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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, 2003
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 the last business day of the Registrant's most recently
completed second fiscal quarter, June 30, 2003, based on the last sale price of
$15.73 per share for the Common Stock on The Nasdaq National Market on such
date, was approximately $100,997,595.
As of March 1, 2004, the Registrant had 40,184,746 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the 2004 Annual Meeting of
Shareholders to be held on or about May 21, 2004 are incorporated by reference
into Part III hereof.
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SYNTEL INC.
FORM 10-K
INDEX
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
SIGNATURES
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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 the United States, India, the United Kingdom,
Singapore, Mauritius, Germany, Australia, Canada and Hong Kong on a consolidated
basis.
FORWARD-LOOKING STATEMENTS
This report on Form 10-K, including without limitation the Business section
and Management's Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements include, but are not limited
to, statements concerning:
- 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
Certain information and statements contained in this Management's
Discussion and Analysis of Financial Condition and Results of Operations and
other sections of this report, including statements containing words such as
"could", "expects", "may", "anticipates", "believes", "estimates", "plans", and
similar expressions, are forward-looking statements. The forward-looking
statements of the Company are subject to risks and uncertainties. Some of the
factors that could cause future results to materially differ from the recent
results or those projected in the forward-looking statements include, but are
not limited to, significant increases or decreases in demand for Syntel's
services, increased competition, lower prices and margins, changes in customer's
technology spending, failure to successfully develop and market new products and
services, competitor introductions of superior services, continued industry
consolidation, instability and currency fluctuations in India and other
international markets, results of litigation, failure to retain and recruit key
employees, adverse economic conditions, acts of war or global terrorism, and
unexpected natural disasters. For a more detailed discussion of certain risks
associated with the Company's business, see the "Business Risks" section of this
Form 10-K. The Company undertakes no obligation to update forward-looking
statements to reflect events or circumstances occurring after the date of this
Form 10-K.
OVERVIEW
Syntel is a worldwide provider of information technology services to Global
2000 companies, as well as to government entities, incorporated
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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 it's implementation, customization, migration and maintenance services
with leading software and IT application software infrastructure providers
including BEA Systems, IBM, Informatica, Microsoft, Oracle, Sun and TIBCO. These
partnerships will provide the Company with increased opportunities for market
penetration.
Through Applications Outsourcing, Syntel provides higher-value applications
management services for ongoing management, development and maintenance of
customers' business applications. Syntel assumes responsibility for and manages
selected applications support functions of the customer. Utilizing its developed
methodologies, processes and tools, known as IntelliTransfer(R), the Company is
able to assimilate the business process knowledge of its customers to develop
and deliver services specifically tailored for that customer. In 2003, 2002 and
2001, E-business and Applications Outsourcing services combined accounted for
approximately 95%, 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
5%, 9% and 13% of revenues, for the years ended December 31, 2003, 2002 and
2001, respectively. The information set forth under Note 18 "Segment Reporting"
to the Consolidated Financial Statements attached as an exhibit to this Annual
Report on Form 10-K is incorporated here by reference.
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
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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 Global 2000 companies
principally in the financial services, manufacturing, retail, transportation and
information/communications industries, as well as to government entities. Its
five largest customers during 2003, based on revenues were American Express
Company, Target Corporation, Wells Fargo, American International Group, Inc. and
Daimler Chrysler. The Company has been chosen as a preferred vendor by several
of its customers and has been recognized for its quality and responsiveness. The
Company has a focused sales effort that includes a strategy of migrating
existing TeamSourcing customers to higher-value E-business and Applications
Outsourcing services. During recent years, the Company has focused on increasing
its resources in the development, marketing and sales of its E-business and
Applications Outsourcing services.
The Company believes its human resources are its most valuable asset and
invests significantly in programs to recruit, train and retain IT professionals.
The Company recruits globally through its worldwide recruiting network and
maintains a broad package of employee support programs. Syntel believes that its
management structure and human resources organization is designed to maximize
the Company's ability to efficiently expand its IT professional staff in
response to customer needs. As of December 31, 2003, Syntel's worldwide billable
headcount consisted of 2,664 IT consultants providing professional services to
Syntel's customers.
The information set forth under Note 19 "Geographic Information" to the
Consolidated Financial Statements attached as an exhibit to this Annual Report
on Form 10-K is incorporated here by reference.
RISK FACTORS
The following factors should be considered carefully when evaluating our
business.
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
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the Company's ability to assist them in obtaining permanent residency status in
the United States has been diminished could result in increased recruiting and
personnel costs or lead to significant employee attrition or both. There can be
no assurance that the Company will be able to recruit and train a sufficient
number of qualified IT professionals or that the Company will be successful in
retaining current or future employees. Failure to hire and train or retain
qualified IT professionals in sufficient numbers could have a material adverse
effect on the Company's business, results of operations and financial condition.
GOVERNMENT REGULATION OF IMMIGRATION. The Company recruits its IT professionals
on a global basis and, therefore, must comply with the immigration laws in the
countries in which it operates, particularly the United States. As of December
31, 2003, approximately 38% of Syntel's U.S. workforce (13% of Syntel's
worldwide workforce) worked under H-1B visas (permitting temporary residence
while employed in the U.S.) and another 21% of the Company's U.S. workforce (7%
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. It is possible that Company's operating results could
be below or above the expectations of market analysts and investors. In such
event, the price of the Company's Common Stock would likely be materially
adversely affected. No assurance can be given that quarterly results will not
fluctuate causing an adverse effect on the Company's financial condition at the
time.
CUSTOMER CONCENTRATION; RISK OF TERMINATION. The Company has in the past
derived, and believes it will continue to derive, a significant portion of its
revenues from a limited number of large, corporate customers. The Company's ten
largest customers represented approximately 64%, 71%, and
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68% of revenues for the years ended December 31, 2003, 2002 and 2001,
respectively. The Company's largest customer for 2003, 2002, and 2001, was
American Express Company accounting for approximately 16%, 18%, and 18% of
revenues for each of the years ended December 31, 2003, 2002, and 2001,
respectively.
The volume of work performed for specific customers is likely to vary from year
to year, and a significant customer in one year may not provide the same level
of revenues in any subsequent year. Because many of its engagements involve
functions that are critical to the operations of its customer's businesses, any
failure by Syntel to meet a customer's expectations could result in cancellation
or non-renewal of the engagement and could damage Syntel's reputation and
adversely affect its ability to attract new business. Many of the Company's
contracts are terminable by the customer with limited notice and without
compensation beyond the professional services rendered through the date of
termination. 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, 2003, the
Company had approximately 52% of its billable workforce in India, and
anticipates that this percentage will increase over time. While wage costs in
India are significantly lower than in the U.S. and other industrialized
countries for comparably skilled IT professionals, wages in India are increasing
at a faster rate than in the U.S., and could result in the Company incurring
increased costs for IT professionals. In the past, India has experienced
significant inflation and shortages of foreign exchange, and has been subject to
civil unrest. No assurance can be given that the Company will not be adversely
affected by changes in inflation, exchange rate fluctuations, interest rates,
taxation, social stability or other political, economic or diplomatic
developments in or affecting India in the future. In addition, the Indian
government is significantly involved in and exerts significant influence over
its economy. In the recent past, the Indian government has provided significant
tax incentives and relaxed certain regulatory restrictions in order to encourage
foreign investment in certain sectors of the economy, including the technology
industry. Certain of these benefits that directly benefited the Company
included, among others, tax holidays, liberalized import and export duties and
preferential rules on foreign investment. The Company treats any earnings from
its operations in India as permanently invested in India. If the Company decides
to repatriate any of such earnings, it will incur a "border" tax, currently 15%,
under Indian tax law and be required to pay U.S. corporate income taxes on such
earnings. The estimated border taxes and U.S. corporate taxes that would be due
upon repatriation are approximately $40.3 million. 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, systems
consulting and implementation firms, applications software development and
maintenance firms, service groups of
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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 arena, Syntel
competes against IBM Global Solutions, Keane, EDS, Cognizant, Accenture and
Computer Sciences Corporation. In the global arena, Syntel is increasingly
competing against a number of India-based companies including TCS, Infosys, and
Wipro. Many of the Company's competitors have substantially greater financial,
technical and marketing resources and greater name recognition than the Company.
