Back to GetFilings.com
1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission File Number 0-22903
SYNTEL, INC.
(Exact name of Registrant as specified in its charter)
Michigan 38-2312018
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2800 Livernois Road, Suite 400, Troy, Michigan 48084
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 619-2800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
--------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the Registrant
has been required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the Common Stock held by non-affiliates
of the Registrant as of March 16, 2001, based on the last sale price of $7.44
per share for the Common Stock on the NASDAQ National Market on such date, was
approximately $37,685,370.
As of March 16, 2001, the Registrant had 38,158,588 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the 2000 Annual Meeting of
Shareholders to be held on or about May 23, 2001 are incorporated by reference
into Part III hereof.
1
2
PART I
ITEM 1. BUSINESS.
References herein to the "Company" or "Syntel" refer to Syntel, Inc. and its
wholly owned subsidiaries in India, the UK, and Singapore, and Germany on a
consolidated basis.
OVERVIEW
Syntel is a worldwide provider of information technology services to
Fortune 1000 companies, as well as to government entities. The Company's service
offerings are grouped into three segments, e-Business, Applications Outsourcing,
and Teamsourcing(sm). E-Business consists of practice areas in Web Solutions,
Customer Relationship Management (CRM), Data Warehousing/Business Intelligence,
and Enterprise Applications Outsourcing (EAI) services. Applications Outsourcing
consists of outsourcing services for ongoing management, development and
maintenance of business Applications. TeamSourcing(sm) consists of professional
IT consulting services. Syntel believes that its service offerings are
distinguished by its Global Delivery Service, a corporate culture focused on
customer service and responsiveness and its own internally developed
"intellectual capital" based on a proven set of methodologies, practices and
tools for managing the IT functions of its customers.
Through its e-Business practices, Syntel helps its customers harness
advanced technologies to improve their businesses. Web Solutions involves
services in the areas of web architecture, web-enabling legacy Applications, as
well as the creation of web portals. CRM involves customizing and implementing
CRM software packages to enhance a customer's interaction with its customers.
Data Warehousing/Business Intelligence involves gathering and analyzing key
business data to make better real-time decisions through "data mining."
Enterprise Applications Outsourcing involves consulting and Applications
Outsourcing services designed to better integrate Front Office and Back Office
Applications. Additionally, the Company has entered into several partnerships to
provide installation services with leading software firms including Broadvision,
Corillian, Kana Communications, Tibco, Selectica Software, and Vigilance. These
partnerships will provide the Company with increased opportunities for market
penetration.
Through Applications Outsourcing, Syntel provides higher-value
Applications management services for ongoing management, development and
maintenance of customers' business Applications. Syntel assumes responsibility
for and manages selected Applications support functions of the customer.
Utilizing its developed methodologies, processes and tools, known as
IntelliTransfer(R), the Company is able to assimilate the business process
knowledge of its customers to develop and deliver services specifically tailored
for that customer. In 2000 and 1999, e-Business and Applications Outsourcing
services combined accounted for approximately 80% and 75% of total consolidated
revenues, respectively.
Through TeamSourcing, Syntel provides professional IT consulting
services directly to customers. TeamSourcing services include systems
specification, design, development, implementation and maintenance of complex IT
Applications involving diverse computer hardware, software, data and networking
technologies and practices. TeamSourcing services are provided by individual
professionals and teams of professionals dedicated to assisting customer IT
departments with systems projects and ongoing functions. TeamSourcing accounted
for approximately 20% and 25% of revenues, for the years ended December 31, 2000
and 1999, respectively.
The Company's Global Delivery Service provides Syntel with flexibility
to deliver to each customer a unique mix of services on-site at the customer's
location, off-site at its U.S. locations and offshore at Global Development
Centers in Mumbai and Chennai, India. The benefits to the customer from this
customized service approach include responsive delivery based on an in-depth
2
3
understanding of the specific processes and needs of the customer, quick
turnaround, access to the most knowledgeable personnel and best practices,
resource depth, 24-hour support seven days a week and cost-effectiveness. By
linking each of its service locations together through a dedicated data and
voice network, Syntel provides a seamless service capability to its customers
around the world largely unconstrained by geographies, time zones and cultures.
Syntel provides its services to a broad range of Fortune 1000 companies
principally in the financial services, manufacturing, retail, transportation and
information/communications industries, as well as to government entities. Its
five largest customers during 2000, based on revenues, were American
International Group, Inc., American Express, Corp., Daimler-Chrysler Corp.,
Dayton Hudson Corp., and Ford Motor Co. The Company has been chosen as a
preferred vendor by several of its customers and has been recognized for its
quality and responsiveness. The Company has a focused sales effort that includes
a strategy of migrating existing TeamSourcing customers to higher-value
e-Business and Applications Outsourcing services. During recent years the
Company has focused on increasing its resources in the development, marketing
and sales of its e-Business and Applications Outsourcing services.
The Company believes its human resources are its most valuable asset
and invests significantly in programs to recruit, train and retain IT
professionals. The Company recruits globally through its worldwide recruiting
network and maintains a broad package of employee support programs. Syntel
believes that its management structure and human resources organization is
designed to maximize the Company's ability to efficiently expand its IT
professional staff in response to customer needs. As of December 31, 2000,
Syntel's worldwide billable headcount consisted of 1,623 IT consultants
providing professional services to Syntel's customers. The company was
incorporated under Michigan law on April 15, 1980.
FORWARD LOOKING STATEMENTS / RISK FACTORS
Certain statements contained in this Report are forward looking
statements within the meaning of the Securities Exchange Act of 1934. In
addition, the Company from time to time may publish other forward looking
statements. Such forward looking statements are based on management's estimates,
assumptions and projections and are subject to risks and uncertainties that
could cause actual results to differ materially from those discussed in the
forward looking statements. Factors which could affect the forward looking
statements include those listed below. The Company does not intend to update
these forward looking statements.
RECRUITMENT AND RETENTION OF IT PROFESSIONALS. The Company's business
of delivering professional IT services is labor intensive, and, accordingly, its
success depends upon its ability to attract, develop, motivate, retain and
effectively utilize highly-skilled IT professionals. The Company believes that
both in the United States and in India there is a growing shortage of, and
significant competition for, IT professionals who possess the technical skills
and experience necessary to deliver the Company's services, and that such IT
professionals are likely to remain a limited resource for the foreseeable
future. The Company believes that, as a result of these factors, it operates
within an industry that experiences a significant rate of annual turnover of IT
personnel. The Company's business plans are based on hiring and training a
significant number of additional IT professionals each year to meet anticipated
turnover and increased staffing needs. The Company's ability to maintain and
renew existing engagements and to obtain new business depends, in large part, on
its ability to hire and retain qualified IT professionals. The Company performs
a significant portion of its employee recruiting in foreign countries,
particularly in India. Any perception among the Company's recruits or foreign IT
professionals, whether or not well-founded, that the Company's ability to assist
them in obtaining permanent residency status in the United States has been
diminished could result in increased recruiting and personnel costs or lead to
significant employee attrition or both. There can be no assurance that the
Company will be able to recruit and train a sufficient
3
4
number of qualified IT professionals or that the Company will be successful in
retaining current or future employees. Failure to hire and train or retain
qualified IT professionals in sufficient numbers could have a material adverse
effect on the Company's business, results of operations and financial condition.
GOVERNMENT REGULATION OF IMMIGRATION. The Company recruits its IT
professionals on a global basis and, therefore, must comply with the immigration
laws in the countries in which it operates, particularly the United States. As
of December 31, 2000, approximately 68% of Syntel's U.S. workforce (34% of
Syntel's worldwide workforce) worked under H-1B visas (permitting temporary
residence while employed in the U.S.) and another 5% of the Company's U.S.
workforce (3% of the Company's worldwide workforce)worked under L-1 visas
(permitting inter-company transfers of employees that have been employed with a
foreign subsidiary for at least 12 months). Pursuant to United States federal
law, the Department of Immigration and Naturalization Services (the "INS")
limits the number of new H-1B visas to be approved in any government fiscal
year. In years in which this limit is reached, the Company may be unable to
obtain enough H-1B visas to bring a sufficient number of foreign employees to
the U.S. If the Company were unable to obtain sufficient H-1B employees, the
Company's business, results of operations and financial condition could be
materially and adversely affected. Furthermore, Congress and administrative
agencies have periodically expressed concerns over the levels of legal
immigration into the U.S. These concerns have often resulted in proposed
legislation, rules and regulations aimed at reducing the number of work visas,
including H-1B visas, that may be issued.
VARIABILITY OF QUARTERLY OPERATING RESULTS. The Company has experienced
and expects to continue to experience fluctuations in revenues and operating
results from quarter to quarter due to a number of factors, including: the
timing, number and scope of customer engagements commenced and completed during
the quarter; progress on fixed-price engagements; timing and cost associated
with expansion of the Company's facilities; changes in IT professional wage
rates; the accuracy of estimates of resources and time frames required to
complete pending assignments; the number of working days in a quarter; employee
hiring, attrition and utilization rates; the mix of services performed on-site,
off-site and offshore; termination of engagements; start-up expenses for new
engagements; longer sales cycles for Applications Outsourcing engagements;
customers' budget cycles; and investment time for training. Because a
significant percentage of the Company's selling, general and administrative
expenses are relatively fixed, variations in revenues may cause significant
variations in operating results. As fixed price engagements grow in revenue and
percent of total revenue, operating results may be adversely affected in the
future if there are cost overruns on fixed-price engagements. In addition, it is
possible that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock would likely be materially adversely
affected. No assurance can be given that quarterly results will not fluctuate
causing an adverse effect on the Company's financial condition at the time.
CUSTOMER CONCENTRATION; RISK OF TERMINATION. The Company has in the
past derived, and believes it will continue to derive, a significant portion of
its revenues from a limited number of large, corporate customers. The Company's
ten largest customers represented approximately 62%, 68% and 70% of revenues for
the years ended December 31, 2000, 1999 and 1998, respectively. For the years
ended December 31, 2000 and 1999 only one customer contributed revenues in
excess of 10% of total consolidated revenues. The Company's largest customer for
both 2000 and 1999 was American Home Assurance Company and certain other
subsidiaries of American International Group Inc. (collectively, "AIG"). AIG
accounted for approximately 19% and 21% of revenues for the years ended December
31, 2000 and 1999, respectively. For the year ended December 31, 1998 two
customers contributed revenues in excess of 10% of total consolidated revenues.
The Company's two largest customers in 1998 were AIG and Target Corporation
(formerly Dayton Hudson Group) contributing approximately 26% and 14%,
respectively, of total consolidated revenues,
4
5
respectively.
Essentially all of the revenue generated from engagements with AIG and Dayton
Hudson Group is in the Applications Outsourcing segment. However, the Company
did provide some e-business services to the Dayton Hudson Group in 2000,
totaling less than $100,000 in revenues.
The volume of work performed for specific customers is likely to vary from year
to year, and a significant customer in one year may not provide the same level
of revenues in any subsequent year. Because many of its engagements involve
functions that are critical to the operations of its customer's businesses, any
failure by Syntel to meet a customer's expectations could result in cancellation
or nonrenewal of the engagement and could damage Syntel's reputation and
adversely affect its ability to attract new business. Many of the Company's
contracts are terminable by the customer with limited notice and without
penalty. An unanticipated termination of a significant engagement could result
in the loss of substantial anticipated revenues and could require the Company to
either maintain or terminate a significant number of unassigned IT
professionals. The loss of any significant customer or engagement could have a
material adverse effect on the Company's business, results of operations and
financial condition. The contract with AIG expires December 31, 2002.
EXPOSURE TO REGULATORY AND GENERAL ECONOMIC CONDITIONS IN INDIA. A
significant element of the Company's business strategy is to continue to develop
and expand offshore Global Development Centers in India. As of December 31,
2000, the Company had approximately 31% of its billable workforce in India, and
anticipates that this percentage will increase over time. While wage costs in
India are significantly lower than in the U.S. and other industrialized
countries for comparably skilled IT professionals, wages in India are increasing
at a faster rate than in the U.S., and could result in the Company incurring
increased costs for IT professionals. In the past, India has experienced
significant inflation and shortages of foreign exchange, and has been subject to
civil unrest. No assurance can be given that the Company will not be adversely
affected by changes in inflation, exchange rate fluctuations, interest rates,
taxation, social stability or other political, economic or diplomatic
developments in or affecting India in the future. In addition, the Indian
government is significantly involved in and exerts significant influence over
its economy. In the recent past, the Indian government has provided significant
tax incentives and relaxed certain regulatory restrictions in order to encourage
foreign investment in certain sectors of the economy, including the technology
industry. Certain of these benefits that directly benefited the Company
included, among others, tax holidays, liberalized import and export duties and
preferential rules on foreign investment. The Company treats any earnings from
its operations in India as permanently invested in India. If the Company decides
to repatriate any of such earnings, it will incur a "border" tax, currently 10%,
under Indian tax law and be required to pay U.S. corporate income taxes on such
earnings. Changes in the business or regulatory climate of India could have a
material adverse effect on the Company's business, results of operations and
financial condition.
INTENSE COMPETITION. The IT services industry is intensely competitive,
highly fragmented and subject to rapid change and evolving industry standards.
The Company competes with a variety of other companies, depending on the IT
services it offers. The Company's primary competitors for professional IT
staffing engagements include participants from a variety of market segments,
including "Big Five" accounting firms, systems consulting and implementation
firms, Applications software development and maintenance firms, service groups
of computer equipment companies and temporary staffing firms. In Applications
Outsourcing and e-business services, the Company competes primarily with Keane,
IBM Global Solutions, Andersen Consulting, and Computer Sciences Corporation, as
well as a growing number of India based companies including TCS, Infosys, and
Wipro. Many of the Company's competitors have substantially greater financial,
technical and marketing resources and greater name recognition than the Company.
As a result, they may be able to compete more
5
6
aggressively on pricing, respond more quickly to new or emerging technologies
and changes in customer requirements, or devote greater resources to the
development and promotion of IT services than the Company. India based companies
also present significant price competition due to their competitive cost
structures and tax advantages. In addition, there are relatively few barriers to
entry into the Company's markets and the Company has faced, and expects to
continue to face, additional competition from new IT service providers. Further,
there is a risk that the Company's customers may elect to increase their
internal resources to satisfy their IT services needs as opposed to relying on a
third-party vendor such as the Company. The IT services industry is also
undergoing consolidation which may result in increased competition in the
Company's target markets. Increased competition could result in price
reductions, reduced operating margins and loss of market share, any of which
could have a material adverse effect on the Company. The Company also faces
significant competition in recruiting and retaining IT professionals which could
result in higher labor costs or shortages. There can be no assurance that the
Company will compete successfully with existing or new competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, results of operations or financial condition.
ABILITY TO MANAGE GROWTH. While the Company has experienced flat
revenues over the past three years, it has historically experienced rapid growth
that has placed significant demands on the Company's managerial, administrative
and operational resources. Additionally, ongoing changes in the delivery mix
from onsite to offshore staffing has placed additional operational and
structural demands. Revenues have increased from $45.3 million in 1993 to $164.8
million in 2000, and the number of worldwide billable employees has increased
from 689 as of December 31, 1993 to 1,623 as of December 31, 2000. The Company
established a sales office in London, England in 1996, opened a sales and
service office in Singapore in May 1997, has expanded its Global Development
Centers in Mumbai and Chennai, India and expects to begin construction of a new
development and training center in Pune, India during the second quarter of
2001. The Company's future growth depends on recruiting, hiring and training IT
professionals, increasing its international operations, expanding its U.S. and
offshore capabilities, adding effective sales and management staff and adding
service offerings. Effective management of these and other growth initiatives
will require the Company to continue to improve its operational, financial and
other management processes and systems. Failure to manage growth effectively
could have a material adverse effect on the quality of the Company's services
and engagements, its ability to attract and retain IT professionals, its
business prospects, and its results of operations and financial condition. The
Company has historically derived most of its revenues from professional IT
staffing services (TeamSourcing). However, in recent years the Company has
realigned existing personnel and resources, and has invested incrementally in
the development of its Applications Outsourcing business, with increased focus
on outsourcing services for ongoing Applications management, development, and
maintenance. Additionally, the Company has invested in the development of its
emerging and rapidly growing e-business practice. A key factor in the Company's
growth strategy is to increase outsourcing service engagements and e-business
with new and existing customers. This strategy was evidenced by a shift in the
revenue mix from TeamSourcing to Applications Outsourcing and e-business in
recent years, as well as the improvement in the Company's direct margins.
However, Applications Outsourcing services generally require a longer sales
cycle (up to 12 months) and generally require approval by more senior levels of
management within the customers organization, as compared with traditional IT
staffing services. Additionally, while the sales cycle for many e-business
engagements tend to be shorter (1 - 6 months), many engagement durations are
short (3 to 6 months), requiring increased sales and marketing. While the
Company has strengthened its experience and strength in marketing, developing,
and performing such services, there can be no assurance that the Company's
increased focus on outsourcing services and e-business will continue to be
successful, and any failure of such strategy could have a material adverse
effect on the Company's business, results of operations, and financial
condition.
