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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, 2001
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.)
525 E, Big Beaver Road, Suite 300, Troy, Michigan 48083
(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 11, 2002, based on the last sale price of $14.68
per share for the Common Stock on the NASDAQ National Market on such date, was
approximately $81,153,785.
As of March 11, 2002, the Registrant had 38,623,575 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the 2002 Annual Meeting of
Shareholders to be held on or about May 17, 2002 are incorporated by reference
into Part III hereof.
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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, incorporated under
Michigan law on April 15, 1980. 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, Vianetta 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
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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 2001 and 2000, e-Business and Applications Outsourcing
services combined accounted for approximately 87% and 80% 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 13% and 20% of revenues, for the years ended December 31, 2001
and 2000, 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
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 2001, based on revenues, were American Express
Corp., Target Corporation, American International Group, Inc., Humana Inc. and
Daimler-Chrysler Corp. 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
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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, 2001,
Syntel's worldwide billable headcount consisted of 1,544 IT consultants
providing professional services to Syntel's customers.
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
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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 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, 2001, approximately 49% of Syntel's U.S. workforce (21% of Syntel's
worldwide workforce) worked under H-1B visas (permitting temporary residence
while employed in the U.S.) and another 12% of the Company's U.S. workforce (5%
of the Company's worldwide workforce) worked under L-1 visas (permitting
inter-company transfers of employees that have been employed with a foreign
subsidiary for at least 6 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 L-1 and 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
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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 68%, 62%, and 68% of revenues for
the years ended December 31, 2001, 2000 and 1999, respectively. For the year
ended December 31, 2001 there were three customers who contributed revenues in
excess of 10% of total consolidated revenues however in 2000 only one customer
contributed revenues in excess of 10% of total consolidated revenues. The
Company's largest customer for 2001 was American Express Inc. whereas for 2000
it was American Home Assurance Company and certain other subsidiaries of
American International Group Inc. (collectively, "AIG"). American Express
accounted for approximately 18% and 9% of revenues for the years ended December
31, 2001 and 2000, respectively whereas AIG accounted for approximately 11% and
19% of revenues for the years ended December 31, 2001 and 2000, respectively.
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 non renewal 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
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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, 2001, the
Company had approximately 27% 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 15%,
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
7
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 companies in the domestic and global arena. In the
domestic area, Syntel competes against Keane, IBM Global Solutions, EDS, and
Computer Sciences Corporation. In the global arena, Syntel is increasingly
competing successfully against a 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 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 $170.8 million in
2001, and the number of worldwide billable employees has increased from 689 as
of
8
December 31, 1993 to 1,544 as of December 31, 2001. The Company established
sales offices in London, England in 1996, Hongkong in 2001, opened sales and
service offices in Singapore in May 1997, Munich, Germany in 2001 and 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 2002. 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
duration 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.
FIXED-PRICE ENGAGEMENTS. The Company undertakes, from time to time, certain
engagements billed on a fixed-price basis, as distinguished from
9
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
36%, 25%, and 22% of total revenues for the years ended December 31, 2001, 2000,
and 1999, 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 co-founder, Chairman,
President, Chief Executive Officer and Director. 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.
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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-off
(before tax benefits) of goodwill and associated restructuring costs. During the
year ended December 31, 2001 the management determined it was appropriate to
write off the value of certain impaired investments and software development
costs related to the Company's incubator investments, resulting in a one-time,
non-cash charge of $4.1 million (net of tax).
LIMITED INTELLECTUAL PROPERTY PROTECTION. The Company's success depends 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
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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), Syntel Y2K
Consultant Online(R), TeamSourcing(R), Architects of e (SM), Digital
Blueprinting-Build-Optimize (SM), Digital Ecosystems (SM), e-sanity (SM), and
Integrating the Global Community (SM) and IntelliCapture (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.
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
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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.
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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 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
14
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 2002. 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 competitive advantage to
perform additional higher-value IT services for that customer.
PROVEN INTELLECTUAL CAPITAL. Over its 22-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
15
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
16
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 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
17
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,
2001 the Company developed and maintained partnership alliances with several
software development firms, including TIBCO, Selectica, Motive, Aspect,
Vianetta, Commerce One, Vigilance, Oracle, BroadVision, Corillian 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 $10.2 million in new
business revenues during the year ended December 31, 2001.
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, 2001 and December 31, 2000, e-Business and Applications
Outsourcing accounted for approximately 87% and 80%, respectively, of the
Company's revenues and
18
TeamSourcing represented approximately 13% and 20%, 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. In the fourth quarter of 2001, more than 84% of
Syntel's revenue came from clients the company has worked with for at least one
year. Syntel has earned a host of quality awards, including the Q-1 rating from
Ford Motor Company as well as "Preferred Supplier" status with Daimler-Chrysler
Corporation receiving the highest rating in each customer service category. The
company has also been recognised by the Target Corporation as a "Best Business
Partner award". Syntel's centers in India earned the highest possible quality
rating of the Software Engineering Institute (SEI) Capability Maturity Model
(CMM) Level 5, making it one of less than 30 American organizations at this
premier level. During 1998, the Company received ISO 9001 Certification. In
2001, Syntel was ranked by Forbes magazine as one of the "Best 200 small
companies in America", for the second time as well as recognition as one of the
VARBusiness 500. 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
19
Software, Aspect, Vianetta, Commerce One, Oracle, BroadVision and Vigilance.
These partnerships will provide the Company with increased opportunities for
market penetration.
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
20
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
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
2001, the Company provided services to over 163 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 2001, include:
21
FINANCIAL SERVICES MANUFACTURING RETAIL
- ------------------ ------------- ------
World Bank Cummins Engine Co Borders
American Express Daimler-Chrysler Corp Dayton Hudson Co.
American Int'l Group, Inc. Dell Computer Ascendant Solutions
Cable & wireless Eaton Corp
Blue Cross/Blue Shield Ford Motor Co.
JP Morgan Chase General Motors Corp INSURANCE
Bank One Hewlett-Packard Corp. ----------
Deloitte & Touche Honeywell American Int'l Group Inc.
Humana New Venture Gear Kemper Insurance
Kemper Insurance Nike CNA Commercial Lines
Kent Bank State of FL Nekema
Prudential Insurance Comview Visual Systems Encompass
VISA Special Metals Corp IBM
Wells Fargo Delta System
Conseco Forest Express HEALTH CARE
Corillian Corporation TekTronix -----------
Union Carbide Humana
BPAD-i HCA
Xerox Corp. Anderson Consulting
MSXI Inc Glaxo Wellcome Inc.
INFORMATION/
TRANSPORTATION/Aviation COMMUNICATIONS GOVERNMENT
- -------------- -------------- ----------
Allied Van Lines Carlson Marketing New Mexico
Airtours International Texyard.com West Virginia
Norfolk Southern Co. GTE (Verizon)
CFI Interpath Communications
United Airlines Avaya
Going Places Ericsson
Time Customer Services
UTILITIES Motive Communications Inc.
