. In addition, we
have sales and marketing offices located in Canada, Germany, Italy, the Netherlands, Spain, Sweden,
United Kingdom and United States and sales and marketing offices located in the rest of the world.
We expect our growth to place significant demands on our management and other resources and to
require us to continue to develop and improve our operational, financial and other internal
controls, both in India and elsewhere. In particular, continued growth increases the challenges
involved in:
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recruiting and retaining sufficiently skilled technical, marketing and management personnel; |
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providing adequate training and supervision to maintain our high quality standards; |
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preserving our culture and values and our entrepreneurial environment; and |
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developing and improving our internal administrative infrastructure, particularly our
financial, operational, communications and other internal systems. |
Our inability to manage our growth effectively could disrupt our business and reduce our
profitability.
The current economic environment, pricing pressure and rising wages in India have negatively
impacted our revenues and operating results.
Spending on IT in most parts of the world has recently increased after a two-year decreasing trend
due to a challenging global economic environment. We do experience pricing pressures from our
customers, which can negatively impact our operating results. If economic growth slows, our
utilization and billing rates for our associates could be adversely affected which may result in
lower gross and operating profits.
Wage costs in India, including in the IT services industry, have historically been
significantly lower than wage costs in the United States and Europe for comparably skilled
professionals, which has been one of our competitive advantages. However, large companies are
establishing offshore operations in India, resulting in wage pressures for Indian companies, which
may prevent us from sustaining this competitive advantage and may negatively affect our profit
margins. Wages in India are increasing at a faster rate than in the United States, which could
result in increased cost of IT professionals, particularly project managers and other mid-level
professionals. We may need to increase the levels of our associate compensation more rapidly than
in the past to remain competitive with other employers, or seek to recruit in other low labor cost
jurisdictions to keep our wage costs low. Compensation increases may result in a material adverse
effect on our financial performance.
Our business will suffer if we fail to anticipate and develop new services and enhance existing
services in order to keep pace with rapid changes in technology and the industries on which we
focus.
The IT services market is characterized by rapid technological change, evolving industry
standards, changing customer preferences and new product and service introductions. Our future
success will depend on our ability to anticipate these advances and develop new product and service
offerings to meet customer needs and complement our offerings of end-to-end IT services. For
example, we have invested significant resources in research and development efforts, such as in our
enterprise business solution laboratory and grid computing laboratory, in order to continually
develop capabilities to provide new services to our customers. Should we fail to develop such
capabilities on a timely basis to keep pace with the rapidly changing IT market or if the services
or technologies that we develop are not successful in the marketplace, our business and
profitability will suffer and it is unlikely that we would be able to recover our research and
development costs. Moreover, products, services or technologies that are developed by our
competitors may render our services non-competitive or obsolete.
Our revenues are highly dependent on customers primarily located in the United States and customers
concentrated in certain industries, and economic slowdowns or factors that affect the economic
health of the United States and our customers industries may affect our business.
In the three months ended June 30, 2006 and in fiscal 2006 and 2005, approximately 64.8%,
64.9% and 68.3%, respectively, of our total revenues were derived from the United States. For the
same periods, we earned 27.8%, 28.6% and 29.2% of our IT revenues from the manufacturing industry
and 18.5%, 18.5% and 17.8%, of our IT revenues from the banking and finance industry respectively.
If the current economic recovery in the United States does not continue, our customers may reduce
or postpone their technology spending significantly, which may in turn lower the demand for our
services and negatively affect our revenues and profitability. Further, any significant decrease in
the growth of the manufacturing or banking and finance industries, or significant consolidation in
these industries, or other industry segments on which we focus, may reduce the demand for our
services and negatively affect our revenues and profitability.
Recently, some countries and organizations have expressed concerns about a perceived
association between offshore outsourcing and the loss of jobs. In the United States, in particular,
there has been increasing political and media attention on these issues following the growth of
offshore outsourcing. Any changes in existing laws or the enactment of new legislation restricting
offshore outsourcing may adversely impact our ability to do business in the United States, which is
the largest market for our services. In the
recent past, some U.S. states have proposed legislation restricting government agencies from
outsourcing their back office processes and IT solutions work to companies outside the United
States or have enacted laws that limit or to discourage such outsourcing. Such laws restrict our
ability to do business with U.S. government related entities. It is also possible that U.S.
private sector companies working with these governmental entities may be restricted from
outsourcing projects related to government contracts or may face disincentives if they outsource
certain projects. Any of these events could adversely affect our revenues and profitability.
Similarly, recent legislation has come into effect in the United Kingdom in April 2006 requiring in
certain circumstances offshore outsourcing providers have to compensate U.K. employees for loss of
jobs arising from the offshore migration of business processes.
We face intense competition in the IT services and BPO markets which could prevent us from
attracting and retaining customers and could reduce our revenues.
The markets for IT services and BPO are rapidly evolving and highly competitive, and we expect
that competition will continue to intensify. We face competition in India and elsewhere from a
number of companies, including:
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consulting firms such as Accenture, BearingPoint, Capgemini and Deloitte Consulting; |
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divisions of large multinational technology firms such as Hewlett-Packard and IBM; |
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IT outsourcing firms such as Computer Sciences Corporation, Electronic Data Systems
and IBM Global Services; and |
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offshore IT services firms such as Infosys Technologies Limited, Tata Consultancy
Services Limited and Wipro Limited. |
We also compete with software firms such as Oracle and SAP, service groups of computer
equipment companies, in-house IT departments of large corporations, programming companies and
temporary staffing firms. Nipuna, through which we provide BPO services, faces competition from
firms like Progeon Limited and Wipro BPO, formerly known as Wipro Spectramind.
In addition, we have agreed not to compete with Nipuna as part of the investor rights and
securities subscription agreements which we have entered into with Nipunas two other investors.
Pursuant to these agreements, we and our affiliates are restricted from engaging in activities that
are or could directly or indirectly be competitive with the business of Nipuna. Such activities
include among others providing BPO, soliciting existing or prospective customers of Nipuna to
obtain the services offered by Nipuna from other service providers and investing in companies
engaged in the same or similar business as Nipuna. These non-compete restrictions apply until the
investors redeem all of their preference shares in Nipuna or their equity interest in Nipuna falls
below 5% after an initial public offering. As a consequence, we currently offer and plan to
continue to offer BPO services only through Nipuna. We cannot assure you that these non-compete
restrictions will not adversely affect our ability to attract and retain customers in this
competitive market or that they will not adversely affect our revenues.
A significant part of our competitive advantage has historically been the cost advantage
relative to service providers in the United States and Europe. Since wage costs in this industry in
India are presently increasing at a faster rate than those in the United States and Europe, our
ability to compete effectively will become increasingly dependent on our reputation, the quality of
our services and our expertise in specific markets. Many of our competitors have significantly
greater financial, technical and marketing resources and generate greater revenues than us, and we
cannot assure you that we will be able to compete successfully with such competitors and will not
lose existing customers to such competitors. We believe that our ability to compete also depends in
part on a number of factors outside our control, including the ability of our competitors to
attract, train, motivate and retain highly skilled technical associates, the price at which our
competitors offer comparable services and the extent of our competitors responsiveness to customer
needs.
Our revenues are highly dependent upon a small number of customers.
We derive a significant portion of our revenues from a limited number of corporate customers.
