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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2003 or
----------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
------------ -------------
Commission file number 0-22903 -------
SYNTEL, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Michigan 38-2312018
------------------------------- -------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
525 E. Big Beaver Road, Suite 300, Troy, Michigan 48083
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(Address of Principal Executive Offices) (Zip Code)
(248) 619-2800
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----------- ----------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, no par value: 39,470,035 shares issued and outstanding as of
April 17, 2003.
SYNTEL, INC.
INDEX
Part I Financial Information Page
Item 1 Financial Statements
Condensed Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II Other Information 16
Signatures 17
Certificate of Principal Executive officer 18
Certificate of Principal Financial officer 19
2
SYNTEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS
ENDED MARCH 31
----------------------------
2003 2002
---- ----
Revenues (net) $ 44,078 $ 40,490
Cost of revenues 25,080 24,559
--------- ----------
Gross profit 18,998 15,931
Selling, general and administrative expenses 7,889 8,021
--------- ----------
Income from operations 11,109 7,910
Other income, principally interest 615 678
--------- ----------
Income before income taxes 11,724 8,588
Income tax 3,347 2,227
--------- ----------
Net income before loss from equity investment 8,377 6,361
Loss from equity investment 25 0
--------- ----------
Net income $ 8,352 $ 6,361
========= ==========
EARNINGS PER SHARE
Basic $ 0.21 $ 0.16
Diluted $ 0.21 $ 0.16
Weighted average common shares outstanding:
Basic 39,247 38,563
========= ==========
Diluted 40,493 40,088
========= ==========
3
SYNTEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2003 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents $139,970 $ 134,976
Investments, marketable securities 8,266 5,737
Accounts receivable, net of provision
for doubtful accounts 28,770 24,329
Advanced billings and other current assets 8,546 9,674
--------- ----------
Total current assets 185,552 174,716
Property and equipment 21,840 20,950
Less accumulated depreciation 16,374 15,801
--------- ----------
Property and equipment, net 5,466 5,149
Goodwill 906 906
Deferred income taxes and other noncurrent assets 2,819 2,801
--------- ----------
$ 194,743 $ 183,572
========= ==========
LIABILITIES
Current liabilities:
Accrued payroll and related costs $ 9,611 $ 10,885
Accounts payable and other current liabilities 16,446 12,557
Deferred revenue 3,480 5,286
--------- ----------
Total liabilities 29,537 28,728
SHAREHOLDERS' EQUITY
Total Shareholders' Equity 165,206 154,844
--------- ----------
Total liabilities and shareholders' equity $ 194,743 $ 183,572
========= ==========
4
SYNTEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31
------------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 8,352 $ 6,361
========== ==========
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 534 510
Realized (gains) / losses on sales of available-for-sale securities 12
Deferred income taxes 388 175
Stock warrants sales incentive 86
Loss on equity investments 25
Changes in assets and liabilities:
Accounts receivable, net (4,205) (569)
Advance billing and other assets 744 158
Accrued payroll and other liabilities 3,036 (432)
Deferred revenues (1,806) (1,529)
---------- ---------
Net cash provided by operating activities 7,154 4,686
Cash flows from investing activities,
Property and equipment expenditures (819) (519)
Purchase of available-for-sale securities (2,465) (11,925)
Proceeds from sales of available-for-sale securities 0 13,185
---------- ---------
Net cash provided by/(used in) investing activities (3,284) 741
Cash flows from financing activities:
Net proceeds from issuance of stock 1,440 2,412
Common stock repurchases (160) (634)
---------- ---------
Net cash provided by financing activities 1,280 1,778
Effect of foreign currency exchange rate changes on cash (156) 65
---------- ---------
Net increase in cash and cash equivalents 4,994 7,270
Cash and cash equivalents, beginning of period $134,976 $ 88,010
Cash and cash equivalents, end of period
$139,970 $ 95,280
5
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying condensed consolidated financial statements of Syntel,
Inc. (the "Company") have been prepared by management, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. In the opinion of the management, the accompanying
unaudited condensed consolidated financial statements contain all
adjustments, consisting of normal recurring adjustments, necessary to
present fairly the financial position of Syntel, Inc. and its subsidiaries
as of March 31, 2003, the results of their operations for the three month
period ended March 31, 2003 and March 31, 2002, and cash flows for the
three months ended March 31, 2003 and March 31, 2002. The year end
condensed balance sheet as of December 31, 2002 was derived from audited
financial statements but does not include all disclosures required by
accounting principles generally accepted in the United States. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10K for the year
ended December 31, 2002.