As a result, they may be able to compete more aggressively on pricing, respond
more quickly to new or emerging technologies and changes in customer
requirements, or devote greater resources to the development and promotion of IT
services than the Company. India based Companies also present significant price
competition due to their competitive cost structures and tax advantages. In
addition, there are relatively few barriers to entry into the Company's markets
and the Company has faced, and expects to continue to face, additional
competition from new IT service providers. Further, there is a risk that the
Company's customers may elect to increase their internal resources to satisfy
their IT services needs as opposed to relying on a third-party vendor such as
the Company. The IT services industry is also undergoing consolidation which may
result in increased competition in the Company's target markets. Increased
competition could result in price reductions, reduced operating margins and loss
of market share, any of which could have a material adverse effect on the
Company. The Company also faces significant competition in recruiting and
retaining IT professionals which could result in higher labor costs or
shortages. There can be no assurance that the Company will compete successfully
with existing or new competitors or that competitive pressures faced by the
Company will not materially adversely affect its business, results of operations
or financial condition.
ABILITY TO MANAGE GROWTH. While the Company has experienced flat revenues over
the past five 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 $179.5 million in
2003, and the number of worldwide billable employees has increased from 689 as
of December 31, 1993 to 2,664 as of December 31, 2003. 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 second quarter of 2004. 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. 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
E-business practice. A key factor in the Company's growth strategy is to
increase outsourcing service
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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 engagements
are short in duration (3 to 6 months), requiring increased sales and marketing.
While the Company has strengthened its experience and strength in marketing,
developing, and performing such services, there can be no assurance that the
Company's increased focus on outsourcing services and E-business will continue
to be successful, and any failure of such strategy could have a material adverse
effect on the Company's business, results of operations, and financial
condition.
FIXED-PRICE ENGAGEMENTS. The Company undertakes engagements, in the nature of
development and maintenance, billed on a fixed-price basis, in addition to the
engagements billed on 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 from development and maintenance activity
represented approximately 52%, 50% and 36% of total revenues for the years ended
December 31, 2003, 2002, and 2001, 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.
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
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Metier liability. No amount is accrued or required for the Metier liabilities as
at December 31, 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 Consider
IT Done(R), Digital Blueprinting-Build-Optimize(R), IntelliCapturesm,
IntelliSourcing(R), IntelliTransfer(R), Latest to Legacysm, Method 2000(R),
Skillbaysm, Syntel(R), Syntel Y2K Consultant Online(R), TeamSourcing(R), and
Total ERP Application Methodology (TEAM)sm. The Company has submitted federal
trademark applications to register certain names for its service offerings.
There can be no assurance, however, that the Company will be successful in
obtaining federal trademarks for these trade names.
INDUSTRY BACKGROUND
Increasing globalization, rapid adoption of the Internet as a business tool
and technological innovation are creating an increasingly competitive business
environment that is requiring companies to fundamentally change their business
processes. This change is driven by increasing demand from customers for
increased quality, lower costs, faster turnaround, and highly responsive and
personalized service. To effect these changes and adequately address these
needs, companies are focusing on their core competencies and cost-effectively
utilizing IT solutions to improve productivity, lower costs and manage
operations more effectively.
Designing, developing, and implementing advanced technology solutions is a
key priority for the majority of corporations. In addition, the development and
maintenance of new information technology (IT) applications continues to be a
high priority. This type of work requires highly skilled individuals trained in
diverse technologies. However, there is a growing shortage of these individuals
and many companies are reluctant to expand their IT departments through
additional
11
staffing, particularly at a time when they are attempting to minimize their
fixed costs and reduce workforces. The Company believes that many organizations
are concluding that using outside specialists to address their advanced
technology and ongoing IT requirements enables them to develop better solutions
in shorter time frames and to reduce implementation risks and ongoing
maintenance costs. Those outside specialists best positioned to benefit from
these trends have access to a pool of skilled technical professionals, have
demonstrated the ability to manage IT resources effectively, have low-cost
offshore software development facilities, and can efficiently expand operations
to meet customer demands.
Demand for IT services has grown significantly as companies seek ways to
outsource not only specific projects for the design, development and integration
of new technologies, but also ongoing management, development and maintenance of
existing IT systems.
The Company believes that outsourcing the ongoing management, development
and maintenance of IT applications is becoming increasingly critical to business
enterprises. The difficulties of IT planning, budgeting and execution in the
face of technological innovations and uncertainties, the focus on cost cutting,
and a growing shortage of skilled personnel are driving senior corporate
management to strategically pursue outsourcing of critical internal IT
functions. Organizations are seeking an experienced IT services outsourcing
provider that not only has the expertise and knowledge to address the
complexities of rapidly changing technologies, but also possesses the capability
to understand and automate the business processes and knowledge base of the
organization. In addition, the IT provider must be able to develop customized
solutions to problems unique to the organization. This involves maintaining
on-site professionals who know the customer's IT processes, providing access to
a wide range of expertise and best practices, providing responsiveness and
accountability to allow internal IT departments to meet organization goals, and
providing low cost, value-added services to stay within the organization's IT
budget constraints.
In this environment, large organizations are increasingly finding that full
facilities management outsourcing providers who own and manage an organization's
entire IT function do not permit the organization to retain control over, or
permit flexible reallocation of, its IT resources.
SYNTEL SOLUTION
Syntel provides E-business solutions in the areas of Web Solutions,
Customer Relationship Management (CRM), Data Warehousing/Business Intelligence,
and Enterprise Applications Integration (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 it's implementation, customization, migration and maintenance services
with leading software and IT application software infrastructure providers
including BEA Systems, IBM, Informatica,
12
Microsoft, Oracle, Sun and TIBCO. These partnerships will provide the Company
with increased opportunities for market penetration.
Syntel provides comprehensive Applications Outsourcing services consisting
of applications management services for ongoing management, development and
maintenance of business applications, as well as TeamSourcing services
consisting of professional IT consulting services. The Company believes that its
Applications Outsourcing approach to IT services outsourcing, which involves
assuming responsibility for management of selected applications rather than
taking over an entire IT department or providing facilities management, provides
significant differentiation from its competitors in the IT services market.
Syntel believes that its E-business and Applications Outsourcing service
offerings are distinguished by its Global Delivery Service, a corporate culture
focused on customer service and responsiveness and its internally developed
"intellectual capital," comprised of a proven set of methodologies, practices
and tools for managing the IT functions of its customers.
GLOBAL DELIVERY SERVICE. Syntel performs its services on-site at the customer's
location, off-site at Syntel's U.S. locations and offshore at its Indian
locations. By linking each of its service locations together through a dedicated
data and voice network, Syntel provides a seamless service capability to its
customers around the world, largely unconstrained by geographies, time zones and
cultures. This Global Delivery Service gives the Company the flexibility to
deliver to each customer a unique mix of on-site, off-site and offshore services
to meet varying customer needs for direct interaction with Syntel personnel,
access to technical expertise, resource availability and cost-effective
delivery. The benefits to the customer from this customized service include
responsive delivery based on an in-depth understanding of the specific processes
and needs of the customer, quick turnaround, access to the most knowledgeable
personnel and best practices, resource depth, 24-hour support seven days a week,
and cost-effectiveness. To support its Global Delivery Service, the Company
currently has three Global Development Centers located in Mumbai, India; Pune,
India and Chennai, India. The company also has a Support Center located at Cary,
North Carolina.
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. When fully completed, 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
training facilities, cafeteria and fitness center. The Company has appointed a
leading project management company, finalized architectural drawings for Phase I
and has appointed contractors for all key elements of the project. The site
office is expected to be in place during Q1 2004 and actual construction is
expected to commence by Q2 of 2004, such that Phase I of 2500 seats is expected
to be ready by Q2 of 2005.
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,
13
IT applications and industry, Syntel gains a competitive advantage to perform
additional higher-value IT services for that customer.
PROVEN INTELLECTUAL CAPITAL. Over its 23-year history, Syntel has developed a
proven set of methodologies, practices, tools and technical expertise for the
development and management of its customers' information systems. This
"intellectual capital" of Syntel includes methodologies for the selection of
appropriate customer IT functions for management by Syntel, tools for the
transfer to Syntel of the systems knowledge of the customer, and techniques for
providing systems support improvements to the customer. Syntel also offers to
its customers well-trained personnel backed by a proven, extensive employee
training and continuing development program. The Company believes its
intellectual capital enhances its ability to understand customer needs, design
customized solutions and provide quality services on a timely and cost-effective
basis.