In the three months ended June 30, 2006 and in fiscal 2006 and 2005, our largest customer together
with its affiliates, accounted for 6.9%, 8.8% and 10.8%, respectively, of our total revenues. In
the three months ended June 30, 2006 and in fiscal 2006 and 2005, our second largest customer
accounted for 5.4%, 5.1% and 7.4%, respectively, of our total revenues. In the three months ended
June 30, 2006 and in fiscal 2006 and 2005, our five largest customers accounted for 21.7%, 24.2%
and 29.2% respectively, of our total revenues. The volume of work performed for specific customers
is likely to vary from year to year, particularly since we are usually not the exclusive outside
service provider for our customers.
There are a number of factors other than our performance that could cause the loss of a
customer and that may not be predictable. In certain cases, we have significantly reduced the
services provided to a customer when the customer either changed its outsourcing strategy by moving
more work in-house or replaced its existing software with packaged software supported by the
licensor. Some customers could also potentially develop competing offshore IT centers in India and
as a result, work that may otherwise be outsourced to us may instead be performed in-house. Reduced
technology spending in response to a challenging economic or competitive environment may also
result in lower revenues or loss of a customer. If we lose one of our major customers or one of our
major customers significantly reduces its volume of business with us, our revenues and
profitability could be reduced.
Our fixed-price contracts expose us to additional risks, many of which are beyond our control,
which may reduce the profitability of these contracts.
As a core element of our business strategy, we offer a portion of our services on a
fixed-price basis, along-with a time-and-materials basis. In the three months ended June 30, 2006
and in fiscal 2006 and 2005, we derived 46.1%, 35.1% and 34.2%, respectively, of our IT services
revenues from fixed-price contracts. Although we use our software engineering processes and past
project experience to reduce the risks associated with estimating, planning and performing
fixed-price projects, we bear the risk of cost overruns, completion delays and wage inflation in
connection with these projects. We may also have to pay damages to our customers for completion
delays. Many of these project risks may be beyond our control. Our failure to accurately estimate
the resources and time required for a project, future wage inflation and currency exchange rates,
or our failure to complete our contractual obligations within the time frame committed could reduce
the profitability of our fixed-price contracts.
Our customers may terminate projects before completion or choose not to renew contracts, many of
which are terminable at will, which could adversely affect our profitability.
Our contracts with customers do not commit our customers to provide us with a specific volume
of business and can typically be terminated by our customers with or without cause, with little or
no advance notice and without penalty. Any failure to meet a customers expectations could result
in a cancellation or non-renewal of a contract. Additionally, our contracts with customers are
typically limited to a specific project and not any future work. Our multi-year contracts will be
due for renewal from time to time, and we cannot assure you that our customers will choose to renew
such contracts for a similar or longer duration, on terms as favorable as their current terms or at
all. Other than our performance, there are also a number of factors not within our control that
could cause the loss of a customer. Our customers may demand price reductions, change their
outsourcing strategy by moving more work in-house or to one of our competitors, or replace their
existing software with packaged software supported by licensors, any of which could reduce our
revenue and profitability.
A number of our customer contracts are conditioned upon our performance, which, if unsatisfactory,
could result in less revenues than previously anticipated.
We continue to consider the viability of introducing performance-based or variable-pricing
contracts. Should we increase our use of value-based pricing terms, it will become more difficult
for us to predict the revenues we will receive from our customer contracts, as such contracts would
likely contain a higher number of contingent terms for payment of our fees by our customers. Our
failure to meet contract goals or a customers expectations in such performance-based contracts may
result in lower revenues, and a less profitable or an unprofitable engagement.
Some of our multi-year customer contracts contain certain provisions which, if triggered, could
result in lower future revenues and profitability under the contract.
Some of our multi-year customer contracts contain benchmarking provisions, most favored
customer clause and/or provisions restricting personnel from working on projects of our customers
competitors. Benchmarking provisions allow a customer in certain circumstances to request a
benchmark study prepared by an agreed upon third-party comparing our pricing, performance and
efficiency gains for delivered contract services with that of an agreed list of other service
providers for comparable services. Based on the results of the benchmarking study and depending on
the reasons for any unfavorable variance, we may be required to make improvements in the services
we provide or to reduce the pricing for services to be performed under the balance term of the
contract, which may result in lower future revenues and profitability under the contract.
Most favored customer clauses generally provide that if, during the term of the contract, we
were to offer similar services to any other customers on terms and conditions more favorable than
those provided in such contract, we would be obligated to offer equally favorable terms and
conditions to the customer. As pricing pressures increase, some customers may demand price
reductions or other pricing incentives. Any pricing reduction agreed to in a subsequent contract
may require us to offer equally favorable terms to other customers with whom we have a most favored
contract under the remaining term of contracts with those customers which may result in lower
future revenues and profitability.
A number of our customer contracts provide that, during the term of the contract and for a
certain period thereafter ranging from six to twelve months, we may not provide similar services to
any of their competitors using the same personnel. This restriction may hamper our ability to
compete for and provide services to customers in the same industry, which may result in lower
future revenues and profitability.
We may be unable to attract skilled professionals in the competitive labor market.
Our ability to execute projects and to obtain new customers depends largely on our ability to
attract, train, motivate and retain highly skilled technical associates, particularly project
managers, project leaders and other
senior technical personnel. We believe that there is
significant competition for technical associates who possess the skills needed to perform the
services that we offer. An inability to hire and retain additional qualified personnel will impair
our ability to bid for or obtain new projects and to continue to expand our business. Also, we
cannot assure you that we will be able to assimilate and manage new technical associates
effectively. In the three months ended June 30, 2006 and in fiscal 2006 and 2005, we experienced
associate attrition in the IT services segment at a rate of 19.6%, 19.2% and 16.5%, respectively.
Any increase in our attrition rates, particularly the attrition rate of experienced software
engineers, project managers and project leaders, could harm our growth strategy. We cannot assure
you that we will be successful in recruiting and retaining a sufficient number of replacement
technical associates with the requisite skills to replace those technical associates who leave.
Further, we cannot assure you that we will be able to redeploy and retrain our technical associates
to keep pace with continuing changes in evolving technologies and changing customer preferences.
Should we be unable to successfully recruit, retain, redeploy or retrain our technical associates,
we may become less attractive to potential customers and may fail to satisfy the demands of
existing customers, which would result in a decrease in revenues and profitability.
We dedicate significant resources to develop international operations which may be more difficult
to manage and operate.
In addition to our offshore IT centers in India, we have established IT centers in Australia,
Canada, China, Hungary, Japan, Malaysia, Singapore, United Arab Emirates, United Kingdom and United
States and plan to open additional international facilities. Because of our limited experience in
managing and operating facilities outside of India, we are subject to additional risks related to
our international expansion strategy, including risks related to complying with a wide variety of
national and local laws, restrictions on the import and export of certain technologies and multiple
and possibly overlapping tax structures. In addition, we may face competition in other countries
from companies that may have more experience with local conditions or with international operations
generally. We may also face difficulties integrating new facilities in different countries into our
existing operations, as well as integrating employees that we hire in different countries into our
existing corporate culture.
We are investing substantial cash assets in new facilities and physical infrastructure and our
profitability could be reduced if our business does not grow proportionately.
As of June 30, 2006, we had contractual commitments of approximately $33.6 million for capital
expenditures, and we estimate spending a further $75.0 million until 2007. We may encounter cost
overruns or project delays in connection with new facilities. These expansions will significantly
increase our fixed costs. If we are unable to grow our business and revenues proportionately, our
profitability will be reduced.