Operating results for the three months ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2003.
2. PRINCIPLES OF CONSOLIDATION AND ORGANIZATION
The consolidated financial statements include the accounts of Syntel, Inc.
("Syntel") and its wholly owned subsidiaries Syntel (India) Limited
("Syntel India"), an Indian limited liability company, Syntel "Singapore"
PTE., Ltd., ("Syntel Singapore"), a Singapore limited liability company,
Syntel Europe, Ltd., ("Syntel U.K."), a United Kingdom limited liability
company, Syntel Canada Inc., ("Syntel Canada") a Canada limited liability
company, Syntel Deutschland GmbH, ("Syntel Germany") a Germany limited
liability Company, Syntel Hong Kong Ltd., ("Syntel Hong Kong") a Hong Kong
limited liability Company, Syntel Mauritius Limited, ("Syntel Mauritius") a
Mauritius limited liability Company and Syntel "Australia" Pty. Limited,
("Syntel Australia"), an Australian limited liability Company. All
intercompany balances and transactions have been eliminated.
3. 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 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. During the first quarter, management
revised its estimates of outstanding bonus compensation and reversed $0.6
million of bonus compensation accrued as of December 31, 2002. In addition,
in connection with settlements and other changes in estimates of underlying
legal costs, $0.3 million of provision for litigation and legal fees was
reversed.
4. 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.
6
Revenues are reported net of sales incentives.
Reimbursements of out-of-pocket expenses are included in revenue in
accordance with Emerging Issues Task Force Consensus ("EITF") 01-14,
"Income Statement Characterization of Reimbursement received for `Out of
Pocket' expenses incurred".
5. CASH AND CASH EQUIVALENTS
For the purpose of reporting cash and cash equivalents, the Company
considers all liquid investments purchased with a maturity of three months
or less to be cash equivalents.
At March 31, 2003 and 2002, approximately $63.1 million and $58.1 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 institutions
including other U.S.-based and local India-based banks.
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. 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 market value of the shares at March 31, 2003, to the extent of
revenues received through March 31, 2003.
The shares at March 31, 2003 were valued at approximately $4.02 million.
The Company recorded the portion of the sales incentive earned in the first
quarter of $ 86,451 against revenue. Cumulatively, the Company has recorded
$3.0 million of the sales incentive as a reduction of 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.
7
7. COMPREHENSIVE INCOME
Total Comprehensive Income for the three month period ended March 31, 2003
and 2002 was as follows (in thousands):
Three Months Ended
------------------
March 31
--------
2003 2002
---- ----
Net income $8,352 $6,361
Other comprehensive income
Unrealized Gain 14 50
Foreign currency translation adjustments 62 (106)
------ ------
Total comprehensive income $8,428 $6,305
====== ======
8. EARNINGS PER SHARE
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 are calculated
considering these potentially dilutive options.
The following table sets forth the computation of earnings per share.
Three Months Ended
March 31, 2003 March 31, 2002
--------------- --------------
Weighted Earnings Weighted Earnings
Average per Average per
Shares share Shares share
------ ----- ------ -----
(in thousands, except per share earnings)
Basic earnings per share 39,247 $ 0.21 38,563 $ 0.16
Net dilutive effect of stock options
outstanding 1,246 1,525
-------- -------- ------- -------
Diluted earnings per share 40,493 $ 0.21 40,088 $ 0.16
======== ======== ======= =======
9. SEGMENT REPORTING
The Company manages its operations through three segments,
Applications Outsourcing, e-Business, and TeamSourcing. Management
allocates all direct expenses to the segments. Financial data for each
segment for the three months period ended March 31, 2003 and March 31,
2002 is as follows:
Three Months Ended
------------------
March 31, 2003 March 31, 2002
-------------- --------------
(In thousands)
Revenues:
Applications Outsourcing $ 32,967 $ 27,467
e-Business 8,466 8,557
TeamSourcing 2,645 4,466
--------- ----------
$ 44,078 $ 40,490
--------- ----------
Gross Profit:
Applications Outsourcing $ 15,010 $ 12,143
e-Business 3,685 3,061
TeamSourcing 303 727
--------- ----------
$ 18,998 $ 15,931
--------- ----------
During the quarter ended March 31, 2003, two customers namely American
Express Corp. and Target Corporation contributed revenues in excess of
10% of total consolidated revenues. Revenues from these customers were
$6.5 million and $4.9 million, contributing approximately 15 % and 11%
respectively, of total consolidated revenues during first quarter of
2003.