SYNTEL STRATEGY
The Company's objective is to become a strategic partner with its customers
in the development of E-business solutions as well as the ongoing management,
development and maintenance of their IT systems by utilizing its Global Delivery
Service, intellectual capital and customer service orientation. The Company
plans to continue to pursue the following strategies to achieve this objective:
LEVERAGE GLOBAL DELIVERY SERVICE. The ability to deliver a seamless service
capability virtually anywhere in the world from its domestic and offshore
facilities gives the Company an effective ability to meet customer needs for
technical expertise, best practice IT solutions, resource availability,
responsive turnaround and cost-effective delivery. The Company strives to
leverage this capability to provide reliable and cost-effective services to its
existing customers, expand services to existing customers and to attract new
customers. Moreover, the flexibility and capacity of the Global Delivery Service
and the Company's worldwide recruitment and training programs enhance the
ability of the Company to expand its business as the number of customers grows
and their IT demands increase. The Company intends to expand the capacity of its
Global Development Centers worldwide.
AGGRESSIVELY BUILD E-BUSINESS COMPETENCIES. Through its comprehensive suite of
E-business services, the Company provides a key strategic role in helping
customers rapidly and cost-effectively build advanced technology solutions.
Through large-scale retraining programs, strategic acquisitions and
partnerships, the Company has quickly built a strong competency in the area of
E-business services.
CONTINUE TO GROW APPLICATIONS OUTSOURCING SERVICES. Through Applications
Outsourcing, the Company markets its higher value applications management
services for ongoing applications management, development and maintenance. In
recent years, the Company has significantly increased its investment in
Applications Outsourcing services and realigned its resources to focus on the
development, marketing and sales of its Applications Outsourcing and E-business
services, including the hiring of additional salespeople and senior managers,
redirecting personnel experienced in the sale of higher value contracts,
developing proprietary methodologies, increasing marketing efforts, and
redirecting organizational support in the areas of finance and administration,
human resources and legal.
EXPAND CUSTOMER BASE AND ROLE WITH CURRENT CUSTOMERS. The Company's sales
efforts include migrating existing TeamSourcing customers to higher value
E-business and Applications Outsourcing services. The Company's emphasis
14
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 four training centers, one of which is
located in the U.S. and three of which are located in India, and (iii) maintains
a broad range of employee support programs, including relocation assistance, a
comprehensive benefits package, career planning, a qualified stock purchase
program, and incentive plans. The Company believes that its management structure
and human resources organization is designed to maximize the Company's ability
to efficiently expand its professional IT staff in response to customer needs.
PURSUE SELECTIVE PARTNERSHIP OPPORTUNITIES. The Company has entered into
partnership alliances with several software firms and IT application
infrastructure firms, including BEA Systems, IBM, Informatica, Microsoft,
Oracle, Sun and TIBCO. 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.
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
15
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, 2003, 2002 and 2001, E-business and Applications
Outsourcing combined accounted for approximately 95%, 91% and 87%, respectively,
of the Company's revenues and TeamSourcing represented approximately 5%, 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 2003, more than 86% 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 "CIO Award" from
General Motors, as well as "Preferred Supplier" status with Daimler-Chrysler
Corporation receiving the 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. During 2003, Syntel also earned a host of media awards, including
Business 2.0 "100 fastest growing Tech companies," Healthcare informatics 100,
June 2003 (#61). VARBusiness 500 (#162), Crain's Detroit Business List: Top 50
Michigan Companies in Detroit, and the Dataquest Top 20 Multi-national Software
Exporters (#7) 2003.
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 effectively engaged
several partnerships to provide it's implementation, customization, migration
and maintenance services with leading software and IT application software
infrastructure providers including BEA Systems, IBM, Informatica, Microsoft,
Oracle, Sun and TIBCO. These partnerships will provide the Company with
increased opportunities for market penetration.
APPLICATIONS OUTSOURCING
Syntel provides higher-value applications management services for
16
ongoing management, development and maintenance of business applications.
Through Applications Outsourcing, the Company assumes responsibility for, and
manages selected applications support functions of the customers. The Global
Delivery Service is central to Syntel's delivery of Applications Outsourcing
services. It enables the Company to respond to customers' needs for ongoing
service and flexibility and has provided the capability to become productive
quickly on a cost-effective basis to meet timing and resource demands for
mission critical applications.
Syntel has developed methodologies, processes and tools to effectively
integrate and execute Applications Outsourcing engagements. Referred to as
"IntelliTransfer(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.
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
17
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 2003, the Company provided services to over 138
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 2003, include:
18
- --------------------------------------------------------------------------------------
FINANCIAL SERVICES MANUFACTURING INSURANCE
- ------------------ ------------- ----------
American Express Breed Technology ACE Ina Holdings
Bear Stern Cummins Engine Co. All State Insurance
Conseco Finance Corp. Daimler-Chrysler Corp American International Group
Corillian Corporation Ford Motor Co. Bankers Life & Casualty Co
Credit Swiss First Boston New Venture Gear Capitol Indemnity
Deutsche Bank State of FL CNA Commercial Lines
First Data Merchant Services Tektronix, Inc. Kemper Insurance/Unitrin
GFI Trade Capture T-System Maxum Speciality Insurance
Group 1 Westfield Insurance
J P Morgan Chase RETAIL
Moody's Investor Services ------------ INFORMATION/COMMUNICATION
State Street Bank H & R Block -----------------------------
US Clearing Nike Inc AvercoM
Washington Mutual Bank School Specialty Computer Task Group
Wells Fargo Bank Target Corporation Consolidated Communication
Datanomics
HEALTHCARE TRANSPORTATION/AVIATION DSMI
- ---------- ----------------------- Hewlett Packard
Aetna Federal Express Corp. TIBCO Software Inc.
Blue Cross Blue Shield of Geologistics Corp. Xerox Corp
North Carolina Kintetsu
First Health Services Corp My Travel Group UTILITIES
Glaxo Welcome Inc. Norfolk Southern ---------
HAP SBS International Detroit Edison
Hanger Orthopedic The News Market Pacific Corp
Health Care Associates Thomas Cook Portland General Electric Co.
Humana Inc
IBM EMERGING/OTHERS
Kent County Community ---------------
McKesson Deloitte Consulting
Verizon Data Services GFI Group Inc.
Well point Johnson & Johnson
OE3 Operating Engineers
Percon
- --------------------------------------------------------------------------------------
For the years ended December 31, 2003, 2002, and 2001, the Company's top
ten customers accounted for approximately 64%, 71%, and 68% of the Company's
revenues, respectively. For the year ended December 31, 2003 one customer
contributed revenues in excess of 10% of total consolidated revenues. The
Company's three largest customers in 2003 were American Express, Target
Corporation and Wells Fargo contributing approximately 16%, 8% and 6%
respectively, of total consolidated revenues. The Company's largest customer for
2003, 2002 and 2001 was American Express Company, accounting for approximately
16%, 18% and 18% of revenues for each of the years ended December 31, 2003, 2002
and 2001, respectively.
AMERICAN EXPRESS. The Company's largest customer is American Express. In
1999, Syntel was selected as one of four Global Information Systems outsourcing
providers for a global financial services corporation
19
in three of its four global regions. This contract award was the result of
several competitive proposal rounds.
This company required an approach to providing Global Systems Development
Subcontracting and Production Support Services Outsourcing. Specifically, Syntel
was challenged with efficiently delivering:
- - Application management and outsourcing services for PREDOMINANTLY MAINFRAME
LEGACY SYSTEMS;
- - Project management and application development services for NEW SYSTEMS
DEVELOPMENT; 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 American Express IT
managers around the globe. Syntel's demonstrated quality and commitment during
these road shows was ranked the highest of the participants.
GLOBAL DELIVERY SERVICE
Syntel's Global Delivery Service gives the Company the flexibility and
resources to perform services on-site at the customer's location, off-site at
the Company's U.S. locations and offshore at the Company's Indian locations. By
linking each of its service locations together through a dedicated data and
voice network, Syntel provides a seamless service capability to its customers.
The Global Delivery Service gives the Company the flexibility to deliver to each
customer a customized mix of integrated on-site, off-site and offshore services
to meet varying customer needs for direct interaction with Syntel personnel,
access to technical expertise and best practices, resource availability and
cost-effective delivery.
