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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, 2002
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
-----
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.
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes X No
----- -----
The aggregate market value of the Common Stock held by non-affiliates
of the Registrant as of March 13, 2003, based on the last sale price of $ 17 per
share for the Common Stock on the NASDAQ National Market on such date, was
approximately $107,762,031.
As of March 13, 2003, the Registrant had 39,411,877 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the 2003 Annual Meeting of
Shareholders to be held on or about June 6, 2003 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, Singapore, Mauritius, Germany,
Australia, Canada and Hong Kong 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(R).
E-business consists of practice areas in Web Solutions, Customer Relationship
Management (CRM), Data Warehousing/Business Intelligence, and Enterprise
Applications Integration (EAI) services. Applications Outsourcing consists of
outsourcing services for ongoing management, development and maintenance of
business Applications. TeamSourcing consists of professional information
technology (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 BEA Systems,
BroadVision, IBM, Microsoft, Siebel, Sun Microsystems, TIBCO and Oracle. These
partnerships will provide the Company with increased opportunities for market
penetration.
Through Applications Outsourcing, Syntel provides higher-value
Applications management services for ongoing management, development and
maintenance of customers' business Applications. Syntel assumes responsibility
for and manages selected Applications support functions of the customer.
Utilizing its developed methodologies, processes and tools, known as
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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 2002 and 2001, E-business and Applications Outsourcing
services combined accounted for approximately 91% and 87% 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 9% and 13% of revenues, for the years ended December 31, 2002
and 2001, 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 Syntel's U.S. locations and offshore at Global Development
Centers in Mumbai, Chennai and Pune, India. The benefits to the customer from
this customized service approach include responsive delivery based on an
in-depth understanding of the specific processes and needs of the customer,
quick turnaround, access to the most knowledgeable personnel and best practices,
resource depth, 24-hour support seven days a week and cost-effectiveness. By
linking each of its service locations together through a dedicated data and
voice network, Syntel provides a seamless service capability to its customers
around the world largely unconstrained by geography, time zones or cultures.
Syntel provides its services to a broad range of 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 2002, based on revenues, were American Express
Company, Target Corporation, American International Group, Inc., HCA Inc. and
Humana Inc. The Company has been chosen as a preferred vendor by several of its
customers and has been recognized for its quality and responsiveness. The
Company has a focused sales effort that includes a strategy of migrating
existing TeamSourcing customers to higher-value E-business and Applications
Outsourcing services. During recent years, the Company has focused on increasing
its resources in the development, marketing and sales of its E-business and
Applications Outsourcing services.
The Company believes its human resources are its most valuable asset
and invests significantly in programs to recruit, train and retain IT
professionals. The Company recruits globally through its worldwide recruiting
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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, 2002,
Syntel's worldwide billable headcount consisted of 2,155 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 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.
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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, 2002, approximately 39% of Syntel's U.S. workforce (17% of Syntel's
worldwide workforce) worked under H-1B visas (permitting temporary residence
while employed in the U.S.) and another 27% of the Company's U.S. workforce (12%
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 (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 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.
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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 71%, 68%, and 62% of revenues for
the years ended December 31, 2002, 2001 and 2000, respectively. For the year
ended December 31, 2002 there was one customer who contributed revenues in
excess of 10% of total consolidated revenues however in 2001 there were three
customers who contributed revenues in excess of 10% of total consolidated
revenues. The Company's largest customer for 2002 and 2001 was American Express
Company accounting for approximately 18% of revenues for each of the years ended
December 31, 2002 and 2001.
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 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.
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, 2002, the
Company had approximately 44% 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
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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 competitors for professional IT staffing
engagements include participants from a variety of market segments, including
"Big Four" 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 IBM Global Solutions, Keane, EDS, Accenture 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
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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 $161.5 million in
2002, and the number of worldwide billable employees has increased from 689 as
of December 31, 1993 to 2,155 as of December 31, 2002. The Company established
sales offices in London, England in 1996 and in Hong Kong in 2001, opened sales
and service offices in Singapore in May 1997 and in Munich, Germany in 2001 and
has expanded its Global Development Centers in Mumbai, Chennai and Pune, India
and expects to begin construction of a new development and training center in
Pune, India during the first quarter of 2003. 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 customer's organization, as compared
with traditional IT staffing services. Additionally, while the sales cycle for
many E-business engagements tend to be shorter (1 to 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
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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 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 50%, 36% and
25% of total revenues for the years ended December 31, 2002, 2001, and 2000,
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 that 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, 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, Inc. (Metier) was
impaired, resulting in a $21.6 million pretax charge, which included a provision
of $2.6 million for the estimated costs of a settlement with the Metier
shareholders. During the year ended December 31, 2001 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).
The consideration for the Metier acquisition in 1999 included a $1.6
million dollar payment to the Metier shareholders in April 2000 and 300,000
shares of Syntel stock, which were to be issued in September 2000. These shares
were included in basic shares outstanding and the fair value of the shares to be
issued, $ 4.7 million, was recorded as additional paid-in capital at the date of
acquisition. During 2000, the Company entered into litigation with the former
shareholders of Metier and the $1.6 million dollar payment was not made and the
300,000 shares were not issued. The acquisition agreement provided Metier
shareholders with the right to put the shares to the Company under certain
conditions. Accordingly, the $ 4.7 million has been reclassified from additional
paid in capital for all periods presented. After the reclassification the
accrued Metier liability at December 31, 2001 was $ 8.9 million, which was
comprised of the fair value of the 300,000 shares, the $1.6 million payment
referred to above and the estimated settlement costs of $2.6 million. The number
of shares used in the Company's computations of basic and diluted earnings per
share have been adjusted to remove the 300,000 shares. This adjustment did not
change the reported earnings per share for the previously reported periods.
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In April 2002, the Company reached a resolution with the Metier
shareholders wherein the $1.6 million dollar payment was not made, the 300,000
shares were not issued and Syntel paid $2.3 million in settlement and legal
costs. During the second quarter, the Company determined that the remaining $6.6
million of the accrued Metier liability, no longer required as a result of the
settlement with the Metier shareholders, should remain accrued for the estimated
costs associated with Metier-related and other litigation. In the fourth
quarter, the Company settled certain of the Metier related and other litigation
and in connection with these settlements, reversed approximately $5.7 million of
the accrued Metier liability. Approximately $ 0.9 million remains in accrued
Metier liabilities at December 31, 2002 and is related to litigation that is
expected to be resolved in 2003.
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 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)
IntelliCapture(SM), Latest to Legacy (SM) and Digital
Blueprinting-Build-Optimize(R). 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.
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INDUSTRY BACKGROUND
Increasing globalization, rapid adoption of the Internet as a business
tool and technological innovation are creating an increasingly competitive
business environment that is requiring companies to fundamentally change their
business processes. This change is driven by increasing demand from customers
for increased quality, lower costs, faster turnaround, and highly responsive and
personalized service. To effect these changes and adequately address these
needs, companies are focusing on their core competencies and cost-effectively
utilizing IT solutions to improve productivity, lower costs and manage
operations more effectively.
Designing, developing, and implementing advanced technology solutions
is a key priority for the majority of corporations. In addition, the development
and maintenance of new information technology (IT) Applications continues to be
a high priority. This type of work requires highly skilled individuals trained
in diverse technologies. However, there is a growing shortage of these
individuals and many companies are reluctant to expand their IT departments
through additional staffing, particularly at a time when they are attempting to
minimize their fixed costs and reduce workforces. The Company believes that many
organizations are concluding that using outside specialists to address their
advanced technology and ongoing IT requirements enables them to develop better
solutions in shorter time frames and to reduce implementation risks and ongoing
maintenance costs. Those outside specialists best positioned to benefit from
these trends have access to a pool of skilled technical professionals, have
demonstrated the ability to manage IT resources effectively, have low-cost
offshore software development facilities, and can efficiently expand operations
to meet customer demands.
Demand for IT services has grown significantly as companies seek ways
to outsource not only specific projects for the design, development and
integration of new technologies, but also ongoing management, development and
maintenance of existing IT systems.
The Company believes that outsourcing the ongoing management,
development and maintenance of IT Applications is becoming increasingly critical
to business enterprises. The difficulties of IT planning, budgeting and
execution in the face of technological innovations and uncertainties, the focus
on cost cutting, and a growing shortage of skilled personnel are driving senior
corporate management to strategically pursue outsourcing of critical internal IT
functions. Organizations are seeking an experienced IT services outsourcing
provider that not only has the expertise and knowledge to address the
complexities of rapidly changing technologies, but also possesses the capability
to understand and automate the business processes and knowledge base of the
organization. In addition, the IT provider must be able to develop
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customized solutions to problems unique to the organization. This involves
maintaining on-site professionals who know the customer's IT processes,
providing access to a wide range of expertise and best practices, providing
responsiveness and accountability to allow internal IT departments to meet
organization goals, and providing low cost, value-added services to stay within
the organization's IT budget constraints.
In this environment, large organizations are increasingly finding that
full facilities management outsourcing providers who own and manage an
organization's entire IT function do not permit the organization to retain
control over, or permit flexible reallocation of, its IT resources.
SYNTEL SOLUTION
Syntel provides E-business solutions in the areas of Web Solutions,
Customer Relationship Management (CRM), Data Warehousing/Business Intelligence,
and Enterprise Applications Outsourcing (EAI). The Company's approach involves
taking an enterprise wide view of the customer's technology and business
environment to ensure comprehensive solution integration. This view is termed
the Digital Ecosystem. Syntel's methodology for implementing its E-business
services involves Digital Blueprinting/Build/Optimize(R). 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 BEA Systems,
BroadVision, IBM, Microsoft, Siebel, Sun Microsystems, TIBCO and Oracle. 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
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of a proven set of methodologies, practices and tools for managing the IT
functions of its customers.
GLOBAL DELIVERY SERVICE. Syntel performs its services on-site at the customer's
location, off-site at Syntel's U.S. locations and offshore at its Indian
locations. By linking each of its service locations together through a dedicated
data and voice network, Syntel provides a seamless service capability to its
customers around the world, largely unconstrained by geographies, time zones and
cultures. This Global Delivery Service gives the Company the flexibility to
deliver to each customer a unique mix of on-site, off-site and offshore services
to meet varying customer needs for direct interaction with Syntel personnel,
access to technical expertise, resource availability and cost-effective
delivery. The benefits to the customer from this customized service include
responsive delivery based on an in-depth understanding of the specific processes
and needs of the customer, quick turnaround, access to the most knowledgeable
personnel and best practices, resource depth, 24-hour support seven days a week,
and cost-effectiveness. To support its Global Delivery Service, the Company
currently has three Global Development Centers located in Cary, North Carolina;
Mumbai, India; and Chennai, India.
In January 2001, the Company acquired 41 acres of land at the cost of
approximately $1.0 million for construction of a state-of-the-art development
and training campus in Pune, India. Construction of the center is expected to
begin during the first quarter of 2003. When fully completed in approximately
four years, the facility will cover over 1 million square feet and will
accommodate 9,000 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 fifteen months with the capacity for about 1,800
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
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development and management of its customers' information systems. This
"intellectual capital" of Syntel includes methodologies for the selection of
appropriate customer IT functions for management by Syntel, tools for the
transfer to Syntel of the systems knowledge of the customer, and techniques for
providing systems support improvements to the customer. Syntel also offers to
its customers well-trained personnel backed by a proven, extensive employee
training and continuing development program. The Company believes its
intellectual capital enhances its ability to understand customer needs, design
customized solutions and provide quality services on a timely and cost-effective
basis.
SYNTEL STRATEGY
The Company's objective is to become a strategic partner with its
customers in the development of E-business solutions as well as the ongoing
management, development and maintenance of their IT systems by utilizing its
Global Delivery Service, intellectual capital and customer service orientation.
The Company plans to continue to pursue the following strategies to achieve this
objective:
LEVERAGE GLOBAL DELIVERY SERVICE. The ability to deliver a seamless service
capability virtually anywhere in the world from its domestic and offshore
facilities gives the Company an effective ability to meet customer needs for
technical expertise, best practice IT solutions, resource availability,
responsive turnaround and cost-effective delivery. The Company strives to
leverage this capability to provide reliable and cost-effective services to its
existing customers, expand services to existing customers and to attract new
customers. Moreover, the flexibility and capacity of the Global Delivery Service
and the Company's worldwide recruitment and training programs enhance the
ability of the Company to expand its business as the number of customers grows
and their IT demands increase. The Company intends to expand the capacity of its
Global Development Centers worldwide.