During the quarter ended March 31, 2002, the Company had one customer,
American Express Corp. that contributed revenues in excess of 10% of
total consolidated revenues. Revenues from this customer was $6.1
million, contributing
8
approximately 15 % of total consolidated revenues during first quarter of 2002.
10. 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:
THREE MONTHS ENDED
------------------------
MARCH 31 MARCH 31,
--------- ----------
2003 2002
---- ----
(In thousands)
Net Revenues
North America, primarily United States $ 40,396 $ 37,705
India 15,236 7,681
UK 3,543 2,552
Far East, primarily Singapore 137 233
Germany 5 -
Intercompany revenue elimination (primarily (15,239) (7,681)
India) ---------- ----------
Total revenue $ 44,078 $ 40,490
========== ==========
Income/(loss) before income taxes
North America, primarily United States $ 3,441 $ 4,879
India 7,964 4,254
UK 473 (458)
Far East, primarily Singapore (51) 43
Germany (103) (130)
---------- ----------
Income/(loss) before income taxes $ 11,724 $ 8,588
========== ==========
Assets, March 31
North America, primarily United States * $131,385 $110,921
India 56,444 42,548
UK 6,528 4,409
Far East, primarily Singapore 289 492
Germany 97 151
---------- ----------
Total assets $194,743 $158,521
========== ==========
* Assets include current assets, deferred tax assets, property and equipment
and goodwill.
11. INCOME TAXES
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:
Q1 2003 Q1 2002
------- -------
(In thousands)
Statutory provision $ 4,103 $ 3,006
State taxes, net of federal benefit 124 183
Tax-free investment income (101) (74)
Foreign effective tax rates different from US (779) (888)
Statutory Rate ------- -------
Total Provision $ 3,347 $ 2,227
======= =======
12. STOCK BASED COMPENSATION
The Company has elected to measure stock based 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
9
for Stock Based Compensation", the pro forma impact on the Company's net
income and earnings per share is as follows:
THREE MONTHS ENDED
MARCH 31
2003 2002
---- ----
(in thousands)
Net Income
As reported $ 8,352 $ 6,361
Impact of SFAS No. 123, net of tax $(1,168) $(1,655)
------- -------
Pro forma net income $ 7,184 $ 4,706
Earnings per share, pro forma
Basic earnings per share $ 0.18 $ 0.12
Diluted earnings per share $ 0.18 $ 0.12
Earnings per share as reported
Basic earnings per share $ 0.21 $ 0.16
Diluted earnings per share $ 0.21 $ 0.16
Weighted Average Shares Outstanding
Basic 39,247 38,563
Diluted 40,493 40,088
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 Q1 2003 and Q1 2002:
Q1 2003 Q1 2002
-------- --------
Estimated fair value of option granted $ 5.85 $ 6.08
Assumptions
Risk free interest rate 2.80% 3.25%
Expected life 5 5
Expected volatility 78.41% 84.42%
Expected dividends $ 0.00 $ 0.00
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SYNTEL INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
REVENUES. The Company's revenues consist of fees derived from its
Applications Outsourcing, e-Business, and TeamSourcing business segments.
Revenues increased by 8.9% to $44.1 million in the first quarter of 2003
from $40.5 million in the first quarter of 2002. Worldwide billable
headcount, including personnel employed by Syntel India, Syntel Singapore,
Syntel Europe, and Syntel Germany as of March 31, 2003 increased to 2,251
compared to 1,581 as of March 31, 2002.
APPLICATIONS OUTSOURCING REVENUES. Applications Outsourcing revenues
increased to $33.0 million for the first quarter of 2003, or 74.8% of total
revenues, from $27.5 million, or 67.8% of first quarter revenues for 2002.
The $5.5 million increase for the first quarter was attributable principally
to net growth in new engagements contributing approximately $17.5 million
largely offset by $12 million in lost revenues as a result of project
completion.
APPLICATIONS OUTSOURCING COST OF REVENUES. Cost of revenues consists of
costs directly associated with billable consultants in the US and offshore,
including salaries, payroll taxes, benefits, relocation costs, immigration
costs, finders fees, trainee compensation, and travel. Applications
Outsourcing costs of revenues decreased to 54.5% total Applications
Outsourcing revenues for the first quarter of 2003, from 55.8% for the first
quarter of 2002. The 1.3% decrease in cost of revenues as a percent of
revenues for the first quarter was attributable to the increase in higher
margin offshore component of the overall services.