Through on-site service delivery at the customer's location, the Company is
able to gain comprehensive knowledge concerning the customer's personnel,
processes, technology and culture, and maintain direct customer contact to
facilitate project management, problem solving and integration of Syntel
services. Off-site service delivery at the Company's U.S. locations provides the
customer with access to the diverse skill base and technical expertise resident
at different regional centers, availability
20
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;
Pune, India; Chennai, India; and a Support Center at Cary, North Carolina
support the Company's Global Delivery Service.
The Mumbai, India Global Development Center, which employed, including
onsite deputations outside Mumbai, approximately 1,742 persons as of December
31, 2003, 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 nine years and has a capacity of
approximately 1,512 people.
The Chennai Training and Global Development Center employed, including
onsite deputations outside Chennai, approximately 743 persons as of December 31,
2003. The Chennai facility has a capacity of over 640 persons and has been in
operation for approximately five years.
The Cary, North Carolina Support Center, which employed over 41 persons at
December 31, 2003, serves as 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.
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. When fully completed, 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
training facilities, cafeteria and fitness center. The company has appointed a
leading project management company, finalized architectural drawings for Phase I
and has appointed contractors for all key elements of the project. The site
office is expected to be in place during Q1 2004 and actual construction is
expected to commence by Q2 of 2004, such that Phase I of 2500 seats is expected
to be ready by Q2 of 2005.
21
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 leased certain
facilities to open an interim Development Center in Pune, which employed
approximately 392 persons as of December 31, 2003, and having a capacity of 881
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 Irvine, California; Santa Clara, California; Phoenix,
Arizona; Schaumburg, Illinois; Dallas, Texas; Minneapolis, Minnesota; New York,
New York; Troy, Michigan; Santa Fe, New Mexico; Cary, North Carolina; Nashville,
Tennessee; 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.
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, conference sponsorship and attendance,
direct mail campaigns, case studies, and public relations aimed at CEOs, CIOs,
and CFOs of Global 2000 companies.
22
In addition, Syntel's marketing team maintains ongoing relationships with
leading industry analysts such as Gartner Group, IDC, Forrester Research, and
Yankee Group, to ensure analysts have a good understanding of Syntel's offerings
and positioning. Syntel's marketing group also supports the Company's investor
relations efforts, proposals development, research, and sales support efforts.
HUMAN RESOURCES
The Company believes that its human resources are its most valuable asset.
Accordingly, the Company's success depends in large part upon its ability to
attract, develop, motivate, retain and effectively utilize highly skilled IT
professionals. The Company has developed a number of processes, methodologies,
technologies and tools for the recruitment, training, development and retention
of its employees. As of December 31, 2003, the Company had 3,861 full time
employees. Of this total, the U.S. operations employed 1,280 persons, including
1,163 IT professionals; the Indian operation employed 2,415 persons, including
2,163 IT professionals; and the Company employed an additional 166 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, Banglore, and Pune, India, to recruit for the Company's global
requirements. The Company also has a recruiting team based in the U.S., which
recruits primarily across the U.S. The Company uses a standardized global
selection process that includes written tests, interviews, and reference checks.
Among the Company's other recruiting techniques are the placement of
advertisements on its own web site and popular job boards, in newspapers and
trade magazines, providing bonuses to its employees who refer qualified
applicants, participating in job fairs and recruiting on university campuses. In
addition, the Company has developed a proprietary database of talent hosted on
the Internet, which is an automated tool for managing all phases of recruiting.
This system enhances the ability of the Company's recruiters to select
appropriate candidates and can distribute resumes directly to the recruiters.
TRAINING. The Company uses a number of established training delivery mechanisms
in its efforts to provide a consistent and reliable source for
23
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 continued to re-skill a significant percentage of the
consulting base during the last year in the latest advanced software platforms,
including JAVA, HTML, Object Oriented, C++, RMI Cobra, JDBC, Cold Fusion, and
Oracle.
Since 1998, the Company has operated 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,
Support Center and provides opportunities for cross-training of its
professionals in emerging technologies.
SUPPORT AND RETENTION. The Company seeks to provide meaningful support to its
employees which the Company believes leads to improved employee retention and
better quality services to its customers. A significant percentage of the
Company's employees have been recruited from outside the U.S. and relocated to
the U.S. This has resulted in the need to provide a higher level of initial
support to its employees than is common for U.S.-based employees. As a result of
these activities, Syntel has developed a significant knowledge base in making
foreign professionals comfortable and quickly productive in the U.S. and Europe.
The Company also conducts regular career planning sessions with its employees,
and seeks to meet their career goals over a long-term planning horizon. As part
of its retention strategy, the Company strives to provide a competitive
compensation and benefits package, including relocation reimbursement and
support, health insurance, 24-hour on-call nurse consulting, a 401(k) plan, life
insurance, dental options, a vision eye-care program, long-term disability
coverage, short-term disability options, tuition subsidy plan, and a health club
reimbursement program. Since its initial public offering in 1997, the Company
has offered a stock option program, and since 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
24
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, Cognizant, Accenture and
Computer Sciences Corporation, as well as India-based companies including 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.
25
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
---- --- --------
Ayan Chatterjee 32 Senior Vice President, Sales
And Business Development
Bharat Desai 51 Chairman, President and
Chief Executive Officer
Chandrashekhar Venkatasubbu 37 Chief Operating Officer
(Europe and APAC) & Chief
Delivery Officer
Prakash "Ken" Kenjale 54 Chief Technology Officer
Marlin Mackey 53 Senior Vice President, Client Partnerships
Daniel M. Moore 49 Chief Administrative Officer
and Secretary
Keshav Murugesh 40 Chief Financial Officer and
Treasurer
Neerja Sethi 49 Vice President, Corporate
Affairs and Director
Rajiv Tandon 45 Senior Vice President, Verticals and
Operations
- --------------------------------------------------------------------------------
Ayan Chatterjee joined the Company in June 2003 as Senior Vice
President, Sales & Business Development. Prior to joining Syntel, Mr. Chatterjee
was the Head of Sales and Relationship Management for Western Americas at
Infosys Technologies Ltd. From October 1998 to June 2003.
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 the
spouse of Ms. Sethi.
Chandrashekhar Venkatasubbu joined the Company in October 2003 as Chief
Operating Officer (Europe and APAC) and Chief Delivery Officer. Prior to joining
Syntel, Mr. Chandrashekhar was the Global Head for the S-Governance (public
sector and e-governance) Practice at Tata Consultancy Services ("TCS") from May
2001 to September 2003. He was the regional manager for the TCS Development
Center at Hyderabad and also was responsible for its operations there from March
1999 to April 2001. He was head of the TCS relationship with HP worldwide and
the center manager for the TCS-HP center in Chennai for the period October 1997
to February 1999. Since 1998, he also served on the management/strategy team at
TCS.
Prakash "Ken" Kenjale has served the Company as Chief Technology
Officer since July 1995 with primary responsibility for new technology.
26
Mr. Kenjale also served as the interim chief operating officer from April 2003
to October 2003.
Marlin Mackey has served the Company as Senior Vice President, since
January 2001 with responsibility for delivery and customer relationship. From
January 1999 until December 2000 he served the Company as Vice President, Global
Delivery West and Information Services.
Daniel M. Moore has served the Company as Chief Administrative Officer
and Secretary since August 1998.
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.
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.
Rajiv Tandon joined Syntel in January 1992, and has served as Senior
Vice President since January 2001 with responsibility for delivery and customer
relationship. From January 1999 until December 2000 he served the Company as
Vice President, Global Delivery East & Enterprise Solutions.
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 support 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 Irvine, California; 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; Nashville, Tennessee; Natick, Massachusetts; Dublin, Ohio;
London, England; Hong Kong; Munich, Germany; and Singapore.
Syntel leases approximately 64,960 square feet of office space in Mumbai,
India, under nine leases expiring on various dates from March 3, 2004 to
September 29, 2008. These facilities house IT professionals, as well as its
senior management, administrative personnel, human resources, recruiting, and
sales and marketing functions. Additionally, Syntel has leased substantially all
of an office building in Chennai and three offices in Pune, India consisting of
approximately 32,808 square feet and 63,486 square feet, respectively. The lease
terms expire April 2006 and July 2005 to September 2006, respectively, all
subject to the Company's option to renew for an additional period of three/five
years.