AGGRESSIVELY BUILD E-BUSINESS COMPETENCIES. Through its comprehensive suite of
E-business services, the Company provides a key strategic role in helping
customers rapidly and cost-effectively build advanced technology solutions.
Through large-scale retraining programs, strategic acquisitions and
partnerships, the Company has quickly built a strong competency in the area of
E-business services.
CONTINUE TO GROW APPLICATIONS OUTSOURCING SERVICES. Through Applications
Outsourcing, the Company markets its higher value Applications management
services for ongoing Applications management, development and maintenance. In
recent years, the Company has significantly increased its investment in
Applications Outsourcing services and realigned its resources to focus on the
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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 Europe.
ENHANCE PROPRIETARY KNOWLEDGE BASE AND EXPERTISE. The Company believes that its
"intellectual capital" of methodologies, practices, tools and technical
expertise is an important part of its competitive advantage. The Company strives
to continually enhance this knowledge base by creating competencies in emerging
technical fields such as Internet/intranet Applications, client/server
Applications, object-oriented software, E-commerce, and data warehousing
technology. The Company continually develops new methodologies and toolsets,
building skills in E-business, and acquiring a broad knowledge and expertise in
the IT functions of specific industries. Through these efforts, the Company
becomes more valuable to the customer, is often able to expand the scope of its
work to existing customers, and is able to offer industry-specific expertise.
ATTRACT AND RETAIN HIGHLY SKILLED IT PROFESSIONALS. The Company believes that
its human resources are its most valuable asset. Accordingly, its success
depends in large part upon its ability to attract, develop, motivate, retain and
effectively utilize highly skilled IT professionals. Over the years, the Company
has developed a worldwide recruiting network, logistical expertise to relocate
its personnel, and programs for human resource retention and development. The
Company (i) employs professional recruiters who recruit qualified professionals
throughout the U.S. and India, (ii) trains employees and new recruits through
both computer based training and its three training centers, one of which is
located in the U.S. and two of which are located in India, and (iii) maintains a
broad range of employee support programs, including relocation assistance, a
comprehensive benefits package, career planning, a qualified stock purchase
program, and incentive plans. The Company believes that its management structure
and human resources organization is
- 16 -
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,
2002, the Company developed and maintained partnership alliances with several
software development firms, including BEA Systems, BroadVision, IBM, Microsoft,
Siebel, Sun Microsystems, TIBCO and Oracle. 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; and (v) the reputation of the potential partner. These alliances
provided approximately $4.4 million in new business revenues during the year
ended December 31, 2002.
SERVICES
Syntel provides a broad range of IT services through its Applications
Outsourcing, E-business and TeamSourcing service offerings. Through Applications
Outsourcing offering, the Company provides complete software applications
development, maintenance and platform migration services. Through its E-business
practices, the Company provides advanced technology services in the areas of Web
Solutions, Customer Relationship Management (CRM), Data Warehousing/Business
Intelligence, and Enterprise Applications Integration (EAI) and Enterprise
Resource Planning (ERP) software package implementation. 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, 2002 and December
31, 2001, E-business and Applications Outsourcing accounted for approximately
91% and 87%, respectively, of the Company's revenues and TeamSourcing
represented approximately 9% and 13%, 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 2002, more than 94% 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, the "CIO Award" from General Motors, as well as "Preferred
Supplier" status with Daimler-Chrysler Corporation receiving the
- 17 -
highest rating in each customer service category. The Company has also been
recognized by the Target Corporation with 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 2002, Syntel was
ranked by Forbes magazine as one of the "Best 200 small companies in America",
for the third time as well as recognized 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 Internet, 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 BEA Systems, BroadVision, IBM, Microsoft, Siebel, Sun Microsystems,
TIBCO and Oracle. 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.
- 18 -
Syntel has developed methodologies, processes and tools to effectively
integrate and execute Applications Outsourcing engagements. Referred to as
"IntelliTransfer(R)," this methodology is implemented in three stages of
planning, transition and launch. Syntel first focuses on the customer's
personnel, processes, technology and culture to develop a plan to effectively
assimilate the business process knowledge of the customer. Syntel then begins to
learn the business processes of the customer, and, finally, seeks to assume
responsibility for performance of a particular customer Applications system or
systems. As the Company develops an in-depth knowledge of the customer's
personnel, processes, technology and culture, Syntel acquires a competitive
advantage to pursue more value-added services. The Company believes its approach
to providing these services results in a long-term customer relationship
involving a key Syntel role in the business processes and Applications of the
customer.
Because providing both E-business and Applications Outsourcing services
typically involves close participation in the IT strategy of a customer's
organization, Syntel adjusts the manner in which it delivers these services to
meet the specific needs of each customer. For example, if the customer's
business requires fast delivery of a mission-critical Applications update,
Syntel will combine its on-site professionals, who have knowledge of the
customer's business processes and Applications, together with its global
infrastructure to deliver around-the-clock resources. If the customer's need is
for cost reduction, Syntel may increase the portion of work performed at its
offshore Global Development Center, which has significantly lower costs. The
Company believes that its ability to provide flexible service delivery and
access to resources permits responsiveness to customer needs and are important
factors that distinguish its E-business and Applications Outsourcing services
from other IT service firms.
TEAMSOURCING(R)
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.
- 19 -
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(R) and
IntelliCapture(sm), 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 Global 2000
corporations principally in the financial services, insurance, manufacturing,
retail and healthcare industries. During 2002, the Company provided services to
over 139 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 2002, include:
FINANCIAL SERVICES MANUFACTURING
American Express Daimler-Chrysler Corp
Conseco State of FL
FDMS Eaton Corp
OCBC Bank Ford Motor Co.
JP Morgan Chase Breed Technology
Bank One Proctor & Gamble
Deloitte Consulting Honeywell
Cambio Consulting Inc New Venture Gear
Genersys Consulting Services Xerox Corp
Wells Fargo Cummins Engine Co
Corillian Corporation
INSURANCE RETAIL
Kemper Insurance Borders
CNA Commercial Lines Target Corporation
Nekema Nike
Westfield Insurance Sears
Bankers Life & Casualty Co School Speciality
Caliber One
Prudential Life Insurance
American Medical & Life Insurance
American International Group
- 20 -
INFORMATION/
TRANSPORTATION/AVIATION COMMUNICATIONS GOVERNMENT
Allied Van Lines ADT Securities Inc Acro
MyTravel Group Texyard.com
Fedex Hewlett Packard
CFI Computer Task Group
Thomas Cook Tektronix
Going Places Computer Associates
SBS Entertainment Publications
Kintetsu Datanomics
Forest Express MCI
Norfolk Southern Avercon
Edcor
Percon
UTILITIES HEALTHCARE
Detroit Edison Humana
Pacific Corp Health Care
Associates IBM
Portland General Electric Co. Glaxo Wellcome
Blue Cross Blue Shield
Hanger Orthopedic
Verizon Data Services
First Health Services Corp
CIMRO
For the years ended December 31, 2002, 2001, and 2000, the Company's
top ten customers accounted for approximately 71%, 68%, and 62% of the Company's
revenues, respectively. For the year ended December 31, 2002 one customer
contributed revenues in excess of 10% of total consolidated revenues. The
Company's three largest customers in 2002 were American Express, Target
Corporation and American International Group Inc. contributing approximately
17%, 9% and 8% respectively, of total consolidated revenues. For the year ended
December 31, 2002 only one customer contributed revenues in excess of 10% of
total consolidated revenues as against three customers for year ended December
31, 2001. The Company's largest customer for both 2002 and 2001 was American
Express Company. Accounting for approximately 18% of revenues for each of the
years ended December 31, 2002 and 2001.
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;
- 21 -
- - Project management and application development services for NEW SYSTEMS
DEVELOPMENT; and
- - 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:
- - 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; and
- - 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,
- 22 -
processes, technology and culture, and maintain direct customer contact to
facilitate project management, problem solving and integration of Syntel
services. Off-site service delivery at the Company's U.S. locations provides the
customer with access to the diverse skill base and technical expertise resident
at different regional centers, availability of resources, and cost-effective
delivery due to the savings in transportation, facilities and relocation costs
associated with on-site work. Offshore service delivery at the Company's Indian
locations provides the customer with the capacity to receive around the clock
attention to Applications maintenance and project development for faster
turnaround, greater availability of resources, expertise resident in India and
more cost-effective delivery than the Company's off-site services.
The Company has developed global recruiting and training programs which
have efficiently provided skilled IT professionals to meet customer needs. In
addition, the Company's sales, solutions and delivery functions are closely
integrated in the Global Delivery Service so that appropriate resources can be
provided to the customer at the right time and at the most advantageous
location. Each customer is tracked and serviced through a multi-stage customer
care process. Regular meetings are held with key project management, sales,
technical, legal and finance personnel to monitor progress, identify issues and
discuss solutions. As engagements evolve and customer needs change, the Company
can reallocate resources responsively among these locations as necessary.
The Company's three Global Development Centers located in; Mumbai,
India; and Chennai, India; Cary, North Carolina support the Company's Global
Delivery Service.
The Mumbai, India Global Development Center, which employed
approximately 1,226 persons as of December 31, 2002, 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 1,322 people.
The Chennai Training and Global Development Center employed
approximately 512 persons as of December 31, 2002. The Chennai facility has a
capacity of over 600 persons and has been in operation for approximately four
years.
- 23 -
The Cary, North Carolina Global Development Center, which employed over
56 persons at December 31, 2002, 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.
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 first quarter of
2003. When fully completed in approximately four years, the facility will cover
over 1 million square feet and will accommodate 9,000 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 fifteen months with
the capacity for about 1,800 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. As a step in this direction, in 2002 the Company opened a Development
Center in Pune, which employed approximately 62 persons as of December 31, 2002,
and having a capacity of 156 persons.
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; Santa Clara California; Phoenix,
Arizona; Beaverton, Oregon; Schaumburg, Illinois; Dallas, Texas; Minneapolis,
Minnesota; New York, New York; Troy, Michigan; Santa Fe, New Mexico; Cary, North
Carolina; Nashville, Tennessee; Coral Springs, Florida; Natick, Massachusetts;
Dublin, Ohio; London, England; Hong Kong; Munich, Germany and Singapore. The
sales staff is aligned into geographic regions, with each salesperson provided
the authority to pursue Applications Outsourcing, E-business and, to a much
lesser degree, TeamSourcing opportunities. The sales team is supported, as
required, by technical expertise and subject matter experts from the Company's
delivery teams.
- 24 -
During recent years, the Company has focused its sales efforts in
E-business and Applications Outsourcing both by dedicating internal sales
professionals to these service offerings and through outside hiring of
professionals experienced in selling E-business and outsourcing engagements.
The sales cycle for Applications Outsourcing engagements ranges from 6
to 9 months depending on the complexity of the engagement. Due to this longer
sales cycle, Applications Outsourcing sales executives follow an integrated
sales process for the development of engagement proposals and solutions, and
receive ongoing input from the Company's technical services, delivery, finance
and legal departments throughout the sales process. The Applications Outsourcing
sales process also typically involves a greater number of customer personnel at
more senior levels of management than the TeamSourcing sales process.
The sales cycle for E-business engagements, from initial contact to
execution of an agreement, varies by type of service and account size, but
typically ranges from 1 to 6 months, depending on the complexity of the
engagement. The sales cycle for large, fixed price E-business engagements is
similar to that of Applications Outsourcing engagements. The sales cycle for
partnership software installations is generally 1 to 2 months. The associated
software installation engagements are also generally short, lasting 1 to 3
months.
The sales cycle for TeamSourcing engagements, from initial contact to
execution of an agreement, varies by type of service and account size, but is
typically completed within 30 days. TeamSourcing engagements are essentially
developed from existing customers as the Company focuses its 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.