- --------- TIBCO Software Inc
Detroit Edison Datanomics
Pacific Corp
Portland Gen. Elc. Co.
22
For the years ended December 31, 2001, 2000, and 1999, the Company's
top ten customers accounted for approximately 68%, 62%, and 68% of the Company's
revenues, respectively. For the year ended December 31, 2001 three customers
contributed revenues in excess of 10% of total consolidated revenues. The
Company's three largest customers in 2001 were American Express Corp., Target
Corporation (formerly Dayton Hudson Group) and American International Group Inc.
contributing approximately 18%, 11% and 11% respectively, of total consolidated
revenues. 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.
AMERICAN EXPRESS. The Company's largest customer is American Express.
In 1999, Syntel was selected as one of four Global Information Systems
outsourcing providers for a global financial services corporation in three of
its four global regions. This contract award was the result of several
competitive proposal rounds.
This company required an approach to providing Global Systems Development
Subcontracting and Production Support Services Outsourcing. Specifically, Syntel
was challenged with efficiently delivering:
- - Application management and outsourcing services for PREDOMINANTLY
MAINFRAME LEGACY SYSTEMS
- - Project management and application development services for NEW SYSTEMS
DEVELOPMENT
- - ACCESS TO LEADING-EDGE TECHNOLOGY TALENT either within its existing
legacy environments or emerging technology areas such as client/server
and web-based technologies
Syntel's approach to building an enduring relationship with this customer was to
offer a flexible relationship to enable us to evaluate the best fit for
technical solutions. As an expert in developing and delivering world-class IT
solutions, Syntel is collaborating with this customer to ensure that critical
milestones are met and the project and support assignments are completed on time
and on budget. We ensure this by applying:
23
- - A best-in-class Global Delivery Service that optimally deploys
scaleable on-site, off-site and offshore resources to the solution mix
- - Best-fit consultants delivered by our Global Recruiting Model
- - State-of-the-art project management, methodologies, tools, and quality
programs
- - Proven experience in executing similar engagements
To jump start the relationship, Syntel participated in a series of "road shows"
to introduce Syntel and the other outsourcing vendors to the company IT managers
across the globe. Syntel's demonstrated quality and commitment during these road
shows was ranked the highest of the participants.
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.
24
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 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
104 persons at December 31, 2001, 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 1,112 persons as of December 31, 2001, 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 eight years and has a capacity of approximately 1,150 people.
The Chennai Training and Global Development Center employed
approximately 489 persons as of December 31, 2001. The Chennai facility has a
capacity of over 600 persons and has been in operation for approximately four
years.
25
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 2002. 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; Portland, Oregon;
Chicago, Illinois; Dallas, Texas; Minneapolis, Minnesota; New York, New York;
Troy, Michigan; San Ramon, California; Santa Fe, New Mexico; Boston,
Massachusetts; Nashville, Tennessee; London, England; Hongkong; Munich, Germany
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.
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.
26
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, 2001 the Company had 2,691 full time
employees. Of this total, the U.S. operations employed 1,162 persons, including
1,010 IT professionals; the Indian operation employed 1,377 persons, including
1,227 IT professionals; and the Company employed an additional 152 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
27
and senior consultants with over 20 years of IT experience. The Company has
personnel who are experienced in mainframe, client/server and open systems
technologies, and proficient in a variety of computer programming languages,
software tools, database management systems, networks, processes, methodologies,
techniques and standards.
The Company has implemented a management structure and human resources
organization intended to maximize the 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.
28
The Company re-skilled 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 worldwide
basis. The 12 to 18 month program consists of lecture style classroom work,
computer based training, and on the job apprenticeships. The program trains
students on industry "best practices" as well as Syntel specific methods and
processes. Program participants must receive certification from the Project
Management Institute ("PMI") before receiving Syntel branded certification.
The Company has been accepted as a Microsoft Certified Solution Partner
and sponsors the Microsoft Certification Program 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 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.
29
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.
30
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................ 49 Chairman, President and
Chief Executive Officer
Neerja Sethi................ 47 Vice President, Corporate
Affairs and Director
Atul Kunwar................. 38 Chief Operating Officer
Prakash "Ken" Kenjale....... 52 Chief Technology Officer
Daniel M. Moore............. 47 Chief Administrative Officer
and Secretary
Sanjay Raizada.............. 37 General Manager, North West
Division
Rajiv Tandon ............... 43 Senior Vice President, North
American Operations
Marlin Mackey .............. 51 Senior Vice President,
Global Relationships
Baru Rao ................... 41 Chief Operating Officer, Asian
Pacific Operations
- ------------------------------------------------------------------------------
Bharat Desai is a co-founder of the Company and has served as its
President and Chief Executive Officer and as a Director since its formation in
1980. Mr. Desai became Chairman of the Board in February 1999. Mr. Desai is
spouse of Ms. Sethi.
Neerja Sethi is a co-founder of the Company and has served as a Vice
President, Corporate Affairs and as a Director since its formation in 1980. Ms.
Sethi is the spouse of Mr. Desai.
Atul Kunwar joined the Company in July, 2001 as Chief Operating
Officer. Prior to joining Syntel, Mr. Kunwar served as President and Chief
Executive Officer of Bharat BT Internet Ltd., a joint venture involving British
Telecom, from May 2000 to July, 2001. Before joining Bharat BT Internet, Mr.
Kunwar was Managing Director of 3Com India, from October 1998 to May 2000. Prior
to 3Com, Mr. Kunwar held various assignments at the HCL Group of Companies from
September 1996 to September 1998.
Prakash "Ken" Kenjale has served the Company as Chief Technology
Officer since July 1995.
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.
31
Sanjay Raizada joined the Company in September 1999 as part of the
acquisition of img,Inc. He has served as General Manager, img Division from Sept
1999 to April 2001 and General Manager, Northwest Division from April 2001 to
the present. 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 has served as Senior
Vice President, North American Operations since April 2001. He 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
through April 1998, Mr. Tandon was Director of Operations for the AIG account.
Marlin Mackey has served the Company as Senior Vice President, Global
Relationships since April 2001. He 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.
Baru Rao has served the Company as Chief Operating Office, Asian
Pacific Division since April 2001. He has also served as Chief Executive
Officer, Syntel (India) Limited since joining the Company in 1997.
32
ITEM 2. PROPERTIES.
The Company's headquarters and principal administrative, sales and
marketing, and system development operations are located in approximately 14,597
square feet of leased space in Troy, Michigan. The Company occupies these
premises under a lease expiring in May, 2007. 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 46,044 square feet of office space in
Mumbai, India, under six leases expiring on various dates from October 13, 2002
to October 7, 2006. 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 2002. 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.
33
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, 2001.