Restrictions on immigration may affect our ability to compete for and provide services to customers
in the United States and in other countries, which could hamper our growth and cause our revenues
to decline.
The vast majority of our associates are Indian nationals. Most of our projects require a
portion of the work to be completed at the customers location which is typically outside India.
The ability of our associates to work in the United States, Europe and in other countries outside
India depends on the ability to obtain the necessary visas and work permits. As of June 30, 2006,
the majority of our associates located outside India were in the United States and held either H-1B
visas, allowing the employee to remain in the United States during the term of the work permit and
work as long as he or she remains an employee of the sponsoring firm, or L-1 visas, allowing the
employee to stay in the United States only temporarily. Although there is no limit to new L-1
visas, there is a limit to the aggregate number of new H-1B visas that the U.S. Citizenship and
Immigration Services, or CIS, may approve in any government fiscal year. The recent 2005
Appropriations Bill further precludes foreign companies from obtaining L-1 visas for employees with
specialized knowledge: (1) if such employees will be stationed primarily at the worksite of another
company in the U.S. and the employee will not be controlled and supervised by his employer, or (2)
if the placement is essentially an arrangement to provide labor for hire rather than in connection
with the employees specialized knowledge. The CIS has also issued new guidelines to more closely
verify the qualifying criteria to restrict the liberal usage of L1visas. Immigration laws in the
United States may also require us to meet certain levels of compensation and to comply with other
legal requirements including labor certifications as a condition to obtaining or maintaining work
visas for our associates working in the United States. The CIS announced on June 1 2006 that it had
received sufficient applications to fill up all 65,000 visas that were available for the year. The
CIS announced that it was considering increasing the H1B by an additional 65,000 visas; however
this proposal has not yet been enacted, and if it does it is likely to only occur for the next
fiscal year 2007.
Immigration laws in the United States and in other countries are subject to legislative change, as
well as to variations in standards of application and enforcement due to political forces, labour
and economic conditions. It is difficult to predict the political and economic events that could
affect immigration laws, or the restrictive impact they could have on obtaining or monitoring work
visas for our employees. Our reliance on work visas for a significant number of associates makes us
particularly vulnerable to such changes and variations as it affects our ability to staff projects
with associates who are not citizens of the country where the work is to be
performed. As a result,
we may not be able to obtain a sufficient number of visas for our associates or may encounter
delays or additional costs in obtaining or maintaining the condition of such visas.
We may engage in acquisitions, strategic investments, strategic partnerships or alliances or other
ventures that may or may not be successful.
We may acquire or make strategic investments in complementary businesses, technologies,
services or products, or enter into strategic partnerships or alliances with third parties in order
to enhance our business. It is possible that we may not be able to identify suitable acquisitions
targets and candidates for strategic investments or partnerships, or if we do identify such targets
or candidates, we may not be able to complete those transactions on terms commercially acceptable
to us, or at all. The inability to identify suitable acquisition targets or investments or the
inability to complete such transactions may affect our competitiveness and our growth prospects. As
of the date of this document, we have no agreements or understanding to enter into any material
acquisition, investment, partnership, joint venture or alliance.
If we acquire a company, we could have difficulty in assimilating that companys personnel,
operations, technology and software. In addition, the key personnel of the acquired company may
decide not to work
for us. In some cases, we could have difficulty in integrating the acquired products, services or
technologies into our operations. These difficulties could disrupt our ongoing business, distract
our management and employees and increase our expenses.
We may make strategic investments in early-stage technology start-up companies in order to
gain experience in or exploit niche technologies. However, our investments may not be successful.
The lack of profitability of any of our investments could have a material adverse effect on our
operating results.
System failure could disrupt our business.
To deliver our services to our customers, we must maintain a high speed network of satellite,
fiber optic and land lines and an active voice and data communications 24 hours a day between our
main offices in Hyderabad, our other IT centers in India and globally and the offices of our
customers worldwide. Any systems failure or a significant lapse in our ability to transmit voice
and data through satellite and telephone communications could result in lost customers and
curtailed operations which would reduce our revenue and profitability.
We may be liable to our customers for damages caused by disclosure of confidential information or
system failure.
We are often required to collect and store sensitive or confidential customer and consumer
data. Many of our customer agreements do not limit our potential liability for breaches of
confidentiality. If any person, including any of our associates, penetrates our network security or
misappropriates sensitive data, we could be subject to significant liability from our customers or
from our customers clients for breaching contractual confidentiality provisions or privacy laws.
Unauthorized disclosure of sensitive or confidential customer and consumer data, whether through
breach of our computer systems, system failure or otherwise, could damage our reputation and cause
us to lose customers. Many of our contracts involve projects that are critical to the operations of
our customers businesses and provide benefits which may be difficult to quantify. Any failure in a
customers system or breaches of security could result in a claim for substantial damages against
us, regardless of our alleged responsibility for such failure. Generally, we attempt to limit our
contractual liability for consequential damages in rendering our services; however these
limitations on liability may be unenforceable in some cases, or may be insufficient to protect us
from liability for damages. In respect of some of our contracts, we sub-contract a part of the work
to certain sub-contractors. We are liable to our customers for any breach or non-performance by our
sub-contractors under the sub-contracts. We maintain general liability insurance coverage,
including coverage for errors and omissions; however this coverage may not continue to be available
on reasonable terms and may be unavailable in sufficient amounts to cover one or more large claims.
Further, an insurer might disclaim coverage as to any future claim. A successful assertion of one
or more large claims against us that exceeds our available insurance coverage or results in changes
in our insurance policies, including premium increases or the imposition of a large deductible or
co-insurance requirement, could adversely affect our operating results and profitability.
Our success depends in large part upon our management team and key personnel and our ability to
attract and retain them.
We are highly dependent on the senior members of our management team. Our future performance
will be affected by any disruptions in the continued service of these persons. We do not maintain
key man life insurance for any of the senior members of our management team or other key personnel,
except for our chief executive officer. Competition for senior management in our industry is
intense, and we may not be able to retain such senior management personnel or attract and retain
new senior management personnel in the future. The loss of any member of our senior management team
or other key personnel may have a material adverse effect on our business, results of operations
and financial condition.
Our insiders are significant shareholders, are able to control the election of our board and may
have interests which conflict with those of our shareholders or holders of our ADSs.
Our executive officers and directors, together with members of their immediate families,
beneficially owned, in the aggregate approximately 8.95 % of our outstanding equity shares as of
June 30, 2006. As a result, acting together, this group has the ability to exercise significant
control over most matters requiring our shareholders approval, including the election and removal
of directors and significant corporate
transactions. These insider shareholders may exercise control even if they are opposed by our other
shareholders. Without the consent of these insider shareholders, we could be delayed or prevented
from entering into transactions (including the acquisition of our company by third parties) that
may be viewed as beneficial to the Company and all of the shareholders.
Our financial results are impacted by the financial results of entities that we do not control.