6
7
FIXED-PRICE ENGAGEMENTS. The Company undertakes, from time to time,
certain engagements billed on a fixed-price basis, as distinguished from the
Company's principal method of billing on a time-and-materials basis and has a
strategy to increase its percentage of revenue from fixed-price outsourcing. The
Company's failure to estimate accurately the resources and time required for an
engagement or its failure to complete fixed-price engagements within budget, on
time and to the required quality levels would expose the Company to risks
associated with cost overruns and, in certain cases, penalties, any of which
could have a material adverse effect on the Company's business, operating
results and financial condition. Fixed price revenues represented approximately
25%, 22% and 22% of total revenues for the years ended December 31, 2000, 1999,
and 1998, respectively.
POTENTIAL LIABILITY TO CUSTOMERS. Many of the Company's engagements
involve IT services that are critical to the operations of its customers'
businesses. The Company's failure or inability to meet a customer's expectations
in the performance of its services could result in a claim for substantial
damages against the Company, regardless of the Company's responsibility for such
failure. Although the Company attempts to limit contractually its liability for
damages arising from negligent acts, errors, mistakes or omissions in rendering
its IT services, there can be no assurance the limitations of liability set
forth in its service contracts will be enforceable in all instances or would
otherwise protect the Company from liability for damages. Although the Company
maintains general liability insurance coverage, including coverage for errors
and omissions, there can be no assurance that such coverage will continue to be
available on reasonable terms or will be available in sufficient amounts to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim. The successful assertion of one or more large claims
against the Company that are uninsured, exceed available insurance coverage or
result in changes to the Company's insurance policies, including premium
increases or the imposition of large deductible or co-insurance requirements,
could adversely affect the Company's business, results of operations and
financial condition.
DEPENDENCE ON PRINCIPAL. The success of the Company is highly dependent
on the efforts and abilities of Bharat Desai, the Company's founder, Chief
Executive Officer and President. The loss of the services of this key executive
for any reason could have a material adverse effect on the Company's business,
operating results and financial condition. The Company does not maintain key man
life insurance on Mr. Desai.
RISKS RELATED TO POSSIBLE ACQUISITIONS. The Company has, and may
continue to expand its operations through the acquisition of additional
businesses. Financing of any future acquisition could require the incurrence of
indebtedness, the issuance of equity (common or preferred) or a combination
thereof. There can be no assurance that the Company will be able to identify,
acquire or profitably manage additional businesses or successfully integrate any
acquired businesses into the Company without substantial expense, delays or
other operational or financial risks and problems. Furthermore, acquisitions may
involve a number of special risks, including diversion of management's
attention, failure to retain key acquired personnel, unanticipated events or
legal liabilities and amortization of acquired intangible assets, any of which
could have a material adverse effect on the Company's business, results of
operations and financial condition. Customer satisfaction or performance
problems within an acquired firm could have a material adverse impact on the
reputation of the Company as a whole. In addition, there can be no assurance
that acquired businesses, if any, will achieve anticipated revenues and
earnings. The failure of the Company to manage its acquisition strategy
successfully could have a material adverse effect on the Company's business,
results of operations and financial condition. During the year ended December
31, 2000, management determined that the goodwill associated with the 1999
acquisition of Metier was impaired, resulting in a $21.6 million write-of
(before tax benefits) of goodwill and associated restructuring costs.
LIMITED INTELLECTUAL PROPERTY PROTECTION. The Company's success depends
7
8
in part upon certain methodologies, practices, tools and technical expertise it
utilizes in designing, developing, implementing and maintaining applications and
other proprietary intellectual property rights. In order to protect its
proprietary rights in these various intellectual properties, the Company relies
upon a combination of nondisclosure and other contractual arrangements and trade
secret, copyright and trademark laws which afford only limited protection. The
Company also generally enters into confidentiality agreements with its
employees, consultants, customers and potential customers and limits access to
and distribution of its proprietary information. India is a member of the Berne
Convention, an international treaty, and has agreed to recognize protections on
intellectual property rights conferred under the laws of foreign countries,
including the laws of the U.S. The Company believes that laws, rules,
regulations and treaties in effect in the U.S. and India are adequate to protect
it from misappropriation or unauthorized use of its intellectual property.
However, there can be no assurance that such laws will not change and, in
particular, that the laws of India will not change in ways that may prevent or
restrict the transfer of software components, libraries and toolsets from India
to the U.S. There can be no assurance that the steps taken by the Company will
be adequate to deter misappropriation of its intellectual property, or that the
Company will be able to detect unauthorized use and take appropriate steps to
enforce its rights. Although the Company believes that its intellectual property
rights do not infringe on the intellectual property rights of others, there can
be no assurance that such a claim will not be asserted against the Company in
the future or what impact any such claim, would have on the Company's business,
results of operation or financial condition. The Company presently holds no
patents or registered copyrights, trademarks or servicemarks other than
Syntel(R), Consider IT Done(R), Method 2000(R), IntelliSourcing(R),
IntelliTransfer(R), TeamSourcing(R), Architects of e (SM), Digital
Blueprinting-Build-Optimize (SM), Digital Ecosystems (SM), e-sanity (SM), and
Integrating the Global Community (SM). The Company has submitted federal
trademark Applications to register certain names for its service offerings.
There can be no assurance, however, that the Company will be successful in
obtaining federal trademarks for these trade names.
8
9
INDUSTRY BACKGROUND
Increasing globalization, rapid adoption of the Internet as a business
tool, and technological innovation are creating an increasingly competitive
business environment that is requiring companies to fundamentally change their
business processes. This change is driven by increasing demand from customers
for increased quality, lower costs, faster turnaround, and highly responsive and
personalized service. To effect these changes and adequately address these
needs, companies are focusing on their core competencies and cost-effectively
utilizing IT solutions to improve productivity, lower costs and manage
operations more effectively.
Designing, developing, and implementing advanced technology solutions
is a key priority for the majority of corporations. In addition, the development
and maintenance of new information technology (IT) Applications continues to be
a high priority. This type of work requires highly skilled individuals trained
in diverse technologies. However, there is a growing shortage of these
individuals and many companies are reluctant to expand their IT departments
through additional staffing, particularly at a time when they are attempting to
minimize their fixed costs and reduce workforces. The Company believes that many
organizations are concluding that using outside specialists to address their
advanced technology and ongoing IT requirements enables them to develop better
solutions in shorter time frames and to reduce implementation risks and ongoing
maintenance costs. Those outside specialists best positioned to benefit from
these trends have access to a pool of skilled technical professionals, have
demonstrated the ability to manage IT resources effectively, have low-cost
offshore software development facilities, and can efficiently expand operations
to meet customer demands.
Demand for IT services has grown significantly as companies seek ways
to outsource not only specific projects for the design, development and
integration of new technologies, but also ongoing management, development and
maintenance of existing IT systems.
The Company believes that outsourcing the ongoing management,
development and maintenance of IT Applications is becoming increasingly critical
to business enterprises. The difficulties of IT planning, budgeting and
execution in the face of technological innovations and uncertainties, the focus
on cost cutting, and a growing shortage of skilled personnel are driving senior
corporate management to strategically pursue outsourcing of critical internal IT
functions. Organizations are seeking an experienced IT services outsourcing
provider that not only has the expertise and knowledge to address the
complexities of rapidly changing technologies, but also possesses the capability
to understand and automate the business processes and knowledge base of the
organization. In addition, the IT provider must be able to develop customized
solutions to problems unique to the organization. This involves maintaining
on-site professionals who know the customer's IT processes, providing access to
a wide range of expertise and best practices, providing responsiveness and
accountability to allow internal IT departments to meet organization goals, and
providing low cost, value-added services to stay within the organization's IT
budget constraints.
In this environment, large organizations are increasingly finding that
full facilities management outsourcing providers who own and manage an
organization's entire IT function do not permit the organization to retain
control over, or permit flexible reallocation of, its IT resources.
SYNTEL SOLUTION
Syntel provides e-Business solutions in the areas of Web Solutions,
Customer Relationship Management (CRM), Data Warehousing/Business Intelligence,
and Enterprise Applications Outsourcing (EAI). The Company's approach involves
taking an enterprisewide view of the customer's technology and business
environment to ensure comprehensive solution integration. This view is termed
the Digital Ecosystem (SM). Syntel's methodology for implementing its e-Business
services involves Digital
9
10
Blueprinting/Build/Optimize. In the Digital Blueprinting phase, Syntel's teams
analyze the customers current technology environment, their business objectives,
and begins architecting the e-Business solution to meet these objectives. In the
Build phase, Syntel actually constructs the technology Applications and
integrates the necessary package Applications for the customer. In the Optimize
phase, Syntel provides ongoing, cost effective maintenance and enhancement
services for the newly created Applications. Additionally, the Company has
entered into several partnerships to provide installation services with leading
software firms including Broadvision, Corillian, Kana Communications, Tibco,
Selectica Software, and Vigilance. These partnerships will provide the Company
with increased opportunities for market penetration.
Syntel provides comprehensive Applications Outsourcing services
consisting of Applications management services for ongoing management,
development and maintenance of business Applications, as well as TeamSourcing
services consisting of professional IT consulting services. The Company believes
that its Applications Outsourcing approach to IT services outsourcing, which
involves assuming responsibility for management of selected Applications rather
than taking over an entire IT department or providing facilities management,
provides significant differentiation from its competitors in the IT services
market. Syntel believes that its e-Business and Applications Outsourcing service
offerings are distinguished by its Global Delivery Service, a corporate culture
focused on customer service and responsiveness and its internally developed
"intellectual capital," comprised of a proven set of methodologies, practices
and tools for managing the IT functions of its customers.
GLOBAL DELIVERY SERVICE. Syntel performs its services on-site at the
customer's location, off-site at Syntel's U.S. locations and offshore at its
Indian locations. By linking each of its service locations together through a
dedicated data and voice network, Syntel provides a seamless service capability
to its customers around the world, largely unconstrained by geographies, time
zones and cultures. This Global Delivery Service gives the Company the
flexibility to deliver to each customer a unique mix of on-site, off-site and
offshore services to meet varying customer needs for direct interaction with
Syntel personnel, access to technical expertise, resource availability and
cost-effective delivery. The benefits to the customer from this customized
service include responsive delivery based on an in-depth understanding of the
specific processes and needs of the customer, quick turnaround, access to the
most knowledgeable personnel and best practices, resource depth, 24-hour support
seven days a week, and cost-effectiveness. To support its Global Delivery
Service, the Company currently has three Global Development Centers located in
Cary, North Carolina; Mumbai, India; and Chennai, India.
In January 2001, the Company acquired 41 acres of land at the cost of
approximately $1.0 million for construction of a state-of-the-art development
and training Campus in Pune, India. Construction of the center is expected to
begin during the second quarter of 2001. When fully completed in approximately
four years, the facility will cover over 1 million square feet and will
accommodate 9000 employees. It will be both a customer and employee focused
facility, including such amenities as a cafeteria and a fitness center. The
facility will be developed in stages, with a corporate and development center
opening in approximately one year with the capacity for about 1800 persons.
FOCUS ON CUSTOMER SERVICE. The Syntel corporate culture reflects a
"customer for life" philosophy which emphasizes flexibility, responsiveness,
cost-consciousness and a tradition of excellence. The Company recognizes that
its best source for new business opportunities comes from existing customers and
believes its customer service is a significant factor in Syntel's high rate of
repeat business. At engagement initiation, Syntel's services are typically based
on expertise in the software life-cycle and underlying technologies. Over time,
however, as Syntel develops an in-depth knowledge of a customer's business
processes, IT Applications and industry, Syntel gains a
10
11
competitive advantage to perform additional higher-value IT services for that
customer.
PROVEN INTELLECTUAL CAPITAL. Over its 21-year history, Syntel has
developed a proven set of methodologies, practices, tools and technical
expertise for the development and management of its customers' information
systems. This "intellectual capital" of Syntel includes methodologies for the
selection of appropriate customer IT functions for management by Syntel, tools
for the transfer to Syntel of the systems knowledge of the customer, and
techniques for providing systems support improvements to the customer. Syntel
also offers to its customers well-trained personnel backed by a proven,
extensive employee training and continuing development program. The Company
believes its intellectual capital enhances its ability to understand customer
needs, design customized solutions and provide quality services on a timely and
cost-effective basis.
SYNTEL STRATEGY
The Company's objective is to become a strategic partner with its
customers in the development of e-Business solutions as well as the ongoing
management, development and maintenance of their IT systems by utilizing its
Global Delivery Service, intellectual capital and customer service orientation.
The Company plans to continue to pursue the following strategies to achieve this
objective:
LEVERAGE GLOBAL DELIVERY SERVICE. The ability to deliver a seamless
service capability virtually anywhere in the world from its domestic and
offshore facilities gives the Company an effective ability to meet customer
needs for technical expertise, best practice IT solutions, resource
availability, responsive turnaround and cost-effective delivery. The Company
strives to leverage this capability to provide reliable and cost-effective
services to its existing customers, expand services to existing customers and to
attract new customers. Moreover, the flexibility and capacity of the Global
Delivery Service and the Company's worldwide recruitment and training programs
enhance the ability of the Company to expand its business as the number of
customers grows and their IT demands increase. The Company intends to expand the
capacity of its Global Development Centers worldwide.
AGGRESSIVELY BUILD E-BUSINESS COMPETENCIES. Through its comprehensive
suite of e-Business services, the Company provides a key strategic role in
helping customers rapidly and cost-effectively build advanced technology
solutions. Through large-scale retraining programs, strategic acquisitions and
partnerships, the Company has quickly built a strong competency in the area of
e-Business services.
CONTINUE TO GROW APPLICATIONS OUTSOURCING SERVICES. Through
Applications Outsourcing, the Company markets its higher value Applications
management services for ongoing Applications management, development,
maintenance. In recent years, the Company has significantly increased its
investment in Applications Outsourcing services and realigned its resources to
focus on the development, marketing and sales of its Applications Outsourcing
and e-business services, including the hiring of additional salespeople and
senior managers, redirecting personnel experienced in the sale of higher value
contracts, developing proprietary methodologies, increasing marketing efforts,
and redirecting organizational support in the areas of finance and
administration, human resources and legal.
EXPAND CUSTOMER BASE AND ROLE WITH CURRENT CUSTOMERS. The Company's
sales efforts include migrating existing TeamSourcing customers to higher value
e-business and Applications Outsourcing services. The Company's emphasis on
customer service and long-term relationships has enabled the Company to generate
recurring revenues from existing customers. The Company also seeks to expand its
customer base by leveraging its expertise in providing services to the financial
services, manufacturing, retail, transportation, and information/communications
industries, as well as to government entities. With the expansion of the
Company's Indian operations, the Company is increasing
11
12
its marketing efforts in other parts of the world, particularly in the UK.
ENHANCE PROPRIETARY KNOWLEDGE BASE AND EXPERTISE. The Company believes
that its "intellectual capital" of methodologies, practices, tools and technical
expertise is an important part of its competitive advantage. The Company strives
to continually enhance this knowledge base by creating competencies in emerging
technical fields such as Internet/intranet Applications, client/server
Applications, object-oriented software, E-commerce, and data warehousing
technology. The Company continually develops new methodologies and toolsets,
building skills in e-Business, and acquiring a broad knowledge and expertise in
the IT functions of specific industries. Through these efforts, the Company
becomes more valuable to the customer, is often able to expand the scope of its
work to existing customers, and is able to offer industry-specific expertise.
ATTRACT AND RETAIN HIGHLY SKILLED IT PROFESSIONALS. The Company
believes that its human resources are its most valuable asset. Accordingly, its
success depends in large part upon its ability to attract, develop, motivate,
retain and effectively utilize highly skilled IT professionals. Over the years,
the Company has developed a worldwide recruiting network, logistical expertise
to relocate its personnel, and programs for human resource retention and
development. The Company (i) employs professional recruiters who recruit
qualified professionals throughout the U.S. and India, (ii) trains employees and
new recruits through both computer based training and its three training
centers, one of which is located in the U.S. and two of which are located in
India, and (iii) maintains a broad range of employee support programs, including
relocation assistance, a comprehensive benefits package, career planning, a
qualified stock purchase program, and incentive plans. The Company believes that
its management structure and human resources organization is designed to
maximize the Company's ability to efficiently expand its professional IT staff
in response to customer needs.
PURSUE SELECTIVE PARTNERSHIP OPPORTUNITIES.