E-BUSINESS REVENUES. e-Business revenues decreased to $8.5 million for the
first quarter of 2003, or 19.2% of total consolidated revenues, from $8.6
million, or 21.1% of total consolidated revenues for the first quarter of
2002. The revenues from this segment remained more or less constant.
E-BUSINESS COST OF REVENUES. e-Business cost of revenues consists of costs
directly associated with billable consultants in the US and offshore,
including salaries, payroll taxes, benefits, relocation costs, immigration
costs, finders fees, trainee compensation, and travel. e-Business cost of
revenues decreased to 56.5% of total e-Business revenues for the first
quarter of 2003, from 64.2% for the first quarter of 2002. The 7.7% decrease
was attributable principally to decreased compensation and benefit costs in
relation to the billing rates.
TEAMSOURCING REVENUES. TeamSourcing revenues decreased to $2.6 million for
the first quarter of 2003, or 6% of total revenues, down from $4.5 million,
or 11% of total revenues for the first quarter of 2002. The $1.9 million
decrease for the first quarter was principally due to a decrease in US based
billable consultants on various engagements, as a result of a conscious
decision by management to reduce organizational focus away from this segment
and focusing on higher margin Segments.
TEAMSOURCING COST OF REVENUES. TeamSourcing cost of revenues consists of
costs directly associated with billable consultants in the US, including
salaries, payroll taxes, benefits, relocation costs, immigration costs,
finders fees, trainee compensation, and travel. TeamSourcing cost of
revenues increased to 88.5% of TeamSourcing revenues for the first quarter
of 2003, from 83.7% for the first quarter of 2002. The 4.8% increase in cost
of revenues as a percent of total TeamSourcing revenues was attributable
primarily to lower utilization due to the softness in the economy.
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. Selling, general, and administrative costs for the three months
ended March 31, 2003 were $7.9 million or 17.9% of total revenues, compared
to $8 million or 19.8% of total revenues for the three months ended March
31, 2002. During the first quarter, management revised its estimates of
outstanding bonus compensation and reversed $0.6 million of bonus
compensation accrued as of December 31, 2002. In addition, in connections
with settlements and other changes in estimates of underlying legal costs,
$0.3 million of provision for litigation and legal fees was reversed. The
change in selling, general and administrative expenses was attributable
principally to an increase in travel, contract services and training
expenses contributing approximately $0.2 million, $0.2 million and
$0.1 million respectively offset by a decrease in compensation costs and
reduction in office expenses contributing approximately $0.4 million and
$0.2 million respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company generally has financed its working capital needs through
operations. The Company's cash and cash equivalents consist primarily of
certificates of deposit, corporate bonds and treasury notes. 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.
11
Net cash generated by operating activities was $7.1 million for the first
three months of 2003, compared to $4.7 million for the first three months of
2002. The number of days sales outstanding in accounts receivable was
approximately 59 days and 70 days as of March 31, 2003 and March 31, 2002,
respectively.
Net cash used by investing activities was $3.3 million for the first three
months of 2003, consisted principally of $2.5 million for purchase of
available-for-sale securities and $0.8 million for capital expenditures,
consisting principally of PCs and communication equipments. Net cash
provided by investing activities was $0.7 million for the first three months
of 2002 consisted principally of $13.2 million for proceeds from sale of
available-for-sale securities, partially offset by $12.0 million for
purchase of available-for-sale securities and $0.5 million for capital
expenditures, consisting principally of PC's and communication equipments.
Net cash provided by financing activities was $1.3 million for the first
three months of 2003, consisted principally of $1.4 million for the proceeds
from the exercise of stock options, offset by common stock repurchases of
$0.2 million. Net cash provided by financing activities was $1.8 million for
the first three months of 2002, consisted principally of $2.4 million for
the proceeds from the exercise of stock options, offset by common stock
repurchases of $0.6 million.
The Company has a line of credit with Bank One, which provides for
borrowings up to $20.0 million. 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 March 31, 2003, there was
no indebtedness outstanding under the line of credit. The letters of credit
bear 1% fee of the face value payable annually in advance. Borrowings under
the line of credit bear interest at 1) a formula approximating the bank's
Eurodollar rate plus applicable margin of 1.25% or 2) the bank's prime rate
plus 1.25%. No borrowings were outstanding at March 31, 2003 and 2002.
The Company believes that the combination of present cash balances and
future operating cash flows will be sufficient to meet the Company's
currently anticipated cash requirements for at least the next 12 months.
CRITICAL ACCOUNTING POLICIES
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.