34
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 to
2001. 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
First Quarter, 2001 7.813 5.000
Second Quarter, 2001 9.480 6.875
Third Quarter, 2001 11.000 8.200
Fourth Quarter, 2001 13.810 8.670
(b) There were approximately 272 shareholders of record and 4,600
beneficial holders on March 21, 2002.
(c) The Company did not pay any cash dividends during the years ended
December 31, 2001, 2000 and 1999. 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.
35
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,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands, except per share data)
STATEMENT OF INCOME DATA
Revenues $170,777 $164,808 $162,117 $167,975 $124,338
Cost of revenues 105,437 104,602 99,300 104,971 87,584
Gross Profit 65,340 60,206 62,817 63,004 36,754
Selling, general and administrative
expenses 34,522 34,424 32,814 28,026 23,547
Capitalized development cost impairment 1,624 - - - -
Goodwill impairment and related charges - 21,650 - - -
Income from operations 29,194 4,132 30,003 34,978 13,207
Other income 3,780 3,412 2,024 2,077 730
Income before income taxes 32,974 7,544 32,027 37,055 13,937
Income tax provision (benefit) (1) 8,636 (967) 10,573 12,424 3,517
Net income before loss from equity
Investments 24,338 8,511 21,454 24,631 10,420
Loss from equity investments (net of 3,893 526 - - -
tax)
Net income $20,445 $7,985 $21,454 $24,631 $10,420
Net income per share, diluted $0.52 $0.20 $0.55 $0.63 $0.27
Pro forma net income (2) $10,196
Pro Forma net income per share $0.26
=====
Weighted average shares outstanding,
Diluted 39,016 39,480 39,049 39,294
====================================================
Pro forma weighted average shares
Outstanding, diluted 39,083
=======
(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.
36
(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.
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
BALANCE SHEET DATA
Working capital $108,240 $77,894 $64,893 $58,862 $35,346
Total assets 152,399 132,898 122,468 104,235 65,232
Long-term debt - - - - -
Total shareholders' equity 116,996 96,683 90,361 64,147 39,585
OTHER DATA
Billable headcount in U.S. 987 994 1,114 1,135 1,260
Billable headcount in India 419 511 225 413 478
Billable headcount at
other locations 138 118 28 33 8
----------------------------------------------------------------------
Total billable headcount 1,544 1,623 1,367 1,581 1,746
======================================================================
==========================================================================================================
37
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 year ended December 31, 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, 2001, 2000, and 1999:
Percent of Total Revenues
2001 2000 1999
---- ---- ----
Applications Outsourcing 63% 54% 54%
E-business 24 26 21
TeamSourcing 13 20 25
-- -- --
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 2001, 2000 and 1999 have
been on a fixed-price basis. For the years ended December 31, 2001, 2000 and
1999, fixed-price revenues comprised
38
approximately 47%, 32% and 37% 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 1999, 2000 and 2001 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 and
2001. For the years ended December 31, 1999, 2000 and 2001, fixed price revenues
comprised approximately 17% 30% and 26% of total e-business revenues,
respectively. Syntel recognizes revenues from fixed-price engagements on the
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.
39
The Company has performed a significant portion of its employee
recruiting in other countries. As of December 31, 2001, approximately 49% of
Syntel's U.S. workforce (21% of Syntel's worldwide workforce) worked under H-1B
temporary work visas in the U.S. and another 12% of the Company's U.S. workforce
(5% 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 6 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 2002. 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 68%, 62%, and 68% of revenues for the years ended
December 31, 2001, 2000, and 1999,. The Company does not believe there is any
material collectibility exposure among its top ten customers.
For the year ended December 31, 2001 three customers contributed
revenues in excess of 10% of total consolidated revenues. The three largest
customers for 2001 were American Express Corporation, Target Corporation
(formerly Dayton Hudson Group ) and American International Group Inc.
(Collectively, "AIG") contributing approximately 18%, 11% and 11%, respectively,
of total consolidated revenues. For the years ended
40
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. 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. During February 2002, the Indian government made certain changes in tax
regulations which will restrict the said exemption to the extent of 90% of
export profits generated by Syntel India, beginning April 2002. 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 15% under the recent changes made by Indian government, under
Indian tax laws and will be required to pay U.S. corporate income taxes on such
earnings.
41
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,
-----------------------------------------
2001 2000 1999
----- ----- -----
Revenues ................................ 100.0% 100.0% 100.0%
Cost of revenues ........................ 61.7 63.5 61.3
----- ----- -----
Gross profit ............................ 38.3 36.5 38.7
Selling, general and
administrative expenses ............... 20.2 20.9 20.2
Goodwill impairment and
related charges ....................... - 13.1 -
Capitalized development
cost impairment ....................... 1.0 - -
----- ----- -----
Income from operations .................. 17.1% 2.5% 18.5%
Following is selected segment financial data for the years ended December 31,
2001, 2000, and 1999. The Company does not allocate assets to specific segments.
2001 2000 1999
---- ---- ----
(In Thousands)
Revenues
Applications Outsourcing $107,890 $89,873 $87,311
e-business 40,375 42,608 33,402
TeamSourcing 22,512 32,327 41,404
----------------------------------------------------
$170,777 $164,808 $162,117
Gross Margin
Applications Outsourcing $46,225 $38,783 $40,324
e-business 14,276 13,622 10,789
TeamSourcing 4,839 7,801 11,704
----------------------------------------------------
$65,340 $60,206 $62,817
Gross Margin %
Applications Outsourcing 42.8% 43.2% 46.2%
e-business 35.4% 32.0% 32.3%
TeamSourcing 21.5% 24.1% 28.3%
----- ----- -----
38.3% 36.5% 38.7%
Sales, general and administrative expenses $34,522 $34,424 $32,814
Goodwill impairment and related charges $ -- $21,650 $ --
Capitalized development cost impairment $ 1,624 $ -- $ --
Operating margin $29,194 $ 4,132 $30,003
====================================================
42
The Applications Outsourcing segment included Year 2000 remediation engagements
for the year ended December 31, 1999. All Year 2000 engagements were completed
before December 31, 1999. Excluding the impact of Year 2000 remediation
engagements, Applications Outsourcing revenues for the year ended December 31,
1999 would have been $74.2 million and gross margins would have been $31.5
million
COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND 2000
REVENUES. Total consolidated revenues increased from $164.8 million in 2000 to
$170.8 million in 2001, representing a 3.6% increase. The Company's total
revenues were more dependent upon its largest customers in 2001 as compared to
2000. The top five customers accounted for, 53% of the total revenues in 2001 up
from 47% of the total revenues in 2000. Additionally, the top 10 customers
accounted for 68% of the revenues in 2001 as compared to 62% in 2000. The
worldwide billable headcount decreased to 1,544 as of December 31, 2001 compared
to 1,623 as of December 31, 2000. The decreased headcount was due principally to
decreased staffing in e-business engagements and Applications Outsourcing
engagements, along with the managed rampdowns of the TeamSourcing segment.