- 25 -
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, 2002, the Company had 2,794 full time
employees. Of this total, the U.S. operations employed 1,255 persons, including
1,131 IT professionals; the Indian operation employed 1,418 persons, including
1,217 IT professionals; and the Company employed an additional 121 persons in
various remote locations, principally the U.K. and Singapore.
A majority of the Company's professional employees have a Bachelor of
Science degree or its equivalent, or higher degrees in computer science,
engineering disciplines, management, finance and other areas. Their experience
level ranges from entry-level programmers to engagement managers and senior
consultants with over 20 years of IT experience. The Company has personnel who
are experienced in mainframe, client/server and open systems technologies, and
proficient in a variety of computer programming languages, software tools,
database management systems, networks, processes, methodologies, techniques and
standards.
The Company has implemented a management structure and human resources
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.
- 26 -
In addition, the Company has developed a proprietary database of talent hosted
on the Internet, which is an automated tool for managing all phases of
recruiting. This system enhances the ability of the Company's recruiters to
select appropriate candidates and can distribute resumes directly to the
recruiters.
TRAINING. The Company uses a number of established training delivery mechanisms
in its efforts to provide a consistent and reliable source for qualified IT
professionals.
Syntel also maintains an Internet-based global Computer-Based Training
(CBT) program with over 200 training courses from which Syntel employees can
select to enhance and develop their skills. The CBT topics cover the latest
Client/Server topics including Object Oriented Programming, local-area and
wide-area networking, E-Commerce, various Microsoft products, and Web-based
solutions in addition to management and related developmental areas.
The Company 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
- 27 -
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, a health club reimbursement program, and an employee referral plan. Upon
consummation of its initial public offering in 1997, the Company offered a stock
option program, and in 1998 a qualified stock purchase program, providing all
eligible employees the opportunity to purchase the Company's Common Stock at a
15% discount to fair market value.
COMPETITION
The IT services industry is intensely competitive, highly fragmented
and subject to rapid change and evolving industry standards. The Company
competes with a variety of other companies, depending on the IT services it
offers. The Company's primary competitors for professional IT staffing
engagements include participants from a variety of market segments, including
"Big Four" 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, EDS, Accenture and Computer Sciences Corporation, as
well as Indian based companies such as TCS, Infosys, and Wipro.
AVAILABLE INFORMATION
Syntel makes available, free of charge, through it's investor relations
website its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15 (d) of the Exchange Act, as soon as reasonably
practicable after they are filed with the SEC. The URL for Syntel's investor
relations web site is www.syntelinc.com.
- 28 -
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 50 Chairman, President and Chief
Executive Officer
Neerja Sethi 48 Vice President, Corporate Affairs
and Director
Atul Kunwar 39 Chief Operating Officer
Keshav Murugesh 39 Chief Financial Officer
Prakash "Ken" Kenjale 53 Chief Technology Officer
Daniel M. Moore 48 Chief Administrative Officer and
Secretary
Pramode Metre 50 Senior Vice President, Sales and
Business Development
Rajiv Tandon 44 Senior Vice President, North
American Operations
Marlin Mackey 52 Senior Vice President, Global
Relationships
Baru Rao 42 Chief Operating Officer, Asian
Pacific Operations
Shyamal Dasgupta 45 Vice President Human Resources
Sanjay Raizada 38 General Manager, North West
Division
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.
- 29 -
Keshav Murugesh joined the Company as Chief Financial Officer in May
2002. Prior to joining Syntel, Mr.Murugesh served as Vice President Finance at
ITC Infotech Ltd from October 2000 to May 2002. Prior to this assignment, Mr.
Murugesh served as Finance Head, Information Systems Business from August 1999
to September 2000 and General Manager-Investments, Financial Services Division
from 1998 to July 1999 at ITC Ltd, India.
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 also as the Company's acting Vice President,
Human Resources.
Pramode Metre joined the Company as Senior Vice President, Sales and
Business Development in January 2002. Prior to joining Syntel, Mr. Metre served
as Chief Executive Officer at Netpilgrim Inc., from March 2000 to December 2001.
Before joining Netpilgrim Inc., Mr Metre served as General Manager/Director
Global Accounts at iLogistix Inc., from November 1999 to March 2000. He also
served as Director, Enterprise at Compaq Computer India from 1996 to 1999 before
returning to North America.
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 Officer, Asian
Pacific Division since April 2001. He has also served as Chief Executive
Officer, Syntel (India) Limited since joining the Company in 1997. He is
scheduled to leave the Company effective March 31, 2003.
- 30 -
Shyamal Dasgupta joined the Company as Vice President, Human Resources
in October 2002. Prior to joining Syntel, Mr. Dasgupta served as Managing
Consultant, Human Resources at Mascot Systems from April 1998 to September 2002.
Before joining Mascot Systems, Mr. Dasgupta served as General Manager - Human
Resources at Microland from July 1995 to April 1998.
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
September 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.
EMPLOYEE AND EXECUTIVE SHARE OPTIONS
SECTION I: OPTION PROGRAM DESCRIPTION
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.
SECTION II: DISTRIBUTION AND DILUTIVE EFFECT OF OPTIONS
EMPLOYEE AND EXECUTIVE OPTION GRANTS
AS OF END OF DECEMBER 31, 2002, 2001 AND 2000
- ---------------------------------------------------------------------------------------------------------
PARTICULARS 2002 YTD 2001 2000
- ---------------------------------------------------------------------------------------------------------
Net grants during the period as % of 1.74% 2.06% 1.60%
outstanding shares
- --------------------------------------------
Grants to listed officers during the 11.12% 15.86% 0.00%
period as % of total options granted (%)
- --------------------------------------------
Grants to listed officers during the 0.19% 0.33% 0.00%
period as % of outstanding shares (%)
- --------------------------------------------
Cumulative options held by listed 15.27% 10.27% 6.48%
officers as % of total options
outstanding (%)
- ---------------------------------------------------------------------------------------------------------
-31-
SECTION III: GENERAL OPTION INFORMATION
SUMMARY OF OPTION ACTIVITY
AS OF END OF DECEMBER 31, 2002 AND 2001
- ---------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING
- ---------------------------------------------------------------------------------------------------------------
SHARES AVAILABLE NUMBER OF SHARES WEIGHTED AVERAGE
FOR OPTIONS EXERCISE PRICE ($)
- ---------------------------------------------------------------------------------------------------------------
Last Fiscal Year (as DECEMBER 31, 2000 2,485,993 8.04
---------------------
reported in the 10K)
--------------------
Grants 788,025 - 6.40
Options assumed in - - -
acquisitions
Exercises 233,470 - 6.06
Cancellations 292,252 - 9.41
Additional shares reserved - - -
DECEMBER 31, 2001 2,748,296 7.68
Year to Date Grants 674,598 - 12.31
------------
(As of End of Current Options assumed in - -
acquisitions
Reporting Period) Exercises 853,083 - 7.14
Cancellations 231,337 - 9.16
Additional shares reserved - - -
DECEMBER 31, 2002 2,338,474 9.14
- ---------------------------------------------------------------------------------------------------------------
IN-THE-MONEY AND OUT-OF-THE-MONEY OPTION INFORMATION
AS OF END OF DECEMBER 31, 2002
- -----------------------------------------------------------------------------------------------------------------
AS OF END OF QUARTER EXERCISABLE UNEXERCISABLE TOTAL
- -----------------------------------------------------------------------------------------------------------------
WTD. AVG. WTD. AVG. WTD. AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
($) ($) ($)
- -----------------------------------------------------------------------------------------------------------------
In-the-Money 495,418 7.61 1,843,056 9.55 2,338,474 9.14
Out-of-the-Money (1) - - - - - -
----------------------------------------------------------------------------------
TOTAL OPTIONS OUTSTANDING 495,418 7.61 1,843,056 9.55 2,338,474 9.14
- -----------------------------------------------------------------------------------------------------------------
SECTION IV: EXECUTIVE OPTIONS
OPTIONS GRANTED TO LISTED OFFICERS
YEAR TO DATE AS OF END OF 2002
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM ($)
- ---------------------------------------------------------------------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE OF
UNDERLYING TO EMPLOYEES YEAR BASE PRICE
OPTIONS PER GRANT TO DATE (%) ($/SHARE) EXPIRATION DATE 5% 10%
- ---------------------------------------------------------------------------------------------------------------------------
Bharat Desai - - - - -
Marlin Mackey - - - - -
Daniel Moore - - - - -
Rajiv Tandon - - - - -
Pramode Metre 75,000 11.12% 13.65 01/18/2012 22.23 35.40
- ---------------------------------------------------------------------------------------------------------------------------
-32-
- --------------------------------------------------------------------------------------------------------------------
OPTIONS EXERCISES AND REMAINING HOLDINGS OF LISTED OFFICERS
- --------------------------------------------------------------------------------------------------------------------
YEAR-TO-DATE, AS OF END OF DECEMBER 31, 2002
- --------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUES OF UNEXERCISED
OPTIONS AT END OF QUARTER IN-THE-MONEY OPTIONS AT END
DATE OF QUARTER DATE ($)
NAME SHARES ACQUIRED VALUE REALIZED -----------------------------------------------------------
ON EXERCISE ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------------------------------------------------------------------------------
Bharat Desai
Marlin Mackey - 59,163 57,000 387,877 333,180
Daniel Moore - - 19,800 25,700 186,933 187,122
Rajiv Tandon - - 58,000 62,500 412,491 409,050
Pramode Metre - - - 75,000 - 1,023,750
SECTION V: EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR FUTURE
NUMBER OF SECURITIES TO BE ISSUANCE UNDER EQUITY
PLAN CATEGORY ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE COMPENSATION PLANS
OUTSTANDING OPTIONS, WARRANTS, PRICE OF OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
AND RIGHTS WARRANTS, AND RIGHTS ($) REFLECTED IN COLUMN (1))
- -----------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans 2,338,474 9.14 -
approved by shareholders
- -----------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans - - -
not approved by shareholders
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL 2,338,474 9.14 -
- -----------------------------------------------------------------------------------------------------------------------------------
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 Costa Mesa, California; Santa
Clara California; Phoenix, Arizona; Beaverton, Oregon; Schaumburg, Illinois;
Dallas, Texas; Minneapolis, Minnesota; New York, New York; Santa Fe, New Mexico;
Nashville, Tennessee; Coral Springs, Florida; Natick, Massachusetts; Dublin,
Ohio; London, England; Hong Kong; Munich, Germany; and Singapore.
Syntel leases approximately 56,690 square feet of office space in
Mumbai, India, under eight leases expiring on various dates from March 8, 2003
to December 31, 2007. 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
-33-
all of an office building in both Chennai and Pune, India consisting of
approximately 32,812 square feet and 14,111 square feet, respectively. The lease
terms expire April 2003 and June 2005, respectively, both 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 first quarter of 2003. When fully completed in approximately
four years, the facility will cover over 1 million square feet and will
accommodate 9,000 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 fifteen months with the capacity for about 1,800
persons.
The Company believes that the existing facilities and planned
development in Pune are adequate for its currently anticipated future needs.
ITEM 3. LEGAL PROCEEDINGS:
The Company is not currently a party to any material legal proceedings or
governmental investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of the year ended December 31, 2002.
-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 2001 and
2002.
Period High Low
- ------------------------------------------------------------------------------------------
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
First Quarter, 2002 17.250 12.030
Second Quarter, 2002 15.310 10.050
Third Quarter, 2002 13.200 10.750
Fourth Quarter, 2002 22.580 11.960
(b) There were approximately 227 shareholders of record and 3,600
beneficial holders on March 13, 2003.
(c) The Company did not pay any cash dividends during the years ended
December 31, 2002, 2001 and 2000. 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.
ITEM 6. SELECTED FINANCIAL DATA.
SYNTEL, INC. & SUBSIDIARIES
FIVE-YEAR HIGHLIGHTS (UNAUDITED)
(In thousands, except per share amounts)
The following tables set forth selected consolidated financial data and other
data concerning Syntel, Inc. for each of the last five years. The selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and related Notes thereto.