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. When fully completed, 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
training facilities, cafeteria and fitness center. The company has appointed a
leading project management company,
27
finalized architectural drawings for Phase I and has appointed contractors for
all key elements of the project. The site office is expected to be in place
during Q1 2004 and actual construction is expected to commence by Q2 of 2004,
such that Phase I of 2500 seats is expected to be ready by Q2 of 2005.
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, 2003.
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK 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 2002 and
2003.
Period High Low
- --------------------------------------
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
First Quarter, 2003 25.500 16.510
Second Quarter, 2003 19.929 13.300
Third Quarter, 2003 29.830 15.590
Fourth Quarter, 2003 28.300 22.190
(b) There were approximately 197 shareholders on record and 2,800
beneficial holders on March 1, 2004.
(c) The Company did not pay any cash dividends during the years ended
December 31, 2002 and 2001. However the Board of Directors at its meeting dated
July 28, 2003 declared a one-time special dividend of $1.25 per share payable to
Syntel shareholders of record at the close of business on August 29, 2003. In
addition, the Board of Directors at the same meeting approved the initiation of
quarterly cash dividends. The initial dividend rate will be $0.06 per share per
quarter.
(d)
- --------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OPTIONS, WARRANTS, AND (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS, AND RIGHTS RIGHTS ($) REFLECTED IN COLUMN (1))
- --------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by shareholders 1,315,410 10.33 2,565,663
- --------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by shareholders -- -- --
- --------------------------------------------------------------------------------------------------------------------
TOTAL 1,315,410 10.33 2,565,663
- --------------------------------------------------------------------------------------------------------------------
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
SYNTEL, INC. & Subsidiaries
FIVE-YEAR HIGHLIGHTS (UNAUDITED)
(In thousands, except share data)
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.
29
YEAR ENDED DECEMBER 31,
2003 2002 2001 2000 1999
----------------------------------------------------
(In thousands, except share data)
STATEMENT OF INCOME DATA
Net Revenues (1) $179,507 $161,507 $172,283 $166,240 $162,117
Cost of revenues 101,699 94,010 106,943 106,034 99,300
Gross Profit 77,808 67,497 65,340 60,206 62,817
Selling, general and administrative
expenses 28,278 31,421 34,522 34,424 32,814
Capitalized development cost
impairment 0 -- 1,624 -- --
Reduction in reserve requirements
applicable to Metier Transaction (882) (5,698) -- 21,650 --
Income from operations 50,412 41,774 29,194 4,132 30,003
Other income, principally interest 3,168 3,191 3,780 3,412 2,024
Income before income taxes 53,580 44,965 32,974 7,544 32,027
Income tax provision (benefit) 13,242 12,338 8,636 (967) 10,573
Net income before loss from equity
Investments and investment write
off 40,338 32,627 24,338 8,511 21,454
Loss from equity investments and
investment write offs (net of tax) 34 141 3,893 526 --
Net income $ 40,304 $ 32,486 $ 20,445 $ 7,985 $ 21,454
Net income per share, diluted $ 0.99 $ 0.81 $ 0.52 $ 0.20 $ 0.55
Weighted average shares outstanding,
Diluted 40,797 39,917 38,987 39,467 39,043
====================================================
- ----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2003 2002 2001 2000 1999
----------------------------------------------------
(In thousands)
BALANCE SHEET DATA
Working capital $142,521 $145,988 $103,502 $ 77,894 $ 64,893
Total assets 186,081 183,572 152,247 132,898 122,468
Long-term debt -- -- -- -- --
Total shareholders' equity 153,406 154,844 112,258 96,683 90,361
OTHER DATA
Billable headcount in U.S. 1,138 1,111 987 994 1,114
Billable headcount in India 1,376 943 419 511 225
Billable headcount at
other locations 150 101 138 118 28
----------------------------------------------------
Total billable headcount 2,664 2,155 1,544 1,623 1,367
==============================================================================================
(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 1999 are shown net of billable expenses, as it was not practical to
prepare the information for that year.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CRITICAL ACCOUNTING POLICIES
We believe the following critical accounting policies, among others, affect
our more significant judgments and estimates used in the preparation of our
consolidated financial statements. The Company has discussed the critical
accounting policies and estimates with the Audit Committee of the Board of
Directors.
REVENUE RECOGNITION. Revenue recognition is the most significant accounting
policy for the Company. The Company recognizes revenue from time and material
contracts as services are performed. During the years ended December 31, 2003
and 2002, revenues from time and material contracts constituted 48% and 50%,
respectively of total revenues. Revenue from fixed-price, application
management, maintenance and support engagements is recognized as earned, which
generally results in straight-line revenue recognition as services are performed
continuously over the term of the engagement. During the years ended December
31, 2003, and 2002, revenues from fixed price application management and support
engagements constituted 27% and 38%, respectively.
Revenue on fixed price development projects is measured using the
proportional performance method of accounting. Performance is generally measured
based upon the efforts incurred to date in relation to the total estimated
efforts to the completion of the contract. The Company monitors estimates of
total contract revenues and cost on a routine basis throughout the delivery
period. The cumulative impact of any change in estimates of the contract
revenues or costs is reflected in the period in which the changes become known.
In the event that a loss is anticipated on a particular contract, provision is
made for the estimated loss. The Company issues invoices related to fixed price
contracts based on either the achievement of milestones during a project or
other contractual terms. Differences between the timing of billings and the
recognition of revenue based upon the proportional performance method of
accounting are recorded as revenue earned in excess of billings or deferred
revenue in the accompanying financial statements. During the years ended
December 31, 2003 and 2002, revenues from fixed price development contracts
constituted 25% and 13%, respectively.
SIGNIFICANT ACCOUNTING ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and judgments that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses for the
reporting period. By their nature, these estimates and judgments are subject to
an inherent degree of uncertainty. We base our estimates and judgments on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Actual results could differ from those
estimates.
REVENUE RECOGNITION. The use of the proportional performance method of
accounting requires that we make estimates about our future efforts and costs
relative to our fixed price contracts. While we have procedures in place to
monitor the estimates throughout the performance period, such estimates are
subject to change as each contract progresses. The cumulative impact of any such
changes is reflected in the period in which the changes become known.
31
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We record an allowance for doubtful
accounts based on a specific review of aged receivables. The provision for the
allowance for doubtful accounts is recorded in general and administrative
expenses. At December 31, 2003 and 2002, the allowance for doubtful accounts was
$0.8 million and $3.6 million respectively. These estimates are based on our
assessment of the probable collection from specific customer accounts, the aging
of the accounts receivable, analysis of credit data, bad debt write-offs, and
other known factors.
INCOME TAXES--ESTIMATES OF EFFECTIVE TAX RATES AND RESERVES FOR TAX
CONTINGENCIES. When preparing our financial statements, we record our provisions
for income taxes based on tax laws and regulations in each of the various
jurisdictions where we conduct business
In determining the tax provisions, the Company also provides reserves for
tax contingencies based on the Company's assessment of future regulatory reviews
of filed tax returns. Such reserves are recorded in income taxes payable and are
based on management's estimates and accordingly are subject to revision based on
additional information and are dependent upon the judgment of regulatory
reviews.
ACCRUALS FOR LEGAL EXPOSURES. The Company estimates the costs associated
with legal exposures that it has and the related legal expenses and records the
probable liability if it can be reasonably estimated or the lower end of a
range, if the amount cannot be reasonably estimated. The accrual related to
litigation and legal fees at December 31, 2003 and 2002, was $0.1 million and
$3.2 million, respectively.
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 and IT
application software infrastructure providers to provide it's implementation,
customization, migration and maintenance services including BEA Systems, IBM,
Informatica, Microsoft, Oracle, Sun and TIBCO 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, 2003, 2002, and 2001:
- --------------------------------------------------------------------------------
Percent of Total Revenues
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Applications Outsourcing 76% 71% 63%
- --------------------------------------------------------------------------------
E-business 19 20 24
- --------------------------------------------------------------------------------
TeamSourcing 5 9 13
- --------------------------------------------------------------------------------
100% 100% 100%
- --------------------------------------------------------------------------------
32
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. Against a significant portion of Applications Outsourcing engagements,
executed historically, on a time-and-materials basis, a significant share of the
new Applications Outsourcing engagements have started on a fixed-price basis
during 2003, 2002 and 2001. For the years ended December 31, 2003, 2002 and
2001, fixed-price revenues from development and maintenance activity comprised
approximately 56%, 65% and 47% of total Applications Outsourcing revenues,
respectively.