APPLICATIONS OUTSOURCING REVENUES. Applications Outsourcing revenues increased
from $89.9 million, or 54% of total revenues in 2000, to $107.9 million, or 63%
of total revenues in 2001. The $18 million increase is attributable principally
due to net growth in new engagements, contributing approximately $33.4 million;
partially offset by $15.4 million in lost revenues as a result of project
completions.
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 57.2% of Applications Outsourcing revenues in 2001, from 56.8% in
2000. The 0.4% increase in cost of revenues as a percent of revenues was
attributable primarily to a decrease in utilization levels and release of
warranty reserves in 2000, no longer deemed necessary, associated with Y2K
remediation engagements, with no material corresponding release in 2001,
contributing approximately 3.5% and 0.1%, respectively, to the increase in
direct costs as a percentage of revenue. These increased costs were largely
offset by an increase in the higher margin offshore component of the overall
services contributing approximately 3.2%.
43
E-BUSINESS REVENUES. e-Business revenues decreased to $40.4 million in 2001, or
24% of total consolidated revenues, from $42.6 million in 2000, or 26% of total
consolidated revenues. The $2.2 million decrease was attributable principally to
loss of revenue from completed engagements and discontinued Metier Division
contributing approximately $13.6 million and $5.9 million respectively; largely
offset by new business revenues of approximately $17.3 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 decreased slightly to 64.6% of
e-business revenues in 2001, from 68.0% in 2000. The 3.4% decrease in cost of
revenues as a percent of revenues was attributable principally to improved
average billing rates in comparison to average compensation rates.
TEAMSOURCING REVENUES. TeamSourcing revenues decreased from $32.3 million, or
20% of total consolidated revenues in 2000, to $22.5 million, or 13% of total
consolidated revenues in 2001. The $9.8 million decrease in TeamSourcing
revenues was attributable principally to a decrease in U.S. based billable
consultants on various engagements, as a result of conscious decision by the
management to reduce organizational focus away from this segment.
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 78.5% of TeamSourcing
revenues in 2001, from 75.9% in 2000. The 2.6% increase in cost of revenues as a
percent of revenues was attributable principally to lower utilization due to the
softness in the economy.
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, 2001,
sales, general, and administrative expenses increased to $34.5 million, or 20.2%
of revenues, from $34.4 million, or 20.9% of revenues for the year ended
December 31, 2000. The $0.1 million increase was attributable principally to
increased professional fees and an allowance for doubtful accounts in the US of
approximately $0.7 million and $1.2 million, respectively; increased allowance
for doubtful debts in UK and Singapore of approximately $0.2 million and $0.1
million
44
respectively, as well as increased facility costs of approximately $0.3 million
in Germany. This increase was largely offset by the savings in discontinued
Metier Division administrative costs and Metier Division goodwill amortization,
contributing approximately $1.8 million and $0.6 million to the decrease in
selling, general, and administrative costs, 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
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.
45
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%.
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
46
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.
QUARTERLY RESULTS OF OPERATIONS
Note 16 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, 2000 and ended December 31, 2001. 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.
47
LIQUIDITY AND CAPITAL RESOURCES
The Company generally has financed its working capital needs through
operations. Both the Mumbai and Chennai expansion programs, as well as the 1999
acquisitions of Metier, Inc. and IMG, Inc. were financed from internally
generated funds. Additionally, construction of the development center in Pune,
India will also be financed through internally generated funds.
The Company's cash and cash equivalents consist primarily of
certificates of deposit, corporate bonds and treasury notes. A large majority
of such amounts are held by Bank One for which a triple A rated letter of
credit has been provided. Remaining amounts are held by various banking
institutions including other U.S.-based and local India-based banks.
Net cash provided by operating activities was $34.6 million, $19.2
million, $17.2 million for the years ended December 31, 2001, 2000 and 1999
respectively. The number of days sales outstanding in accounts receivable was
approximately 65 days 68 days, and 52 days, as of December 31, 2001, 2000 and
1999, respectively.
Net cash used in investing activities was $20.7 million, $7.5 million
and $18.2 million for the years ended December 31, 2001, 2000 and 1999
respectively.
Net cash used in investing activities in 2001 of $20.7 million included
$32.9 million for purchase of available-for-sale securities, $2.0 million for
capital expenditures, consisting principally of PC's, capitalized development
costs, and communications equipment; and $1.4 million in equity and other
investments, including $1.0 million in Nekema, $0.1 million in New2USA.com, $0.2
million in utilitiesmart.com and $0.1 million in Convergent Applications,
partially offset by $15.6 million from the proceeds from sale of available for
sale securities.
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 provided by financing activities was $0.5 million in 2001, due
principally to the proceeds from the issuance of stock options and shares issued
from the stock purchase plan of $2.6 million, offset by repurchase of 218,700
shares of common stock for $2.1 million
48
Net cash used in financing activities was $1.4 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 $1.7 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.
The Company had a line of credit with Bank One, which provided for
borrowings up to $40.0 million. The above line of credit expired on August 31,
2001. Before the expiration of the line of credit, in view of the adequacy of
the liquid cash available, the Company has extended the line of credit providing
for borrowings only up to $20.0 million. The line of Credit expires on August
31, 2002. 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, 2001, there was no indebtedness
outstanding under the line of credit. The letters of credit bear 1% fee of the
face value payable annually in advance. Borrowings under the line of credit bear
interest 1) a formula approximating the bank's Eurodollar rate plus applicable
margin of 1.25% or 2) the bank's prime rate plus 1.25%.
In addition to the bank line of credit, the Company had a $20.0 million
facility with Bank One to finance acquisitions which also expired on August 31,
2001. The Company had not borrowed any amounts under this facility. In view of
the adequacy of the liquid cash the company has not extended the above line of
credit.
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.
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
- Government Regulation of Immigration
- Variability of Quarterly Operating Results
- Customer Concentration; Risk of Termination
- Exposure to Regulatory and General Economic Conditions in India
- Intense Competition
- Ability to Manage Growth
- Fixed-Price Engagements
- Potential Liability to Customers
- Dependence on Principal
- Risks Related to Possible Acquisitions
- Limited Intellectual Property Protection
49
CRITICAL ACCOUNTING POLICIES
Revenue recognition is the most significant accounting policy for the Company.
The Company recognizes revenue from time and material contracts as services are
rendered and costs are incurred. Revenue on 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets".
SFAS 141 replaces Accounting Principles Board Opinion 16, "Business
Combinations" and requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. SFAS 142 replaces APB
17, "Intangible Assets". In accordance with SFAS No. 141 and 142, effective for
the Company's year ended December 31, 2002, as a replacement to amortization of
goodwill and intangible assets with indefinite lives, the Company will evaluate
goodwill and intangible assets for impairment annually. The Company will adopt
the standards as of January 1,2002. As of December 31, 2001, net goodwill was
approximately $906000. Adoption of the standard is not expected to have a
material effect on the financial statements.