-35-
YEAR ENDED DECEMBER 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA
Net Revenues(1) $ 161,507 $ 172,283 $ 166,240 $ 162,117 $ 167,975
Cost of revenues 94,010 106,943 106,034 99,300 104,971
Gross Profit 67,497 65,340 60,206 62,817 63,004
Selling, general and administrative
expenses 31,421 34,522 34,424 32,814 28,026
Capitalized development cost impairment - 1,624 - - -
Metier Goodwill impairment and related (5,698) - 21,650 -
charges/ (credits)
Income from operations 41,774 29,194 4,132 30,003 34,978
Other income, principally interest 3,191 3,780 3,412 2,024 2,077
Income before income taxes 44,965 32,974 7,544 32,027 37,055
Income tax provision (benefit) 12,338 8,636 (967) 10,573 12,424
Net income before loss from equity
Investments and investment write off 32,627 24,338 8,511 21,454 24,631
Loss from equity investments (net of tax ) 141 3,893 526 - -
Net income $ 32,486 $ 20,445 $ 7,985 $ 21,454 $ 24,631
Net income per share, diluted $ 0.81 $ 0.52 $ 0.20 $ 0.55 $ 0.63
Weighted average shares outstanding,
Diluted 39,917 38,987 39,467 39,043 39,294
===================================================================
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA
Working capital $145,988 $103,502 $ 77,894 $ 64,893 $ 58,862
Total assets 183,572 152,247 132,898 122,468 104,235
Long-term debt - - - - -
Total shareholders' equity 154,844 112,258 96,683 90,361 64,147
OTHER DATA
Billable headcount in U.S. 1,111 987 994 1,114 1,135
Billable headcount in India 943 419 511 225 413
Billable headcount at
other locations 101 138 118 28 33
-------------------------------------------------------------------
Total billable headcount 2,155 1,544 1,623 1,367 1,581
========================================================================================================================
(1) The Company adopted the provisions of Emerging Issues Task Force (EITF)
Issue No. 01-14, "Income Statement Characterization of 'Out of Pocket'
Expenses Incurred" effective January 1, 2002. Revenues for 2001 and
2000 have been reclassified to comply with the guidance of EITF 01-14.
Revenues for 1998 and 1999 are shown net of billable expenses as it was
not practical to prepare the information for these years.
-36-
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, Motive, Aspect,
Commerce One, Oracle and Corillian; and TeamSourcing, consisting of
professional IT consulting services.
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, 2002, 2001, and 2000:
Percent of Total Revenues
2002 2001 2000
---- ---- ----
Applications Outsourcing 71% 63% 54%
E-business 20 24 26
TeamSourcing 9 13 20
--- --- ---
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 2002, 2001 and 2000 have
been on a fixed-price basis. For the years ended December 31, 2002, 2001 and
2000, fixed-price revenues comprised approximately 65%, 47% and 32% of total
Applications Outsourcing revenues, respectively. Syntel recognizes revenues from
fixed-price engagements on the percentage of completion method or as earned.
-37-
The Company re-skilled a very significant percentage of the consulting
base during 2000, 2001 and 2002 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 2000, 2001 and
2002. For the years ended December 31, 2002, 2001 and 2000, fixed price revenues
comprised approximately 24%, 26% and 30% of total E-business revenues,
respectively. Syntel recognizes revenues from fixed-price engagements on the
percentage of completion method or as earned.
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 percentage 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, a wholly owned subsidiary of the Company, provides software
development services from Mumbai and Chennai, India, where salaries of IT
professionals are comparatively lower than in the U.S.
The Company has performed a significant portion of its employee
recruiting in other countries. As of December 31, 2002, approximately 39% of
Syntel's U.S. workforce (17% of Syntel's worldwide workforce) worked under H-1B
temporary work visas in the U.S. and another 27% of the Company's U.S. workforce
(12% 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.).
-38-
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 (vi) replacement
of informal systems with a 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
commence in first quarter of 2003. 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 fifteen months 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 71%, 68% and 62% of revenues for the years ended
December 31, 2002, 2001, and 2000, respectively. The Company does not believe
there is any material collectibility exposure among its top ten customers.
For the year ended December 31, 2002 only one customer contributed
revenues in excess of 10% of total consolidated revenues. The Company's largest
customer for 2002 was American Express Company contributing approximately 18% of
total consolidated revenues. 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 Corp) and American Home Assurance Company
and certain other subsidiaries of American International Group Inc.
(collectively, "AIG") contributing approximately 18%, 11% and 11%, respectively,
of total consolidated revenues. For the year ended December 31, 2000 only one
customer contributed revenues in excess of 10% of total consolidated revenues.
The Company's largest customer for 2000 was AIG. AIG accounted for approximately
19% of consolidated revenues for the year ended December 31, 2000. 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.
-39-
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 Holiday will expire no earlier than March 31,
2003. During February 2002, the Indian government made certain changes in tax
regulations, which restricted the Export Exemption to the extent of 90% of
export profits generated by Syntel India, beginning April 2002. In the proposed
annual budget during February 2003, the Indian government has removed the
restriction of 90% beginning April 2003. The Company treats most of Syntel
India's 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 under
Indian tax laws, currently 15% under the recent changes made by Indian
government, and will be required to pay U.S. corporate income taxes on such
earnings.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
income statement data as a percentage of the Company's total revenues.
PERCENTAGE OF REVENUES
-----------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
------- ------ ------
Net Revenues....................... 100.0% 100.0% 100.0%
Cost of revenues................... 58.2 62.1 63.8
----- ----- -----
Gross profit....................... 41.8 37.9 36.2
Selling, general and
administrative expenses.......... 19.5 20.0 20.7
Metier Goodwill impairment and
related charges / (credits)...... (3.5) - 13.0
Capitalized development
cost impairment.................... - 0.9 -
----- ----- -----
Income from operations............. 25.8% 17.0% 2.5%
-40-
Following is selected segment financial data for the years ended December 31,
2002, 2001, and 2000. The Company does not allocate assets to operating segments
2002 2001 2000
---- ---- ----
(In Thousands)
Net Revenues
Applications Outsourcing $ 113,981 $ 108,274 $ 90,069
E-business 31,951 41,449 43,789
TeamSourcing 15,575 22,560 32,382
----------------------------------------------
$ 161,507 $ 172,283 $ 166,240
Gross Margin
Applications Outsourcing $ 54,053 $ 46,225 $ 38,783
E-business 11,429 14,276 13,622
TeamSourcing 2,015 4,839 7,801
----------------------------------------------
$ 67,497 $ 65,340 $ 60,206
Gross Margin %
Applications Outsourcing 47.4% 42.7% 43.1%
E-business 35.8% 34.4% 31.1%
TeamSourcing 12.9% 21.4% 24.1%
---- ----- -----
41.8% 37.9% 36.2%
Sales, general and administrative expenses $ 31,421 $ 34,522 $ 34,424
Metier Goodwill impairment and related
charges/ (credits) $ (5,698) $ -- $ 21,650
Capitalized development cost impairment $ -- $ 1,624 $ --
Income from Operations $ 41,744 $ 29,194 $ 4,132
=============================================
COMPARISON OF YEARS ENDED DECEMBER 31, 2002 AND 2001.
REVENUES. Total consolidated revenues decreased from $172.3 million in 2001 to
$161.5 million in 2002, representing a 6.3% decrease. The Company's total
revenues were more dependent upon its largest customers in 2001 as compared to
2002. The top five customers accounted for, 49% of the total revenues in 2002
down from 53% of the total revenues in 2001. However, the top 10 customers
accounted for 71% of the revenues in 2002 as compared to 68% in 2001. The
worldwide billable headcount increased to 2,155 as of December 31, 2002 compared
to 1,544 as of December 31, 2001. The increased headcount was due principally to
increased staffing in Applications Outsourcing engagements and E-business
engagements, partially offset by the managed rampdowns of the TeamSourcing
segment.
APPLICATIONS OUTSOURCING REVENUES. Applications Outsourcing revenues increased
from $108.3 million, or 63% of total revenues in 2001, to $113.9 million, or 71%
of total revenues in 2002. The $5.6 million increase is attributable principally
due to net growth in new engagements, contributing approximately $31.6 million;
partially offset by $26.0 million in lost revenues as a result of project
completions.
-41-
COST OF REVENUES. Cost of revenues consists of costs directly associated with
billable consultants in both the U.S. and offshore, including salaries, payroll
taxes, benefits, relocation costs, immigration costs, finders fees, trainee
compensation, and warranty reserves. Applications Outsourcing cost of revenues
decreased to 52.6% of Applications Outsourcing revenues in 2002, from 57.3% in
2001. The 4.7% decrease in cost of revenues as a percent of revenues was
attributable primarily to the release of vacation reserves, due to an internal
policy change, related to unused employee vacation time contributing
approximately 1.3% along with the increase in the higher margin offshore
component of the overall services contributing approximately 3.4%.
E-BUSINESS REVENUES. E-business revenues decreased to $32.0 million in 2002, or
20% of total consolidated revenues, from $41.4 million in 2001, or 24% of total
consolidated revenues. The $9.4 million decrease was attributable principally to
the recording of a sales incentive issued in the form of warrants to a large
customer in the amount of $2.9 million, loss of revenue from completed
engagements contributing approximately $16.9 million largely offset by new
business revenues of approximately $10.4 million.
COST OF REVENUES. E-business cost of revenues consists of costs directly
associated with billable consultants, including salaries, payroll taxes,
benefits, relocation costs, immigration costs, finders fees, and trainee
compensation. E-business cost of revenues decreased to 64.2% of E-business
revenues in 2002, from 65.6% in 2001. The 1.4% decrease in cost of revenues as a
percent of revenues was attributable principally to the release of vacation
reserve, due to an internal policy change, related to unused employee vacation
time, contributing approximately 0.7% and to improved average billing rates in
comparison to average compensation rates.
TEAMSOURCING REVENUES. TeamSourcing revenues decreased from $22.6 million, or
13% of total consolidated revenues in 2001, to $15.6 million, or 9% of total
consolidated revenues in 2002. The $7.0 million decrease in TeamSourcing
revenues was attributable principally to a decrease in U.S. based billable
consultants on various engagements as a result of a conscious decision by
management to move the organization's focus away from this segment.
COST OF REVENUES. TeamSourcing cost of revenues consists 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 87.1% of TeamSourcing
revenues in 2002, from 78.6% in 2001. The 8.5% increase in cost of revenues as a
percent of revenues was attributable principally to lower utilization due to the
softness in the economy, partially offset by release of vacation reserves, due
to an internal policy change, related to unused employee vacation time
contributing approximately 0.9%.
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SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses consist primarily of salaries, payroll taxes and
benefits for sales, solutions, finance, administrative, and corporate staff;
travel; telecommunications; business promotions; marketing; and various facility
costs for the Company's Global Development Centers and various offices. For the
year ended December 31, 2002, selling, general, and administrative expenses
decreased to $31.4 million, or 19.5% of revenues, from $34.5 million, or 20.0%
of revenues for the year ended December 31, 2001. The decrease of $3.1 million
in selling, general and administrative expenses was attributable principally to
decreased compensation costs due to reduced corporate staff in the U.S. and UK
($3.0 million), reversal of bonus provisions in the U.S., in excess of the
actual payouts made, based on management performance appraisals ($2.8 million),
reduction in the depreciation expenses due to fully depreciated assets ($0.3
million), reversal of outstanding checks pertaining to earlier periods ($0.9
million) and recovery of receivables that had previously been reserved ($2.1
million). The decrease was partially offset by increases in marketing expenses
($0.5 million), office expenses ($0.2 million), telecommunication costs ($0.5
million), legal expenses ($1.6 million), recognition of current period bonus
provision ($2.2 million), travel ($0.4 million), office rent ($0.2 million),
immigration expenses ($0.2 million) and increased facility costs in Germany
($0.2 million).
COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND 2000
REVENUES. Total consolidated revenues increased from $166.2 million in 2000 to
$172.3 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, partially offset by the managed rampdowns of the TeamSourcing
segment.
APPLICATIONS OUTSOURCING REVENUES. Applications Outsourcing revenues increased
from $90.0 million, or 54% of total revenues in 2000, to $108.2 million, or 63%
of total revenues in 2001. The $18.2 million increase is attributable
principally due to net growth in new engagements, contributing approximately
$33.6 million; partially offset by $15.4 million in lost revenues as a result of
project completions.