The Company re-skilled a very significant percentage of the consulting base
during 2001, 2002 and 2003 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 and entered into fixed-price arrangements for a significant number of new
e-business engagements started during 2003, 2002 and 2001. For the years ended
December 31, 2003, 2002 and 2003, fixed price revenues from development and
maintenance activity comprised approximately 51%, 24% and 26% of total
E-business revenues, respectively.
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, Pune 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, 2003, approximately 38% of Syntel's U.S.
workforce (13% of Syntel's worldwide workforce) worked under H-1B visas
(permitting temporary residence while employed in the U.S.) and another 21% of
the Company's U.S. workforce (7% 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
33
for at least 6 months).
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. 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. When fully
completed, 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 training facilities, cafeteria and fitness
center. The company has appointed a leading project management company,
finalized architectural drawings for Phase I and has appointed contractors for
all key elements of the project. The site office is expected to be in place
during Q1 2004 and actual construction is expected to commence by Q2 of 2004,
such that Phase I of 2500 seats is expected to be ready by Q2 of 2005.
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 64%, 71% and 68% of revenues for the years ended December 31,
2003, 2002, and 2001, respectively. The Company does not believe there is any
material collectibility exposure among its top ten customers.
For the years ended December 31, 2003 and 2002 only one customer
contributed revenues in excess of 10% of total consolidated revenues. The
Company's largest customer for 2003 and 2002 was American Express Company
contributing approximately 16% and 18%, respectively 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
revenue. 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.
34
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected income
statement data as a percentage of the Company's net revenues.
PERCENTAGE OF REVENUES
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001
-----------------------
Net Revenues 100.0% 100.0% 100.0%
Cost of revenues 56.7 58.2 62.1
-----------------------
Gross profit 43.3 41.8 37.9
Selling, general and administrative expenses 15.3 19.5 20.0%
Reduction in reserve requirements relative
to Metier Transaction
-- (3.5) --
Capitalized development cost Impairment -- 0.9
-----------------------
Income from operations 28.0% 25.8% 17.0%
35
Following is selected segment financial data for the years ended December 31,
2003, 2002, and 2001. The Company does not allocate assets to operating segments
- --------------------------------------------------------------------------------
2003 2002 2001
-------------------------------
(In Thousands)
- --------------------------------------------------------------------------------
Net Revenues
Applications Outsourcing $136,424 $113,981 $108,274
E-business 33,795 31,951 41,449
TeamSourcing 9,288 15,575 22,560
------------------------------
$179,507 $161,507 $172,283
Gross Margin
Applications Outsourcing $ 62,282 $ 54,053 $ 46,225
E-business 14,389 11,429 14,276
TeamSourcing 1,137 2,015 4,839
------------------------------
$ 77,808 $ 67,497 $ 65,340
Gross Margin %
Applications Outsourcing 45.7% 47.4% 42.7%
E-business 42.6% 35.8% 34.4%
TeamSourcing 12.2% 12.9% 21.4%
------------------------------
43.3% 41.8% 37.9%
Sales, general and administrative expenses 28,278 $ 31,421 $ 34,522
Reduction in reserve requirements for
Metier transaction (882) $ (5,698) $ --
Capitalized development cost impairment $ -- $ -- $ 1,624
------------------------------
Income from Operations $ 50,412 $ 41,774 $ 29,194
- --------------------------------------------------------------------------------
36
COMPARISON OF YEARS ENDED DECEMBER 31, 2003 AND 2002.
REVENUES. Net revenues increased from $161.5 million in 2002 to $179.5 million
in 2003, representing an 11.1% increase. Our revenues have increased primarily
consequent to our increased workforce. Information technology offshoring is
clearly becoming a mega trend with increasing numbers of Global Corporations
aggressively outsourcing their crucial applications development or Business
Processes to vendors with an offshore presence. Syntel too has benefited from
this trend. Worldwide billable headcount, including personnel employed by Syntel
India, Syntel Singapore, Syntel Europe, and Syntel Germany as of December 31,
2003 increased 24% to 2,664 employees as compared to 2,155 employees as of
December 31, 2002. However, the growth in revenues was not commensurate with the
growth in the billable headcount. This is primarily because a significant growth
in the billable headcount was in India, where our recoveries per off-shore
billable resource is generally lower as compared to an on-site based resource.
As of December 31, 2003, the Company had approximately 52% of its billable
workforce in India as compared to 44% as of December 31, 2002. Further, revenue
generation from these additional billable headcounts started primarily during
the second half of the year 2003. The Company also decreased its dependence on
its larger customers. The top five customers accounted for 42% of the total
revenues in 2003, down from 48% of the total revenues in 2002. Moreover, the top
10 customers accounted for 64% of the revenues in 2003 as compared to 71% in
2002.
APPLICATIONS OUTSOURCING REVENUES. Applications Outsourcing revenues increased
from $114.0 million, or 71% of total revenues in 2002, to $136.4 million, or 76%
of total revenues in 2003. The $22.5 million increase is attributable
principally due to revenue from new engagements, contributing $37.9 million and
net increase in existing projects contributing $4.2 million; partially offset by
$19.6 million in lost revenues as a result of project completions.
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, and trainee
compensation. Applications Outsourcing cost of revenues increased to 54.3% of
Applications Outsourcing revenues in 2003, from 52.6% in 2002. The 1.7% increase
in cost of revenues as a percent of revenues was partly attributable to the
aggressive hiring during the second half of 2003 which impacted costs, but did
not necessarily add to revenues as a significant number of these hires went into
training. This contributed approximately 0.4% of the increase. Additionally, due
to an internal policy change during 2002, there was a release of vacation
reserves in 2002 related to unused employee vacation time. This resulted in a
lower cost of revenues during 2002 and contributes approximately 1.3% to the
increase during 2003.
E-BUSINESS REVENUES. E-business revenues increased from $32.0 million in 2002,
or 20% of total consolidated revenues, to $33.8 million in 2003, or 19% of total
consolidated revenues. During 2002, the Company had granted a sales incentive to
a significant customer of $2.9 million as compared to only $1.7 million during
2003, a decrease of $1.2 million. Net of this decrease in the sales incentive,
e-business revenues have generally remained flat during 2003 as compared to
2002. Increase of revenue from new engagements contributed $14.8 million, offset
by $14.2 million in lost revenues as a result of project completion and net
reductions in existing projects.
COST OF REVENUES. Cost of revenues consists of costs directly associated with
billable consultants, including salaries, payroll taxes, benefits,
37
relocation costs, immigration costs, finders' fees, and trainee compensation.
E-business cost of revenues decreased to 57.4% of E-business revenues in 2003,
from 64.2% in 2002, a decrease of 6.8%. As referred to above, during 2002,
E-business revenues were lower primarily due to a sales incentive which had been
granted to a significant customer. This has resulted in a higher % of cost of
revenues as compared to revenues of 5.5%. Additionally, increased utilization of
our off-shore resources has also contributed to a reduction of the cost of
revenues of approximately 2.2%. These decreases were partially offset by an
increase in the cost of revenues as a percent of revenues attributable to the
release of vacation reserves in 2002 related to unused employee vacation time,
due to an internal policy change, which resulted in an increase of approximately
0.9%.
TEAMSOURCING REVENUES. TeamSourcing revenues decreased from $15.6 million, or 9%
of total consolidated revenues in 2002, to $9.3 million, or 5% of total
consolidated revenues in 2003. The $6.3 million decrease in TeamSourcing
revenues was attributable principally to a decrease in US based billable
consultants on various engagements, as a result of a conscious decision by
management to reduce organizational focus on this segment and focus on higher
margin segments of Applications Outsourcing and e-business.
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 marginally to 87.8% of
TeamSourcing revenues in 2003, from 87.1% in 2002. The 0.7% increase in cost of
revenues as a percent of revenues was attributable principally to lower
utilization of our resources due to the softness in the economy.
As a result of the continued uncertainty and weakness in the global economic and
political environment, companies continue to seek to outsource their IT spending
offshore. However, the Company also sees clients' needs to reduce their costs
and the increased competitive environment among IT companies. The Company
expects these conditions to continue in the next few quarters. In response to
the continued pricing pressures and increased competition for outsourcing
clients, the Company continues to focus on expanding its service offerings into
areas with higher and sustainable price margins, on managing its cost structure,
and on anticipating and correcting for decreased demand, and skill and pay level
imbalances in its personnel. The Company's immediate measures include increased
management of compensation expenses through headcount management and variable
compensation plans, as well as increasing utilization rates or reducing
non-deployed (sub-contractors) or non-billable IT professionals.