During the year ended December 31, 2000 the Company developed partnership
alliances with several software development firms, including TIBCO, Selectica,
Motive, Aspect, Vianetta, Commerce One, Vigilance, and Kana Communications. The
alliances provide a strong software implementation strategy for the customer,
combining the partner's software with Syntel's extensive implementation and
delivery capabilities. Before entering into a partnership alliance, the Company
considers a number of criteria, including: (i) technology employed; (ii)
projected product lifecycles; (iii) size of the potential market; (iv) software
integration requirements of the product; (v) the reputation of the potential
partner. These alliances provided approximately $7.5 million in new business
revenues during the year ended December 31, 2000.
12
13
SERVICES
Syntel provides a broad range of IT services through its e-Business,
Applications Outsourcing and TeamSourcing service offerings. Through its
e-Business practices, the Company provides advanced technology services in the
areas of Web Solutions, Customer Relationship Management, Data
Warehousing/Business Intelligence, and Enterprise Applications Outsourcing.
Through Applications Outsourcing, the Company provides Applications management
services for ongoing management, development and maintenance of customer
Applications. Through TeamSourcing, the Company provides professional IT
consulting services. During the past year the Company has increased the
personnel and resources dedicated to the development, marketing and sales of its
Applications Outsourcing and e-business services. TeamSourcing, e-Business, and
Applications Outsourcing services are based on Syntel's methodologies and
technical expertise, which the Company continues to develop on an ongoing basis
in order to further enhance the value of its services to customers. For the
years ended December 31, 2000 and December 31, 1999, e-Business and Applications
Outsourcing accounted for approximately 80% and 75%, respectively, of the
Company's revenues and TeamSourcing represented approximately 20% and 25%,
respectively, of the Company's revenues.
Syntel's focus on customer service is evidenced by the high level of
repeat business from existing customers and the quality awards its customers
have bestowed on Syntel. During 1996, Syntel received the Q-1 rating from Ford
Motor Company and became a "Preferred Supplier" to Daimler-Chrysler Corporation
receiving the highest rating in each customer service category. The Q-1 rating
from Ford Motor Company and the Preferred Supplier designation from
Daimler-Chrysler Corporation are the highest facility supplier quality ratings
awarded by each of these principal customers. During 1998, the Company received
ISO 9001 Certification in its Chennai and Mumbai Global Development Centers as
well as SEI-CMM Level 3 certification, and received the "Best Business Partner
Award for Excellence in Education" from the Target Corporation (formerly Dayton
Hudson Corporation). In 2000, Syntel was ranked by the market research firm IDC
as one of "35 Companies to Watch" in its report on "Systems Integrators of the
21st Century". The Company was also ranked #13 on the "e-business 150" report by
UPSIDE Magazine and one of the VARBusiness 500, both in 2000. The Company is
also a Microsoft Certified Solution Provider.
e-Business Services
Syntel provides strategic advanced technology services for the design,
development, implementation and maintenance of solutions to enable customers to
be more competitive. Many of today's advanced technology solutions are built
around utilization of the web, which has transformed many businesses. The
Company provides customized technology services in the areas of web solutions,
including web architecture, web-enablement of legacy Applications, and portal
development. The Company also provides Customer Relationship Management
services, which involve software solutions to put customers in closer touch with
their own customers. Syntel helps customers select appropriate package software
options, then customize and implement the solutions. In the area of Data
Warehousing/Business Intelligence, Syntel helps customers make more strategic
use of information within their businesses through the development and
implementation of data warehouses and data mining tools. In the area of
Enterprise Applications Outsourcing, Syntel takes an enterprise wide view of its
customers' environment to implement package software solutions to create better
integration, and therefore better information utilization, between front office
and back office Applications. Additionally, the Company has entered into several
partnerships to provide installation services with leading software firms
including Motive, Corillian, Kana Communications, Tibco, Selectica Software,
Aspect, Vianetta, Commerce One, and Vigilance. These partnerships will provide
the Company with increased opportunities for market penetration.
13
14
Applications Outsourcing
Syntel provides higher-value Applications management services for
ongoing management, development and maintenance of business Applications.
Through Applications Outsourcing, the Company assumes responsibility for, and
manages selected Applications support functions of the customers. The Global
Delivery Service is central to Syntel's delivery of Applications Outsourcing
services. It enables the Company to respond to customers' needs for ongoing
service and flexibility and has provided the capability to become productive
quickly on a cost-effective basis to meet timing and resource demands for
mission critical Applications.
Syntel has developed methodologies, processes and tools to effectively
integrate and execute Applications Outsourcing engagements. Referred to as
"IntelliTransfer," this methodology is implemented in three stages of planning,
transition and launch. Syntel first focuses on the customer's personnel,
processes, technology and culture to develop a plan to effectively assimilate
the business process knowledge of the customer. Syntel then begins to learn the
business processes of the customer, and, finally, seeks to assume responsibility
for performance of a particular customer Applications system or systems. As the
Company develops an in-depth knowledge of the customer's personnel, processes,
technology and culture, Syntel acquires a competitive advantage to pursue more
value-added services. The Company believes its approach to providing these
services results in a long-term customer relationship involving a key Syntel
role in the business processes and Applications of the customer.
Because providing both e-Business and Applications Outsourcing services
typically involves close participation in the IT strategy of a customer's
organization, Syntel adjusts the manner in which it delivers these services to
meet the specific needs of each customer. For example, if the customer's
business requires fast delivery of a mission-critical Applications update,
Syntel will combine its on-site professionals, who have knowledge of the
customer's business processes and Applications, together with its global
infrastructure to deliver around-the-clock resources. If the customer's need is
for cost reduction, Syntel may increase the portion of work performed at its
offshore Global Development Center, which has significantly lower costs. The
Company believes that its ability to provide flexible service delivery and
access to resources permits responsiveness to customer needs and are important
factors that distinguish its e-Business and Applications Outsourcing services
from other IT service firms.
TeamSourcing(sm)
Syntel offers professional IT consulting services directly to its
customers and, to a lesser degree, in partnership with other service providers.
The professional IT consulting services include individual professionals and
teams of professionals dedicated to assisting customer systems projects and
ongoing IT functions. This service responds to the demand from internal IT
departments for additional expertise, technical skills and personnel. The
Company's wide range of TeamSourcing services include IT Applications systems
specification, design, development, implementation and maintenance, which
involve diverse computer hardware, software, data and networking technologies
and practices.
Technical Services Group
The Company seeks to gain a competitive advantage through its
methodologies, tools and technical expertise. The Company employs a team of
professionals in its Technical Services Group whose mission is to develop and
formalize Syntel's "intellectual capital" for use by the entire Syntel
organization. The Technical Services Group focuses on monitoring industry
trends, creating competencies in emerging technical fields, developing new
methodologies, techniques and tools such as IntelliTransfer(sm) and
IntelliCapture, creating reusable software components through its Innovate
14
15
methodology to enhance quality and value on customer assignments, and educating
Syntel's personnel to improve marketing, sales and delivery effectiveness. The
Technical Services Group consists of senior technical personnel located in both
the U.S. and India.
CUSTOMERS
Syntel provides its services to a broad range of Fortune 1000 companies
principally in the financial services, manufacturing, retail, transportation and
information/communications industries, as well as to government entities. During
2000, the Company provided services to over 200 customers, principally in the
U.S. The Company also provides services to customers in Europe and Southeast
Asia, many of whom are subsidiaries or affiliates of its U.S. customers.
Representative customers of the Company, each of which provided revenue of at
least $100,000 during 2000, include:
FINANCIAL SERVICES MANUFACTURING RETAIL
- ------------------ ------------- ------
American Annuities Group Cummins Engine Co Borders
American Express Daimler-Chrysler Corp Dayton Hudson Co.
American Int'l Group, Inc. Dell Computer Mervyn's
Bank of America Eaton Corp Safeway, Inc.
Blue Cross/Blue Shield Ford Motor Co.
CIGNA Corp. General Motors Corp
CNA Insurance Hewlett-Packard Corp.
Deloitte & Touche Honeywell
Fireman's Fund Int'l Business Machines Corp.
GMAC Mortgage Lucent Technologies
Humana New Venture Gear
Kemper Insurance Nike
Kent Bank Power One
Prudential Insurance Special Metals Corp
US Life TekTronix
VISA Union Carbide
Wells Fargo Unisys Corp.
World Bank Xerox Corp.
INFORMATION/
TRANSPORTATION COMMUNICATIONS GOVERNMENT
- -------------- -------------- ----------
Allied Van Lines 21st Century New Mexico
Norfolk Southern Co. GTE (Verizon) New York
Ryder Interpath Communications West Virginia
LM Ericsson Telephone Co.
MCI
Nielsen Media
Time Customer Services
For the years ended December 31, 2000, 1999, and 1998, the Company's
top ten customers accounted for approximately 62%, 68%, and 70% of the Company's
revenues, respectively. For the years ended December 31, 2000 and 1999 only one
customer contributed revenues in excess of 10% of total consolidated revenues.
The Company's largest customer for both 2000 and 1999 was American Home
Assurance Company and certain other subsidiaries of American International Group
Inc. (collectively, "AIG"). AIG accounted for approximately 19% and 21% of
revenues for the years ended December 31, 2000 and 1999, respectively. For the
year ended December 31, 1998 two customers contributed revenues in excess of 10%
of total consolidated revenues. The Company's two largest customers in 1998 were
AIG and Target Corporation (formerly Dayton Hudson Group) contributing
approximately 26% and 14%, respectively, of total consolidated revenues,
respectively.
AMERICAN INTERNATIONAL GROUP. The Company's largest customer is
American Home Assurance Company, and certain other subsidiaries of American
15
16
International Group, Inc. (collectively, "AIG"). This customer relationship
began with the placement of a single IT professional in 1989 and has grown
significantly since then. The Company supports AIG systems throughout the U.S.
and in selected countries around the world. Both the Company's Cary, North
Carolina and Mumbai, India Global Development Centers were initially established
to support AIG. As the Company has become more knowledgeable about AIG's
personnel, processes, technology and culture, it has had the opportunity to
expand the range of its services beyond contract minimums and to play an
increasingly valuable role in project management and systems design.
Currently, the Company provides Applications development and
maintenance services in support of various AIG subsidiaries through integrated
service teams located onsite, offsite, and offshore. Its Applications
development services focus on providing customized solutions and Applications in
support of policy underwriting, claims management and financial reporting and
encompass both mainframe and client/server environments. The Company's
Applications maintenance services focus on enhancing existing business systems,
including 24-hour management of data processing functions and a 24 hour customer
assistance center. The Company is responsible for complete production support,
maintenance and related activities for over 40 Applications. Through its
long-term relationship with AIG, Syntel has enabled AIG to better control,
manage, and plan its IT resource allocation and to simplify management of IT
functions while benefiting from Syntel's expertise, practices and resource
availability for the cost-efficient execution of their plans and priorities.
Syntel has also delivered to AIG 24-hour support, fast turnaround and the
capacity to address AIG enterprise needs in other parts of the world. The
Company's current contract with AIG terminates on December 31, 2002.
GLOBAL DELIVERY SERVICE
Syntel's Global Delivery Service gives the Company the flexibility and
resources to perform services on-site at the customer's location, off-site at
the Company's U.S. locations and offshore at the Company's Indian locations. By
linking each of its service locations together through a dedicated data and
voice network, Syntel provides a seamless service capability to its customers.
The Global Delivery Service gives the Company the flexibility to deliver to each
customer a customized mix of integrated on-site, off-site and offshore services
to meet varying customer needs for direct interaction with Syntel personnel,
access to technical expertise and best practices, resource availability and
cost-effective delivery.
Through on-site service delivery at the customer's location, the
Company is able to gain comprehensive knowledge concerning the customer's
personnel, processes, technology and culture, and maintain direct customer
contact to facilitate project management, problem solving and integration of
Syntel services. Off-site service delivery at the Company's U.S. locations
provides the customer with access to the diverse skill base and technical
expertise resident at different regional centers, availability of resources, and
cost-effective delivery due to the savings in transportation, facilities and
relocation costs associated with on-site work. Offshore service delivery at the
Company's Indian locations provides the customer with the capacity to receive
around the clock attention to Applications maintenance and project development
for faster turnaround, greater availability of resources, expertise resident in
India and more cost-effective delivery than the Company's off-site services.
The Company has developed global recruiting and training programs which
have efficiently provided skilled IT professionals to meet customer needs. In
addition, the Company's sales, solutions and delivery functions are closely
integrated in the Global Delivery Service so that appropriate resources can be
provided to the customer at the right time and at the most advantageous
location. Each customer is tracked and serviced through a multi-stage customer
care process. Regular meetings are held with key project management, sales,
technical, legal and finance personnel to monitor progress, identify issues and
discuss solutions. As engagements evolve and customer needs change, the
16
17
Company can reallocate resources responsively from among these locations as
necessary.
The Company's three Global Development Centers located in Cary, North
Carolina; Mumbai, India; and Chennai, India; support the Company's Global
Delivery Service.
The Cary, North Carolina Global Development Center, which employed over
230 persons at December 31, 2000, serves as the hub for the Company's
telecommunications, project management, technical training and professional
development programs. Its support functions include administration of a
dedicated data and voice network, a 24-hour customer assistance center which
coordinates problem resolution worldwide, and a development center for the
sharing of knowledge and expertise among IT professionals. Moreover, due to its
proximity to a large number of major universities, the Cary, North Carolina
Global Development Center has access to a relatively large talent pool.
The Mumbai, India Global Development Center, which employed
approximately 700 persons as of December 31, 2000, serves as the hub of the
Company's Indian operations. This Global Development Center provides substantial
resource depth to meet customer needs around the world, low-cost service
delivery, a 24-hour customer assistance center and development of technical
solutions and expertise. Mumbai also serves as the principal recruiting and
training center for the Company. The Mumbai Center has been in operation for
over seven years and has a capacity of approximately 900 people.
The Chennai Training and Global Development Center employed
approximately 300 persons as of December 31, 2000. The Chennai facility has a
capacity of over 600 persons and has been in operation for approximately three
years.
In January 2001, the Company acquired 41 acres of land for construction
of a state-of-the-art development and training Campus in Pune, India.
Construction of the center is expected to begin during the second quarter of
2001. When fully completed in approximately four years, the facility will cover
over 1 million square feet and will accommodate 9000 employees. It will be both
a customer and employee focused facility, including such amenities as a
cafeteria and a fitness center. The facility will be developed in stages, with a
corporate and development center opening in approximately one year with the
capacity for about 1800 persons.
The Company believes that space availability in Mumbai and Chennai will
accommodate short term facility requirements and the new Campus in Pune will
enable the Company to meet offshore growth requirements for the next several
years.
SALES AND MARKETING
The Company markets and sells its services directly through its
professional salespeople and senior management operating principally from the
Company's offices in Costa Mesa, California, Phoenix, Arizona; Beaverton,
Oregon; Oakbrook, Illinois; Dallas, Texas; Jacksonville, Florida; San Francisco,
California; Minneapolis, Minnesota; New York, New York; Troy, Michigan; San
Ramon, California; Santa Fe, New Mexico; Ft. Lauderdale, Florida; London,
England; and Singapore. The sales staff is aligned into geographic regions, with
each sales person provided the authority to pursue Application Outsourcing,
e-business, and to a much lessor degree, TeamSourcing opportunities. The sales
team is supported, as required, by technical expertise and subject matter
experts from the Company's delivery teams.
17
18
During recent years the Company has focused it's sales efforts in
e-Business and Applications Outsourcing both by dedicating internal sales
professionals to these service offerings and through outside hiring of
professionals experienced in selling e-business and outsourcing engagements.
The sales cycle for Applications Outsourcing engagements ranges from 6
to 9 months depending on the complexity of the engagement. Due to this longer
sales cycle, Applications Outsourcing sales executives follow an integrated
sales process for the development of engagement proposals and solutions, and
receive ongoing input from the Company's technical services, delivery, finance
and legal departments throughout the sales process. The Applications Outsourcing
sales process also typically involves a greater number of customer personnel at
more senior levels of management than the TeamSourcing sales process.
The sales cycle for e-Business engagements, from initial contact to
execution of an agreement, varies by type of service and account size, but
typically ranges from 1 to 6 months, depending on the complexity of the
engagement. The sales cycle for large, fixed price e-business engagements is
similar to that of Applications Outsourcing engagements. The sales cycle for
partnership software installations is generally 1 to 2 months. The associated
software installation engagements are also generally short, lasting 1 to 3
months.
The sales cycle for TeamSourcing engagements, from initial contact to
execution of an agreement, varies by type of service and account size, but is
typically completed within 30 days. TeamSourcing engagements are essentially
developed from existing customers as the Company focuses it's attention on
growing the e-business and Applications Outsourcing segments.
Syntel's marketing organization seeks to build and support the Syntel
brand as well as generate awareness and leads for the Company's e-business and
Applications Outsourcing solutions. The Company's current marketing initiatives
include online advertising, webcasts, direct mail campaigns, case studies, and
public relations aimed at CEOs, CIOs, and CFOs of Global 2000 companies. In
addition, Syntel's marketing team maintains ongoing relationships with leading
industry analysts such as Gartner Group, IDC, Forrester Research, and Yankee
Group, to ensure analysts have a good understanding of Syntel's offerings and
positioning. Syntel's marketing group also supports the Company's investor
relations efforts, proposals development, research, and sales support efforts.