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 MARCH 31, 2003 AND DECEMBER 31, 2002 AND 2001
- ---------------------------------------------------------------------------------------------------------------------------
PARTICULARS 2003 YTD 2002 YTD 2001 YTD
- ---------------------------------------------------------------------------------------------------------------------------
Net grants during the period as % of
outstanding shares (#) 0.09% 1.74% 2.06%
- -------------------------------------
Grants to listed officers* during
the period as % of total options
granted (%) 0.00% 11.12% 15.86%
- -------------------------------------
Grants to listed officers* during
the period as % of outstanding
shares (%) 0.00% 0.19% 0.33%
- -------------------------------------
Cumulative options held by listed
officers* as % of total options
outstanding (%) 13.72% 15.27% 10.27%
- ---------------------------------------------------------------------------------------------------------------------------
*See section IV for listed officers; these are defined by the SEC for the proxy
as the CEO and each of the four other most highly compensated executive
officers.
12
SECTION III. GENERAL OPTION INFORMATION
- ----------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPTION ACTIVITY
AS OF END OF MARCH 31, 2003 AND DECEMBER 31, 2002
- ----------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF OPTIONS NUMBER OF SHARES WEIGHTED AVERAGE
OUTSTANDING (#) (#) EXERCISE PRICE ($)
- ----------------------------------------------------------------------------------------------------------------------
Last Fiscal Year (as DECEMBER 31, 2001 2,748,296 7.68
- ---------------------
reported in the 10K)
- -------------------- Grants 674,598 - 12.31
Options assumed in acquisitions - - -
Exercises 853,083 - 7.14
Cancellations 231,337 - 9.16
Additional shares reserved - - -
DECEMBER 31, 2002 2,338,474 9.14
Year to Date Grants 36,000 - 19.91
- ------------
(As of End of Options assumed in acquisitions -
Current Interim Exercises 151,950 - 9.33
Reporting Period) Cancellations 87,014 - 12.56
Additional shares reserved - -
MARCH 31, 2003 2,135,510 10.01
- ----------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
IN-THE-MONEY AND OUT-OF-THE-MONEY OPTION INFORMATION
AS OF END OF CURRENT INTERIM REPORTING PERIOD
- --------------------------------------------------------------------------------------------------------------------------------
EXERCISABLE UNEXERCISABLE TOTAL
WTD. AVG. SHARES (#) WTD. AVG. SHARES (#) WTD. AVG.
EXERCISE PRICE EXERCISE PRICE EXERCISE PRICE
AS OF END OF QUARTER MARCH 31, 2003 SHARES (#) ($) ($) ($)
- --------------------------------------------------------------------------------------------------------------------------------
In-the-Money 657,409 7.69 1,452,101 10.86 2,109,510 9.87
Out-of-the-Money (1) - - 26,000 21.27 26,000 21.27
---------------------------------------------------------------------------------------------
Total Options Outstanding 657,409 7.69 1,478,101 11.04 2,135,510 10.01
=============================================================================================
- --------------------------------------------------------------------------------------------------------------------------------
(1) Out-of-the-money options are those options with an exercise price equal to
or above the closing price of $19.17 at the end of the quarter.
13
SECTION IV. EXECUTIVE OPTIONS
- ------------------------------------------------------------------------------------------------------------------------------
OPTIONS GRANTED TO LISTED OFFICERS*
YEAR-TO-DATE, AS OF END OF MARCH 31, 2003
- ------------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR OPTION
TERM ($)
- ------------------------------------------------------------------------------------------------------------------------------
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS GRANTED
UNDERLYING OPTIONS TO EMPLOYEES EXERCISE OF BASE
PER GRANT (#) YEAR TO DATE (%)** PRICE ($/SHARE) EXPIRATION DATE 5% 10%
- ------------------------------------------------------------------------------------------------------------------------------
Bharat Desai - - - - - -
Marlin Mackey - - - - - -
Rajiv Tandon - - - - - -
Daniel Moore - - - - - -
Sanjay Raizada - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------
*The definition of "listed officers" here is the same used in the proxy
statement: the CEO and each of the four other most highly compensated executive
officers. This information may be presented for each officer or for the listed
officers in the aggregate
**Based on a year-to-date total of 36,000 shares subject to options granted to
employees under the company's option plans.