As of June 30, 2006, we have a significant, non-controlling interests in Satyam Venture
Engineering Services Private Limited, or Satyam Venture, and CA Satyam ASP Private Limited, or CA
Satyam, that are accounted for under U.S. GAAP using the equity method of accounting. Under this
method, we are obligated to report as Equity in earnings (losses) of associated companies, net of
taxes a pro-rata portion of the financial results of any such company in our statement of
operations even though we do not control such company but have the ability to exercise certain
influence over their operating and financial policies. Thus, our reported results of operations can
be significantly higher or lower depending on the results of Satyam Venture and CA Satyam or other
companies in which we may make similar investments even though we may have only a limited ability
to influence their activities. We may also be required to record additional impairment charges in
their carrying value if we deem the investment to be impaired due to adverse events, many of which
are outside of our control, on their business, results of operations and financial condition in
future periods. Currently, we make estimates in the preparation of financial statements including
the utility of goodwill. Changes in such estimates resulting from events, many of which are outside
of our control, may result in the impairment of goodwill which would negatively impact our net
income under U.S. GAAP. Such impact on net income may result in a reduction of the market value of
our shares.
The value of our interest in our subsidiaries may decline.
Nipuna, our subsidiary, has experienced losses during each year since its inception and it is
likely that it will continue to experience such losses in the future. Our recently acquired
subsidiaries, Citisoft and Knowledge Dynamics have also experienced losses since our acquisition
and they may also incur losses that might have an adverse effect on our operating results in future
periods.
Stock-based compensation expenses may significantly reduce our net income under U.S. GAAP.
Although Satyam has suspended, except in certain cases, new grants of stock options as of
April 1, 2005, our reported income under U.S. GAAP has been and will continue to be affected by the
grant of warrants or options under our various associate benefit plans. Under the terms of our
existing plans, some of which have outstanding obligations to grant options in future, associates
are typically granted warrants or options to purchase equity shares at a substantial discount to
the current market value. These grants require us to record non-cash compensation expenses under
currently applicable U.S. GAAP, amortized over the vesting period of the warrants or options.
Depending on the market value or fair value of our equity shares on the dates the outstanding
grants were made and future grants are made, amortization of deferred stock-based compensation may
contribute to reducing our operating income and net income under U.S. GAAP. Our subsidiaries also
have stock option schemes which have and will continue to generate stock-based compensation
expenses and have and will reduce our operating income and net income.
Our earnings will be adversely affected once we change our accounting policies with respect to the
expensing of stock options.
On December 16, 2004, the FASB issued FAS 123R, Share-Based Payment, an amendment of FASB
Statements No. 123 and 95, which requires that such transactions be accounted for using a
fair-value-based method and recognized as expenses in our consolidated statement of operations. As
of the required effective date, the standard requires that the modified prospective method be used,
which requires that the fair value of new awards granted from the beginning of the year of adoption
(plus unvested awards at the date of adoption) be expensed over the vesting period. In addition,
the statement encourages the use of the binomial approach to value stock options, which differs
from the Black-Scholes option pricing model that we currently use in the footnotes to our
consolidated financial statements.
Satyam adopted SFAS 123R using the modified prospective transition method, which required the
application of the accounting standard as of April 1, 2006, the first day of Satyams fiscal year
2007. Due to adoption of SFAS 123R, Stock-compensation expenses
increased to $3.6 million, or 1.1%
of revenues,
during the three months ended June 30, 2006 from $0.1 million during the three months ended June
30, 2005.
Compliance with new and changing corporate governance and public disclosure requirements adds
uncertainty to our compliance policies and increases our costs of compliance.
Changing laws, regulations and standards relating to accounting, corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002, new U.S. Securities and Exchange
Commission, or SEC, regulations, the NYSE, rules, Securities and Exchange Board of India, or SEBI,
rules, and Indian stock market listing regulations are creating uncertainty for companies like
ours. These new or changed laws, regulations and standards may lack specificity and are subject to
varying interpretations. Their application in practice may evolve over time, as new guidance is
provided by regulatory and governing bodies. This could result in continuing uncertainty regarding
compliance matters and higher costs of compliance as a result of ongoing revisions to such
corporate governance standards.
In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and
the related regulations regarding our required assessment of our internal controls over financial
reporting and our external auditors audit of that assessment requires the commitment of
significant financial and managerial resources. We consistently assess the adequacy of our internal
controls over financial reporting, remediate any control deficiencies that may be identified, and
validate through testing that our controls are functioning as documented. While we do not
anticipate any material weaknesses or significant deficiencies, our independent auditors may be
unable to issue unqualified attestation reports on managements assessment on the operating
effectiveness of our internal controls over financial reporting.
Additionally, under revised corporate governance standards adopted by Bombay Stock Exchange
Ltd., or the BSE, and The National Stock Exchange of India Limited, or the NSE, which we
collectively refer to as the Indian Stock Exchanges, we are required to comply with additional
standards from December 31, 2005. These standards include a certification by our chief executive
officer and chief financial officer that they have evaluated the effectiveness of our internal
control systems and that they have disclosed to our auditors and our audit committee any
deficiencies in the design or operation of our internal controls of which they may become aware, as
well as any steps taken or proposed to resolve the deficiencies.
We are committed to maintaining high standards of corporate governance and public disclosure,
and our efforts to comply with evolving laws, regulations and standards in this regard have
resulted in, and are likely to continue to result in, increased general and administrative expenses
and a diversion of management time and attention from revenue-generating activities to compliance
activities. In addition, the new laws, regulations and standards regarding corporate governance may
make it more difficult for us to obtain director and officer liability insurance. Further, our
board members, chief executive officer and chief financial officer could face an increased risk of
personal liability in connection with their performance of duties. As a result, we may face
difficulties attracting and retaining qualified board members and executive officers, which could
harm our business. If we fail to comply with new or changed laws, regulations or standards of
corporate governance, our business and reputation may be harmed.
As a foreign private issuer, we are subject to different U.S. securities laws and rules than a
domestic issuer, which may, among other things, limit the information available to holders of our
securities.
As a foreign private issuer, we are subject to requirements under the Securities Act of 1933,
as amended, or Securities Act, and the Securities Exchange Act of 1934, as amended, or Exchange
Act, which are different from the requirements applicable to domestic U.S. issuers. For example,
our officers, directors and principal shareholders are exempt from the reporting and short-swing
profit recovery provisions of Section 16 of the Exchange Act and the rules there under with respect
to their purchases and sales of our ordinary shares and/or ADSs. The periodic disclosure required
of foreign private issuers is more limited than the periodic disclosure required of domestic U.S.
issuers and therefore there may be less publicly available information about us than is regularly
published by or about U.S. public companies in the United States.
Terrorist attacks or a war could adversely affect our business, results of operations and financial
condition.
Terrorist attacks, such as the attacks of September 11, 2001 in the United States, and other
acts of violence or war, such as the continuing conflict in Iraq, have the potential to have a
direct impact on our customers. To the extent that such attacks affect or involve the United
States, our business may be significantly impacted, as the majority of our revenues are derived
from customers located in the United States. In addition, such attacks may make travel more
difficult, may make it more difficult to obtain work visas for many of our associates who are
required to work in the United States, and may effectively curtail our ability to deliver our
services to our customers. Such obstacles to operate our business may increase our expenses and
negatively affect the results of our operations. Many of our customers visit several IT services
firms, including their offshore facilities, prior to reaching a decision on vendor selection.
Terrorist threats, attacks or war could make travel to our facilities more difficult for our
customers and may delay, postpone or cancel decisions to use our services.
Risks Related to Investments in Indian Companies
We are incorporated in India, and a substantial portion of our assets and our associates are
located in India. Consequently, our financial performance and the market price of our ADSs will be
affected by changes in exchange rates and controls, interest rates, Government of India policies,
including taxation policies, as well as political, social and economic developments affecting
India.
The Government of India has recently taken actions to curtail or eliminate tax benefits that we
have historically benefited from.