HUMAN RESOURCES
The Company believes that its human resources are its most valuable
asset. Accordingly, the Company's success depends in large part upon its ability
to attract, develop, motivate, retain and effectively utilize highly skilled IT
professionals. The Company has developed a number of processes, methodologies,
technologies and tools for the recruitment, training, development and retention
of its employees. As of December 31, 2000 the Company had 2,427 full time
employees. Of this total, the U.S. operations employed 1,287 persons, including
1,129 IT professionals; the Indian operation employed 996 persons, including 927
IT professionals; and the Company employed an additional 144 persons in various
remote locations, principally the U.K. and Singapore.
A majority of the Company's professional employees have a Bachelor of
Science degree or its equivalent, or higher degrees in computer science,
engineering disciplines, management, finance and other areas. Their experience
level ranges from entry-level programmers to engagement managers and senior
consultants with over 20 years of IT experience. The Company has personnel who
are experienced in mainframe, client/server and open systems technologies, and
proficient in a variety of computer programming languages, software tools,
database management systems, networks, processes, methodologies, techniques and
standards.
The Company has implemented a management structure and human resources
18
19
organization intended to maximize the Company's ability to efficiently expand
its professional staff. Although the Company believes that it has the capability
to meet its anticipated future needs for IT professionals through its
established recruiting and training programs, there can be no assurance that the
Company will be able to hire, train or retain qualified IT professionals in
sufficient numbers to meet anticipated staffing needs.
RECRUITING. The Company has developed a recruiting methodology and
organization which is a core competency. The Company has significantly expanded
it's international-based recruiting team, with recruiters in Mumbai, Chennai,
Hyderabad, Delhi, Banglore, Pune, and Calcutta, India, to recruit for the
Company's global requirements. The Company also has a recruiting team based in
the U.S. which recruits primarily across the U.S. The Company uses a
standardized global selection process that includes written tests, interviews,
and reference checks.
Among the Company's other recruiting techniques are the placement of
advertisements on its own web site and popular job boards, in newspapers and
trade magazines, providing bonuses to its employees who refer qualified
applicants, participating in job fairs and recruiting on university campuses. In
addition, the Company has developed a proprietary database of talent hosted on
the internet, which is an automated tool for managing all phases of recruiting.
This system enhances the ability of the Company's recruiters to select
appropriate candidates and can distribute resumes directly to the recruiters.
TRAINING. The Company uses a number of established training delivery
mechanisms in its efforts to provide a consistent and reliable source for
qualified IT professionals.
Syntel also maintains an Internet-based global Computer-Based Training
(CBT) program with over 200 training courses from which Syntel employees can
select to enhance and develop their skills. The CBT topics cover the latest
Client/Server topics including Object Oriented Programming, local-area and
wide-area networking, E-Commerce, various Microsoft products, and Web-based
solutions in addition to management and related developmental areas.
The Company reskilled a significant percentage of the consulting base
during the past two years in the latest advanced software platforms, including
JAVA, HTML, Object Oriented, C++, RMI Cobra, JDBC, Cold Fusion, and Oracle.
During 1998 the Company implemented a Project Manager Training program.
The objective of the program is to develop certified project managers to ensure
consistent and quality delivery of the Company's engagements on a world wide
basis. The 12 to 18 month program consists of lecture style classroom work,
computer based training, and on the job apprenticeships. The program trains
students on industry "best practices" as well as Syntel specific methods and
processes. Program participants must receive certification from the Project
Management Institute ("PMI") before receiving Syntel branded certification.
The Company has been accepted as a Microsoft Certified Solution Partner
and sponsors the Microsoft Certification Program in its Cary, North Carolina,
Global Development Center and provides opportunities for cross-training of its
professionals in emerging technologies.
SUPPORT AND RETENTION. The Company seeks to provide meaningful support
to its employees which the Company believes leads to improved employee retention
and better quality services to its customers. A significant percentage of the
Company's employees have been recruited from outside the U.S. and relocated to
the U.S. This has resulted in the need to provide a higher level of initial
support to its employees than is common for U.S.-based employees. As a result of
these activities, Syntel has developed a significant knowledge base in making
foreign professionals comfortable and quickly productive in the U.S. and Europe.
The Company also conducts regular career planning sessions with its employees,
and seeks to meet their career goals
19
20
over a long-term planning horizon. As part of its retention strategy, the
Company strives to provide a competitive compensation and benefits package,
including relocation reimbursement and support, health insurance, 24-hour
on-call nurse consulting, a 401(K) plan, life insurance, dental options, a
vision eye-care program, long-term disability coverage, short-term disability
options, tuition subsidy plan, PC purchase plan, a health club reimbursement
program, and an employee referral plan. Upon consummation of its initial public
offering in 1997 the company offered a stock option program, and in 1998 a
qualified stock purchase program, providing all eligible employees the
opportunity to purchase the Company's Common Stock at a 15% discount to fair
market value.
COMPETITION
The IT services industry is intensely competitive, highly fragmented
and subject to rapid change and evolving industry standards. The Company
competes with a variety of other companies, depending on the IT services it
offers. The Company's primary competitors for professional IT staffing
engagements include participants from a variety of market segments, including
"Big Five" accounting firms, systems consulting and implementation firms,
Applications software development and maintenance firms, service groups of
computer equipment companies and temporary staffing firms. In Applications
outsourcing and e-business services, the Company competes primarily with IBM
Global Solutions, Keane, Andersen Consulting (now named Accenture), and Computer
Sciences Corporation, as well as Indian based companies such as TCS, Infosys,and
Wipro.
20
21
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Registrant, their ages, and the position
or office held by each, are as follows:
NAME AGE POSITION
---- --- --------
Bharat Desai................ 48 Chairman, President, Chief
Executive Officer
Neerja Sethi................ 46 Vice President, Corporate Affairs
and Director
John Andary................. 51 Chief Financial Officer and
Treasurer
Ken Kenjale................. 51 Chief Technology Officer
Daniel M. Moore............. 46 Chief Administrative Officer and
Secretary
Sanjay Raizada.............. 36 General Manager, IMG Division
Rajiv Tandon................ 42 Senior Vice President, Global Delivery
Marlin Mackey............... 49 Senior Vice President, Strategic Initiatives
Baru Rao.................... 42 Chief Executive Officer, Syntel (India) Ltd.
- ------------------------------------------------------------------------------
Bharat Desai is a co-founder of the Company and has served as its
President, Chief Executive Officer and Director since its formation in 1980.
Mr. Desai became Chairman of the Board in February 1999.
Neerja Sethi is a co-founder of the Company and has served as a Vice
President, Corporate Affairs and Director since its formation in 1980 and as
Secretary and Treasurer from 1980 to March 1996. Ms. Sethi is the spouse of Mr.
Desai.
John Andary has served the Company as Chief Financial Officer since
August 1994 and as Treasurer since March 1996. From October 1992 to April 1994,
Mr. Andary was a General Manager of Automatic Data Processing and from May 1987
to October 1992 he was one of its Division Controllers.
Ken Kenjale has served the Company as Chief Technology Officer since
July 1995. From April 1988 to July 1995, Mr. Kenjale served in various positions
with the Company.
Daniel M. Moore has served the Company as Chief Administrative Officer
and Secretary since August 1998. From March 1996 through August 1998, Mr. Moore
served as General Counsel and Secretary and also served as Vice President,
Benefits and Policy Administration from July 1997 through August 1998. From June
1996 to June 1997, Mr. Moore served as the Company's acting Vice President,
Human Resources. From June 1992 to March 1996, Mr. Moore served as Vice
president and Senior Corporate Counsel with Comerica Incorporated, and he was
Vice President and Managing Commercial Counsel with Manufacturers National
Corporation prior to its merger with Comerica Incorporated.
Sanjay Raizada joined the Company in September 1999 as part of the
acquisition of IMG. He has served as General Manager, IMG since that time. Prior
to joining Syntel, Mr. Raizada served as President of IMG from July 1998 until
September 1999, and from February 1995 until July 1998 he worked for
PricewaterhouseCoopers as a practice manager for the MCS and STT practices.
Rajiv Tandon joined Syntel in January 1992, and was promoted to Senior
Vice President, Global Delivery in January, 2001. From January 1999 until
December 2000 he served the Company as Vice President, Global Delivery East &
Enterprise Solutions. From April 1998 through January 1999, Mr. Tandon was
Assistant Vice President, Global Delivery Services and, from November 1996
21
22
through April 1998, Mr. Tandon was Director of Operations for the AIG account.
From January 1992 until November 1996 Mr. Tandon served in various other project
management positions within the Company.
Marlin Mackey was promoted to Senior Vice President, Strategic
Initiatives in January, 2001. From January 1999 until December 2000 he served
the Company as Vice President, Global Delivery West and Information Services.
From April 1998 through January 1999, Mr. Mackey was Assistant Vice President,
Global Delivery Services and, from November 1995 through April 1998, Mr. Mackey
was a Deputy Engagement Manager; both with the Company. From 1991 to November
1995, Mr. Mackey was Project Director for the State of New Mexico's ONGARD
project, a multi-million dollar software development project.
Baru S. Rao, CEO of Syntel Software Limited, India, joined the company
in 1997. Prior to joining Syntel, Mr. Rao spent 14 years in India and overseas
at Tata Consultancy Services.
22
23
ITEM 2. PROPERTIES.
The Company's headquarters and principal administrative, sales and
marketing, and system development operations are located in approximately 24,900
square feet of leased space in Troy, Michigan. The Company occupies these
premises under a lease expiring on November 30, 2001. The Company's primary
training and development center is located in approximately 50,240 square feet
of leased space in Cary, North Carolina, under a lease which expires March 31,
2004. The Company also leases regional office facilities in Dallas, Texas; San
Ramon, California; Oakbrook, Illinois; Minneapolis, Minnesota; Santa Fe, New
Mexico; Jacksonville, Florida; New York, New York; Beaverton, Oregon; Fort
Lauderdale, Florida; Costa Mesa, California; Phoenix, Arizona; London, England;
and Singapore.
Syntel leases approximately 40,744 square feet of office space in
Mumbai, India, under six leases expiring on various dates from October 13, 2002
to March 2, 2004. This facility houses IT professionals, as well as its senior
management, administrative personnel, human resources, recruiting, and sales and
marketing functions. Additionally, Syntel has leased substantially all of an
office building in Chennai, India consisting of approximately 32,812 square
feet. The lease terms expire May 2003, subject to the Company's option to renew
for an additional period of three years.
In January 2001, the Company acquired 41 acres of land at a cost of
approximately $1.0 million for construction of a state-of-the-art development
and training Campus in Pune, India. Construction of the center is expected to
begin during the second quarter of 2001. When fully completed in approximately
four years, the facility will cover over 1 million square feet and will
accommodate 9000 employees. It will be both a customer and employee focused
facility, including such amenities as a cafeteria and a fitness center. The
facility will be developed in stages, with a corporate and development center
opening in approximately one year with the capacity for about 1800 persons.
The Company believes that the existing facilities and planned
development in Pune are adequate for its currently anticipated future needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently a party to any material legal proceedings
or governmental investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of the year ended December 31, 2000.
23
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
(a) The Registrant's common stock is traded on the NASDAQ National
Market under the symbol "SYNT." The following table sets forth, for the periods
indicated, the range of high and low bid information per share of the Company's
common stock as reported on NASDAQ for each full quarterly period in 1998 and
1999. All prices give effect to a 3:2 stock split effective April 22, 1998.
Period High Low
- -------------------------------------------------------------------------------
First Quarter, 1998 $ 27.333 $ 9.875
Second Quarter, 1998 37.333 21.375
Third Quarter, 1998 31.500 11.500
Fourth Quarter, 1998 20.625 10.438
First Quarter, 1999 13.500 8.000
Second Quarter, 1999 12.063 7.125
Third Quarter, 1999 12.500 8.500
Fourth Quarter, 1999 18.547 8.063
First Quarter, 2000 20.375 12.000
Second Quarter, 2000 14.063 9.375
Third Quarter, 2000 11.563 7.750
Fourth Quarter, 2000 9.688 5.750
(b) There were approximately 269 shareholders of record and 3,500
beneficial holders on March 16, 2001.
(c) The Company did not pay any cash dividends during the years ended
December 31, 2000, December 31, 1999, or December 31, 1998. The Company does not
intend to declare or pay cash dividends in the foreseeable future. Management
anticipates that all earnings and other cash resources of the Company, if any,
will be retained by the Company for investment in its business.
24
25
ITEM 6. SELECTED FINANCIAL DATA.
SYNTEL, INC. & Subsidiaries
FIVE-YEAR HIGHLIGHTS (UNAUDITED)
(In thousands, except per share amounts)
The following tables set fourth selected consolidated financial data and other
data concerning Syntel, Inc. for each of the last five years. The pro forma
weighted average shares outstanding for all periods shown give effect to a 3:2
stock split effective April 22, 1998.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands, except per share data)
STATEMENT OF INCOME DATA
Revenues $164,808 $162,117 $167,975 $124,338 $92,330
Cost of revenues 104,602 99,300 104,971 87,584 67,083
----------------------------------------------------------------
Gross Profit 60,206 62,817 63,004 36,754 25,247
Selling, general and administrative
expenses 34,424 32,814 28,026 23,547 19,271
Goodwill impairment and related charges 21,650 - - - -
----------------------------------------------------------------
Income from operations 4,132 30,003 34,978 13,207 5,976
Other income 3,412 2,024 2,077 730 149
----------------------------------------------------------------
Income before income taxes 7,544 32,027 37,055 13,937 6,125
Income tax provision (benefit) (1) (967) 10,573 12,424 3,517 350
----------------------------------------------------------------
Net income before loss from equity
Investments 8,511 21,454 24,631 10,420 5,775
Loss from equity investments 526 - - - -
----------------------------------------------------------------
Net income $7,985 $21,454 $24,631 $10,420 $5,775
Net income per share, diluted $0.20 $0.55 $0.63 $0.27 $0.15
Pro forma net income (2) $10,196 $4,379
=========================
Pro Forma net income per share $0.26 $0.11
====== ======
Weighted average shares outstanding,
Diluted 39,480 39,049 39,294
=======================================
Pro forma weighted average shares
outstanding, diluted 39,083 39,367
=========================
(1) For all periods shown through August 12, 1997, the Company elected to
be treated as an S corporation and, as a result, the income of the
Company has been taxed for federal and state purposes (with exceptions
under certain state income tax laws) directly to the Company's
shareholders rather than to the Company.
(2) Pro forma data reflect income tax provisions for the periods presented
for federal and additional state income taxes as if the Company had
been taxed as a C corporation.
25
26
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
BALANCE SHEET DATA
Working capital $77,894 $64,893 $58,862 $35,346 $1,842
Total assets 132,898 122,468 104,235 65,232 32,992
Long-term debt - - - - -
Total shareholders' equity 96,683 90,361 64,147 39,585 6,145
OTHER DATA
Billable headcount in U.S. 994 1,114 1,135 1,260 1,103
Billable headcount in India 511 225 413 478 190
Billable headcount at
other locations 118 28 33 8 -
---------------------------------------------------------------------
Total billable headcount 1,623 1,367 1,581 1,746 1,293
=====================================================================
26
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Syntel is a worldwide provider of professional IT consulting and
Applications management services to Global 2000 companies, as well as to
government entities. The Company's service offerings include Applications
Outsourcing, consisting of application management services for ongoing
management, development and maintenance of business applications; e-business,
consisting of the integration and development of advanced technology
applications including E-commerce, Web development, Data Warehousing, CRM,
Oracle, and SAP; as well as partnerships with leading software companies to
provide installation services, including Tibco, Selectica Software, Corillian,
Kana Communications, and Vigilance; and TeamSourcing, consisting of professional
IT consulting services. For the years ended December 31, 1998 and 1999, the
Company provided Year 2000 remediation services as a component of the
Applications Outsourcing segment. All Year 2000 remediation engagements were
completed before December 31, 1999.
The Company's revenues are generated from professional services fees
provided through three segments, Applications Outsourcing, e-business, and
TeamSourcing. The Company has invested significantly in developing its ability
to sell and deliver Applications Outsourcing and e-business services, and has
shifted a larger portion of its business to engagements within these two
segments, which the Company believes have higher growth and gross margin
potential. The following table outlines the revenue mix for the years ended
December 31, 2000, 1999, and 1998:
Percent of Total Revenues
2000 1999 1998
---- ---- ----
Applications Outsourcing 54% 54% 63%
E-business 26 21 9
TeamSourcing 20 25 28
-- -- --
100% 100% 100%
On Applications Outsourcing engagements, the Company typically assumes
responsibility for engagement management and generally is able to allocate
certain portions of the engagement to on-site, off-site and offshore personnel.