In February 2002, the Emerging Issues Task Force issued Topic D-103, "Income
Statement Characterization of Reimbursements Received for "Out-of-Pocket"
Expenses", which requires reimbursements of out-of-Pocket expenses to be
presented as revenues and the associated costs to be presented as expenses. The
statement will likely result in increased revenues and corresponding expenses
for the Company, however, the Company is currently reviewing the statement to
determine the full impact.
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.
50
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 58 of this Report and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
51
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the section entitled "Election of
Directors" in the Registrant's Proxy Statement for the Annual Shareholders'
Meeting to be held on or about May 17, 2002 (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 AND
RELATED STOCK HOLDER MATTERS.
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.
Not applicable.
52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) & (d) 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 56 of this Report, which is
incorporated herein by reference.
(b) No report on form 8-K was filed during the fourth quarter of the
year ended December 31, 2001.
(c) 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
by 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 Line of Credit Agreement, dated August 31, 2001,
between the Registrant and Bank One, Michigan.
10.2 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.
10.3 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.
53
10.4 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.
10.5 Indentures of Lease entered into between the
President of India and Syntel (India) Ltd. (formerly
known as 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.
10.6 Rental Agreement, dated February 24, 1997, between
Syntel India Ltd. (formerly known as 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.
10.7* 1997 Stock Option and Incentive Plan, (Amended and
Restated).
10.8* 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.
54
21 SUBSIDIARIES OF THE REGISTRANT.
99 Proxy Statement for the Registrant's 2002 Annual
Meeting of Shareholders, filed by the Registrant
pursuant to Regulation 14A and incorporated herein by
reference.
55
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 25,2002 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
President and Chief Executive Officer
- ---------------------- (Principal Executive Officer) March 25,2002
Bharat Desai
Interim Chief Financial Officer March 25,2002
- ---------------------- (Principal Financial and Accounting Officer)
Sanjay Chheda
Director and Vice President, March 25,2002
- ---------------------- Corporate Affairs
Neerja Sethi
Director March 25,2002
- ----------------------
Paritosh K. Choksi
Director March 25,2002
- ----------------------
Douglas Van Houweling
Director March 25,2002
- ----------------------
George R. Mrkonic
56
- --------------------------------------------------------------------------
CONTENTS
PAGE(s)
REPORT OF INDEPENDENT ACCOUNTANTS.........................................58
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets...............................................59
Consolidated Statements of Income.........................................60
Consolidated Statements of Shareholders' Equity...........................61
Consolidated Statements of Cash Flows.....................................62
Notes to Consolidated Financial Statements.............................63-82
57
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, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001 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
Detroit, Michigan
March 25, 2002
58
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
ASSETS 2001 2000
--------- ---------
Current assets:
Cash and cash equivalents $ 88,010 $ 73,478
Investments, marketable securities 17,203 -
Accounts receivable 30,982 31,194
Advanced billings and other current assets 7,448 9,437
--------- ---------
Total current assets 143,643 114,109
Property and equipment 19,041 19,183
Less accumulated depreciation 13,823 12,023
--------- ---------
Property and equipment, net 5,218 7,160
--------- ---------
Goodwill, net of amortization 906 1,026
Equity and other investments - 3,918
Deferred income taxes, non-current 2,632 6,685
--------- ---------
$ 152,399 $ 132,898
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 4,282 $ 4,801
Accrued payroll and related costs 12,984 10,909
Income taxes payable 3,702 6,105
Accrued warranty costs 150 150
Accrued liabilities 4,661 4,948
Accrued Metier costs 4,173 4,113
Deferred revenue 5,451 4,948
--------- ---------
Total current liabilities 35,403 36,215
SHAREHOLDERS' EQUITY
Common stock, no par value per share, 100 million shares authorized; 38,689
million and 38,499 million shares issued and outstanding at
December 31, 2001 and 2000, respectively 1 1
Additional paid-in capital 38,883 38,345
Accumulated other comprehensive loss (1,577) (907)
Retained earnings 79,689 59,244
--------- ---------
Total shareholders' equity 116,996 96,683
Total liabilities and shareholders' equity $ 152,399 $ 132,898
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
59
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
2001 2000 1999
--------- --------- ---------
Revenues $ 170,777 $ 164,808 $ 162,117
Cost of revenues 105,437 104,602 99,300
--------- --------- ---------
Gross profit 65,340 60,206 62,817
Selling, general and administrative expenses 34,522 34,424 32,814
Capitalized development cost impairment 1,624 - -
Goodwill impairment and related charges - 21,650 -
--------- --------- ---------
Income from operations 29,194 4,132 30,003
Other income, principally interest 3,780 3,412 2,024
--------- --------- ---------
Income before income taxes 32,974 7,544 32,027
Income tax (provision) benefit (8,636) 967 (10,573)
--------- --------- ---------
Net income before loss from equity investments 24,338 8,511 21,454
Loss from equity investments, net of tax of
$2,000 in 2001 3,893 526 -
--------- --------- ---------
Net income $ 20,445 $ 7,985 $ 21,454
========= ========= =========
EARNINGS PER SHARE
Basic $ 0.53 $ 0.21 $ 0.56
Diluted $ 0.52 $ 0.20 $ 0.55
The accompanying notes are an integral part of the consolidated financial
statements.