The statutory corporate income tax rate in India is currently 30.0%. This tax rate is
presently subject to a 10.0% surcharge. The amount of tax and surcharge payable is further subject
to a 2.0% education cess, resulting in an effective tax rate of 33.66%. We benefit from tax
incentives provided to software entities such as an exemption from payment of Indian corporate
income taxes until the earlier of fiscal 2009 or 10 consecutive years of operations for software
development facilities designated as Software Technology Parks, or STP units. The benefits of
this tax incentive have historically resulted in our effective tax rate being well below statutory
rates. The exemption for our STP units was reduced from 100% to 90% for the fiscal 2003, and is
expected to expire between fiscal 2006 and fiscal 2010. Exemption for two of our STP units in
Hyderabad expired during fiscal 2006. We also earn certain other foreign income and domestic
income, which is taxable irrespective of the above tax exemption.
All facilities registered in the exemption program before March 31, 2001, which include all of
our existing facilities in India and registrations for two new facilities which have not yet been
constructed, will continue to benefit from this program under present law. Over time, as we
construct additional facilities, however, the overall benefits of this tax program to our company
will decrease with a consequential increase in our effective tax rate. When our tax holidays expire
or terminate, our tax expense will materially increase, reducing our profitability. We cannot
assure you as to what action the present or future governments of India will take regarding tax
incentives for the IT industry.
Foreign investment restrictions under Indian law may adversely impact the value of our ADSs,
including, for example, restrictions that limit your ability to reconvert equity shares into ADSs,
which may cause our equity shares to trade at a discount or premium to the market price of our
ADSs.
Our equity shares are listed and traded on the Indian Stock Exchanges, and they may trade on
these stock exchanges at a discount or premium to the ADSs traded on the NYSE, in part because of
restrictions on foreign ownership of the underlying shares.
Our ADSs are freely convertible into our equity shares under the deposit agreement governing
their issuance, or the Deposit Agreement. The Reserve Bank of India, or RBI, prescribes fungibility
regulations permitting, subject to compliance with certain terms and conditions, the reconversion
of equity shares to ADSs provided that such equity shares are purchased from an Indian Stock
Exchange through stock brokers and the actual number of ADSs outstanding after such reconversion is
not greater than the original number of ADSs outstanding. If you elect to surrender your ADSs and
receive equity shares, you will only be able to trade those equity shares on an Indian Stock
Exchange and, under present law, it is unlikely you will be permitted to reconvert those equity
shares to ADSs. Additionally, investors who exchange ADSs for the underlying equity shares and are
not holders of record will be required to declare to us details of the holder of record, and the
holder of record will be required to disclose the details of the beneficial owner. Any
investor who fails to comply with this requirement may be liable for a fine of up to Rs.1,000 for
each day such failure continues. Such restrictions on fungibility of the underlying equity shares
to ADSs may cause our equity shares to trade at a discount or premium to the ADSs.
The sale of equity shares underlying the ADSs by a person not resident in India to a resident
of India does not require the prior approval of the RBI, provided such sales are effected through
the Indian Stock Exchanges. Any sale of such underlying equity shares by a person not resident in
India to a resident of India outside of the Indian Stock Exchanges can, however, be completed
without prior RBI approval, provided such equity shares are transferred based on a pricing formula
established by the Indian foreign exchange laws which set a maximum price requirement for sale of
such equity shares.
Regional conflicts or natural disasters in South Asia and elsewhere could adversely affect the
Indian economy, disrupt our operations and cause our business to suffer.
South Asia has from time to time experienced instances of civil unrest and hostilities among
neighboring countries, including between India and Pakistan. In recent years there have been
military confrontations between India and Pakistan that have occurred in the region of Kashmir and
along the India-Pakistan border. There has also been a recent increase in the incidence of
terrorist attacks in India, including various bombings in Delhi earlier this year and the train
bombings in Mumbai on July 11, 2006. Military activity or terrorist attacks in the future could
influence the Indian economy by disrupting communications and making travel more difficult and such
political tensions could create a perception that investments in Indian companies involve
higher
degrees of risk. This, in turn, could have a material adverse effect on the market for securities
of Indian companies, including our equity shares and our ADSs, and on the market for our services.
In addition, as an international company, our offshore and onsite operations may be impacted by
natural disasters such as earthquakes, tsunamis, floods, disease and health epidemics. In December
2004, certain parts of India were severely affected by a tsunami triggered by an earthquake in the
Indian Ocean, and in October 2005, certain parts of northern India, Pakistan and Afghanistan were
severely devastated by a major earthquake. Though our operations were not affected by these
disasters, we cannot guarantee that in the future our operations will not be affected by the effect
such natural disasters may have on the economies of India and other countries in the region.
Political instability could seriously harm business and economic conditions in India generally and
our business in particular.
During the past decade, the Government of India has pursued policies of economic
liberalization, including significantly relaxing restrictions on the private sector. Nevertheless,
the role of the Indian central and state governments in the Indian economy as producers, consumers
and regulators has remained significant. The general elections in 2004 for the lower house of the
Indian Parliament resulted in no party winning an absolute majority and a coalition government has
been formed. We cannot assure you that these liberalization policies will continue in the future.
Government corruption scandals and protests against privatization could slow down the pace of
liberalization and deregulation. The rate of economic liberalization could change, and specific
laws and policies affecting technology companies, foreign investment, currency exchange rates and
other matters affecting investment in our securities could change as well. A significant change in
Indias economic liberalization and deregulation policies could disrupt business and economic
conditions in India generally and our business in particular.
Currency exchange rate fluctuations may affect the value of our ADSs and our financial condition.
Our functional currency is the Indian rupee, although we transact a major portion of our
business in U.S. dollars and several other currencies and accordingly face foreign currency
exposure through our sales in the United States and elsewhere and purchases from overseas suppliers
in U.S. dollars and other currencies. Historically, we have held a substantial majority of our cash
funds in rupees. Accordingly, changes in exchange rates may have a material adverse effect on our
revenues, other income, cost of services sold, gross margin and net income, which may in turn have
a negative impact on our business, operating results and financial condition.
The exchange rate between the rupee and the U.S. dollar has changed substantially in recent
years and may fluctuate substantially in the future. In the three months ended June 30, 2006 and in
fiscal 2006 and 2005, our U.S. dollar-denominated revenues represented 77.9%, 77.6% and 81.8%,
respectively, of our total revenues. We expect that a majority of our revenues will continue to be
generated in U.S. dollars for
the foreseeable future and that a significant portion of our expenses, including personnel costs as
well as capital and operating expenditures, will continue to be denominated in rupees.
Consequently, our results of operations will be adversely affected to the extent that the rupee
appreciates against the U.S. dollar. Depreciation of the rupee will result in foreign currency
translation losses in respect of foreign currency borrowings, if any.
We have sought to reduce the effect of exchange rate fluctuations on our operating results by
entering into foreign exchange forward and options contracts to cover a portion of outstanding
accounts receivable of Satyam Computer Services. As of June 30, 2006 and 2005, we had outstanding
forward and options contracts in the amount of $198.0 million and $171.0 million, respectively. We
may not be able to purchase contracts adequate to insulate ourselves from foreign exchange currency
risks. Additionally, the policies of the RBI may change from time to time which may limit our
ability to hedge our foreign currency exposures adequately.