Syntel may bill the customer on either a time-and-materials or fixed-price
basis. While a significant portion of Applications Outsourcing engagements have
been historically on a time-and-materials basis, a significant share of the
Applications Outsourcing engagements started during 2000, 1999 and 1998, have
been on a fixed-price basis. For the years ended December 31, 2000, 1999 and
1998, fixed-price revenues comprised approximately 32%, 37%, and 36% of total
Applications Outsourcing revenues, respectively. Syntel recognizes revenues from
fixed-price engagements on the percentage of completion method.
The Company reskilled a very significant percentage of the consulting
base during both 1999 and 2000 in the latest advanced software platforms,
including JAVA, HTML, Object Oriented, C++, RMI Cobra, JDBC, Cold Fusion, and
Oracle. The Company has focused training efforts on consultants assigned to
TeamSourcing engagements, and as a result, has successfully migrated such
consultants to the growing e-business segment.
Historically, most e-business engagements were billed on a time and
materials basis under the direct supervision of the customer (similar to
TeamSourcing engagements); however, as the Company expanded its expertise in
delivering e-commerce engagements, Syntel has assumed the project management
role for a significant number of new engagements starting in 1999 and 2000. For
the years ended December 31, 2000, 1999, and 1998, fixed price revenues
comprised approximately 30%, 17%, and 2%, of total e-business revenues,
respectively. Syntel recognizes revenues from fixed-price engagements on the
27
28
percentage of completion method.
On TeamSourcing engagements, Syntel's professional services typically
are provided at the customer's site and under the direct supervision of the
customer. TeamSourcing revenues generally are recognized on a time-and-materials
basis as services are performed. As indicated in the above table, the Company's
dependence on TeamSourcing engagements has decreased significantly and is
expected to continue to decrease as a percent of the total revenue base as the
Company consciously refocuses its sales efforts and migrates resources to
e-business and Applications Outsourcing engagements.
The Company's most significant cost is personnel cost, which consists
of compensation, benefits, recruiting, relocation and other related costs for
its IT professionals. The Company strives to maintain its gross margin by
migrating more revenue toward Applications Outsourcing and e-business,
controlling engagement costs, and offsetting increases in salaries and benefits
with increases in billing rates. The Company has established a human resource
allocation team whose purpose is to staff IT professionals on engagements that
efficiently utilize their technical skills and allow for optimal billing rates.
Syntel India derives essentially all of its revenues from software development
services provided to the Company from Mumbai and Chennai, India, where salaries
of IT professionals are comparatively lower than in the U.S.
The Company has performed a significant portion of its employee
recruiting in other countries. As of December 31, 2000, approximately 68% of
Syntel's U.S. workforce (34% of Syntel's worldwide workforce) worked under H-1B
temporary work visas in the U.S. and another 5% of the Company's U.S. workforce
(3% of Syntel's worldwide workforce) worked under L-1 visas (permitting
intercompany transfers of employees that have been employed with a foreign
subsidiary for at least 12 months prior to being transferred to the U.S.).
The Company has made substantial investments in infrastructure in
recent years, including: (i) expanding the Mumbai, India facility; (ii)
establishing a Global Development Center in Chennai, India; (iii) increasing
Applications Outsourcing sales and delivery capabilities through significant
expansion of the sales force and the Technical Services Group, which develops
and formalizes proprietary methodologies, practices and tools for the entire
Syntel organization; (iv) hiring additional experienced senior management; and
(v) expanding global recruiting and training capabilities, and replacement of
informal systems with highly integrated, Y2K compliant, Human Resource and
Financial Information Systems. Additionally, in January 2001, the Company
acquired 41 acres of land for construction of a state-of-the-art development and
training Campus in Pune, India. Construction of the center is expected to begin
during the second quarter of 2001. When fully completed in approximately four
years, the facility will cover over 1 million square feet and will accommodate
9000 employees. It will be both a customer and employee focused facility,
including such amenities as a cafeteria and a fitness center. The facility will
be developed in stages, with a corporate and development center opening in
approximately one year with the capacity for about 1800 persons.
Through its strong relationships with customers, the Company has been
able to generate recurring revenues from repeat business. These strong
relationships also have resulted in the Company generating a significant
percentage of revenues from key customers. The Company's top ten customers
accounted for approximately 62%, 68% and 70% of revenues for the years ended
December 31, 2000, 1999, and 1998. The Company does not believe there is any
material collectibility exposure among its top ten customers.
For the years ended December 31, 2000 and 1999 only one customer
contributed revenues in excess of 10% of total consolidated revenues. The
Company's largest customer for both 2000 and 1999 was American Home Assurance
Company and certain other subsidiaries of American International Group Inc.
(collectively, "AIG"). AIG accounted for approximately 19% and 21% of revenues
for the years ended December 31, 2000 and 1999, respectively. For the year
28
29
ended December 31, 1998 two customers contributed revenues in excess of 10% of
total consolidated revenues. The Company's two largest customers in 1998 were
AIG and Target Corporation (formerly Dayton Hudson Group) contributing
approximately 26% and 14%, respectively, of total consolidated revenues.
Although the Company does not currently foresee a credit risk associated with
accounts receivable from these customers, credit risk is affected by conditions
or occurrences within the economy and the specific industries in which these
customers operate.
INCOME TAX MATTERS
Syntel India is eligible for certain favorable tax provisions provided
under Indian tax law including: (i) an exemption from payment of corporate
income taxes for the first ten years of operation (the "Tax Holiday"); or (ii)
an exemption from income taxes on the profits derived from exporting computer
software services from India (the "Export Exemption"). During 1999, the Indian
government amended the Tax Holiday regulations, extending the effective period
to ten years, from the previous regulation which permitted a tax Holiday of five
consecutive years within the first eight years of operation. Under the new
regulations, the Company's Tax Holidays will expire no earlier than March 31,
2003. The Company treats most of Syntel India earnings as permanently invested
in India and does not anticipate repatriating any of these earnings to the U.S.
If the Company decides to repatriate any earnings of Syntel India, it will incur
a "border" tax, currently 10%, under Indian tax law and will be required to pay
U.S. corporate income taxes on such earnings.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
income statement data as a percentage of the Company's total revenues.
PERCENTAGE OF REVENUES
-----------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 1998
---- ---- ----
Revenues................... 100.0% 100.0% 100.0%
Cost of revenues........... 63.5 61.3 62.5
----- ----- -----
Gross profit............... 36.5 38.7 37.5
Selling, general and
administrative expenses.. 20.9 20.2 16.7
Goodwill impairment and
related charges 13.1 - -
----- ----- -----
Income from operations..... 2.5% 18.5% 20.8%
29
30
Following is selected segment financial data for the years ended December 31,
2000, 1999, and 1998. The Company does not allocate assets to specific segments.
2000 1999 1998
---- ---- ----
(in thousands)
Revenues
Applications Outsourcing $89,873 $87,311 $105,835
e-business 42,608 33,402 14,614
TeamSourcing 32,327 41,404 47,526
------------------------------------------------
$164,808 $162,117 $167,975
Gross Margin
Applications Outsourcing $38,783 $40,324 $45,516
e-business 13,622 10,789 4,409
TeamSourcing 7,801 11,704 13,079
------------------------------------------------
$60,206 $62,817 $63,004
Gross Margin %
Applications Outsourcing 43.2% 46.2% 43.0%
e-business 32.0% 32.3% 30.2%
TeamSourcing 24.1% 28.3% 27.5%
----- ----- -----
36.5% 38.7% 37.5%
Sales, general and administrative $34,424 $32,814 $28,026
Goodwill impairment and related charges $21,650 $ - $ -
Operating margin $4,132 $30,003 $34,978
================================================
The Applications Outsourcing segment included Year 2000 remediation engagements
for the years ended December 31, 1998 and 1999. All Year 2000 engagements were
completed before December 31, 1999. Excluding the impact of Year 2000
remediation engagements, Applications Outsourcing revenues for the years ended
December 31, 1999 and 1998 would have been $74.2 million and $77.0 million,
respectively; and gross margins would have been $31.5 million and $30.7 million,
respectively.
COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999
Revenues. Total consolidated revenues increased from $162.1 million in
1999 to $164.8 million in 2000, representing a 2% increase. The Company's total
revenues were less dependent upon its largest customers in 2000 as compared to
1999. The top five customers accounted for 47% of the total revenues in 2000,
down from 50% of total revenues in 1999. Additionally, the top 10 customers
accounted for 62% of the revenues in 2000 as compared to 68% in 1999. The
worldwide billable headcount increased to 1,623 as of December 31, 2000 compared
to 1,367 as of December 31, 1999. The increased headcount was due principally to
increased staffing in e-business engagements and Applications Outsourcing
engagements, partially offset by managed rampdowns of the TeamSourcing segment.
APPLICATIONS OUTSOURCING
REVENUES. Applications Outsourcing revenues increased from $87.3 million, or 54%
of total revenues in 1999, to $89.9 million, or 54% of total revenues in 2000.
The $2.6 million increase is due principally to new business engagements in the
U.S. and U.K. of approximately $18.9 million and growth in the base of
approximately $2.2 million; largely offset by the loss of revenues from
completed engagements of $18.5 million. The completed engagements included $13.1
million of Y2K remediation revenues in the year ended December 31, 1999.
COST OF REVENUES. Cost of revenues consist of costs directly associated with
billable consultants in both the US and offshore, including salaries, payroll
taxes, benefits, relocation costs, immigration costs, finders fees, trainee
compensation, and warranty reserves. Applications Outsourcing cost of revenues
increased to 56.8% of Applications Outsourcing revenues in 2000, from 53.8% in
30
31
1999. The 3.0% increase in cost of revenues as a percent of revenues was
attributable principally to the completion of Y2K remediation engagements in
1999 and a decrease in billing utilization levels, contributing approximately
5.5% and 3.2%, respectively, to the increase in direct costs as a percent of
revenue. These increased costs were largely offset by the impact of increased
offshore utilization net of global compensation increases and the release of
unused warranty reserves in 2000, contributing approximately 4.4% and 1.3%,
respectively.
E-BUSINESS
REVENUES. e-Business revenues increased to $42.6 million in 2000, or 26% of
total consolidated revenues, from $33.4 million in 1999, or 21% of total
consolidated revenues. The $9.2 million increase was attributable principally to
growth in practice partnerships, a full year of revenues and growth in IMG, and
growth in existing engagements as well as new engagements, contributing
approximately $7.5 million, $3.7 million, and $4.1 million, respectively;
partially offset by decreased Metier revenues of $6.1 million.
COST OF REVENUES. e-business cost of revenues consist of costs directly
associated with billable consultants, including salaries, payroll taxes,
benefits, relocation costs, immigration costs, finders fees, and trainee
compensation. e-business cost of revenues increased slightly to 68.0% of
e-business revenues in 2000, from 67.7% in 1999. The .3% increase in cost of
revenues as a percent of revenues was attributable primarily to reduced
consultant utilization levels due to softness in the Oracle marketplace and
increased training activities, contributing approximately 7.0% to the increase
in direct costs as a percent of e-business revenues. This was largely offset by
improved average billing rates in comparison to average compensation rates,
contributing approximately 6.7% to the direct margins.
TEAMSOURCING
REVENUES. TeamSourcing revenues decreased from $41.4 million, or 25% of total
consolidated revenues in 1999, to $32.3 million, or 20% of total consolidated
revenues in 2000. The $9.1 million decrease in TeamSourcing revenues was
attributable principally to a decrease in average billable consultants,
resulting in decreased revenues of $10.5 million, partially offset by an
increase in average bill rates of $1.4 million. End of year average bill rates
increased to $58.14 per hour as of December 31, 2000, from $54.73 as of December
31, 1999.
COST OF REVENUES. TeamSourcing cost of revenues consist of costs directly
associated with billable consultants, including salaries, payroll taxes,
benefits, relocation costs, immigration costs, finders fees, and trainee
compensation. TeamSourcing cost of revenues increased to 75.9% of TeamSourcing
revenues in 2000, from 71.7% in 1999. The 4.2% increase in cost of revenues as a
percent of revenues was attributable principally to increased compensation
levels and benefits and a decrease in utilization rates, contributing
approximately 6.3% and 2.4%, respectively, to the increase in direct costs as a
percent of TeamSourcing revenues; partially offset by increased average bill
rates of approximately 4.5%.
31
32
SALES, GENERAL, AND ADMINISTRATIVE COSTS.
Selling, general, and administrative expenses consist primarily of salaries,
payroll taxes and benefits for sales, finance, human resources, administrative,
and corporate staff, travel, communications, business promotions, marketing, and
various facility costs for the Company's Global Development Centers. For the
year ended December 31, 2000, sales, general, and administrative expenses
increased to $34.4 million, or 20.9% of revenue, from $32.8 million, or 20.2% of
revenues for the year ended December 31, 1999. The $1.6 million increase in
sales, general, and administrative costs was attributable principally to an
increase in management bonuses of about $1.5 million and approximately $0.3
million increase in both depreciation and marketing costs in the U.S. as well as
approximately $0.3 million in staffing, facilities, and travel in both the U.K.
and India. These increased costs were partially offset by staffing savings in
the U.S. of approximately $1.1 million (net of compensation increases)
attributable primarily to savings in Metier, recruiting, and sales.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES. Total consolidated revenues decreased from $168.0 million in 1998 to
$162.1 million in 1999, representing a 3% decrease. The Company's total revenues
were less dependent upon its largest customers in 1999 as compared to 1998. The
top five customers accounted for 50% of the total revenues in 1999, down from
58% of total revenues in 1998. Additionally, the top 10 customers accounted for
68% of the revenues in 1999 as compared to 70% in 1998. The worldwide billable
headcount decreased to 1,367 as of December 31, 1999 compared to 1,581 as of
December 31, 1998. The decreased headcount was due principally to the completion
of the Y2K engagements, the ramp down in some TeamSourcing engagements,
partially offset by increased staffing in e-business engagements.
APPLICATIONS OUTSOURCING
REVENUES. Applications Outsourcing revenues decreased from $105.8 million, or
63% of total revenues in 1998, to $87.3 million, or 54% of total revenues in
1999. The $18.5 million decrease is due principally to the completion of Year
2000 remediation engagements and the completion of major development projects of
approximately $15.8 million and $8.6 million, respectively; partially offset by
new business development and net growth in other engagements of approximately
$5.9 million.
COST OF REVENUES. Cost of revenues consist of costs directly associated with
billable consultants in both the US and offshore, including salaries, payroll
taxes, benefits, relocation costs, immigration costs, finders fees, trainee
compensation, and warranty reserves. Applications Outsourcing cost of revenues
decreased to 53.8% of Applications Outsourcing revenues in 1999, down from 57.0%
in 1998. The decrease in cost of revenues as a percent of revenues was
attributable principally to productivity improvements on several large
engagements, billing rate increases, the release of warranty reserves on
completed Year 2000 remediation engagements, and higher margins on new
engagements, contributing approximately 3.9%, 1.0%, 1.0 %, and 1.0%,
respectively; partially offset by pay rate increases and increased bench of 2.4%
and 1.3%, respectively.
E-BUSINESS.
REVENUES. E-Business revenues increased to $33.4 million in 1999, or 21% of
total consolidated revenues, from $14.6 million in 1998, or 8.7% of total
consolidated revenues. The $18.8 million increase was attributable principally
to the acquisitions of Metier and IMG, as well as new engagements, contributing
approximately $12.1 million, $1.7 million, and $5.0 million, respectively.
COST OF REVENUES. E-business Cost of revenues consist of costs directly
associated with billable consultants, including salaries, payroll taxes,
benefits, relocation costs, immigration costs, finders fees, and trainee
compensation. E-business cost of revenues decreased to 67.7% of e-business
32
33
revenues in 1999, from 69.8% in 1998. The decrease in cost of revenues as a
percent of revenues was attributable primarily to improved margins on new fixed
price e-business engagements of approximately 3.5%; partially offset by slightly
reduced margins on acquired businesses of 0.8% and increased travel expense of
0.6%.
TEAMSOURCING
REVENUES. TeamSourcing revenues decreased from $47.5 million, or 28% of total
consolidated revenues in 1998, to $41.4 million, or 25% of total consolidated
revenues in 1999. The $6.1 million decrease in TeamSourcing revenues was
attributable principally to a decrease in average billable consultants of $8.6
million, partially offset by bill rate increases of $2.5 million. End of year
average bill rates increased to $54.73 per hour as of December 31, 1999, from
$51.80 as of December 31, 1998.
COST OF REVENUES. TeamSourcing Cost of revenues consist of costs directly
associated with billable consultants, including salaries, payroll taxes,
benefits, relocation costs, immigration costs, finders fees, and trainee
compensation. TeamSourcing cost of revenues decreased to 71.7% of TeamSourcing
revenues in 1999, from 72.5% in 1998. The decrease in cost of revenues as a
percent of revenues was attributable principally to bill rate changes of 4.0%,
partially offset by pay rate increases of 3.2%.