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 year ended December 31, 2003
were $27.4 million or 15.3% of total revenues, compared to $31.4 million or
19.5% of total revenues for the year ended December 31, 2002.
Selling, general, and administrative costs for the year ended December 31, 2003
includes net reversals of $0.5 million primarily on account of successful
recovery of receivables previously provided for as allowance
38
for doubtful accounts, $2.0 million revision of the estimated reserve for
litigation and legal fees due to settlements and other changes in estimates of
underlying legal costs, $0.7 million reduction in office related expenses due to
the settlement of vendor disputes, and a downward revision of the 2002 estimates
of bonus compensation of $0.8 million.
Selling, general, and administrative costs for the year ended December 31, 2002
included an additional reserve of $2.0 million due to a revision of the
estimated reserve for litigation and legal fees due to changes in estimates of
underlying legal costs, an additional reserve of $0.5 million as an allowance
for doubtful accounts, a downward revision of the 2001 estimates of bonus
compensation of $2.8 million, an additional reserve for bonus for the year 2002
of $2.0 million and a $0.3 million reduction in office related expenses due to
reversal of outstanding checks pertaining to earlier periods.
After considering the impact of non-recurring items, the Selling, general, and
administrative expenses are at 18.0% and 19.8% of total revenues, for the years
ended December 31, 2003 and 2002, respectively. The 1.8% reduction in Selling,
general, and administrative expenses as a percentage of revenue is primarily on
account of increase in revenue in 2003 over 2002.
The factors, which affect the fluctuations in our allowance for doubtful
accounts and write offs of uncollectible accounts include the financial health
and economic environment of our clients. No one client has contributed
significantly to a loss and we have had no significant changes in our collection
policies or payment terms.
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, 48% 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 ramp downs 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.
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%.
39
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%.
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).
40
QUARTERLY RESULTS OF OPERATIONS
Note 20 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, 2002 and ended December 31, 2003. 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.
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 $44.1 million, $32.7 million
and $34.6 million for the years ended December 31, 2003, 2002 and 2001,
respectively. The number of days sales outstanding in accounts receivable was
approximately 62 days, 56 days and 65 days as of December 31, 2003, 2002 and
2001, respectively.
Net cash used in investing activities was $ 22.3 million for the year ended
December 31, 2003. During 2003, the Company invested $52.3 million to purchase
available-for-sale securities and $4.2 million for capital expenditures,
consisting principally of PCs, and communications equipment. This was partially
offset by the sale of available for sale securities of $33.9 million and $0.3
million for equities and other investments.
Net cash provided by investing activities was $10.8 million for the year
ended December 31, 2002 and net cash used in investing activities was
41
$20.7 million for the year ended December 31, 2001
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 financing activities in 2003 was $45.9 million, due
principally to the distribution of dividend of $52.3 million, repurchase of
10,000 shares of common stock for $0.2 million, partially offset by proceeds
from the issuance of shares under stock option and stock purchase plans of $6.5
million.
Net cash provided by financing activities in 2002 was $3.3 million, 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 in 2001 was $0.5 million, 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.
The Company has a line of credit with Bank One, which provides for
borrowings up to $20.0 million. The line of credit has been renewed and now
expires on August 31, 2004. 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. The line of credit has a
sub-limit of $5.0 million for letters of credit, which bear a fee of 1% per
annum of the face value of each standby letter of credit issued. Borrowing under
the line of credit bear interest at (i) a formula approximating the Eurodollar
rate plus the applicable margin of 1.25%, or (ii) the bank's prime rate plus
1.25%. No borrowings were outstanding at December 31, 2003 and 2002.
The Company believes that the combination of present cash balances and
future operating cash flows will be sufficient to meet the Company's currently
anticipated cash requirements for at least the next 12 months.
The following table sets forth the Company's known contractual obligations
as of December 31, 2003:
($ '000)
- -----------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------------
LESS THAN 1 MORE THAN 5
CONTRACTUAL OBLIGATION TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
- -----------------------------------------------------------------------------------------------------------
Long-Term Debt - - - - -
Capital Lease Obligations - - - - -
Operating Leases 4,065 1,648 1,972 221 223
Purchase Obligations 745 590 155 - -
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP - - - - -
- -----------------------------------------------------------------------------------------------------------
TOTAL 4,809 2,238 2,127 221 223
===========================================================================================================
Certain agreements for lease and purchase obligations included above are
cancelable with a specified notice period or penalty, however all contracts are
reflected in the table above as if they will be performed for the full term of
the agreement.
Although no contractual obligations on account of purchases, other than
those specified above, exist as of 12/31/03 relating to the construction of the
Pune facility, management anticipates that the construction costs for the
facility to be incurred by the Company during 2004 and 2005 will be $15.2
million.
INCOME TAX MATTERS
Under the Indian Income Tax Act of 1961 (the "Act"), Syntel's software
development centers/units located in Mumbai, Chennai and Pune are eligible for
certain favorable tax provisions. Units in Mumbai are located in Special
Economic Zone (SEZ), the unit at Chennai is a 100% Export Oriented Unit (EOU)
and units at Pune are registered with Software Technologies Park of India
(STPI). Under the Act 100% EOU at Chennai, units registered with STPI at Pune
and certain units located in SEZ are
42
eligible for an exemption from payment of corporate income taxes, for up to 10
years of operation, on the profits generated from these undertakings. Certain
units located in SEZ are eligible for 100% exemption from payment of corporate
taxes for first five years of operation and 50% exemption for the next 5 years.
For the period commencing from 1st April 2002 and ending on 31st March 2003 the
above mentioned exemption was restricted to 90% of the income earned by way of
software exports. However, with effect from April 1, 2003, this exemption has
been restored to 100%.
The benefit of tax Holiday granted by the Indian authorities was $9.1 million,
$5.9 million and $5.6 million for the years 2003, 2002 and 2001, respectively.
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. According to local
jurisdictions, the entire undistributed earnings of the foreign subsidiaries are
not repatriable. The unrecognized taxes on the undistributed repatriable
earnings are approximately $ 42.0 million at December 31, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In April 2003, the
FASB issued Statement of Financial Accounting Standards No. 149, " Amendment of
SFAS No. 133 on Derivative Instruments and Hedging Activities " (SFAS 149").
SFAS 149 amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under issued Statement of Financial
Accounting Standards No. 133, " Accounting for Derivative Instruments and
Hedging Activities ("SFAS 133"). SFAS 149 is effective for contracts entered
into or modified after June 30, 2003 and hedging relationships designated after
June 30, 2003. The Company currently does not hold derivative financial
instruments or engage in hedging activities and the adoption of SFAS 149 did not
have a material impact on its financial condition or results of operation.
ACCOUNTING FOR FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES
AND EQUITY. In May 2003, the FASB issued Statement of Financial Accounting
Standards No.150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity " ("SFAS 150"). SFAS 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS 150 is effective for the
first interim period beginning after June 15, 2003. The adoption of SFAS 150 did
not have a material effect on the Company's results of operations or financial
position.
ACCOUNTING FOR REVENUE ARRANGEMENTS WITH MULTIPLE ELEMENTS. In November 2002,
the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 00-21,
" Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). EITF 00-21
provides guidance on how to account for arrangements that involve the delivery
or performance of multiple products, services and/or rights to use assets. The
provisions of EITF 00-21 will apply to revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 did not
have a material impact on the Company's results of operations and financial
condition.
VARIABLE INTEREST ENTITIES - In January 2003, the FASB issued Financial
Accounting Standards Board Interpretation No.46, " Consolidation of Variable
Interest Entities " ("FIN 46"). In December 2003, FIN 46 was
43
revised for clarifications and modification of the effective dates. FIN 46
requires that if an entity has a controlling financial interest in a variable
interest entity, the assets, liabilities and results of activities of the
variable interest entity should be included in the consolidated financial
statements of the entity. FIN 46 shall be applied to all variable interests held
no later than the end of the first reporting period after March 15, 2004. The
Company has no contractual relationships or other business relationships with
any variable interest entities and, therefore, the initial adoption of FIN 46
did not have an effect on the Company's results of operations or financial
condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to the impact of interest rate changes and foreign currency
fluctuations.