Fluctuations in the exchange rate between the rupee and the U.S. dollar will also affect the
U.S. dollar conversion by our Depositary of any cash dividends paid in rupees on the equity shares
represented by the ADSs. In addition, fluctuations in the exchange rate between the Indian rupee
and the U.S. dollar will affect the U.S. dollar equivalent of the Indian rupee price of our equity
shares on the Indian Stock Exchanges. As a result, these fluctuations are likely to affect the
prices of our ADSs. These fluctuations will also affect the dollar value of the proceeds a holder
would receive upon the sale in India of any equity shares withdrawn from our Depositary under the
deposit agreement. We cannot assure you that holders of ADSs will be able to convert rupee proceeds
into U.S. dollars or any other currency or with respect to the rate at which any such conversion
could occur. In addition, our market valuation could be seriously harmed by the devaluation of the
rupee if U.S. investors analyze our value based on the U.S. dollar equivalent of our financial
condition and results of operations.
Our ability to acquire companies organized outside India as part of our growth strategy depends on
the approval of the Government of India and/or the RBI and failure to obtain this approval could
negatively impact our business.
We have developed a growth strategy based on, among other things, expanding our presence in
existing and new markets and selectively pursuing joint venture and acquisition opportunities.
Foreign exchange laws in India presently permit Indian companies to acquire or invest in foreign
companies without any prior governmental approval if the transaction amount does not exceed 200% of
the net worth of the foreign company as of the date of its most recent audited balance sheet. If
consideration for the transaction is paid out of the proceeds of an American Depositary Receipt, or
ADR, or Global Depositary Receipt, or GDR sale, Indian exchange control laws do not impose any
investment limits. Acquisitions in excess of the 200% net worth threshold require prior RBI
approval. It is possible that any required approval from the RBI may not be obtained. Our failure
to obtain approvals for acquisitions of companies organized outside India may restrict our
international growth, which could negatively affect our business and prospects.
If we are unable to protect our intellectual property rights, or if we infringe on the intellectual
property rights of others, our business may be harmed.
The laws of India do not protect intellectual property rights to the same extent as the laws
in the United States. Further, the global nature of our business makes it difficult for us to
control the ultimate destination of our products and services. The misappropriation or duplication
of our intellectual property could curtail our operations or reduce our profitability.
We rely upon a combination of non-disclosure and other contractual arrangements and copyright,
trade secret and trademark laws to protect our intellectual property rights. Ownership of software
and associated deliverables created for customers is generally retained by or assigned to our
customers, and we do not retain an interest in such software and deliverables.
We have applied for the registration of Satyam and other related marks as trademarks in
India, the United States and in other jurisdictions where we carry on business. We currently
require our technical associates to enter into non-disclosure and assignment of rights agreements
to limit use of, access to and distribution of confidential and proprietary information. We cannot
assure you that the steps taken by us in this regard will be adequate to prevent misappropriation
of confidential and proprietary information or that
we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual
property rights.
Although we believe that our services and products do not infringe upon the intellectual
property rights of others, we cannot assure you that such a claim will not be asserted against us
in the future. Assertion of such claims against us could result in litigation, and we cannot assure
you that we would prevail in such litigation or be able to obtain a license for the use of any
infringed intellectual property from a third party on reasonable commercial terms.
We expect that the risk of infringement claims against us will increase if more of our
competitors are able to obtain patents for software products and processes. Any such claims,
regardless of their outcome, could result in substantial cost to us and divert managements
attention from our operations. In the future, litigation may be necessary to enforce our
intellectual property rights or to determine the validity and scope of the proprietary rights of
others. Any infringement claim or litigation against us could therefore result in substantial costs
and diversion of resources.
Indian laws limit our ability to raise capital outside India and may limit the ability of others to
acquire us, which could prevent us from operating our business or entering into a transaction that
is in the best interests of our shareholders.
Presently, Indian technology companies such as ours are able to raise capital outside of India
without the prior approval of any Indian governmental authority through an ADR or GDR issuance or
an issuance of convertible debt securities, subject with respect to convertible debt issuances to a
limit of $500 million in any fiscal year. Changes to Indian foreign exchange laws may create
restrictions on our capital raising abilities. For example, a limit on the foreign equity ownership
of Indian technology companies may constrain our ability to seek and obtain additional equity
investment by foreign investors. In addition, these restrictions, if applied to us, may prevent us
from entering into certain transactions, such as an acquisition by a non-Indian company, which
might otherwise be beneficial for us and the holders of our equity shares and ADSs.
Conditions in the Indian securities market may affect the price or liquidity of our equity
shares and our ADSs.
The Indian securities markets are smaller and more volatile than securities markets in more
developed economies. The Indian stock exchanges have in the past experienced substantial
fluctuations in the prices of listed securities and the price of our equity shares has been
especially volatile. The high and low prices of our shares on the BSE from fiscal 2001 until the
latest practicable date are set forth in the table below.
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High |
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Low |
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Fiscal Year |
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Rs |
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$ equivalent |
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Rs. |
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$ equivalent |
2001 |
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902.0 |
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19.3 |
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179.0 |
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3.8 |
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2002 |
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331.2 |
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6.8 |
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|
111.0 |
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2.3 |
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2003 |
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|
291.9 |
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6.1 |
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|
175.1 |
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3.7 |
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2004 |
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|
391.0 |
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9.0 |
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|
127.3 |
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|
|
2.9 |
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2005 |
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|
442.0 |
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|
|
10.1 |
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|
|
250.0 |
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5.7 |
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2006 |
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862.0 |
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19.4 |
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364.4 |
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8.4 |
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2007 (through July 21, 2006) |
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710.0 |
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15.5 |
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676.6 |
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14.8 |
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On July 21, 2006, the closing price of our shares on the BSE was Rs. 686.6 ($15.0). For
comparison purposes, these prices have been adjusted to give effect to our August 25, 2000
five-for-one stock split. The prices of our shares have been translated into U.S. dollars based on
the noon-buying rate as certified by the Federal Reserve Bank of New York on the last date of each
period presented.
The Indian Stock Exchanges have also experienced problems that have affected the market price
and liquidity of the securities of Indian companies. These problems have included temporary
exchange closures, the suspension of stock exchange administration, broker defaults, settlement
delays and strikes by brokers. In addition, the governing bodies of the Indian Stock Exchanges
have, from time to time, restricted securities from trading, limited price movements and restricted
margin requirements. Moreover, from time to time, disputes have occurred between listed companies
and stock exchanges and other regulatory bodies, which in some cases may have had a negative effect
on market sentiment. Similar problems could occur in the future and, if they do, they could harm
the market price and liquidity of our equity shares and our ADSs.
It may be difficult for you to enforce any judgment obtained in the United States against us or our
affiliates.
We are incorporated under the laws of the Republic of India. Many of our directors and key
managerial personnel and some of the experts named in this document reside outside the United
States. In addition, virtually all of our assets and the assets of many of these persons are
located outside the United States. As a result, you may be unable to:
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(i) |
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effect service of process upon us outside India or these persons
outside the jurisdiction of their residence; or |
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(ii) |
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enforce against us in courts outside of India or these persons
outside the jurisdiction of their residence, judgments obtained in
United States courts, including judgments predicated solely upon the
federal securities laws of the United States. |
Currently the United States and India do not have a treaty providing for reciprocal
recognition and enforcement of judgments (other than arbitration awards) in civil and commercial
matters. Therefore, a final judgment for the payment of money rendered by any federal or state
court in the United States on civil liability, whether or not predicated solely upon the federal
securities laws of the United States, would not be enforceable in India. However, the party in
whose favor such final judgment is rendered may bring a new suit in a competent court in India
based on a final judgment which has been obtained in the United States. If and to the extent Indian
courts were of the opinion that fairness and good faith so required, it
would, under current practice, give binding effect to the final judgment which had been
rendered in the United States unless such a judgment was founded on a claim which breached the laws
of India.