60
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
- --------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------- PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS LOSS EQUITY
------ ------ ------- -------- ---- ------
FOREIGN
CURRENCY
UNREALIZED TRANSLATION
GAIN ADJUSTMENT
---- ----------
BALANCE, JANUARY 1, 1999 38,195 $ 1 $ 34,784 $ 29,805 - $ (443) $ 64,147
Net income 21,454 21,454
Translation adjustments (133) (133)
--------
Total other comprehensive 21,321
income, net of tax
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 other comprehensive 7,654
income, net 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
Net income 20,445 20,445
Unrealized gain on investments, 33 33
net of tax
Translation adjustments (703) (703)
--------
Total other comprehensive 19,775
income, net of tax
Common stock repurchases (219) (2,060) (2,060)
Employee stock purchase plan 175 1,143 1,143
Exercised stock options 234 1,414 1,414
Compensation expense related to
Stock options 41 41
------ -------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2001 38,689 $ 1 $ 38,883 $ 79,689 $ 33 $ (1,610) $116,996
====== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
61
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
TWELVE MONTHS
ENDED DECEMBER 31
--------------------------------
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income $ 20,445 $ 7,985 $ 21,454
-------- -------- --------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,800 2,633 2,353
Goodwill 76 655 662
Realized losses on sales of available-for-sale 72 - -
securities
Deferred income taxes 4,468 (8,311) 1,078
Compensation expense related to
stock options 41 134 105
Expense related to common stock issued to - - 111
directors
Loss on equity investments 752 526 -
Goodwill impairment and related charges - 21,650 -
Changes in assets and liabilities net of effects from
Purchase of Metier Inc & IMG Inc in 1999:
Accounts receivable, net (602) (7,394) 4,934
Advance billing and other assets 1,574 1,711 (77)
Accrued payroll and other liabilities (984) (1,137) (7,438)
Deferred revenues 217 728 (5,936)
Capitalized development cost impairment 1,624 - -
Investment impairment 5,141 - -
-------- -------- --------
Net cash provided by operating activities 34,624 19,180 17,246
-------- -------- --------
Cash flows used in investing activities:
Property and equipment expenditures (2,071) (3,785) (2,496)
Equity and other investments (1,386) (3,730) -
Purchase of available-for-sale securities (32,952) - -
Proceeds from sales of available-for-sale
securities 15,677 - -
Payments for purchases of Metier, Inc. and IMG, Inc
Net of cash acquired - - (15,738)
-------- -------- --------
Net cash used in investing activities (20,732) (7,515) (18,234)
-------- -------- --------
Cash flows used in financing activities:
Net proceeds from issuance of stock 2,557 1,670 1,036
Common stock repurchases (2,060) (3,136) (1,097)
-------- -------- --------
Net cash used in financing activities 497 (1,466) (61)
Effect of foreign currency exchange rate changes
on cash 143 (332) -
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 14,532 9,867 (1,049)
Cash and cash equivalents, beginning of period 73,478 63,611 64,660
-------- -------- --------
Cash and cash equivalents, end of period $ 88,010 $ 73,478 $ 63,611
======== ======== ========
Cash paid during the period for income taxes $ 5,356 $ 4,564 $ 9,993
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
- --------------------------------------------------------------------------------
62
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BUSINESS
Syntel, Inc. and Subsidiaries (the "Company") provide information
technology services such as programming, systems integration,
outsourcing and overall project management. The Company provides
services to customers primarily in the financial, manufacturing,
transportation, retail, and information/communication industries, as
well as to government entities. The Company's reportable operating
segments consist of Applications Outsourcing, e-business, and
TeamSourcing.
Through Applications Outsourcing, the Company provides higher-value
outsourcing services for ongoing management, development and
maintenance of customers' business applications. In most Application
Outsourcing engagements, the Company assumes responsibility for the
management of customer development and support functions. Application
Outsourcing engagements are generally supported by multiyear contracts.
As a percentage of total consolidated revenues, Application Outsourcing
revenues remained at 63% of total revenues during 2001 and 54% during
both 2000 and 1999.
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 24%, 26% and 21% of total consolidated
revenues in 2001, 2000, and 1999, respectively.
Through TeamSourcing, the Company provides professional information
technology services directly to the customer. TeamSourcing contracts
are generally revocable by the customer without penalty.
63
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
During the year ended December 31, 2001 three customers contributed
revenues in excess of 10% of total consolidated revenues. The Company's
three largest customers in 2001 were American Express Corp., Target
Corporation (formerly Dayton Hudson Group) and American International
Group Inc. Revenues from these customers were approximately
$31,112,400, $18,954,100 and $18,598,500 contributing approximately
18%, 11% and 11% respectively, of total consolidated revenues during
2001. At December 31, 2001 approximately 3.4%, 12.3% and 10.8%,
respectively of accounts receivable, net, were from these customers.
All revenues from these customers were generated in the Applications
Outsourcing segment.
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, was
from this customer. All revenues from this customer were generated in
the Applications Outsourcing segment.
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 (India)
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 Inc., ("Syntel
Canada") a Canada limited liability company, Syntel Deutschland GmbH,
("Syntel Germany") a Germany limited liability Company, Syntel Hong
Kong Ltd. ("Syntel Hong Kong") a Hong Kong limited liability Company,
Syntel Mauritius Limited ("Syntel Mauritius") a Mauritius 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
64
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. At December 31, 2001 and 2000,
approximately $60,027 and $40,723, respectively, represent corporate
bonds and treasury notes held by Bank One, for which a triple A rated
letter of credit has been provided by the bank. The remaining cash and
cash equivalents are certificates of deposit, corporate bonds, and
treasury notes held by various banking institutions including other
U.S.-based and local India-based banks.
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.
INVESTMENTS, MARKETABLE SECURITIES
The Company's marketable mutual funds have been classified as
available-for-sale and are carried at estimated fair value. Fair value
is determined based on quoted market prices. Unrealized gains and
losses on available-for-sale securities are reported as a separate
component of shareholders' equity. Net realized gains or losses
resulting from the sale of these investments and losses resulting from
decline in fair values of investments that are other than temporary
declines, are included in other income. The cost of securities sold is
determined on the weighted average method. Dividend income is
recognized when earned.
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
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
65
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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, be capitalized. The Company
capitalized $0.9 million and $1.0 million of Web site development costs
during the year ended December 31, 2001 and 2000, respectively. Such
costs are included in Capitalized Software and Development Costs.
GOODWILL
Goodwill originated from the acquisition, in 1999, of two entities, IMG
and Metier. The IMG 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.
66
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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 the
cost 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.
The operating results of both Metier and IMG have been included in the
consolidated results since July 1, 1999, their respective effective
dates.
67
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENTS, MARKETABLE SECURITIES
Investment in marketable securities included the following
at December 31, 2001 (in thousands):
Total
Unrealized Carrying
Cost Gain, net Value
-------- ---------- --------
Mutual Funds $ 17,170 $ 33 $ 17,203
The gross realized gains on sale of available-for-sale investments
approximated $ 69 for the year ended December 31, 2001. The gross
realized losses on sale of available-for-sale investments approximated
$141 for the year ended December 31, 2001. The dividend income on
certain mutual funds approximated $ 767 for the year ended December 31,
2001.
68
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. INVESTMENTS
At December 31, 2001, the Company had the following investments:
Accounting Investment balance
Investment Ownership Method Prior to impairment Description of Business
---------- --------- ----------- ------------------- -----------------------
New2USA (1) Equity $860,626 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) <5% Cost $500,000 Computerized transcriptions of
medical transcripts
eliminating the
need for dictation equipment.
Utilitysmart.com 6.5% Cost $200,000 Business to Business and
Business to consumer e-business
Nekema.com 0.7% Cost $1,000,000 A web base market place for
providing e-commerce
technology to the business
requirements of Insurance and
Finance companies
Convergent Corporation 13% Cost $62,500 Supplier of Advance Billing
System to Communication
networks
(1) Syntel's ownership in New2USA includes 3,500 shares of
preferred stock, representing approximately 97% ownership.
This ownership percentage does not represent the Company's
economic control, which 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 was
payable on or before the earlier of April 30, 2001 or the
closing of qualified financing. During 2001, the note was
converted into equity shares.
For the Year ended December 31, 2001, the Company recorded losses, net
of taxes of $752,000 on it's equity investments.
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. During the year ended December 31, 2001 and 2000 the
Company recorded total revenues of $0.7 million and $1.8 million,
respectively.