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COST OF REVENUES. Cost of revenues consists 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 57.3% of Applications Outsourcing revenues in 2001, from 56.9% in
2000. The 0.4% increase in cost of revenues as a percent of revenues was
attributable primarily to a decrease in utilization levels in 2001 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%.
E-BUSINESS REVENUES. E-business revenues decreased to $41.4 million in 2001, or
24% of total consolidated revenues, from $43.7 million in 2000, or 26% of total
consolidated revenues. The $2.3 million decrease was attributable principally to
loss of revenue from completed engagements and the discontinued Metier Division,
contributing approximately $13.6 million and $5.9 million respectively; largely
offset by new business revenues of approximately $17.2 million.
COST OF REVENUES. E-business cost of revenues consists 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 65.6% of
E-business revenues in 2001, from 68.9% in 2000. The 3.3% 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 $32.4 million, or
20% of total consolidated revenues in 2000, to $22.6 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 a conscious decision by
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 78.6% of TeamSourcing
revenues in 2001, from 75.9% in 2000. The 2.7% increase in cost of revenues as a
percentage of revenues was attributable principally to lower utilization due to
the softness in the economy.
-44-
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. 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, selling, 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 accounts in the UK and Singapore of
approximately $0.2 million and $0.1 million, respectively; as well as increased
facility costs of approximately $0.3 million in Germany. This increase was
largely offset by the savings in the 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.
QUARTERLY RESULTS OF OPERATIONS
Note 19 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, 2001 and ended December 31, 2002. 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.
-45-
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 $32.7 million, $34.6
million and $19.2 million for the years ended December 31, 2002, 2001 and 2000,
respectively. The number of days sales outstanding in accounts receivable was
approximately 56 days, 65 days and 68 days as of December 31, 2002, 2001 and
2000, respectively.
Net cash provided by investing activities was $10.8 million and net
cash used in investing activities was $20.7 million and $7.5 million for the
years ended December 31, 2002, 2001, and 2000, respectively.
Net cash provided by investing activities in 2002 of $10.8 million
included $28.0 million of proceeds from the sale of available for sale
securities, partially offset by $15.2 million used to purchase
available-for-sale securities and $2.0 million for capital expenditures,
consisting principally of PCs, and communications equipment.
Net cash used in investing activities in 2001 of $20.7 million included
$32.9 million used to purchase 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 used to purchase 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 of proceeds from the sale of
available for sale securities.
Net cash used in investing activities in 2000 of $7.5 million included
$3.8 million used for capital expenditures, consisting principally of PCs,
capitalized development costs, and communications equipment; and $3.7 million
used to purchase equity and other investments, including $2.2 million in
-46-
Textiles Online Marketplaces, $1.0 million in New2USA.com, and $0.5 million in
Vianetta Communications.
Net cash provided by financing activities was $3.3 million in 2002, due
principally to the proceeds from the issuance of shares under stock option and
stock purchase plans of $6.6 million, offset by the repurchase of 250,000 shares
of common stock for $3.3 million.
Net cash provided by financing activities was $0.5 million in 2001, due
principally to the proceeds from the issuance of stock under stock option and
stock purchase plans of $2.6 million, offset by the repurchase of 218,700 shares
of common stock for $2.1 million.
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 under stock option and
stock purchase plans of $1.7 million.
The Company had a line of credit with Bank One, which provided for
borrowings up to $20.0 million. The above line of credit expired on August 31,
2002. Before the expiration of the line of credit, the Company extended the
same. Standby letters of credit are available for up to $5,000,000 of this
amount, at any one time outstanding, expiring not later than August 31, 2003.
The line of Credit expires on August 31, 2003. 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,
2002, there was no indebtedness outstanding under the line of credit. 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, 2002 and 2001.
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
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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
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 price development 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 December 2002, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others". This Interpretation expands the disclosures to be made by a guarantor
in its interim and annual financial statements about its obligations under
certain guarantees. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation
-48-
undertaken in issuing the guarantee. The initial recognition and measurement
provisions of this interpretation are applicable on a prospective basis and will
be adopted by the Company as of January 1, 2003, for any guarantees issued or
modified after that date. The Company has given no guarantees and does not
expect the effects of the adoption of this interpretation to be significant.
Costs Associated with Exit or Disposal Activities - The FASB has issued
Statement of Financial Accounting Standard (SFAS) No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which is effective for all exit or
disposal activities initiated after December 31, 2002. This statement requires
that a liability for costs associated with an exit or disposal activity be
recognized when the liability is incurred. Such costs include one-time employee
termination costs, contract cancellation provisions and other costs typically
associated with a corporate restructuring or other exit or disposal activities.
Accounting for Stock-Based Compensation - The FASB has issued SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
which is effective for fiscal years ending after December 15, 2002. This
statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," by
providing alternative methods of transition for the adoption of the fair value
based method of accounting for stock-based compensation and by requiring
additional disclosures. The alternative methods under SFAS No. 148 include the
prospective method, the modified prospective method and the retroactive
restatement method.
Variable Interest Entities - The FASB has issued Interpretation No. 46,
"Consolidation of Variable Interest Entities," the provisions of which apply
immediately to any variable interest entity created after January 31, 2003 and
apply in the first interim period beginning after June 15, 2003 to any variable
interest entity created prior to February 1, 2003. This interpretation requires
the consolidation of a variable interest entity by its primary beneficiary and
may require the consolidation of a portion of a variable interest entity's
assets or liabilities under certain circumstances. The Company does not expect
the effects of the adoption of this interpretation to be significant.
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
-49-
mitigated as the Company has sufficient resources in the local currency to meet
immediate requirements. The Company's holdings and positions in market sensitive
instruments do not subject the Company to material risk. These exposures are
monitored and managed by the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements filed herewith are set forth on the Index to
Financial Statements on page F-1 of the separate financial section which follows
page 63 of this Report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
-50-
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 June 06, 2003(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 "Equity Compensation
Plans" in the section entitled "Executive Compensation" and 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.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an
evaluation was carried out under the supervision and with the participation of
the Registrant's management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures (as defined in Rule 13a-14 and
15d-14 under the Securities Exchange Act of 1934). Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that those
disclosure controls and procedures were effective and ensure that information
-51-
required to be disclosed by the Registrant in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Commission's rules and forms. There
have been no significant changes in the Registrant's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
-52-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(a) & (d) The financial statements and supplementary financial
information filed herewith are set forth on the Index to Financial Statements on
page F-1 of the separate financial section which follows page 63 of this Report,
which is incorporated herein by reference.
(b) On November 18,2002, the Company filed a Report on Form 8-K dated
November 11, 2002. In that report on Form 8-K, a change in certifying accountant
was reported under Item 4 and a letter from the former certifying accountant was
filed as an exhibit under Item 7.
(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, 2002, between the
Registrant and Bank One, Michigan.
10.2 Lease, dated October 24, 2001, between Big Beaver / Kilmer
Associates L.L.C. and the Registrant.
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.
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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)
filed as an Exhibit to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2001, and incorporated
herein by reference.
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.
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21 Subsidiaries of the Registrant.
99.1 Proxy Statement for the Registrant's 2002 Annual Meeting of
Shareholders, filed by the Registrant pursuant to Regulation
14A and incorporated herein by reference.
99.2 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.3 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
-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,Chairman,
Dated: March 24, 2003 President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Bharat Desai Chairman, President and Chief
- -------------------------- Executive Officer March 24, 2003
Bharat Desai (Principal Executive Officer)
/s/ Keshav Murugesh Chief Financial Officer March 24, 2003
- -------------------------- (Principal Financial and Accounting Officer)
Keshav Murugesh
/s/ Neerja Sethi Director and Vice President, March 24, 2003
- --------------------------- Corporate Affairs
Neerja Sethi
/s/ Paritosh K. Choksi Director March 24, 2003
- ---------------------------
Paritosh K. Choksi
/s/ Douglas Van Houweling Director March 24, 2003
- ---------------------------
Douglas Van Houweling
/s/ George R. Mrkonic Director March 24, 2003
- ---------------------------
George R. Mrkonic
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CERTIFICATIONS
I, Bharat Desai, Chairman, President, and Chief Executive Officer of Syntel,
Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Syntel, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
-57-
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date March 24, 2003
---------------------------------------------------------
By /s/ BHARAT DESAI
--------------------------------------------------
BHARAT DESAI
CHAIRMAN, PRESIDENT, AND CHIEF EXECUTIVE OFFICER
-58-
CERTIFICATIONS
I, Keshav Murugesh, Chief Financial Officer of Syntel, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Syntel, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
-59-
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date March 24, 2003
---------------------------------------------------------
By /s/ KESHAV MURUGESH
-----------------------------------------------------------
KESHAV MURUGESH,
CHIEF FINANCIAL OFFICER
-60-
CONTENTS
- --------------------------------------------------------------------------------------
PAGE(S)
REPORT OF INDEPENDENT AUDITORS
For 2002............................................................................62
For 2001............................................................................63
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets.........................................................64
Consolidated Statements of Income...................................................65
Consolidated Statements of Shareholders' Equity.....................................66
Consolidated Statements of Cash Flows...............................................67
Notes to Consolidated Financial Statements.......................................68-89
- 61 -
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of Syntel, Inc.
We have audited the accompanying consolidated balance sheet of Syntel, Inc. and
Subsidiaries (the "Company") as of December 31, 2002, and the related
consolidated statements of income, shareholders' equity and cash flows for the
year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Syntel, Inc. as of
December 31, 2002, and the consolidated results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States.
As discussed in Notes 1 and 3 to the consolidated financial statements, the
Company adopted SFAS No. 142, "Accounting for Goodwill and other Intangible
Assets" in 2002.
Detroit, Michigan /s/ Ernst & Young LLP
March 3, 2003
- 62 -
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
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 the results of their
operations and their cash flows for each of the two 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 LLP
Detroit, Michigan
March 25, 2002
- 63 -
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
ASSETS 2002 2001
---- ----
Current assets:
Cash and cash equivalents $ 134,976 $ 88,010
Investments, marketable securities 5,737 17,203
Accounts receivable, net of allowance for doubtful accounts 24,329 29,146
Advanced billings and other current assets 9,674 9,132
---------------------------------
Total current assets 174,716 143,491
Property and equipment 20,950 19,041
Less accumulated depreciation 15,801 13,823
---------------------------------
Property and equipment, net 5,149 5,218
Goodwill 906 906
Deferred income taxes and other non-current assets 2,801 2,632
---------------------------------
$ 183,572 $ 152,247
=================================
LIABILITIES
Current liabilities:
Accounts payable 2,026 2,184
Accrued payroll and related costs 10,885 14,930
Income taxes payable 3,530 3,702
Accrued warranty costs 100 150
Accrued liabilities 6,001 4,661
Metier related liabilities 900 8,911
Deferred revenue 5,286 5,451
--------------------------------
Total current liabilities 28,728 39,989
Total liabilities 28,728 39,989
--------------------------------
SHAREHOLDERS' EQUITY
Common stock, no par value per share, 100,000 shares authorized;
39,068 and 38,389 shares issued and outstanding at December 31, 2002 and
2001, respectively; 1 1
Additional paid-in capital 43,184 34,145
Accumulated other comprehensive loss (516) (1,577)
Retained earnings 112,175 79,689
---------------------------------
Total shareholders' equity 154,844 112,258
---------------------------------
Total liabilities and shareholders' equity $ 183,572 $ 152,247
=================================
The accompanying notes are an integral part of the consolidated financial
statements.
- 64 -
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31
2002 2001 2000
---- ---- ----
Net Revenues $ 161,507 $ 172,283 $ 166,240
Cost of revenues 94,010 106,943 106,034
--------- --------- ---------
Gross profit 67,497 65,340 60,206
Selling, general and administrative expenses 31,421 34,522 34,424
Capitalized development cost impairment - 1,624 -
Metier goodwill impairment and related charges /
(credits) (5,698) - 21,650
--------- --------- ---------
Income from operations 41,774 29,194 4,132
Other income, principally interest 3,191 3,780 3,412
--------- --------- ---------
Income before income taxes 44,965 32,974 7,544
Income tax (provision) / benefit (12,338) (8,636) 967
--------- --------- ---------
Net income before loss from equity investments 32,627 24,338 8,511
and investment write off
Loss from equity investment and investment
write off, net of tax of $2,000 in 2001 141 3,893 526
--------- --------- ---------
Net income $ 32,486 $ 20,445 $ 7,985
========= ========= =========
EARNINGS PER SHARE
Basic $0.84 $0.53 $0.21
Diluted $0.81 $0.52 $0.20
The accompanying notes are an integral part of the consolidated financial
statements.