You may be subject to Indian taxes arising out of capital gains on the sale of the underlying
equity shares.
Generally, capital gains, whether short-term or long-term, arising from the sale of the
underlying equity shares in India are subject to Indian capital gains tax. For the purpose of
computing the amount of capital gains subject to tax, Indian law specifies that the cost of
acquisition of the equity shares will be deemed to be the share price prevailing on the BSE or the
NSE on the date the Depositary advises the custodian to redeem receipts in exchange for underlying
equity shares. The period of holding of such equity shares, for determining whether the gain is
long-term or short-term, commences on the date of the giving of such notice by our Depositary to
the custodian. With effect from October 1, 2004, any gains realized on the sale of listed equity
shares held for more than 12 months to an Indian resident, or a non-resident investor in India,
will not be subject to Indian capital gains tax if the securities transaction tax has been paid on
the transaction. Investors are advised to consult their own tax advisors and to consider carefully
the potential tax consequences of an investment in our ADSs.
There may be less company information available in Indian securities markets than securities
markets in other countries.
There is a difference between the level of regulation and monitoring of the Indian securities
markets and the activities of investors, brokers and other participants and that of markets in the
United States and other developed economies. SEBI is responsible for improving disclosure and other
regulatory standards for the Indian securities markets. SEBI has issued regulations and guidelines
on disclosure requirements, insider trading and other matters. There may, however, be less publicly
available information about Indian companies than is regularly made available by public companies
in developed economies.
Risk Related to our ADSs and our Trading Market
Historically, our ADSs have traded at a significant premium to the trading prices of our underlying
equity shares, a situation which may not continue.
Historically, our ADSs have traded on the NYSE at a substantial premium to the trading prices
of our underlying equity shares on the Indian Stock Exchanges. We believe that this price premium
has resulted from the relatively small portion of our market capitalization represented by ADSs,
restrictions imposed by Indian law on the conversion of equity shares into ADSs, and an apparent
preference for some investors to trade U.S. dollar-denominated securities. Further, over time, some
of the restrictions on the issuance of the ADSs imposed by Indian law have been relaxed and we
expect that other restrictions may be relaxed in the future. As a result, the historical premium
enjoyed by ADSs as compared to equity shares may be reduced or eliminated due to our sponsored ADS
offering or similar transactions in the future, a change in Indian law permitting further
conversion of equity shares into ADSs or changes in investor preferences.
You may be restricted in your ability to exercise preemptive rights under Indian law and thereby
may suffer future dilution of your ownership position.
Under the Companies Act, 1956 of India, or the Companies Act, a company incorporated in India
must offer its holders of equity shares preemptive rights to subscribe and pay for a proportionate
number of shares to maintain their existing ownership percentages before the issuance of any new
equity shares, unless the preemptive rights have been waived by adopting a special resolution by
holders of three-fourths of the shares which are voted on the resolution. As U.S. holders of ADSs
represent 19.85% of our outstanding equity shares as at June 30, 2006, you may be unable to
exercise preemptive rights for equity shares underlying ADSs unless a registration statement under
the Securities Act of 1933, as amended, or the Securities Act, is effective with respect to the
rights or an exemption from the registration requirements of the Securities Act is available. Our
decision to file a registration statement will depend on the costs and potential liabilities
associated with any given registration statement as well as the perceived benefits of enabling the
holders of our ADSs to exercise their preemptive rights and any other factors that we deem
appropriate to consider at the time the decision must be made. We may elect not to file a
registration statement relating to preemptive rights otherwise available by law to you. In the case
of future issuances, the new securities may be issued to our Depositary, which may sell the
securities for your benefit. The
value, if any, our Depositary would receive upon the sale of such securities cannot be predicted.
To the extent that you are unable to exercise preemptive rights granted in respect of the equity
shares represented by your ADSs, your proportional interests in our company would be reduced.
Holders of ADSs may be restricted in their ability to exercise voting rights.
At our request, our Depositary will mail to you any notice of shareholders meeting received
from us together with information explaining how to instruct our Depositary to exercise the voting
rights of the securities represented by ADSs. If our Depositary timely receives voting instructions
from you, it will endeavor to vote the securities represented by your ADSs in accordance with such
voting instructions. However, the ability of our Depositary to carry out voting instructions may be
limited by practical and legal limitations and the terms of the securities on deposit. We cannot
assure you that you will receive voting materials in time to enable you to return voting
instructions to our Depositary in a timely manner. Securities for which no voting instructions have
been received will not be voted.
Under Indian law, subject to the presence in person at a shareholder meeting of persons
holding equity shares representing a quorum, all resolutions proposed to be approved at that
meeting are voted on by a show of hands unless a shareholder present in person and holding at least
10% of the total voting power or on which an aggregate sum of not less than Rs.50,000 has been
paid-up, at the meeting demands that a poll be taken. Equity shares not represented in person at
the meeting, including equity shares underlying ADSs for which a holder has provided voting
instructions to our Depositary, are not counted in a vote by show of hands. As a result,
only in
the event that a shareholder present at the meeting demands that a poll be taken will the votes of
ADS holders be counted. Securities for which no voting instructions have been received will not be
voted on a poll.
As a foreign private issuer, we are not subject to the SECs proxy rules, which regulate the
form and content of solicitations by U.S.- based issuers of proxies from their shareholders.
To-date, our practice has been to provide advance notice to our ADS holders of all shareholder
meetings and to solicit their vote on such matters through our Depositary, and we expect to
continue this practice. The form of notice and proxy statement that we have been using does not
include all of the information that would be provided under the SECs proxy rules.
An active or liquid trading market for our ADSs is not assured.
We cannot predict the extent to which an active, liquid public trading market for our ADSs
will exist. Active, liquid trading markets generally result in lower price volatility and more
efficient execution of buy and sell orders for investors. The lack of an active, liquid trading
market could result in the loss of market makers, media attention and analyst coverage. If there is
no longer a market for our equity shares, or if we fail to continue to meet eligibility
requirements, we may be required to delist from the NYSE and this may cause our share prices to
decrease significantly. In addition, if there is a prolonged decline in the price of our equity
shares, we may not be able to issue equity securities to fund our growth, which would cause us to
limit our growth or to incur higher cost funding, such as short-term or long-term debt.
Liquidity of a securities market is often a function of the volume of the underlying shares
that are publicly held by unrelated parties. Although you are entitled to withdraw the equity
shares underlying the ADSs from our Depositary at any time, there is no public market for our
equity shares in the United States.
The future sales of securities by our company or existing shareholders may harm the price of our
ADSs or our equity shares.
The market price of our ADSs or our equity shares could decline as a result of sales of a large
number of ADSs or equity shares or the perception that such sales could occur. Such sales also
might make it more difficult for us to sell ADSs or equity securities in the future at a time and
at a price that we deem appropriate. As of June 30, 2006, we had an aggregate of equity shares
outstanding of 325,119,401 (excluding 1,190,640 equity shares held by the Satyam Associate Trust),
which includes underlying equity shares of 64,765,054 represented by 32,382,527 ADSs. In addition,
as of June 30, 2006 we had outstanding options to purchase approximately 22,265,334 of our equity
shares. All ADSs are freely tradable, other than ADSs purchased by our affiliates. The remaining
equity shares outstanding may be sold in the United States only pursuant to a registration
statement under the Securities Act or an exemption from the registration requirements of the
Securities Act, including Regulation S.