SALES, GENERAL, AND ADMINISTRATIVE COSTS.
Selling, general, and administrative expenses consist primarily of salaries,
payroll taxes and benefits for sales, finance, human resources, administrative,
and corporate staff, travel, communications, business promotions, marketing, and
various facility costs for the Company's Global Development Centers. For the
year ended December 31, 1999, sales, general, and administrative expenses
increased to $32.8 million, or 20.2% of revenue, from $28.0 million, or 16.7% of
revenues for the year ended December 31, 1998. The $4.8 million increase in
sales, general, and administrative costs was attributable principally to $3.5
million associated with the acquisition of Metier and IMG, $1.2 million from
continued investments in sales personnel, $0.9 million in compensation
increases, $0.7 million in goodwill amortization, and approximately $0.6 million
in increased costs in the U.K. and Singapore. These costs were partially offset
by a decrease in management bonuses of approximately $1.7 million and decreased
costs in India of approximately $0.4 million.
QUARTERLY RESULTS OF OPERATIONS
Note 15 of the consolidated financial statements appearing elsewhere in
this document sets forth certain quarterly income statement data for each of the
eight quarters beginning January 1, 1999 and ended December 31, 2000. In the
opinion of management, this information has been presented on the same basis as
the Company's Financial Statements appearing elsewhere in this document and all
necessary adjustments (consisting only of normal recurring adjustments) have
been included in order to present fairly the unaudited quarterly results. The
results of operations for any quarter are not necessarily indicative of the
results for any future period.
The Company's quarterly revenues and results of operations have not
fluctuated significantly from quarter to quarter in the past but could fluctuate
in the future. Various factors causing such fluctuations include: the timing,
number and scope of customer engagements commenced and completed during the
quarter; fluctuation in the revenue mix by segments; progress on fixed-price
engagements; acquisitions; timing and cost associated with expansion of the
Company's facilities; changes in IT professional wage rates; the accuracy of
estimates of resources and time frames required to complete pending assignments;
the number of working days in a quarter; employee hiring and training, attrition
and utilization rates; the mix of services performed on-site, off-site and
offshore; termination of engagements; start-up expenses for new engagements;
longer sales cycles for Applications Outsourcing engagements; customers' budget
cycles and investment time for training.
33
34
LIQUIDITY AND CAPITAL RESOURCES
The Company generally has financed its working capital needs through
operations, occasionally supplemented by borrowings under a line of credit with
a commercial bank. Both the Mumbai and Chennai expansion programs, as well as
the 1999 acquisitions of Metier, Inc. and IMG, Inc. were financed from
internally generated funds. Additionally, construction of the development center
in Pune, India will also be financed through internally generated funds.
Net cash provided by operating activities was $20.0 million, $17.2
million, and $35.3 million for the years ended December 31, 2000, 1999, and
1998, respectively. The number of days sales outstanding in accounts receivable
was approximately 68 days, 52 days, and 50 days, as of December 31, 2000, 1999,
and 1998, respectively. The increase in days sales outstanding at December 31,
2000 was in part the result of fewer contracts with advanced payment provisions
and does not represent collection risk.
Net cash used in investing activities was $7.5 million, $18.2 million,
and $3.3 million, for the years ended December 31, 2000, 1999 and 1998,
respectively.
Net cash used in investing activities in 2000 of $7.5 million included
$3.8 million for capital expenditures, consisting principally of PC's,
capitalized development costs, and communications equipment; and $3.7 million in
equity and other investments, including $2.2 million in Textiles Online
Marketplaces, $1.0 million in New2USA.com, and $0.5 million in Vianetta
Communications.
Net cash used in investing activities in 1999 of $18.2 million included
$15.7 million for the acquisitions of Metier, Inc. and IMG, Inc., $1.7 million
for capitalized development costs, and $0.8 million for computer equipment. The
$1.7 million for capitalized development costs consists of $0.9 million for
implementation of internal PeopleSoft financial systems and $0.8 million for new
product development.
Net cash used in investing activities in 1998 of $3.3 million included
$2.1 million for completion of the facility expansion and improvement programs
at the Company's Global Development Centers in Mumbai and Chennai, India, $0.7
million for computer equipment, and $0.5 million for new human resource and
financial information systems.
Net cash used in financing activities was $2.6 million in 2000, due
principally to the repurchase of 329,000 shares of common stock for $3.1
million, offset by proceeds from the issuance of stock options and shares issued
from the stock purchase plan of $0.5 million. Net cash used in financing
activities was $0.1 million in 1999, due principally to the repurchase of
129,000 shares of common stock for $1.1 million, offset by proceeds from shares
issued from the Company's first stock purchase plan of $1.0 million. Net cash
used in financing activities was $0.2 million in 1998, due principally to a
final distribution of S corporation undistributed taxable profits.
The Company has a line of credit with Bank One which provides for
borrowings up to $40.0 million. The line of credit expires on August 31, 2001.
The line of credit contains covenants restricting the Company from, among other
things, incurring additional debt, issuing guarantees and creating liens on the
Company's property, without the prior consent of the bank. The line of credit
also requires the Company to maintain certain tangible net worth levels and
leverage ratios. At December 31, 2000, there was no indebtedness outstanding
under the line of credit. Borrowings under the line of credit bear interest at
the lower of the Eurodollar rate plus the applicable Eurodollar margin, the
bank's prime rate or a negotiated rate established by the bank at the time of
borrowing.
In addition to the bank line of credit, the Company has a $20.0 million
facility with Bank One to finance acquisitions which terminates on August 31,
34
35
2001. The Company has not borrowed any amounts under this facility. The Company
intends to extend both the $40 million and $20 million lines of credit before
the expiration date.
The Company believes that the combination of present cash balances and
future operating cash flows will be sufficient to meet the Company's currently
anticipated cash requirements for at least the next 12 months.
NEW ACCOUNTING STANDARDS
Effective January 1, 1999 the Company adopted Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use", which requires capitalization of certain costs for the
development of internal use software, including the costs of coding, software
configuration, upgrades, and enhancements. The adoption of the pronouncement did
not have a material effect on the Company's financial results.
Effective January 1, 2000 the Company adopted Emerging Issues Task
Force (EITF) 00-02, "Accounting for Web Site Development Costs", which required
that certain costs for development of a web site, including costs of developing
graphics and content. During the year ended December 31, 2000, the Company
capitalized approximately $1.0 million of Web site development costs. Such
capitalized costs are included in Capitalized Development Costs.
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
Accounting for Derivative Instruments and Hedging Activities", was issued by the
Financial Accounting Standards Board in June 1998. This statement is effective
for the Company as of January 1, 2001. SFAS 133, as amended by 138, established
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The Company's management has assessed the
impact that adoption of FAS 133 will have on the Company's results of operations
and financial position; it anticipates an immaterial effect.
ITEM 7A. MARKET RISKS
The Company is primarily exposed to the effects of changes in foreign
currency. Foreign currency exchange risk exists as costs are paid in local
currency and receipts are provided in U.S. dollars. The risk is partially
mitigated as the Company has sufficient resources in the local currency to meet
immediate requirements. The Company's holdings and positions in market sensitive
instruments do not subject the Company to material risk. These exposures are
monitored and managed by the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and schedules filed herewith are set forth on
the Index to Financial Statements and Financial Statement Schedules on page F-1
of the separate financial section which follows page 42 of this Report and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
35
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the first part of the section entitled
"Election of a Director" in the Registrant's Proxy Statement for the Annual
Shareholders' Meeting to be held on or about May 23, 2001 (the "Proxy Statement)
is incorporated herein by reference.
The information set forth under the caption "Compliance with Section
16(a) of The Exchange Act" in the section entitled "Additional Information" in
the Registrant's Proxy Statement is incorporated herein by reference. The
information set forth in the section entitled "Executive Officers of the
Registrant" in Item 1 of this report is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the section entitled "Executive
Compensation" in the Registrant's Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the captions "Principal Shareholders"
and "Security Ownership of Management" in the section entitled "Additional
Information" in the Registrant's Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has invested $2.5 million in Textiles Online Marketplaces,
Ltd. In addition to the Company's investment, it's President and CEO as well as
one of it's outside directors, have invested $500,000 and $100,000,
respectively, with terms similar to those of the Company. See Note 4 of the
Audited Financial Statements which follow page 42 of this report for additional
information.
36
37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The financial statements, supplementary financial information, and
financial statement schedules filed herewith are set forth on the Index to
Financial Statements and Financial Statement Schedules on page F-1 of the
separate financial section which follows page 39 of this Report, which is
incorporated herein by reference.
The following exhibits are filed as part of this Report. Those exhibits
with an asterisk(*) designate the Registrant's management contracts or
compensation plans or arrangements for its executive officers.
Exhibit No. Description
3.1 Restated Articles of Incorporation of the registrant
filed as an exhibit to the Registrant's Statement on
Form S-1 dated June 6, 1997, and incorporated herein
be reference.
3.2 Amendment to Articles of Incorporation of the
Registrant dated September 21, 1998 filed as an
Exhibit to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1998 and
incorporated herein by reference.
3.3 Bylaws of the Registrant filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 dated
June 6, 1997, and incorporated herein by reference.
10.1 Credit Authorization Agreement, dated September 13,
1996, between the Registrant and NBD Bank filed as an
Exhibit to the Registrant's Registration Statement on
Form S-1 dated June 6, 1997, and incorporated herein
by reference.
10.2 Letter Agreement between the Registrant and NBD Bank
dated March 11, 1997 amending Credit Authorization
Agreement, filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 dated June 6,
1997, and incorporated herein by reference.
10.3 Letter Agreement between the Registrant and NBD Bank
dated March 25, 1997 amending Credit Authorization
Agreement, filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 dated June 6,
1997, and incorporated herein by reference.
10.4 Letter Agreement between the Registrant and Bank One
dated September 13, 1999 amending the prior Credit
Authorization Agreement, filed as an exhibit to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999 and incorporated herein by
reference.
10.5 Letter of Agreement between the Registrant and Bank
One dated August 31, 2000 amending the prior Credit
Authorization Agreement.
10.6 Lease, dated August 22, 1996, between WRC Properties,
Inc. and the Registrant, filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 dated
June 6, 1997, and incorporated herein by reference.
10.7 Lease Agreement, dated November 30, 1994, between the
Registrant and NationsBank of North Carolina, NA., as
Trustee for the Public Employees Retirement System of
Ohio,
37
38
filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 dated June 6,
1997, and incorporated herein by reference.
10.8 First Amendment, dated October 19, 1998, between the
Registrant and Corning Road, L.L.C. (successor to
First Union National Bank of North Carolina as
Trustee, successor to NationsBank), to the Lease
Agreement, dated November 30, 1994, between the
Registrant and NationsBank, filed as an Exhibit to
the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein
by reference.
10.9 Indentures of Lease entered into between the
President of India and Syntel Software Pvt. Ltd. on
various dates in 1992 and 1993 for the Mumbai Global
Development Center and filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 dated
June 6, 1997, and incorporated herein by reference.
10.10 Rental Agreement, dated February 24, 1997, between
Syntel Software Pvt. Ltd. and the Landlords for the
Chennai Global Development Center, filed as an
Exhibit to the Registrant's Registration Statement on
Form S-1 dated June 6, 1997, and incorporated herein
by reference.
10.11 Agreement for Software Programming Services, dated as
of December 31, 1997, between the Registrant and
American Home Assurance Company, filed as an Exhibit
to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998 and incorporated
herein by reference.
10.12 * 1997 Stock Option and Incentive Plan, filed as an
Exhibit to the Registrant's Registration Statement on
Form S-1 dated June 6, 1997, and incorporated herein
by reference.
10.13 * Employee Stock Purchase Plan, filed as an Exhibit
to the Registrant's Registration Statement on Form
S-1 dated June 6, 1997, and incorporated herein by
reference.
10.14 Asset Purchase Agreement dated as of September 22,
1999 by Syntel, Inc. and Metier, Inc. filed as an
Exhibit to the Registrant's Current Report on Form
8-K dated October 5, 1999 and incorporated herein by
reference.
21 Subsidiaries of the Registrant.
99.1 Proxy Statement for the Registrant's 2001 Annual
Meeting of Shareholders, filed by the Registrant
pursuant to Regulation 14A and incorporated herein by
reference.
(b) No report on Form 8-K was filed during the fourth
quarter of the year ended December 31, 2000.
38
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SYNTEL, INC.
By: /s/Bharat Desai
-------------------------
Bharat Desai
Dated: March 27, 2001 President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/Bharat Desai President and Chief Executive Officer March 27, 2001
- ------------------- (Principal Executive Officer)
Bharat Desai
/s/John Andary Chief Financial Officer March 27, 2001
- -------------------- (Principal Financial and
John Andary and Accounting Officer)
/s/Neerja Sethi Director and Vice President, March 27, 2001
- -------------------- Corporate Affairs
Neerja Sethi
/s/Paritosh K. Choksi Director March 27, 2001
- ---------------------
Paritosh K. Choksi
/s/Douglas VanHouweling Director March 27, 2001
- -----------------------
Douglas Van Houweling
/s/GEORGE R. Mrkonic Director March 27, 2001
- -----------------------
George R. Mrkonic
39
40
SYNTEL, INC.
CONTENTS
- ------------------------------------------------------------------
PAGE(S)
-------
REPORT OF INDEPENDENT ACCOUNTANTS...................................... 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets............................................ 2
Consolidated Statements of Income...................................... 3
Consolidated Statements of Shareholders' Equity........................ 4
Consolidated Statements of Cash Flows.................................. 5
Notes to Consolidated Financial Statements.............................6-21
41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Syntel, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Syntel,
Inc., and its subsidiaries at December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
February 14, 2001
1
42
SYNTEL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
2000 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 73,478 $ 63,611
Accounts receivable, net 31,194 23,800
Advanced billings and other current assets 9,437 9,522
--------- ---------
Total current assets 114,109 96,933
Property and equipment 19,183 15,812
Less accumulated depreciation 12,023 9,390
--------- ---------
Property and equipment, net 7,160 6,422
Goodwill, net of amortization 1,026 19,113
Equity and other investments 3,918 --
Deferred income taxes, noncurrent 6,685 --
--------- ---------
$ 132,898 $ 122,468
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 4,801 $ 4,381
Accrued payroll and related costs 10,909 12,748
Income taxes payable 6,105 3,464
Accrued warranty costs 150 1,641
Accrued liabilities 9,016 5,367
Deferred revenue 5,234 4,506
--------- ---------
Total current liabilities 36,215 32,107
SHAREHOLDERS' EQUITY
Common stock, no par value per share, 100 million shares authorized; 38.499
million and 38.556 million shares issued and outstanding at
December 31, 2000 and 1999, respectively 1 1
Additional paid-in capital 38,345 39,677
Accumulated other comprehensive income (907) (576)
Retained earnings 59,244 51,259
--------- ---------
Total shareholders' equity 96,683 90,361
--------- ---------
Total liabilities and shareholders' equity $ 132,898 $ 122,468
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
2
43
SYNTEL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
--------- --------- ---------
Revenues $ 164,808 $ 162,117 $ 167,975
Cost of revenues 104,602 99,300 104,971
--------- --------- ---------
Gross profit 60,206 62,817 63,004
Selling, general and administrative expenses 34,424 32,814 28,026
Goodwill impairment and related charges 21,650 -- --
--------- --------- ---------
Income from operations 4,132 30,003 34,978
Other income, principally interest 3,412 2,024 2,077
--------- --------- ---------
Income before income taxes 7,544 32,027 37,055
Income tax benefit (provision) 967 (10,573) (12,424)
--------- --------- ---------
Net income before loss from equity investments 8,511 21,454 24,631
Loss from equity investments 526 -- --
--------- --------- ---------
Net income $ 7,985 $ 21,454 $ 24,631
========= ========= =========
EARNINGS PER SHARE
Basic $ 0.21 $ 0.56 $ 0.65
Diluted $ 0.20 $ 0.55 $ 0.63
The accompanying notes are an integral part of the consolidated financial
statements.