- 65 -
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL ACCUMULATED OTHER TOTAL
COMMON STOCK PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
------------
SHARES AMOUNT CAPITAL EARNINGS LOSS EQUITY
------ ------ ------- -------- ---- ------
FOREIGN
CURRENCY
UNREALIZED TRANSLATION
GAIN ADJUSTMENT
---- ----------
BALANCE, JANUARY 1, 2000 AS 38,256 $1 $34,939 $51,259 - $(576) $85,623
ADJUSTED, SEE NOTE 3
Net income 7,985 7,985
Translation adjustments (331) (331)
------------
Other comprehensive income 7,654
------------
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 38,199 $1 $33,607 $59,244 - $(907) $91,945
Net income 20,445 20,445
Unrealized gain on investments, net 33 33
of tax
Translation adjustments (703) (703)
-------------
Other comprehensive income 19,775
-------------
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 38,389 $1 $34,145 $79,689 $33 $(1,610) $112,258
Net income 32,486 32,486
Unrealized gain on investments, net 644 644
of tax
Translation adjustments 417 417
-------------
Other comprehensive income 32,486 644 417 33,547
-------------
Common stock repurchases (250) (3,361) (3,361)
Employee stock purchase plan 76 523 523
Exercised stock options 853 6,093 6,093
Tax benefit on stock options exercised 2,881 2,881
Stock warrants sales incentive 4,407 4,407
Deferred stock warrant sales incentive (1,504) (1,504)
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 39,068 $1 $43,184 $112,175 $677 $(1,193) $154,844
====================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
- 66 -
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------
YEAR
ENDED DECEMBER 31
---------------------------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income $ 32,486 $ 20,445 $ 7,985
Adjustments to reconcile net income to net cash
Provided by/(used in) operating activities:
Depreciation and amortization 2,176 1,800 2,633
Metier Goodwill impairment and related charges (credits) (5,698) - 21,650
Goodwill amortization 0 76 655
Realized (gains)/ losses on sales of available-for-sale securities (727) 72 0
Deferred income taxes (345) 4,468 (8,311)
Stock warrants sales incentive 2,903
Compensation expense related to
Stock options 0 41 134
Loss on equity investments 141 752 526
Changes in assets and liabilities:
Accounts receivable, net 5,266 (602) (7,394)
Advance billing and other assets (406) 1,574 1,711
Accrued payroll and other liabilities (2,933) (984) (1,137)
Deferred revenues (165) 217 728
Capitalized development Cost - impairment 0 1,624
Investments Impairment 0 5,141 0
--------------------------------------
Net cash provided by operating activities 32,698 34,624 19,180
--------------------------------------
Cash flows provided by /(used in) investing activities:
Property and equipment expenditures (2,078) (2,071) (3,785)
Equity and other investments 0 (1,386) (3,730)
Purchase of available-for-sale securities (15,228) (32,952) 0
Proceeds from sales of available-for-sale securities 28,084 15,677 0
--------------------------------------
Net cash provided by/ (used in) investing activities 10,778 (20,732) (7,515)
--------------------------------------
Cash flows provided by /(used in) financing activities:
Net proceeds from issuance of stock 6,616 2,557 1,670
Common stock repurchases (3,361) (2,060) (3,136)
--------------------------------------
Net cash provided by/(used in) financing activities 3,255 497 (1,466)
--------------------------------------
Effect of foreign currency exchange rate changes on cash 235 143 (332)
--------------------------------------
Net increase in cash and cash equivalents 46,966 14,532 9,867
Cash and cash equivalents, beginning of period 88,010 73,478 63,611
--------------------------------------
Cash and cash equivalents, end of period $ 134,976 $ 88,010 $ 73,478
======================================
Cash paid during the year for income taxes $ 10,100 $ 5,356 $ 4,564
======================================
- 67 -
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, healthcare, 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. Application
Outsourcing revenues were 71%, 63% and 54% of revenues during 2002, 2001 and
2000, respectively.
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 and Selectica, , 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. E-business revenues
were 20%, 24% and 26% of total revenues in 2002, 2001 and 2000,
respectively.
Through TeamSourcing, the Company provides professional information
technology services directly to the customer. TeamSourcing contracts are
generally revocable by the customer without penalty.
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
- 68 -
liability company, Syntel Europe, Ltd., ("Syntel U.K."), a United Kingdom
limited liability company, Syntel Canada Inc., ("Syntel Canada") a Canadian
limited liability company, Syntel Deutschland GmbH, ("Syntel Germany") a
German limited liability Company, Syntel Hong Kong Ltd. ("Syntel Hong Kong")
a Hong Kong limited liability Company, Syntel 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, development
projects is measured by the percentage of costs incurred to date to the
estimated total costs at completion. The Company issues invoices related to
fixed price contracts based on achievement of milestones during a project or
other contractual terms. Differences between the timing of billings and the
recognition of revenue based upon the percentage completion method of
accounting, are recognized as accrued or deferred revenue. 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.
Revenues are reported net of sales incentives.
Reimbursements of out-of-pocket expenses are included in revenue in
accordance with Emerging Issues Task Force Consensus ("EITF') 01-14, "Income
Statement Characterization of Reimbursement received for `Out of Pocket'
expenses incurred". The Company has retroactively applied the provisions of
EITF 01-14 and has included reimbursements in the amounts of $1.5 million
and $1.4 million as revenues in 2001 and 2000, respectively.
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, 2002 and 2001,
approximately $66.6 million and $60.0 million 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 and financial institutions including other
U.S.-based and India-based banks.
- 69 -
FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISKS
Financial instruments that potentially subject us to a concentration of
credit risk consist principally of investments and accounts receivable. Cash
on deposit is held with financial institutions with high credit standings.
Our customer base consists primarily Global 2000 Companies and accordingly
our accounts receivable is not exposed to significant credit risk. However,
we periodically perform credit evaluations of our customers.
The Company establishes an allowance for doubtful accounts as a provision
for known and inherent collection risks related to its accounts receivable.
The estimation of the provision is primarily based on an analysis of past
due receivables.
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
accumulated other comprehensive loss in 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.
LONG-LIVED ASSETS (OTHER THAN GOODWILL)
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets, the Company reviews its long-lived assets (other than
goodwill) for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. We
assess the recoverability of the long-lived assets (other than goodwill) by
comparing the estimated undiscounted cash flows associated with the related
asset or group of assets against their respective carrying amounts. The
amount of an impairment charge if any, is calculated based on the excess of
the carrying amount over the fair value of those assets.
OTHER INCOME
Other Income includes interest and dividend income, gains and losses from
sale of securities and other investments.
- 70 -
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, fixtures and other equipment 7
Vehicles 3
Leasehold improvements Life of lease
Leasehold Land Life of lease
The Company capitalizes certain direct internal and external costs
associated with upgrading and enhancing its information systems to support
its information processing needs. Capitalization of such costs begins when
the preliminary planning stage for each project is completed and management
has formally authorized its funding and ends when the project is
substantially complete.
Other computer software and hardware maintenance and training costs are
charged to expenses as incurred.
GOODWILL
Prior to 2002, goodwill was amortized on a straight-line basis over 15
years.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142
"Goodwill and Other Intangible Assets". SFAS 142 replaces APB 17,
"Intangible Assets". In accordance with SFAS No. 142, effective for the
Company's year ended December 31, 2002, as a replacement to amortization of
goodwill , the Company will evaluate goodwill for impairment annually.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities including the recoverability of tangible and intangible
assets, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts including, but not limited to
warranty costs, allowance for doubtful accounts, reserves for employee
benefits, amortization and
- 71 -
impairment of goodwill, contingencies and litigation, the recognition of
revenues and profits based on percentage completion method and potential tax
liabilities. Actual results could differ from those estimates and
assumptions used in the preparation of the accompanying financial
statements.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries use the local
currency of the country in which business is conducted as its functional
currency. Revenues, costs and expenses of the foreign subsidiaries are
translated to U. S. dollars at average period exchange rates. Assets and
liabilities are translated to U. S. dollars at year-end exchange rates with
the effects of these translation adjustments being reported as a separate
component of accumulated other comprehensive loss in shareholders' equity.
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.
EMPLOYEE BENEFITS
The Company maintains 401(k) retirement plans that cover all regular
employees on Syntel's U.S. payroll. Eligible employees may contribute up to
15% of their compensation, subject to certain limitations, to the retirement
plans. The Company may make contributions to the plans at the discretion of
our Board of Directors; however, through December 31, 2002, no contributions
have been made.
Eligible employees of Syntel India also receive benefits from a provident
fund, which is a defined contribution plan. Both the employee and the
company make monthly contributions equal to a specified percentage of the
covered employee's salary to a Government administered provident fund. The
Company has no further obligations beyond its monthly contributions.
In accordance with the Payment of Gratuity Act, 1972, the Indian subsidiary
provides for
- 72 -
gratuity, a defined benefit retirement plan (the "Gratuity Plan") covering
eligible employees. The Gratuity Plan provides a lump sum payment to vested
employees at retirement, death, incapacitation or termination of employment,
of an amount based on the respective employee's salary and the tenure of
employment. Liabilities with regard to the Gratuity Plan are determined by
actuarial valuation. The Gratuity Plan is a non-funded plan and the Company
intends to discharge this liability through its internal resources.
STOCK BASED COMPENSATION
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 is as follows:
YEAR ENDED DECEMBER 31
Pro forma Net Income 2002 2001 2000
---- ---- ----
(In thousands, except per share data)
Net Income reported $32,486 $20,445 $ 7,985
Impact of SFAS No. 123 (2,924) (3,505) (2,358)
------- ------- -------
Pro forma Net Income $29,562 $16,940 $ 5,627
======= ======= =======
Earnings per share as reported
Basic $0.84 $0.53 $0.21
Diluted 0.81 0.52 0.20
Earnings per share, Pro forma
Basic $0.76 $0.44 $0.15
Diluted 0.74 0.43 0.14
Under SFAS No. 123, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the
following assumptions for grants in 2002, 2001 and 2000:
2002 2001 2000
---- ---- ----
Estimated fair value of option $5.86 $3.83 $12.41
granted
Assumptions
Risk free interest rate 3.25% 4.30% 5.00%
Expected life 5.00 5.00 5.00
Expected volatility 79.16% 80.40% 84.09%
Expected dividends $0.00 $0.00 $0.00
- 73 -
INCOME TAXES
Income tax expense is the total of the current year income tax due or
refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the
temporary differences between carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount that is more likely than
not to be realized
RECLASSIFICATIONS
Certain amounts in previously issued financial statements have been
reclassified to conform with the current year presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
Costs Associated with Exit or Disposal Activities - The FASB has issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities,"
which is effective for all exit or disposal activities initiated after
December 31, 2002. This statement requires that a liability for costs
associated with an exit or disposal activity be recognized when the
liability is incurred. Such costs include one-time employee termination
costs, contract cancellation provisions and other costs typically associated
with a corporate restructuring or other exit or disposal activities.
Accounting for Stock-Based Compensation - The FASB has issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," which
is effective for fiscal years ending after December 15, 2002. This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," by providing
alternative methods of transition for the adoption of the fair value based
method of accounting for stock-based compensation and by requiring
additional disclosures. The alternative methods under SFAS No. 148 include
the prospective method, the modified prospective method and the retroactive
restatement method. The Company has adopted the disclosure requirements of
SFAS No. 148.
Accounting and Disclosure Requirements for Guarantees - The FASB has issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,"
the provisions of
- 74 -
which apply to guarantees issued or modified after December 31, 2002. This
interpretation requires guarantors to record a liability for the fair value
of certain guarantees at their inception. The Company has given no
guarantees and does not expect the effect of adoption of this interpretation
to be significant.