69
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In addition to the Company's investment in Utilitismart.com, the
Company's President and CEO has invested $ 100,000 with terms similar
to those of the Company.
The Company signed an agreement in March, 1999 to provide Application
Development, Maintenance and Technical support services to Nekema.com.
During the year ended December 31, 2001, the Company recorded total
revenues of $ 2.5 million.
The above investments have been deemed to be impaired with any
remaining investment being written off as of December 31, 2001 and
reflected within loss from equity investments on the consolidated
statements of income.
6. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND DEFERRED
REVENUE
The following summarizes activity for uncompleted, fixed price, fixed
deliverable projects:
2001 2000
-------- ------
(IN THOUSANDS)
Direct costs incurred on uncompleted, fixed price, fixed
deliverable projects $ 12,799 $6,159
Direct margins incurred on uncompleted, fixed price, fixed
deliverable projects 12,067 6,049
-------- ------
Revenues recognized on uncompleted projects 24,866 12,208
Less -- billings to date 27,508 14,859
-------- ------
Deferred revenues on fixed price, fixed deliverable projects 2,642 2,651
Advanced billings on application management projects 2,405 1,553
Other deferred revenues 404 1,030
-------- ------
Total deferred revenue as reported in the balance sheet $ 5,451 $5,234
======== ======
Projects with billings in excess of costs and estimated earnings
on uncompleted fixed price, fixed deliverable projects $ 2,885 $2,832
Projects with costs and estimated earnings in excess of billings
on uncompleted fixed price, fixed deliverable projects (243) (181)
-------- ------
Deferred revenues in fixed price, fixed deliverable projects $ 2,642 $2,651
======== ======
7. PROPERTY AND EQUIPMENT
Cost of property and equipment at December 31, 2001 and 2000 is
summarized as follows (in thousands):
2001 2000
---- ----
Computer equipment and internal software $ 11,426 $10,852
Furniture and equipment 5,594 5,447
Leasehold improvements 925 1,047
Capitalized software and development costs 1,096 1,837
-------- -------
19,041 19,183
Accumulated depreciation and amortization 13,823 12,023
-------- -------
$ 5,218 $ 7,160
======== =======
70
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. LINE OF CREDIT
The Company has a line-of-credit arrangement with a bank, expiring
August 31, 2002, which provides for borrowings up to $20,000,000.
Standby letters of credit are available for up to $5,000,000 of this
amount, at any one time outstanding, expiring not later than February
2003. The letters of credit bear a 1% fee of the face value payable
annually in advance. Interest is computed on the basis of the Company's
option at (i) a formula approximating the Eurodollar rate plus the
applicable Eurodollar margin of 1.25%, or (ii) the bank's prime rate
plus 1.25%. No borrowings were outstanding at December 31, 2001 and
2000.
9. 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
non-cancelable leases expiring beyond one year as of December 31, 2001
are as follows (in thousands):
2002 $ 2,035
2003 1,680
2004 884
2005 571
2006 534
-------
$ 5,704
-------
Total rent expense charged to operations amounted to approximately
$2,303, $2,359 and $2,221 for the years ended December 31, 2001, 2000,
and 1999, respectively.
10. INCOME TAXES
Income (loss) before income taxes for U. S. and foreign operations was
as follows (in thousands):
2001 2000 1999
-------- -------- --------
U. S $ 12,555 $ (5,439) $ 27,052
Foreign 20,419 12,983 4,975
-------- -------- --------
$ 32,974 $ 7,544 $ 32,027
======== ======== ========
71
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The provision for income taxes is as follows:
2001 2000 1999
------- ------- -------
Current Provision
Federal $ 806 $ 6,075 $ 7,965
State 640 219 1,190
Foreign 2,722 1,050 340
------- ------- -------
Total current provision 4,168 7,344 9,495
------- ------- -------
Deferred
Federal 3,220 (7,019) 976
State 1,248 (1,292) 102
------- ------- -------
Total deferred 4,468 (8,311) 1,078
------- ------- -------
Total provision (benefit) for income taxes $ 8,636 $ (967) $10,573
======= ======= =======
The components of the net deferred tax asset are as follows (in
thousands):
2001 2000
------- -------
Deferred tax assets
Goodwill impairment and related costs $ 956 $ 8,373
Investments and capitalized development cost impairment 2,632 -
Accrued warranty and other expenses 3,304 2,516
Advanced billing receipts 655 1,125
------- -------
Net deferred tax asset $ 7,547 $12,014
======= =======
Balance sheet classification of the net deferred tax asset is
summarized as follows (in thousands) :
2001 2000
------- -------
Deferred tax asset, current $ 4,915 $ 5,329
Deferred tax asset, non-current 2,632 6,685
------- -------
$ 7,547 $12,014
======= =======
Current deferred tax assets of $4,915 and $5,329 are included in
advanced billing and other current assets at December 31, 2001 and 2000
respectively.
Under the Indian Income Tax Act of 1961 (the "Act"), Syntel is eligible
for certain favorable tax provisions including: (i) an exemption from
payment of corporate income taxes for up to five years of operation
(the "Tax Holiday"); or (ii) an exemption 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 and under the new regulations, the Company's Tax
Holidays will expire no earlier than March 31, 2003 and hence deferred
tax liabilities, if any, have not been computed. During February 2002,
the Indian government made certain prospective changes in tax
regulations, which will restrict the exemption under (i) above to the
extent of 90%, resulting in taxation of the remaining 10% of export
profits earned by Syntel India, beginning April 2002.
72
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
For those undistributed earnings of foreign subsidiaries 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 $
16.6 million at December 31, 2001.
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:
2001 2000 1999
------- ------ -------
(IN THOUSANDS)
Statutory provision $ 10,353 $2,640 $11,209
State taxes, net of federal benefit 1,887 219 1,190
Tax-free investment income - (676) (531)
Foreign income not subject to tax (5,221) (4,000) (1,595)
Prov. for sub part F--Income of Syntel India 300 - -
Other 1,317 850 300
------- ------ -------
$ 8,636 $ (967) $10,573
======= ====== =======
11. EARNINGS PER SHARE
The reconciliation of earnings per share computations for the fiscal
years 2001, 2000, and 1999 were as follows:
2001 2000 1999
------------------------- ------------------------- -------------------------
Per Per Per
Shares Share Shares Share Shares Share
------ ----- ------ ----- ------ -----
(in thousands, except per share earnings)
-----------------------------------------
Basic earnings per 38,690 $ 0.53 38,499 $0.21 38,556 $0.56
share
Net dilutive effect
of stock
options outstanding 326 981 493
------------ -------- -------- ------------ ------- --------
39,016 $ 0.52 39,480 $0.20 39,049 $0.55
============ ======== ======== ============ ======= =======
As of December 31, 2001 and 2000, stock options to purchase 411,397 and
1,687,313 shares of common stock, respectively, at a weighted average
price per share of $ 12.57 and $9.69, 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.