Forward-looking statements contained in this Quarterly Report may not be realized.
We have included statements in this Quarterly Report which contain words or phrases such as
may, will, will likely result, believe, expect, will continue, anticipate,
estimate, intend, plan, contemplate, seek to, future, objective, goal, project,
should and similar expressions or variations of such expressions, that are forward-looking
statements. Actual results may differ materially from those suggested by the forward-looking
statements due to risks or uncertainties associated with our expectations with respect to, but not
limited to, our ability to implement our strategy and our growth and expansion.
In addition, other factors that could cause results to differ materially from those estimated by
the forward-looking statements contained in this document include, but are not limited to, general
economic and political conditions in India, Southeast Asia, and other countries which have an
impact on our business activities, changes in Indian and foreign laws, regulations and taxes,
changes in competition and other factors beyond our control, including the factors described in
this Risk Factors section.
We do not intend to update any of the forward-looking statements after the date of this
Quarterly Report to conform such statements to actual results.
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Item 3: |
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Quantitative and Qualitative Disclosure about Market Risk |
Our currency, maturity and interest rate information relative to our
short-term and long-term debt are disclosed in Note. 12 Borrowings to our consolidated financial
statements.
The table below provides information about our financial instruments that are sensitive to
changes in interest rates and foreign currencies as of the dates shown. Weighted average variable
rates were based on average interest rates applicable to the loans. The information is presented
in U.S. dollars, which is our reporting currency, based on the applicable exchange rates as of the
relevant period end. Actual cash flows are denominated in various currencies, including U.S.
dollars and Indian rupees.
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As at June 30, |
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2006 |
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2005 |
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(unaudited) |
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(unaudited) |
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Total Recorded |
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Total Recorded |
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Amount |
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Fair Value |
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Amount |
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Fair Value |
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( dollars in millions) |
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Debt: |
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Variable rate short-term debt |
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$4.5 |
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$4.5 |
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$0.5 |
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$0.5 |
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Average interest rate |
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4.7 |
% |
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5.6 |
% |
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Variable rate long term debt |
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18.6 |
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18.6 |
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$4.4 |
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$4.4 |
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Average interest rate |
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6.0 |
% |
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4.3 |
% |
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Fixed rate long-term debt |
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4.1 |
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4.2 |
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$4.2 |
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$4.2 |
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Average interest rate |
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9.2 |
% |
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8.8 |
% |
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Limitations: Fair value estimates are made at a specific point in time and
are based on relevant market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could significantly affect the
estimates.
We also face market risk relating to foreign exchange rate fluctuations,
principally relating to the fluctuation of U.S. dollar to Indian rupee exchange rate. Our foreign
exchange risk principally arises from accounts payable to overseas vendors. This risk is partially
mitigated as we have receipts in foreign currency from overseas customers and hold balances in
foreign currency with overseas banks.
During the three months ended June 30, 2006 and fiscal 2006, 98.9% and 98.6%, respectively,
of our revenues were generated outside of India. Using sensitivity analysis, a hypothetical 10%
increase in the value of the Indian rupee against all other currencies would decrease revenue by
2.2%, or $7.1 million, in the three months ended June 30, 2006, 2.3%, or $24.9 million, in fiscal
2006 while a hypothetical 10% decrease in the value of the Indian rupee against all other currency
would increase revenue by 2.2% or $7.1 million during the three months ended June 30, 2006 and
2.3% or $24.9 million in fiscal 2006.
We had outstanding forward and options contract amounting to $198.0 million and $216.0
million as at June 30, 2006 and fiscal 2006, respectively. Gains/ (losses) on outstanding forward
and options contracts amounted to $(5.7) million and $(1.4) million during the three months ended
June 30, 2006 and fiscal 2006 respectively. Using sensitivity analysis, a hypothetical 1% increase
in the value of the Indian rupee against all other currencies would decrease these gains by $0.7
million in the three months ended June, 30 2006 and by $0.8 million in fiscal 2006 while a
hypothetical 1% decrease in the value of the Indian rupee against all other currency would
increase these gains by $0.7 million in the three months ended June 30, 2006 and $0.8 million in
fiscal 2006.
In the opinion of management, a substantial portion of this fluctuation would be offset by
expenses incurred in local currencies. As a result, the aggregate of the hypothetical movement
described above of the value of the Indian rupee against all other currencies in either direction
would have impacted our earnings before interest and taxes by $8.8 million during the three months
ended June 30, 2006 and $25.7 million during the three months ended June 30, 2005. This amount
would be offset, in part, from the impacts of local income taxes and local currency interest
expense. As of June 30, 2006, we had approximately $336.1 million of non-Indian rupee denominated
cash and cash equivalents.
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Item 4: |
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Controls and Procedures |
Not applicable.
PART II
OTHER INFORMATION
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Item 1. |
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Legal Proceedings |
Satyam and its subsidiaries on a consolidated basis are not currently a party to any material legal
proceedings.
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
In May 2001, we completed an offering of 16,675,000 ADSs (representing 33,350,000 equity shares) at
a price of $9.71 per ADS. We received approximately $150.6 million in cash, net of underwriting
discounts, commissions and other offering costs. Our Securities Act registration statement on Form
F-1 with respect to the offering was declared effective by the Securities and Exchange Commission
on May 14, 2001 (Registration No. 333-13464). As of June 30, 2006 approximately $138.9 million of
these proceeds has been used for prepayment of loans ($26.9 million); strategic investments in our
subsidiaries ($51.0 million); development of facilities and infrastructure ($35.4 million) and
working capital and general corporate purposes ($25.6 million). We intend to use the balance of the
net proceeds to fund expansion of our existing facilities and communication network in different
locations in India and outside India; to develop new facilities within and outside India; to invest
in joint ventures and other strategic investments; and for working capital and general corporate
purposes. None of the net proceeds from our ADS offering were paid, directly or indirectly, to any
of our directors, officers or general partners or any of their associates, or to any persons owning
ten percent or more of any class of our equity securities, or any affiliates.
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Item 3. |
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Default Upon Senior Securities |
None
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Item 4. |
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Submission of Matters to a Vote of Security Holders |
None
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Item 5. |
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Other Information |
None
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Item 6. |
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Exhibits and Reports |
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99.1 |
|
Press Release of the Company concerning financial results dated July 21,
2006. |
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99.2 |
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Summary of Financial Results of the Company for the quarter ended June 30,
2006 dated July 21, 2006. |
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99.3 |
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Investor Link News Update of the Company dated July 21, 2006. |
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99.4 |
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Unconsolidated/standalone financial statements for the quarter ended June 30,
2006 under Indian GAAP (audited). |
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99.5 |
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Consolidated financial statements for the quarter ended June 30, 2006 under
Indian GAAP (unaudited). |
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99.6 |
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Consolidated financial statements for the three months ended June 30, 2006
under US GAAP (unaudited). |
SIGNATURE
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, there under duly authorized.
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Satyam Computer Services Ltd.
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/s/ G.Jayaraman
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Name: G. Jayaraman
Title: Sr.Vice President - Corp. Governance &
Company Secretary |
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Date: July 28, 2006.