3
44
SYNTEL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
- --------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN RETAINED COMPREHENSIVE SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
------ ------ -------- ---------- ------------- -------------
BALANCE, JANUARY 1, 1998 25,450 $1 $34,659 $ 5,174 $ (249) $39,585
Net income 24,631 24,631
Translation adjustments (194) (194)
--------
Total comprehensive income, net of tax 24,437
Stock Split, 3-for-2, April 22, 1998 12,725 -
Exercised stock options 20 66 66
Compensation expense related to
stock options 59 59
------ -- ------- ------- ------ -------
BALANCE, DECEMBER 31, 1998 38,195 $1 $34,784 $29,805 $ (443) $64,147
Net income 21,454 21,454
Translation adjustments (133) (133)
-------
Total comprehensive income, net of tax 21,321
Stock issued to directors 18 111 111
Common stock repurchases (129) (1,097) (1,097)
Metier acquisition 300 4,738 4,738
Employee stock purchase plan 101 762 762
Exercised stock options 71 274 274
Compensation expense related to
stock options 105 105
------ -- ------- ------- ------ -------
BALANCE, DECEMBER 31, 1999 38,556 $1 $39,677 $51,259 $ (576) $90,361
Net income 7,985 7,985
Translation adjustments (331) (331)
-------
Total comprehensive income, net 7,654
of tax
Common stock repurchases (329) (3,136) (3,136)
Employee stock purchase plan 169 1,127 1,127
Exercised stock options 103 543 543
Compensation expense related to
stock options 134 134
------ -- ------- ------- ------ -------
BALANCE, DECEMBER 31, 2000 38,499 $1 $38,345 $59,244 $ (907) $96,683
====== == ======= ======= ====== =======
The accompanying notes are an integral part of the consolidated financial
statements.
4
45
SYNTEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,985 $ 21,454 $ 24,631
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,633 2,353 1,977
Goodwill 655 662 0
Deferred income taxes (8,311) 1,078 (3,368)
Compensation expense related to
stock options 134 105 59
Expense related to common stock issued to directors 111
Loss on equity investments 526 -- --
Goodwill impairment and related charges 21,650 -- --
Changes in assets and liabilities net of effects from
purchase of Metier Inc and IMG Inc in 1999:
Accounts receivable, net (7,394) 4,934 (2,937)
Advanced billings and other assets 1,711 (77) 376
Accrued payroll and other liabilities (342) (7,438) 9,810
Deferred revenues 728 (5,936) 4,737
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 19,975 17,246 35,285
-------- -------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES
Property and equipment expenditures (3,785) (2,496) (3,336)
Equity and other investments (3,730) -- --
Payments for purchases of Metier Inc. and IMG Inc.
net of cash acquired -- (15,738) --
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (7,515) (18,234) (3,336)
-------- -------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES
Net proceeds from issuance of stock 543 1,036 66
Common stock repurchases (3,136) (1,097) --
Dividend/distribution payments -- -- (300)
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES (2,593) (61) (234)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 9,867 (1,049) 31,715
Cash and cash equivalents, beginning of period 63,611 64,660 32,945
======== ======== ========
Cash and cash equivalents, end of period $ 73,478 $ 63,611 $ 64,660
======== ======== ========
Cash paid during the period for income taxes $ 4,564 $ 9,993 $ 15,186
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
5
46
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BUSINESS
Syntel, Inc. and Subsidiaries (the "Company") provides information
technology services such as programming, systems integration, outsourcing
and overall project management. The Company provides services to customers
primarily in the financial, manufacturing, transportation, retail, and
information/communication industries, as well as to government entities.
The Company's reportable operating segments consist of Application
Outsourcing, e-business, and TeamSourcing. Additionally, during 1999, and
1998, the Company provided Year 2000 remediation services. All Year 2000
remediation engagements were completed by the end of 1999.
Through Application Outsourcing, the Company provides higher-value
outsourcing services for ongoing management, development and maintenance of
customers' business applications. In most Application Outsourcing
engagements, the Company assumes responsibility for the management of
customer development and support functions. Application Outsourcing
engagements are generally supported by multiyear contracts. As a percentage
of total consolidated revenues, Application Outsourcing revenues remained
at 54% of total revenues during both 2000 and 1999, and 63% in 1998.
Through e-business, the Company provides development and implementation
services for a number of emerging and rapidly growing high technology
applications, including Web development, Data Warehousing, e-commerce, CRM,
and Oracle, as well as partnership arrangements with leading software
firms, including Tibco, Motive, Selectica, and Vigilence, to provide
installation services to their respective customers. These services may be
provided on either a time-and-material basis or on a fixed price basis, in
which the Company assumes responsibility for management of the engagement.
As a percent of total revenues, e-business revenues contributed 26%, 21%,
and 9% of total consolidated revenues in 2000, 1999, and 1998,
respectively.
Through TeamSourcing, the Company provides professional information
technology services directly to the customer. TeamSourcing contracts are
generally terminable by the customer without penalty.
During the years ended December 31, 2000 and 1999, the Company had one
customer, AIG, that contributed in excess of 10% of the total consolidated
revenues. Revenues from this customer were approximately $31,779,000 and
$33,900,000, for the years ended 2000 and 1999, respectively; contributing
approximately 19%, and 21%, respectively of total consolidated revenues. At
December 31, 2000 and 1999, approximately 2% and 16%, respectively of
accounts receivable, net, were from this customer. All revenues from this
customer were generated in the Applications Outsourcing segment.
For the year ended December 31, 1998, the Company had two customers, AIG
and Dayton Hudson Corporation, with revenues in excess of 10% of total
consolidated revenues. Revenues from these customers totaled $43,100,000
and $23,625,000, contributing 26% and 14%, respectively, of total
consolidated revenues.
6
47
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Syntel, Inc.
("Syntel") and its wholly owned subsidiaries Syntel Software Private
Limited ("Syntel India"), an Indian limited liability company, Syntel
"Singapore" PTE., Ltd., ("Syntel Singapore"), a Singapore limited liability
company, Syntel Europe, Ltd., ("Syntel U.K."), a United Kingdom limited
liability company, Syntel Canada Ltd., ("Syntel Canada") a limited
liability company, and Syntel "Australia" Pty Limited ("Syntel Australia"),
an Australian limited liability Company. All intercompany balances and
transactions have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenues from time and material contracts as
services are rendered and costs are incurred
Revenue on fixed-price, fixed deliverable projects is measured by the
percentage of cost incurred to date to the estimated total cost at
completion. Revenue from fixed-price application management and support
engagements is recognized as earned. The cumulative impact of any change in
estimates of the percentage complete or losses on contracts is reflected in
the period in which the changes become known.
CASH AND CASH EQUIVALENTS
For the purpose of reporting cash and cash equivalents, the Company
considers all liquid investments purchased with a maturity of three months
or less to be cash equivalents. Cash equivalents are principally triple A
rated corporate bonds and treasury notes, held by a bank, with maturity
dates of less than 90 days.
FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, trade receivables and trade
payables approximate fair value because of the short-term nature of these
instruments.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Maintenance and repairs are
charged to expense when incurred. Depreciation is computed primarily using
the straight-line method over the estimated useful lives as follows:
YEARS
Computer equipment and software 3
Furniture and fixtures 7
Telephone equipment 5
Leasehold improvements Life of lease
Capitalized software development costs See below
Effective January 1, 1999 the Company adopted Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use". In accordance with this standard, the Company
capitalizes certain direct internal and external costs associated with
upgrading and enhancing its information systems to support its information
processing needs. Capitalization of such costs begins when the preliminary
planning stage for each project is completed and management has formally
authorized its funding and ends when the project is substantially complete.
These costs are amortized using the straight-line method over three years.
7
48
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company considers the future undiscounted cash flows attributable to
capitalized development costs in evaluating potential impairment of the
asset.
Other computer software and hardware maintenance and training costs are
charged to expenses as incurred.
Effective January 1, 2000 the Company adopted Emerging Issues Task Force
(EITF) 00-02, "Accounting for Web Site Development Costs", which required
that certain costs for development of a web site, including costs of
developing graphics and content. During the year ended December 31, 2000,
the Company capitalized approximately $1.0 million of Web site development
costs. Such capitalized costs are included in Capitalized Development
Costs.
GOODWILL
Goodwill is being amortized on a straight-line basis over a 15 year period.
The Company determines the recoverability of recorded goodwill by the
undiscounted expected future cash flow from the operations to which the
goodwill applies. If the goodwill is determined to be impaired as a result
of this measurement, the impairment recognized is measured by the amount by
which the carrying amount of the asset exceeds the fair value of the asset,
as determined on a discounted cash flow basis.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts including, but not limited to
warranty costs, valuation of trade accounts receivable, amortization and
impairment of goodwill, and potential tax liabilities. Actual results could
differ from those estimates and assumptions.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign operations utilize the
functional currency of the country in which business is conducted.
Revenues, costs and expenses of the foreign subsidiaries are translated to
U. S. dollars at average period exchange rates. Assets and liabilities are
translated to U. S. dollars at year-end exchange rates with the effects of
these translation adjustments being reported as a separate component of
accumulated other comprehensive income in shareholders' equity. The change
in the accumulated other comprehensive income account results from
translation adjustments recognized for the respective period.
PER SHARE DATA
Basic earnings per share is calculated by dividing net income by the
weighted average number of shares outstanding during the applicable period.
The Company has stock options which are considered to be potentially
dilutive to common stock. Diluted earnings per share is calculated by
dividing net income by the weighted average number of shares outstanding
during the applicable period adjusted for these potentially dilutive
options.
8
49
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain amounts in previously issued financial statements have been
reclassified to conform with the current year presentation.
3. ACQUISITIONS
During 1999, the Company acquired substantially all the business and assets
of Metier, Inc. The acquisition resulted in goodwill of $20,450,000. During
the year ended December 31, 2000, the Company determined that the Metier
goodwill was impaired, and as a result, wrote-off the remaining portion of
unamortized goodwill and provided for costs associated with the downsizing
of the Metier business.
During 1999, the Company also acquired the business and assets of IMG, Inc.
The resulting goodwill of $1,122,000 is being amortized on a straight line
basis over 15 years. As of December 31, 2000 further earnout consideration
is not expected to be material.
The operating results of both Metier and IMG have been included in the
consolidated results since July 1, 1999, their effective acquisition dates.
The consolidated results of operations for 1999 and 1998, on a pro forma
basis, are presented below as though Metier had been acquired as of January
1, 1998 (In thousands):
TWELVE MONTHS ENDED
(UNAUDITED) DECEMBER 31
---------------------------
1999 1998
-------- --------
Revenue $180,120 $186,146
Net income 22,402 24,705
Earnings per share (diluted) $ 0.57 $ 0.62
9
50
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
4. INVESTMENTS
At December 31, 2000, the Company had the following investments:
Accounting Investment
Investment Ownership Method amount Description of Business
---------- ------------ ---------- ---------- -----------------------
New2USA (1) Equity $ 918,400 Web portal providing information
and services to assist immigrants with
settling in the U.S.
Textiles Online
Marketplaces Ltd. 10% Cost $2,500,000 Business to Business internet
based online textile exchange.
Vianetta
Communications (2) less than 5% Cost $ 500,000 Computerized transcriptions of
medical transcripts eliminating the
need for dictation equipment.
(1) Syntel's ownership in New2USA includes 3,500 shares of preferred
stock. The Company's voting control is approximately 20%.
(2) The $500,000 investment in Vianetta Communications consists of a
convertible note, bearing interest at the lower of (a) the highest
permissible rate under applicable law or (b) the rate equal to the
minimum rate established pursuant to Section 1274(d) of the Internal
Revenue Code of 1986. The note is payable on or before the earlier of
April 30, 2001 or the closing of qualified financing.
In addition to the Company's investment in Vianetta, the Company's
president and CEO as well as an outside director have invested $500,000 and
$100,000, respectively, with terms similar to those of the Company.
The Company signed an agreement in April 2000 to provide development
services to Textiles Online Marketplaces with a total contract value of
$3.6 million. As of December 31, 2000, the Company recorded total revenues
of $1.8 million related to this contract.
10
51
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND DEFERRED REVENUE
The following summarizes activity for uncompleted, fixed price, fixed
deliverable projects:
2000 1999
-------- --------
(IN THOUSANDS)
Direct costs incurred on uncompleted, fixed price, fixed
deliverable projects $ 6,159 $ 2,324
Direct margins incurred on uncompleted, fixed price, fixed
deliverable projects 6,049 1,246
-------- --------
Revenues recognized on uncompleted projects 12,208 3,570
Less - billings to date 14,859 4,518
-------- --------
Deferred revenues on fixed price, fixed deliverable projects 2,651 948
Advanced billings on application management projects 1,553 3,558
Other deferred revenues 1,030 --
-------- --------
Total deferred revenue as reported in the balance sheet $ 5,234 $ 4,506
======== ========
Projects with billings in excess of costs and estimated earnings
on uncompleted fixed price, fixed deliverable projects $ 2,832 $ 948
Projects with costs and estimated earnings in excess of billings
on uncompleted fixed price, fixed deliverable projects (181) --
-------- --------
Deferred revenues in fixed price, fixed deliverable projects 2,651 948
======== ========
6. PROPERTY, EQUIPMENT, AND CAPITALIZED DEVELOPMENT COSTS
Cost of property and equipment at December 31, 2000 and 1999 is summarized
as follows (in thousands):
2000 1999
-------- --------
Computer equipment and internal software $ 10,852 $ 9,018
Furniture and equipment 5,447 4,899
Leasehold improvements 1,047 878
Capitalized software and development costs 1,837 1,017
-------- --------
19,183 15,812
Accumulated depreciation and amortization 12,023 9,390
-------- --------
$ 7,160 $ 6,422
======== ========
7. LINE OF CREDIT
The Company has a line-of-credit arrangement with a bank which expires
August 31, 2001, which provides for borrowings up to $40,000,000. Interest
is computed on the basis of the Company's option at (i) the Eurodollar rate
plus the applicable Eurodollar margin, (ii) the bank's prime rate or (iii)
a negotiated rate. The Company also has an additional line of credit with
the same bank which expires August 31, 2001, which provides for borrowings
up to $20,000,000 to finance acquisitions.
11
52
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. LEASES
The Company leases certain facilities and equipment under operating leases.
Current operating lease obligations are expected to be renewed or replaced
upon expiration. Future minimum lease payments under all noncancelable
leases expiring beyond one year as of December 31, 2000 are as follows (in
thousands):
2001 $ 1,978
2002 1,325
2003 1,108
2004 323
2005 -
-------
$ 4,734
=======
Total rent expense charged to operations amounted to approximately $2,359,
$2,221, and $1,869 for the years ended December 31, 2000, 1999, and 1998,
respectively.
9. INCOME TAXES
Income (loss) before income taxes for U. S. and foreign operations was as
follows (in thousands):
2000 1999 1998
-------- -------- --------
U.S $ (5,439) $ 27,052 $ 28,928
Foreign 12,983 4,975 8,127
-------- -------- --------
$ 7,544 $ 32,027 $ 37,055
======== ======== ========
The provision for income taxes is as follows (in thousands):
2000 1999 1998
-------- -------- --------
Currently Payable
Federal $ 6,075 $ 7,965 $ 14,271
State 219 1,190 1,350
Foreign 1,050 340 171
-------- -------- --------
Total currently payable 7,344 9,495 15,792
Deferred
Federal (7,019) 976 (3,002)
State (1,292) 102 (366)
-------- -------- --------
Total deferred (8,311) 1,078 (3,368)
-------- -------- --------
Total provision (benefit)
for income taxes $ (967) $ 10,573 $ 12,424
======== ======== ========
12
53
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. INCOME TAXES (CONTINUED)
The components of the net deferred tax asset are as follows (in thousands):
2000 1999
------- -------
Deferred tax assets
Goodwill impairment and related costs $ 8,373 $ --
Accrued warranty and other expenses 2,516 3,437
Advanced billing receipts 1,125 266
-------- --------
Net deferred tax asset $ 12,014 $ 3,703
======== ========
Balance sheet classification of the net deferred tax asset is summarized as
follows (in thousands):
2000 1999
-------- --------
Deferred tax asset, current $ 5,329 $ 3,703
Deferred tax asset, noncurrent 6,685 --
-------- --------
$ 12,014 $ 3,703
======== ========
Under the Indian Income Tax Act of 1961 (the "Act"), Syntel is eligible for
certain favorable tax provisions including: (i) an exception from payment
of corporate income taxes for up to five years of operation (the "Tax
Holiday"); or (ii) an exception from income taxes on profits derived from
exporting computer software services from India (the "Export Exemption").
During 1999, the Indian government amended the Tax Holiday regulations,
extending the effective period to ten years, from the previous regulation
which permitted a tax holiday of five consecutive years within the first
eight years of operation. Under the new regulations, the Company's Tax
Holidays will expire no earlier than March 31, 2003.
The Company has not recorded deferred income taxes applicable to all of the
undistributed earnings of its foreign subsidiaries. For those earnings
considered to be indefinitely reinvested no provision for U. S. federal and
state income tax or applicable withholding tax has been provided thereon.
The unrecognized taxes on the undistributed earnings are approximately $9.9
million at December 31, 2000.