73
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. 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.
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
FASB Statement No. 123, "Accounting for Stock Based Compensation", 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:
YEAR ENDED DECEMBER 31
2001 2000 1999
---- ---- ----
Net Earnings
As reported $20,445 $7,985 $21,454
Impact of SFAS No. 123 (3,505) ( 2,358) (1,534)
-------- -------- --------
Pro forma 16,940 5,627 19,920
Earnings per share, pro forma
Basic earnings per share $0.44 $0.15 $0.52
Diluted earnings per share 0.43 0.14 0.51
Earnings per share as reported
Basic earnings per share $0.53 $0.21 $0.56
Diluted earnings per share 0.52 0.20 0.55
74
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 2001, 2000 and
1999:
2001 2000 1999
----- ---- ----
Estimated fair value of option $ 3.83 $ 12.41 $ 6.26
granted
Assumptions
Risk free interest rate 4.30% 5.00% 6.00%
Expected life 5.00 5.00 5.00
Expected volatility 80.40% 84.09% 68.38%
Expected dividends $ 0.00 $ 0.00 $ 0.00
75
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table sets forth changes in options outstanding:
Weighted
Number Average
of Shares Amount Price
Shares under option
Outstanding, January 1, 1999 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
Activity during 2001
Granted, price equals fair value 788,025 5,045,548 6.40
Exercised 233,470 1,349,684 5.78
Forfeited 283,338 2,665,779 9.41
Expired 8,914 84,323 9.46
--------- ----------- ---------
Outstanding, December 31, 2001 2,748,296 $21,166,920 $ 7.70
========= =========== =========
Exercisable, December 31, 2001 898,582 $ 6.93
========= =========
The following table sets forth details of options outstanding at
December 31, 2001:
Weighted Weighted
Average Average
Number Contractual Exercise
RANGE OF EXERCISE PRICES Outstanding Life Price
----------- ---- -----
$1.33 70,750 5.25 $ 1.33
$4.67 - $8.00 1,107,501 7.48 5.39
$8.0625 - $11.00 1,155,882 8.11 8.68
$11.25 - $16.75 399,929 7.25 12.23
$20.00 - $33.19 14,234 7.24 22.69
----------------------------------------
$1.33 - $33.19 2,748,296 7.65 $ 7.70
========================================
76
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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
lesser of 85% of the fair market value of the common stock on the
NASDAQ National Market on the first day of the purchase period or 85%
of the fair market value of the common stock on the last day of the
purchase period. The Company has reserved 1.5 million shares of common
stock for issuance under the 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, 2001, the Company has $ 236,007 of employee withholdings, included
in accrued payroll and related costs in the balance sheet to be used to
purchase company stock.
13. 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.
Application Outsourcing engagements are frequently supported by
long-term contractual agreements which generally provide for
77
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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
communications. 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.
78
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2001 2000 1999
---- ---- ----
Revenues
Application Outsourcing $ 107,890 $ 89,873 $ 87,311
e-business 40,375 42,608 33,402
TeamSourcing 22,512 32,327 41,404
-----------------------------------------
170,777 164,808 162,117
Gross Profit
Application Outsourcing 46,225 38,783 40,324
e-business 14,276 13,622 10,789
TeamSourcing 4,839 7,801 11,704
-----------------------------------------
65,340 60,206 62,817
Sales, general and administrative expenses 34,522 34,424 32,814
Goodwill impairment and related charges - 21,650 -
Capitalized development cost impairment 1,624 - -
-----------------------------------------
Income from operations $29,194 $4,132 $ 30,003
=========================================
14. GEOGRAPHIC INFORMATION
Total revenues, income before income taxes and identifiable assets by
geographic location were as follows:
2001 2000 1999
---- ---- ----
Revenues
United States operations $152,315 $154,661 $158,452
India operations 30,487 19,716 10,188
Europe operations 16,731 9,317 3,211
Singapore operations 1,328 794 548
Intercompany revenue elimination (30,084) (19,680) (10,282)
---------------------------------------------
Total revenue $170,777 $164,808 $162,117
=============================================
Income (loss) before income taxes
United States operations $12,555 $ (5,439) $27,052
India operations 18,390 12,580 4,486
U.K. operations 2,294 358 645
Germany operations (326) - -
Singapore operations 61 45 (156)
---------------------------------------------
Total income before taxes $32,974 $7,544 $32,027
=============================================
Assets, December 31
United States operations $108,181 $101,100
India operations 37,976 24,170
Europe operations 5,535 7,345
Singapore operations 446 278
Germany operations 256 -
Canada 5 5
----------------------------
Total assets $152,399 $132,898
============================
79
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
15. 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, 2001 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.
80
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected financial data by calendar quarter were as follows:
First Second Third Fourth Full Year
Quarter Quarter Quarter Quarter
(in thousands)
2001
Revenues $ 42,271 $ 42,721 $ 42,825 $ 42,960 $ 170,777
Cost of revenues 26,664 26,105 26,294 26,374 105,437
-----------------------------------------------------------
Gross profit 15,607 16,616 16,531 16,586 65,340
Sales, general and administrative expenses 8,813 8,436 8,622 8,651 34,522
Capitalized development cost impairment - - - 1,624 1,624
-----------------------------------------------------------
Income from operations 6,794 8,180 7,909 6,311 29,194
Other income, net 957 912 1,108 803 3,780
-----------------------------------------------------------
Income before income taxes 7,751 9,092 9,017 7,114 32,974
Income tax provision 1,865 2,522 2,471 1,778 8,636
-----------------------------------------------------------
Net income before loss from
equity investments 5,886 6,570 6,546 5,336 24,338
Loss from equity investments 321 218 213 3,141 3,893
-----------------------------------------------------------
Net income $ 5,565 $ 6,352 $ 6,333 $ 2,195 $ 20,445
===========================================================
Earnings per share, diluted $0.14 $0.16 $0.16 $0.06 $0.52
===========================================================
Weighted average shares outstanding, diluted 38,814 38,841 38,826 39,584 39,016
===========================================================
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 5,152 (7,686) 5,550 5,495 8,511
equity investments
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
===========================================================
81
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 to the full year presentation.
82
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 by 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 Line of Credit Agreement, dated August 31, 2001, between
the Registrant and Bank One, Michigan.
10.2 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.
10.3 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.
10.4 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.
83
10.5 Indentures of Lease entered into between the President of
India and Syntel (India) Ltd. (formerly known as 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.
10.6 Rental Agreement, dated February 24, 1997, between Syntel
India Ltd. (formerly known as 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.
10.7* 1997 Stock Option and Incentive Plan, (Amended and
Restated).
10.8* 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.
84
21 SUBSIDIARIES OF THE REGISTRANT.
99 Proxy Statement for the Registrant's 2002 Annual Meeting of
Shareholders, filed by the Registrant pursuant to
Regulation 14A and incorporated herein by reference.
85