Variable Interest Entities - The FASB has issued Interpretation No. 46,
"Consolidation of Variable Interest Entities," the provisions of which apply
immediately to any variable interest entity created after January 31, 2003
and apply in the first interim period beginning after June 15, 2003 to any
variable interest entity created prior to February 1, 2003. This
interpretation requires the consolidation of a variable interest entity by
its primary beneficiary and may require the consolidation of a portion of a
variable interest entity's assets or liabilities under certain
circumstances. The Company does not expect the effects of adoption to be
significant.
3. ACQUISITIONS
METIER, INC.
During 1999, the Company acquired substantially all the business and assets
of Metier, Inc. The acquisition resulted in goodwill of $20.5 million.
During the year ended December 31, 2000, the Company determined that the
Metier goodwill was impaired, resulting in a $21.6 million pretax charge,
which included a provision of $2.6 million for the estimated costs of a
settlement with the Metier shareholders.
The consideration for the Metier acquisition in 1999 included a $1.6 million
dollar payment to the Metier shareholders in April 2000 and 300,000 shares
of Syntel stock, which were to be issued in September 2000. These shares
were included in basic shares outstanding and the fair value of the shares
to be issued, $ 4.7 million, was recorded as additional paid-in capital at
the date of acquisition. During 2000, the Company entered into litigation
with the former shareholders of Metier and the $1.6 million dollar payment
was not made and the 300,000 shares were not issued. The acquisition
agreement provided Metier shareholders with the right to put the shares to
the Company under certain conditions. Accordingly, the $ 4.7 million was
been reclassified from additional paid in capital for all periods presented.
After the reclassification the accrued Metier liability at December 31, 2001
was $ 8.9 million, which was comprised of the fair value of the 300,000
shares, the $1.6 million payment referred to above and the estimated
settlement costs of $2.6 million. The number of shares used in the Company's
computations of basic and diluted earnings per share have been adjusted to
remove the 300,000 shares. This adjustment did
- 75 -
not change the reported earnings per share for the previously reported
periods.
In April 2002, the Company reached a resolution with the Metier shareholders
wherein the $1.6 million dollar payment was not made, the 300,000 shares
were not issued and the Company paid $2.3 million in settlement and legal
costs. During the second quarter, the Company determined that the remaining
$6.6 million of the accrued Metier liability, no longer required as a result
of the settlement with the Metier shareholders, should remain accrued for
the estimated costs associated with Metier-related and other litigation. In
the fourth quarter, the Company settled certain of the Metier related and
other litigation and in connection with these settlements, reversed
approximately $5.7 million of the accrued Metier liability. Approximately $
0.9 million remains in Accrued Metier Liabilities at December 31,2002 and is
related to litigation that is expected to be resolved in 2003.
IMG, INC
Goodwill at December 31, 2002 and 2001 relates to the Company's acquisition
of the business and assets of IMG, Inc. in 1999, which resulted in goodwill
of $ 1.1 million. The IMG Goodwill has been allocated to the e- business
reporting unit. The Company evaluated the carrying value of goodwill in
accordance with SFAS 142 and determined that it was not impaired. In
accordance with SFAS 142, no amortization has been recorded during the year
ended December 31, 2002.
The adjusted net income and earnings per share if goodwill had not been
amortized in 2001 and 2000 are as follows:
- ------------------------------------------------------------------------------------
2001 2000
(In thousands, except per share data)
Per Share Per Share
Net Income Basic Diluted Net Income Basic Diluted
---------- ----- ------- ---------- ----- -------
Net income / EPS as $20,445 $ 0.53 $0.52 $7,985 $0.21 $0.20
reported
Goodwill amortization 76 65
Adjusted Net Income and
earnings per share - $20,521 $ 0.54 $0.53 $8,050 $0.21 $0.20
basic/ diluted
====================================================================================
- 76 -
4. INVESTMENTS
At December 31, 2002, the Company had the following investments:
Investment
Accounting balance prior
Investment Ownership Method to impairment Description of Business
---------- --------- ------ -------------- -----------------------
recorded in
2001 (In
thousands)
New2USA (1) Equity $861 Web portal providing
information and services to
assist immigrants with
settling in the U.S.
Textiles Online
Marketplaces Ltd. 10% Cost $2,500 Business to Business internet
based online textile exchange.
Vianetta
Communications (2) <5% Cost $500 Computerized transcriptions of
medical transcripts eliminating
the need for dictation equipment.
Utilitiesmart.com 6.5% Cost $200 Business to Business and
Business to consumer E-business
Nekema.com 0.7% Cost $1,000 A web base market place for
providing e-commerce
technology to the business
requirements of Insurance and
Finance companies
Convergent Corporation 13% Cost $63 Supplier of Advance Billing
System to Communication
networks
(1) Syntel's ownership in New2USA at December 31, 2002 and as at
December 31, 2001 includes 3,500 shares of Class B common stock,
representing approximately 81% ownership. This ownership percentage
does not represent the Company's economic control, which is
approximately 20%. The web portal of the company has been closed.
(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.
The above investments were impaired with the balance being written off as of
December 31, 2001 and reflected within loss from equity investments on the
consolidated statements of income.
In addition to the Company's investment in Vianetta, the Company's president
and CEO as well as an outside director have invested $0.5 million and
$0.1 million, respectively, with terms similar to those of the Company.
Syntel's ownership in Skillbay, a web portal providing a Business to
Business internet based exchange for IT services, includes 4,000 shares of
Class B common stock representing approximately 97% Ownership. However, the
company does not have any voting interest. Accordingly, it follows the
equity basis of accounting. During the year ended December 31, 2002
- 77 -
and 2001, the Company recorded total revenues of $0.2 million and $ 0.1
million, respectively from Skillbay.
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 years ended December 31, 2002, 2001 and 2000 the Company
recorded total revenues of $0.6 million, $0.7 million and $1.8 million,
respectively.
In addition to the Company's investment in Utilitiesmart.com, the Company's
President and CEO has invested $ 0.1 million 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, 2002 and 2001, the Company recorded total
revenues of $ 1.0 million and $ 2.5 million, respectively.
5. INVESTMENTS, MARKETABLE SECURITIES
Investment in marketable securities included the following at December 31,
2002 and 2001:
2002 2001
---- ----
(In thousands)
Cost $ 4,980 $ 17,170
Unrealized gain, net $ 677 $ 33
---------------- -----------------
Carrying value $ 5,737 $ 17,203
---------------- -----------------
Gross realized gains $ 734 $ 69
Gross realized losses $ 7 $ 141
Dividend income $ 84 $ 767
Proceeds on sale of investments $ 28,084 $ 15,677
6. STOCK WARRANTS SALES INCENTIVE
During 2002, the Company granted to a significant customer an immediately
exercisable warrant entitling the customer to purchase 322,210 shares of
Company stock at an exercise price of $7.25 per share. The stated exercise
price was based upon the customer achieving a specified minimum level of
purchases of services (the "Performance Milestone") from the Company over a
specified performance period ending in October of 2003. The customer
exercised the warrant in February 2003 and received 209,739 shares in a
cashless exercise.
- 78 -
The warrant agreement provides that if the customer does not meet the
Performance Milestone, the customer would pay the Company the market price
of the Company's stock at October 2003 for all shares held by the customer
at the end of the performance period. If any shares had been sold by the
customer prior to October 2003, then the payment to the Company would equal
the gain realized by the customer on sale of such shares. Accordingly, the
customer would earn the incentive only if the Performance Milestone is met.
The Company has estimated that the customer will meet the Performance
Milestone and in accordance with EITF 01-09, "Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendor's Products", has
recorded the sales incentive as a reduction of revenues, measured based on
the fair value of the warrant at December 31, 2002, to the extent of
revenues received through December 31, 2002.
The warrant at December 31, 2002 was valued at approximately $4.4 million,
based on a Black-Scholes model using the following assumptions ; volatility
- 79.16%, interest rate - 3.25%, expected life - 2 months, expected dividend
- 0%. The Company recorded the sales incentive of $2.9 million against
revenue and the remaining sales incentive has been recorded as a
contra-equity item in the Statement of Shareholders' Equity. The remaining
sales incentive will be recorded against revenues from the customer as the
remaining revenues are earned over the performance period ending in October
2003.
The value of the sales incentive during future interim periods and at the
final measurement date will be adjusted based on the market value of the
shares on those dates. The final measurement date for calculating the value
of the sales incentive will be the date that the Performance Milestone is
reached or the shares are sold by the customer. If the customer does not
reach the Performance Milestone, as estimated, the sales incentive recorded
will be reversed.
The Company has granted the same customer certain additional performance
warrants at significantly higher performance milestones. The Company has
estimated that such higher performance milestones will not be met.
Accordingly, the Company has not accounted for these performance warrants.
When the Company estimates that such higher performance milestones will be
met, the sales incentive associated with the warrants will be recorded as a
reduction of revenue.
- 79 -
7. DEFERRED REVENUE
Deferred revenue consists of:
2002 2001
---------------------------------
(In thousands)
Uncompleted fixed price development contracts (1)
Billings $ 15,701 $ 27,508
Direct costs 6,335 12,799
Estimated earnings 5,771 12,067
-----------------------------------
Deferred revenue on uncompleted fixed price development
contracts 3,595 2,642
Advance billing on application management & support
contracts 1,241 2,405
Other deferred revenue 450 404
-----------------------------------
$5,286 $5,451
===================================
(1) Deferred revenue on uncompleted fixed price development contracts for
the years ended December 31, 2002 and 2001 includes costs in excess of
billings and estimated earnings of $0 and $243, respectively.
8. PROPERTY AND EQUIPMENT
Cost of property and equipment at December 31, 2002 and 2001 is summarized
as follows:
2002 2001
---- ----
(IN THOUSANDS)
Computer equipment and software $11,925 $11,042
Furniture, fixtures & other equipment 6,026 5,557
Vehicles 549 404
Leasehold improvements 1,274 925
Leasehold Land 1,001 -
Capital Advances / Work in Progress 175 1,113
------ ------
20,950 19,041
Accumulated depreciation and amortization 15,801 13,823
------ ------
$5,149 $ 5,218
===================
9. LINE OF CREDIT
The Company has a line-of-credit arrangement with a bank, expiring August
31, 2003, which provides for borrowings up to $20.0 million. Standby letters
of credit are available for up to $5.0 million of this amount, at any one
time outstanding, expiring not later than August 31, 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
- 80 -
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, 2002 and 2001.
10. 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, 2002 are as follows:
(In thousands)
2003 $2,071
2004 1,352
2005 917
2006 646
2007 89
thereafter 27
-------
$ 5,102
-------
Total rent expense amounted to approximately $2.4 million, $2.3 million and
$2.4 million for the years ended December 31, 2002, 2001, and 2000,
respectively.
11. INCOME TAXES
Income (loss) before income taxes for U. S. and foreign operations was as
follows:
2002 2001 2000
---- ---- ----
(In thousands)
U. S. $ 21,357 $ 12,555 $(5,439)
Foreign 23,608 20,419 12,983
--------------------------------------
$ 44,965 $ 32,974 $ 7,544
======================================
The provision for income taxes is as follows:
2002 2001 2000
---- ---- ----
(In thousands)
Current Provision
Federal $ 7,389 $ 1,828 $5,535
State 1,348 (382) 759
Foreign 3,946 2,722 1,050
------- ------- ------
Total current provision 12,683 4,168 7,344
------- ------- ------
Deferred
Federal (292) 3,220 (7,019)
State (53) 1,248 (1,292)
------- ------- ------
Total deferred (credit) provision (345) 4,468 (8,311)
------- ------- ------
Total provision (benefit) for income taxes $ 12,338 $ 8,636 $ (967)
======== ======= ======
- 81 -
The components of the net deferred tax asset are as follows:
2002 2001
------ ------
(In thousands)
Deferred tax assets
Goodwill impairment and related costs $ -- $ 956
Investments and capitalized development costs impairment 2,632 2,632
Accrued expenses and allowances 4,787 3,304
Advanced billing receipts 473 655
------ ------
Net deferred tax asset $7,892 $7,547
====== ======
Balance sheet classification of the net deferred tax asset is summarized
as follows:
S 2002 2001
------ ------
(IN THOUSANDS)
Deferred tax asset, current (1) $5,187 $4,915
Deferred tax asset, non-current 2,705 2,632
------ ------
$7,892 $7,547
====== ======
(1) Current deferred tax assets are included in advanced billing and
other current assets at December 31, 2002 and 2001, 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 restricted 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. In the proposed annual budget during
February 2003, the Indian government has removed the restriction of 90%
beginning April 2003.