The following table accounts for the differences between the actual tax
provision and the amounts obtained by applying the statutory U. S. federal
income tax rate of 35% to income before income taxes:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Statutory provision $ 2,640 $ 11,209 $ 12,969
State taxes, net of federal benefit 219 1,190 1,350
Tax-free investment income (676) (531) (344)
Foreign income not subject to tax (4,000) (1,595) (2,470)
Other 850 300 919
-------- -------- --------
Total provision for income taxes $ (967) $ 10,573 $ 12,424
======== ======== ========
13
54
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. EARNINGS PER SHARE
The reconciliations of earnings per share computations for the fiscal years
2000, 1999, and 1998 were as follows:
2000 1999 1998
---------------- --------------- ---------------
PER PER PER
SHARES SHARE SHARES SHARE SHARES SHARE
------ ----- ------ ----- ------ -----
(IN THOUSANDS, EXCEPT PER SHARE EARNINGS)
Basic earnings per share 38,499 $0.21 38,556 $0.56 38,195 $0.65
Net dilutive effect of stock
options outstanding 981 493 1,099
------ ----- ------ ----- ------ -----
Diluted earnings per share 39,480 $0.20 39,049 $0.55 39,294 $0.63
====== ===== ====== ===== ====== =====
As of December 31, 2000 and 1999, stock options to purchase 1,687,313 and
36,000 shares of common stock, respectively, at a weighted average price
per share of $9.69 and $18.70, respectively, were outstanding but were not
included in the computation of diluted earnings per share. The options'
exercise price was greater than the average market price of the common
shares and was antidilutive.
11. STOCK COMPENSATION PLANS
The Company established a stock option plan in 1997 under which 3 million
shares of common stock were reserved for issuance. The dates on which
granted options are first exercisable are determined by the Compensation
Committee of the Board of Directors, but generally vest over a four-year
period from the date of grant. The term of any option may not exceed ten
years from the date of grant.
For certain options granted during 1997, the exercise price was less than
the fair value of the Company's stock on the date of grant and,
accordingly, compensation expense is being recognized over the vesting
period for such difference. For the other options granted in 2000, 1999,
1998 and 1997, the exercise price equaled the market price on the date of
grant, and therefore, no compensation expense was recognized.
The Company has elected to measure compensation cost using the intrinsic
value method, in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Had the fair value of each stock option granted been
determined consistent with the methodology of SFAS 123, the pro forma
impact on the Company's net income and earnings per share would have been
adjusted to the pro forma amounts listed below:
14
55
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. STOCK COMPENSATION PLANS (CONTINUED)
YEAR ENDED DECEMBER 31
------------------------------------
2000 1999 1998
-------- --------- ---------
Net Earnings
As reported $ 7,985 $ 21,454 $ 24,631
Impact of SFAS No. 123 (2,358) (1,534) (976)
------- -------- --------
Pro forma 5,627 19,920 23,655
Earnings per share, pro forma
Basic earnings per share $ 0.15 $ 0.52 $ 0.62
Diluted earnings per share $ 0.14 0.51 0.60
Earnings per share as reported
Basic earnings per share $ 0.21 $ 0.56 $ 0.65
Diluted earnings per share 0.20 0.55 0.63
Under SFAS No. 123, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions for grants in 2000, 1999 and 1998:
2000 1999 1998
------- --------- --------
Estimated fair value of option granted $ 12.41 $ 6.26 $ 8.86
Assumptions
Risk free interest rate 5.00% 6.00% 5.33%
Expected life 5.00 5.00 5.00
Expected volitility 84.09% 68.38% 51.26%
Expected dividends 0.00% 0.00% 0.00%
15
56
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. STOCK COMPENSATION PLANS (CONTINUED)
The following table sets forth changes in options outstanding:
WEIGHTED
NUMBER AVERAGE
OF SHARES AMOUNT PRICE
--------- ----------- --------
Shares under option
Outstanding, January 1, 1998 1,620,870 $ 8,056,380 $ 4.97
Activity during 1998
Granted, price equals fair value 513,500 8,843,933 17.22
Exercised 19,191 64,558 3.36
Forfeited 684,456 8,697,203 12.71
Expired 3,072 15,168 4.94
--------- ----------- ------
Outstanding, December 31, 1998 1,427,651 8,123,384 5.69
Activity during 1999
Granted, price equals fair value 2,052,259 19,061,738 9.29
Exercised 71,896 272,805 3.79
Forfeited 256,807 1,966,161 7.66
Expired 13,970 73,644 5.27
--------- ----------- ------
Outstanding, December 31, 1999 3,137,237 24,872,512 7.93
Activity during 2000
Granted, price equals fair value 618,796 8,068,149 13.04
Exercised 103,214 540,466 5.24
Forfeited 1,158,436 12,125,921 10.47
Expired 8,390 53,116 6.33
--------- ----------- ------
Outstanding, December 31, 2000 2,485,993 $20,221,158 $ 8.04
========= =========== ======
Exercisable, December 31, 2000 629,522
=========
The following table sets forth details of options outstanding at December
31, 2000:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE
Range of Exercise Prices OUTSTANDING LIFE PRICE
------------------------ ----------- ----------- --------
$1.33 94,750 6.25 1.33
$4.67 - $8.00 741,430 6.86 5.54
$8.0625 - $11.00 1,170,656 8.87 8.61
$11.25 - $16.75 464,923 8.2 12.25
$26.38 - $33.19 14,234 8.24 22.69
--------- ---- -----
$1.33 - $33.19 2,485,993 8.18 8.04
========= ==== =====
16
57
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
11. STOCK COMPENSATION PLANS (CONTINUED)
The Company has an employee stock purchase plan which provides for
employees to purchase pre-established amounts as determined by the
compensation committee. The price at which employees may purchase common
stock is set by the compensation committee as not less than the lessor of
85% of the fair market value of the common stock on the NASDAQ National
Market on the first day of the purchase period or 85% of the fair market
value of the common stock on the last day of the purchase period. The
Company has reserved 1.5 million shares of common stock for issuance under
the Company's employee stock purchase plan. Under the terms of the plan,
eligible employees may elect to have up to 5% of their regular base
earnings withheld to purchase company stock, with a maximum contribution
value which may not exceed $21,250 for each calendar year in which a
purchase period occurs. As of December 31, 2000, the Company has $687,367
of employee withholdings, included in accrued payroll and related costs in
the balance sheet to be used to purchase company stock.
12. SEGMENT REPORTING
The Company manages its operations through three segments, Application
Outsourcing, e-business, and TeamSourcing.
Through Application Outsourcing, the Company provides higher-value
applications management services for ongoing management, development and
maintenance of customers' business applications. The Company assumes
responsibility for, and manages selected application support functions for
the customer. Utilizing its developed methodologies, processes and tools,
the Company is able to assimilate the business process knowledge of its
customers to develop and deliver services specifically tailored for that
customer. The Company's Global Service Delivery Model provides the
flexibility to deliver to each client a unique mix of services on-site to
the customer's location, off-site at its U.S. development centers and
offshore at development centers in Mumbai and Chennai, India. The Company
also provided Year 2000 compliance services to customers during 1999 and
1998, all of which were completed before December 31, 1999.
Application Outsourcing engagements are frequently supported by long-term
contractual agreements which generally provide for minimum resource
commitments, if billed on a time-and-materials basis, or a specific set of
deliverables for fixed-price engagements.
Through e-business, the Company provides development and implementation
services for a number of emerging and rapidly growing high technology
applications, including Web development, Data Warehousing, e-commerce, CRM,
Oracle, and SAP; as well as partnership agreements with software providers
including, but not limited to Selectica, Tibco, and Motive. These services
may be provided on either a time-and-material basis on a fixed price basis,
in which the Company assumes responsibility for management of the
engagement.
Through TeamSourcing, the Company provides professional information
technology consulting services directly to customers on a staff
augmentation basis. TeamSourcing services include systems specification,
design, development, implementation and maintenance of complex information
technology applications involving diverse computer hardware, software, data
and networking technologies and practices. TeamSourcing consultants,
whether working individually or as a team of professionals, generally
receive direct supervision from the customer's management staff.
TeamSourcing services are generally invoiced on a time and material basis.
The accounting policies of the segments are the same as those presented in
Note 2. Management allocates all corporate expenses to the segments. No
balance sheet/identifiable assets data is presented since the Company does
not segregate its assets by segment.
17
58
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. SEGMENT REPORTING (CONTINUED)
2000 1999 1998
-------- -------- --------
Revenues
Application Outsourcing $ 89,873 $ 87,311 $105,835
e-business 42,608 33,402 14,614
TeamSourcing 32,327 41,404 47,526
-------- -------- --------
164,808 162,117 167,975
Gross Profit
Application Outsourcing 38,783 40,324 45,516
e-business 13,622 10,789 4,409
TeamSourcing 7,801 11,704 13,079
-------- -------- --------
60,206 62,817 63,004
Sales, general and administrative expenses 34,424 32,814 28,026
Goodwill impairment and related charges 21,650 -- --
-------- -------- --------
Income from operations $ 4,132 $ 30,003 $ 34,978
======== ======== ========
13. GEOGRAPHIC INFORMATION
Total revenues, income before income taxes and identifiable assets by
geographic location were as follows:
2000 1999 1998
--------- --------- ---------
Revenues
United States operations $ 154,661 $ 158,452 $ 166,046
India operations 19,716 10,188 14,400
Europe operations 9,317 3,211 1,632
Singapore operations 794 548 456
Intercompany revenue elimination (19,680) (10,282) (14,559)
--------- --------- ---------
Total revenue $ 164,808 $ 162,117 $ 167,975
========= ========= =========
Income (loss) before income taxes
United States operations $ (5,439) $ 27,052 $ 28,928
India operations 12,580 4,486 7,839
Europe operations 358 645 296
Singapore operations 45 (156) (8)
--------- --------- ---------
Total income before taxes $ 7,544 $ 32,027 $ 37,055
========= ========= =========
Assets, December 31
United States operations $ 101,100 $ 100,495 $ 90,884
India operations 24,170 19,933 12,084
Europe operations 7,345 1,842 985
Singapore operations 278 198 282
Canada 5 -- --
--------- --------- ---------
Total assets $ 132,898 $ 122,468 $ 104,235
========= ========= =========
18
59
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. LITIGATION, CLAIMS AND COMMITMENTS
Legal actions and other claims are pending or may be instituted or asserted
in the future against the Company. Although the amount of liability at
December 31, 2000 with respect to these matters cannot be ascertained, the
Company believes that any resulting liability should not materially affect
future consolidated financial position or results of operations of the
Company. As of December 31, 2000 the Company had a commitment to purchase
41 acres of land for approximately $1.0 million in Pune, India for the
construction of a new development and training center.
19
60
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected financial data by calendar quarter were as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter Full Year
--------- --------- --------- --------- ---------
(in thousands)
2000
Revenues $ 40,506 $ 42,079 $ 41,105 $ 41,118 $ 164,808
Cost of revenues 25,513 26,872 26,001 26,216 104,602
--------- --------- --------- --------- ---------
Gross profit 14,993 15,207 15,104 14,902 60,206
Sales, general and administrative expenses 8,993 8,450 8,348 8,633 34,424
Goodwill impairment and related charges -- 21,650 -- -- 21,650
--------- --------- --------- --------- ---------
Income from operations 6,000 (14,893) 6,756 6,269 4,132
Other income, net 780 800 829 1,003 3,412
--------- --------- --------- --------- ---------
Income before income taxes 6,780 (14,093) 7,585 7,272 7,544
Income tax provision (benefit) 1,628 (6,407) 2,035 1,777 (967)
--------- --------- --------- --------- ---------
Net income (loss) before loss from
equity investments 5,152 (7,686) 5,550 5,495 8,511
Loss from equity investments -- 119 200 207 526
--------- --------- --------- --------- ---------
Net income (loss) $ 5,152 $ (7,805) $ 5,350 $ 5,288 $ 7,985
========= ========= ========= ========= =========
Earnings per share, diluted $ 0.13 $ (0.20) $ 0.14 $ 0.14 $ 0.20
========= ========= ========= ========= =========
Weighted average shares outstanding, diluted 40,168 39,574 39,255 38,923 39,480
========= ========= ========= ========= =========
1999
Revenues $ 38,797 $ 39,654 $ 42,564 $ 41,102 $ 162,117
Cost of revenues 23,942 24,377 26,477 24,504 99,300
--------- --------- --------- --------- ---------
Gross profit 14,855 15,277 16,087 16,598 62,817
Sales, general and administrative expenses 7,245 7,307 9,502 8,760 32,814
--------- --------- --------- --------- ---------
Income from operations 7,610 7,970 6,585 7,838 30,003
Other income, net 532 575 541 376 2,024
--------- --------- --------- --------- ---------
Income before income taxes 8,142 8,545 7,126 8,214 32,027
Income tax provision 2,708 2,657 2,442 2,766 10,573
--------- --------- --------- --------- ---------
Net income $ 5,434 $ 5,888 $ 4,684 $ 5,448 $ 21,454
========= ========= ========= ========= =========
Earnings per share, diluted $ 0.14 $ 0.15 $ 0.12 $ 0.14 $ 0.55
========= ========= ========= ========= =========
Weighted average shares outstanding, diluted 38,886 38,683 39,016 39,631 39,049
========= ========= ========= ========= =========
20
61
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - CONTINUED
Earnings per share for the quarter are computed independently and may not
equal the earnings per share computed for the total year. Certain amounts
in previously issued quarterly financial data have been reclassified to
conform with the full year presentation.
21
62
EXHIBIT INDEX
Exhibit No. Description
3.1 Restated Articles of Incorporation of the registrant
filed as an exhibit to the Registrant's Statement on
Form S-1 dated June 6, 1997, and incorporated herein
be reference.
3.2 Amendment to Articles of Incorporation of the
Registrant dated September 21, 1998 filed as an
Exhibit to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1998 and
incorporated herein by reference.
3.3 Bylaws of the Registrant filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 dated
June 6, 1997, and incorporated herein by reference.
10.1 Credit Authorization Agreement, dated September 13,
1996, between the Registrant and NBD Bank filed as an
Exhibit to the Registrant's Registration Statement on
Form S-1 dated June 6, 1997, and incorporated herein
by reference.
10.2 Letter Agreement between the Registrant and NBD Bank
dated March 11, 1997 amending Credit Authorization
Agreement, filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 dated June 6,
1997, and incorporated herein by reference.
10.3 Letter Agreement between the Registrant and NBD Bank
dated March 25, 1997 amending Credit Authorization
Agreement, filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 dated June 6,
1997, and incorporated herein by reference.
10.4 Letter Agreement between the Registrant and Bank One
dated September 13, 1999 amending the prior Credit
Authorization Agreement, filed as an exhibit to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999 and incorporated herein by
reference.
10.5.1 Letter Agreement between the Registrant and Bank One
dated August 31, 2000 amending the prior Credit
Authorization Agreement.
10.6 Lease, dated August 22, 1996, between WRC Properties,
Inc. and the Registrant, filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 dated
June 6, 1997, and incorporated herein by reference.
10.7 Lease Agreement, dated November 30, 1994, between the
Registrant and NationsBank of North Carolina, NA., as
Trustee for the Public Employees Retirement System of
Ohio, filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 dated June 6,
1997, and incorporated herein by reference.
10.8 First Amendment, dated October 19, 1998, between the
Registrant and Corning Road, L.L.C. (successor to
First Union National Bank of North Carolina as
Trustee, successor to NationsBank), to the Lease
Agreement, dated November 30, 1994, between the
Registrant and NationsBank, filed as an Exhibit to
the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein
by reference.
10.9 Indentures of Lease entered into between the
President of India and Syntel Software Pvt. Ltd. on
various dates in 1992 and 1993 for the Mumbai Global
Development Center and filed
63
as an Exhibit to the Registrant's Registration
Statement on Form S-1 dated June 6, 1997, and
incorporated herein by reference.
10.10 Rental Agreement, dated February 24, 1997, between
Syntel Software Pvt. Ltd. and the Landlords for the
Chennai Global Development Center, filed as an
Exhibit to the Registrant's Registration Statement on
Form S-1 dated June 6, 1997, and incorporated herein
by reference.
10.11 Agreement for Software Programming Services, dated as
of December 31, 1997, between the Registrant and
American Home Assurance Company, filed as an Exhibit
to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998 and incorporated
herein by reference.
10.12 * 1997 Stock Option and Incentive Plan, filed as an
Exhibit to the Registrant's Registration Statement on
Form S-1 dated June 6, 1997, and incorporated herein
by reference.
10.13 * Employee Stock Purchase Plan, filed as an Exhibit to
the Registrant's Registration Statement on Form S-1
dated June 6, 1997, and incorporated herein by
reference.
10.14 Asset Purchase Agreement dated as of September 22,
1999 by Syntel, Inc. and Metier, Inc. filed as an
Exhibit to the Registrant's Current Report on Form
8-K dated October 5, 1999 and incorporated herein by
reference.
21 Subsidiaries of the Registrant.
99.1 Proxy Statement for the Registrant's 2001 Annual
Meeting of Shareholders, filed by the Registrant
pursuant to Regulation 14A and incorporated herein by
reference.