- -------------------------------------------------------------------------------------------------------------------------------
OPTIONS EXERCISES AND REMAINING HOLDINGS OF LISTED OFFICERS*
- -------------------------------------------------------------------------------------------------------------------------------
YEAR-TO-DATE, AS OF END OF MARCH 31, 2003
- -------------------------------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Unexercised Values of Unexercised
Shares Acquired on Options at End of Quarter In-the-Money Options at End
Name Exercise (#) Value Realized ($) Date (#) of Quarter Date ($)**
- -------------------------------------------------------------------------------------------------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------------------------------------------------------------------------------------------
Bharat Desai - - - - - -
Marlin Mackey - - 77,163.00 39,000.00 1,479,214.71 747,630.00
Rajiv Tandon - - 75,500.00 45,000.00 1,447,335.00 862,650.00
Daniel Moore - - 29,000.00 16,500.00 555,930.00 316,305.00
Sanjay Raizada - - - 10,800.00 - 207,036.00
- -------------------------------------------------------------------------------------------------------------------------------
*Definition of "listed officers" is same as above table
** Option values based on stock price of $ 19.17 on (end of quarter date)
SECTION V. EQUITY COMPENSATION PLAN INFORMATION
- -------------------------------------------------------------------------------------------------------------------------------
(1) (2) (3)
- -------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO BE AVAILABLE FOR FUTURE ISSUANCE
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE PRICE UNDER EQUITY COMPENSATION
OUTSTANDING OPTIONS, WARRANTS, OF OUTSTANDING OPTIONS, PLANS (EXCLUDING SECURITIES
PLAN CATEGORY AND RIGHTS (#) WARRANTS, AND RIGHTS ($) REFLECTED IN COLUMN (1))
- -------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans 2,135,510 10.01 -
approved by shareholders
- -------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not - - -
approved by shareholders
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL 2,135,510 10.01 -
- ------------------------------=================================================================================================
14
FORWARD LOOKING STATEMENTS/RISK FACTORS
Certain statements contained in this Report are forward looking statements
within the meaning of the Securities Exchange Act of 1934. In addition, the
Company from time to time may publish other forward looking statements. Such
forward looking statements are based on management's estimates, assumptions
and projections and are subject to risks and uncertainties that could cause
actual results to differ materially from those discussed in the forward
looking statements. Factors which could affect the forward looking
statements include those listed below. The Company does not intend to update
these forward looking statements.
- Recruitment and Retention of IT Professionals
- Government Regulation of Immigration
- Variability of Quarterly Operating Results
- Customer Concentration; Risk of Termination
- Exposure to Regulatory and General Economic Conditions in India
- Intense Competition
- Ability to Manage Growth
- Fixed-Price Engagements
- Potential Liability to Customers
- Dependence on Principal
- Risks Related to Possible Acquisitions
- Limited Intellectual Property Protection
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is primarily exposed to the effects of changes in foreign
currency. Foreign currency exchange risk exists as costs are paid in local
currency and receipts are provided in U.S. dollars. The risk is partially
mitigated as the Company has sufficient resources in the local currency to
meet immediate requirements. The Company's holdings and positions in market
sensitive instruments do not subject the Company to material risk. These
exposures are monitored and managed by the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
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 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.
ITEM 4. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation
of the Company's disclosure controls and procedures as of a date within 90
days of the filing date of this Quarterly Report on Form 10-Q as well as
mirror certifications from senior Management, the Company's Chairman,
President and Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are designed
to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms and
are operating in an effective manner.
CHANGES IN INTERNAL CONTROLS. There were no significant changes in the
Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their most recent
evaluation.
15
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
While the Company is a party to ordinary routine litigation incidental to
its business, the Company is not a party to any material pending legal
proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description
99.1 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
99.2 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
(b) Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the three month
period ended March 31, 2003.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYNTEL, INC.
Date April 30, 2003 By /s/ Bharat Desai
---------------------------
Bharat Desai, President and
Chief Executive Officer
Date April 30, 2003 By /s/ Keshav Murugesh
----------------------------
Keshav Murugesh, Chief
Financial Officer
17
CERTIFICATIONS
I, Bharat Desai, Chairman, President, and Chief Executive Officer of
Syntel, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Syntel, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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 function):
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
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not 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 April 30, 2003
By /s/ Bharat Desai
----------------------------------------------------------
Bharat Desai, Chairman, President, and Chief Executive Officer
18
CERTIFICATIONS
I, Keshav Murugesh, Chief Financial Officer of Syntel, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Syntel, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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 function):
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
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not 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 April 30, 2003
--------------------------------------------------------------
By /s/ Keshav Murugesh
-------------------------------------------------------------------
Keshav Murugesh, Chief Financial Officer
19
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
99.1 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
99.2 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
20