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 $ 24.7
million at December 31, 2002.
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:
- 82 -
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
Statutory provision $ 15,738 $ 11,541 $ 2,640
State taxes, net of federal benefit 787 431 (287)
Tax-free investment income (411) (527) (676)
Foreign effective tax rates different from US (4,317) (4,425) (3,494)
Statutory Rate
Other,net 541 1,616 850
-------- -------- --------
Total Provision $ 12,338 $ 8,636 $ (967)
======== ======== ========
12. EARNINGS PER SHARE
The reconciliation of earnings per share computations for the years 2002,
2001, and 2000 are as follows:
2002 2001 2000
------------------------- ---------------------- ----------------------
Per Per Per
Shares Share Shares Share Shares Share
------ ----- ------ ----- ------ -----
(In thousands, except per share data)
Basic earnings per share 38,733 $0.84 38,220 $ 0.53 38,323 $0.21
Net dilutive effect of stock
Options and warrants outstanding 1,184 (.03) 767 (.01) 1,144 (.01)
------------------------- ---------------------- ----------------------
39,917 $0.81 38,987 $ 0.52 39,467 $0.20
========================= ====================== ======================
As of December 31, 2001 and 2000, stock options to purchase 411,379 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. No options were excluded from the
computation as of December 31, 2002.
13. 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 was being recognized over the vesting
period for such difference.
- 83 -
Option activity during the years ended December 31, 2002, 2001 and 2000
is as follows:
Weighted
Number Average
of Shares Price
--------- -----
Shares under option
Outstanding, January 1, 2000 3,137,237 $7.93
Activity during 2000
Granted, price equals fair value 618,796 13.04
Exercised 103,214 5.24
Forfeited 1,158,436 10.47
Expired 8,390 6.33
--------------- -------------------
Outstanding, December 31, 2000 2,485,993 8.04
Activity during 2001
Granted, price equals fair value 788,025 6.40
Exercised 233,470 6.06
Forfeited 283,338 9.41
Expired 8,914 9.46
---------------------------------------
Outstanding, December 31, 2001 2,748,296 7.68
Activity during 2002
Granted, price equals fair value 674,598 12.31
Exercised 853,083 7.14
Forfeited 223,629 9.19
Expired 7,708 8.38
--------------- -------------------
Outstanding, December 31, 2002 2,338,474 $9.14
=============== ===================
Exercisable, December 31, 2002 495,418 $7.61
=============== ===================
The following tables sets forth details of options outstanding and
exercisable at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------------------------------------
Range of Exercise Number Weighted Weighted Number Weighted
Prices Outstanding Average Average Exercisable Average
Contractual Exercise Exercise Price
Life Price
--------------------------------------------------------------------------------------------------
$0.00 - $3.31 12,250 4.3 $ 1.33 12,250 $ 1.33
$3.31 - $6.63 733,713 7.5 5.13 178,225 5.33
$6.63 - $9.95 738,572 7.3 8.53 222,792 8.31
$9.95 - $13.27 459,251 8.0 11.75 76,851 11.36
$13.27 - $16.59 305,688 9.1 14.08 5,300 14.42
$16.59 - $19.91 82,000 9.4 17.64
$19.91 - $23.23 7,000 9.9 19.99
2,338,474 7.8 $9.14 495,418 $7.61
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
- 84 -
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, 2002 and 2001 the Company has
$0.4 million and $ 0.2 million, respectively of employee withholdings,
included in accrued payroll and related costs in the balance sheet to be
used to purchase company stock.
14. COMMITMENTS & CONTINGENCIES
The Indian subsidiary had commitments for capital expenditures (net of
advances) of $0.3 million related to a new facility being constructed at
Pune, India, as on December 31, 2002. The Company and its subsidiaries
are parties to litigation and claims which have arisen in the normal
course of their activities. Although the amount of the Company's ultimate
liability, if any, with respect to these matters cannot be determined
with reasonable certainty, management, after consultation with legal
counsel, believes that they will not have a material adverse effect upon
the Company's consolidated financial position.
15. EMPLOYEE BENEFIT PLANS
Provident Fund Contribution expense recognized by Syntel India
was $0.1 million, $0.1 million and $0.09 million for the years ended
December 31, 2002, 2001 and 2000, respectively.
Expense recognized by Syntel India under the Gratuity Plan was
$0.2 million, $0.1 million and $0.04 million for the years ended December
31, 2002, 2001 and 2000, respectively.
The Company offers a discretionary bonus plan for its
employees. During 2002, management revised its estimate of the 2001 bonus
compensation and reversed approximately $2.8 million of bonus
compensation accrued as of December 31, 2001, which was in excess of the
actual payouts made, based on management performance appraisals.
16. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Allowance for Doubtful Accounts 2002 2001 2000
------------------------------- ---- ---- ----
(In thousands)
Balance at beginning of period $ 5,852 $ 3,309 $ 3,323
Charged to costs and expenses 692 2,543 (3)
Uncollectible accounts written off, net of
recoveries 3,162 - 11
---------------------------------------------
Balance at end of period $ 3,382 $ 5,852 $ 3,309
---------------------------------------------
- 85 -
17. 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 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.
- 86 -
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.
2002 2001 2000
---- ---- ----
(In thousands)
Net Revenues
Application Outsourcing $113,981 $ 108,274 $ 90,069
E-business 31,951 41,449 43,789
TeamSourcing 15,575 22,560 32,382
-------------------------------------------
161,507 172,283 166,240
Gross Profit
Application Outsourcing 54,053 46,225 38,783
E-business 11,429 14,276 13,622
TeamSourcing 2,015 4,839 7,801
-------------------------------------------
67,497 65,340 60,206
Selling, general and administrative expenses 31,421 34,522 34,424
Metier goodwill impairment and related
charges/(credit) (5,698) - 21,650
Capitalized development cost impairment 1,624 -
-------------------------------------------
Income from operations $41,774 $29,194 $4,132
===========================================
During the year ended December 31, 2002, one customer American Express
Corp. contributed revenue in excess of 10% of total consolidated
revenues. The Company's largest customer in 2002 was American Express
Corp. Revenue from this customer was approximately $28.6 million,
contributing approximately 18% of total consolidated revenues during
2002. At December 31, 2002 accounts receivable, from this customer was
nil. All revenue from this customer was generated in the Applications
Outsourcing segment.
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 $31.1
million, $19.0 million and $18.6 million 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, were from
- 87 -
these customers. All revenues from these customers were generated in the
Applications Outsourcing segment.
During the year ended December 31, 2000, the Company had one customer,
AIG, that contributed in excess of 10% of the total consolidated
revenues. Revenue from this customer was approximately $31.8 million,
contributing approximately 19% of total consolidated revenues during
2000. At December 31, 2000, approximately 2% of accounts receivable, was
from this customer. All revenues from this customer were generated in the
Applications Outsourcing segment.
18. GEOGRAPHIC INFORMATION
Customers of the Company are primarily situated in the United States. Net
revenues, income before income taxes and identifiable assets by
geographic location were as follows:
2002 2001 2000
---- ---- ----
(In thousands)
Net Revenues
North America, primarily United States $148,326 $153,821 $156,093
India 43,891 30,487 19,716
UK 12,182 16,731 9,317
Far East, primarily Singapore 830 1,328 794
Germany 85 - -
Intercompany revenue elimination (primarily
India) (43,807) (30,084) (19,680)
----------------------------------------------
Total revenue $161,507 $172,283 $166,240
==============================================
Income / (loss) before income taxes
North America, primarily United States $21,357 $12,555 $(5,439)
India 23,417 18,390 12,580
UK 661 2,294 358
Far East, primarily Singapore (32) 61 -
Germany (438) (326) 45
----------------------------------------------
Income/(loss) before income taxes $44,965 $32,974 $7,544
==============================================
Assets, December 31
North America, primarily United States * $125,932 $108,186 $101,105
India 50,447 37,976 24,170
UK 6,808 5,383 7,345
Far East, primarily Singapore 363 446 278
Germany 22 256 -
Total assets $183,572 $152,247 $132,898
==============================================
* Assets include current assets, deferred tax assets , property and
equipment and goodwill.
- 88 -
19. 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, except per share data)
2002
Net Revenues (a) $40,490 $39,500 $42,126 $39,391 $161,507
Cost of revenues (b) 24,559 23,903 23,332 22,216 94,010
--------------------------------------------------------
Gross profit 15,931 15,597 18,794 17,175 67,497
Selling, general and administrative expenses (c) 8,021 7,648 7,976 7,776 31,421
Write Back related to Metier settlement (d) - - - (5,698) (5,698)
--------------------------------------------------------
Income from operations 7,910 7,949 10,818 15,097 41,774
Other income, principally interest 678 733 795 985 3,191
--------------------------------------------------------
Income before income taxes 8,588 8,682 11,613 16,082 44,965
Income tax provision 2,227 2,397 2,924 4,790 12,338
--------------------------------------------------------
Net income before loss from 6,361 6,285 8,689 11,292 32,627
equity investments
Loss from equity investments - - - 141 141
--------------------------------------------------------
Net income $6,361 $6,285 $8,689 $11,151 $32,486
========================================================
Earnings per share, diluted (e) $0.16 $0.16 $0.22 $0.28 $0.81
========================================================
Weighted average shares outstanding, diluted (f) 40,088 39,768 39,509 40,304 39,917
========================================================
2001
Net Revenues $42,752 $42,953 $43,257 $43,321 $172,283
Cost of revenues 27,145 26,337 26,726 26,735 106,943
--------------------------------------------------------
Gross profit 15,607 16,616 16,531 16,586 65,340
Selling, 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, principally interest 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 5,886 6,570 6,546 5,336 24,338
equity investments and
investment write off (net of tax)
Loss from equity investments and investment 321 218 213 3,141 3,893
write off
--------------------------------------------------------
Net income $5,565 $6,352 $6,333 $2,195 $20,445
========================================================
Earnings per share, diluted (e) $0.14 $0.16 $0.16 $0.06 $0.52
========================================================
Weighted average shares outstanding, diluted (f) 38,812 38,814 38,799 39,523 38,987
========================================================
(a) As discussed in note 6, the Company recorded a $2.9 million stock warrant
sales incentive as a reduction of revenue in the fourth quarter.
(b) During the fourth quarter, the Company reversed $1.3 million in connection
with a change in an internal policy related to unused employee vacation
time.
(c) During the second quarter, the Company changed its estimate of the payout
on previously accrued discretionary bonus and reversed $2.8 million. In
addition, the Company recorded a recovery of $0.8 million and $1.3 million
in the second quarter and forth quarter respectively, relating to
receivables that had previously been reserved for.
(d) As discussed in Note 3, the Company reached a resolution with the Metier
shareholders in the second quarter for $2.0 million and paid legal costs of
$0.3 million. The remaining accrued Metier liability of $6.6 million was
determined to be necessary for the estimated settlement costs of
Metier-related and other litigation. Certain of the Metier-related and other
litigation was settled in the fourth quarter and the Company reversed $5.7
million of the accrued Metier liability.
(e) Earnings per share for the quarter are computed independently and may not
equal the earnings per share computed for the total year.
(f) Refer note 3 related to Metier with regard to change in previously reported
weighted average shares outstanding.
(g) Certain amounts in previously issued quarterly financial data have been
reclassified to conform to the full year presentation.
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EXHIBIT INDEX
Exhibit No. Description
10.4 Line of Credit Agreement, dated August 31, 2002, between the
Registrant and Bank One, Michigan.
10.5 Lease, dated October 24, 2001, between Big Beaver/Kilmer
Associates L.L.C. and the Registrant.
21 Subsidiaries of the Registrant.
99.2 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.3 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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