INTEREST RATE RISK
We consider investments purchased with an original or remaining maturity
of less than three months at date of purchase to be cash equivalents. The
following table summarizes our cash and cash equivalents and investments in
marketable securities (in thousands):
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
Cash and cash equivalents $110,699 $134,976
Investments, marketable securities 26,137 5,737
-------- --------
Total 136,836 140,713
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We do not use derivative financial
instruments in our investment portfolio. Our investments are in high-quality
Indian Mutual Funds and, by policy, limit the amount of credit exposure to any
one issuer. At any time, changes in interest rates could have a material impact
on interest earnings for our investment portfolio. We protect and preserve our
invested funds by limiting default, market and reinvestment risk. Investments in
interest earning instruments carry a degree of interest rate risk. Floating rate
securities may produce less income than expected if there is a decline in
interest rates. Due in part to these factors, our future investment income may
fall short of expectations, or we may suffer a loss in principal if we are
forced to sell securities, which have declined in market value due to changes in
interest rates as stated above.
FOREIGN CURRENCY RISK
Our sales are primarily sourced in the United States and our subsidiary in the
United Kingdom and are mostly denominated in U.S. dollars or UK pounds
respectively. Our foreign subsidiaries incur most of their expenses in the local
currency. Accordingly, all foreign subsidiaries use the local currency as their
functional currency. Our business is subject to risks typical of an
international business, including, but not limited to differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
our future results could be materially adversely impacted by changes in these or
other factors. The risk is partially mitigated as the Company has sufficient
resources in the respective local currencies to meet immediate requirements. We
are also exposed to foreign exchange rate fluctuations as the financial results
of foreign
44
subsidiaries are translated into U.S. dollars in consolidation. As exchange
rates vary, these results, when translated, may vary from expectations.
During 2003, the Indian rupee has appreciated by 6% as compared to 2002,
which has marginally reduced the Company's gross margin by 0.3%. The Indian
rupee denominated Cost of revenues and Selling, General and Administrative cost
was 16% and 19%, respectively, which did not have a significant impact.
Although the Company cannot predict future movement in interest rates or
fluctuations in foreign currency rates, the Company does not currently
anticipate that interest rate risk or foreign currency risk will have a
significant impact.
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 56 of this Report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On November 11, 2002, the Company's Audit Committee voted to engage the
independent accounting firm of Ernst & Young as the Company's independent
accountants for the remainder of the 2002 fiscal year and for fiscal year 2003,
and dismissed PricewaterhouseCoopers.
The report of PricewaterhouseCoopers on the Company's financial statements
for the 2001 fiscal year did not contain an adverse opinion or a disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope, or
accounting principles. During the 2001 fiscal year and the subsequent period
through November 11, 2002, there were no disagreements between the Company and
PricewaterhouseCoopers on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers,
would have caused it to make reference to the subject matter of the
disagreements in connection with its reports on the financial statements for
such years. In addition, during the 2001 fiscal year and the period through
November 11, 2002, there were no "reportable events" within the meaning of Item
304(a)(1)(v) of the Securities and Exchange Commission's Regulation S-K.
During the fiscal year ended December 31, 2001, and during the subsequent
interim period through November 11, 2002, the Company did not consult with Ernst
& Young with respect to the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's financial statements, or any other matters or
reportable events as set forth in Items 304(a)(2)(i) and (ii) of the Securities
and Exchange Commission's Regulation S-K, except for accounting principles
relating to the Company's wholly-owned subsidiary, Syntel (India) Ltd., for
which an Ernst & Young affiliate was previously and continues to be engaged as
the independent accountants.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation of
the Company's disclosure controls and procedures as of a
45
date within 90 days of the filing date of this Report 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 (the Exchange Act) 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. There have been no significant changes in the Company's
internal controls or in other factors which could significantly affect internal
controls subsequent to the date the Company carried out its evaluation.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS. Disclosure Controls are procedures
designed to ensure that information required to be disclosed in our reports
filed under the Exchange Act, such as this Report, is recorded, processed,
summarized and reported within the time periods specified in the U.S. Securities
and Exchange Commission's (the SEC) rules and forms. Disclosure Controls are
also designed to ensure that such information is accumulated and communicated to
our management, including the CEO and CFO, as appropriate to allow timely
decisions regarding required disclosure. Internal Controls are procedures
designed to provide reasonable assurance that (1) our transactions are properly
authorized; (2) our assets are safeguarded against unauthorized or improper use;
and (3) our transactions are properly recorded and reported, all to permit the
preparation of our financial statements in conformity with generally accepted
accounting principles.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. The company's management,
including the CEO and CFO, does not expect that our Disclosure Controls or our
Internal Controls will prevent all error and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system's objectives will be met. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the company have been detected. The design of any system of controls
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions or deterioration in the
degree of compliance with its policies or procedures.
SCOPE OF THE CONTROLS EVALUATION. In the course of the Controls Evaluation, we
sought to identify data errors, control problems or acts of fraud and confirm
that appropriate corrective actions, including process improvements, were being
undertaken. Our Internal Controls are also evaluated on an ongoing basis by our
Internal Audit Department and by other personnel in our organization. The
overall goals of these various evaluation activities are to monitor our
Disclosure Controls and our Internal Controls, and to modify them as necessary;
our intent is to maintain the Disclosure Controls and the Internal Controls as
dynamic systems that change as conditions warrant.
Among other matters, we sought in our evaluation to determine whether there were
any "significant deficiencies" or "material weaknesses" in the company's
Internal Controls, and whether the company had identified any acts of fraud
involving personnel with a significant role in the company's Internal Controls.
This information was important both for the Controls Evaluation generally, and
because the Rule 13a-14 Certifications of the CEO and CFO require that the CEO
and CFO disclose that information
46
to our Board's Audit Committee and our independent auditors. We also sought to
deal with other controls matters in the Controls Evaluation, and in each case if
a problem was identified, we considered what revision, improvement and/or
correction to make in accordance with our ongoing procedures.
From the date of the Controls Evaluation to the date of this Report, there have
been no significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls.
CONCLUSIONS. Based upon the Controls Evaluation, our CEO and CFO have concluded
that our Disclosure Controls are effective to ensure that material information
relating to Syntel and its consolidated subsidiaries is made known to
management, including the CEO and CFO, particularly during the period when our
periodic reports are being prepared, and that our Internal Controls are
effective to provide reasonable assurance that our financial statements are
fairly presented in conformity with generally accepted accounting principles.
OUTLOOK. During the year, the company created a Task force of Management to
fulfill compliance requirements of Section 404 of the Sarbanes Oxley Act. An
external firm was also appointed to assist in the exercise enterprise wide. The
Company is also moving ahead with BS 7799 and SAS 70 related initiatives during
2004.
47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the section entitled "Election of Directors"
in the Registrant's Proxy Statement for the Annual Shareholders' Meeting to be
held on or about May 21, 2004 (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.
The Company has adopted a Code of Ethics applicable to the Company's
principal executive officer, principal financial officer, and principal
accounting officer or controller.
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 STOCKHOLDER 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. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
Ernst & Young LLP served as the Company's independent auditors for the
fiscal years ending December 31, 2003 and 2002. The following table lists the
aggregate fees for professional services rendered by Ernst & Young LLP for all
"Audit Fees," "Audit-Related Fees," "Tax Fees," and "All Other Fees" which
pertain to the last two fiscal years.
FISCAL YEAR ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
Audit Fees $239,725 $97,150
Audit - Related Fees $ 25,905 $15,651
Tax Fees $329,152 $64,355
All Other Fees $ 10,207 $ --
Audit Fees represent fees for professional services rendered for the audit
of the consolidated financial statements of the Company and
48
assistance with review of documents filed with the SEC. Audit-Related Fees
represent professional fees in connection with the statutory audits services
relative to Syntel India and Syntel Germany and the 401K plan for Syntel Inc.
Tax Fees represent fees for the services related to the tax compliance, tax
advice and tax planning. All Other Fees represent consultation on matters
related to transfer pricing, dividend and other advisory services.
AUDIT COMMITTEE AUTHORIZATION OF AUDIT AND NON-AUDIT SERVICES
The Audit Committee has the sole authority to authorize all audit and
non-audit services to be provided by the independent audit firm engaged to
conduct the annual statutory audit of the Company's consolidated financial
statements. In addition, the Audit Committee has adopted pre-approval policies
and procedures that are detailed as to each particular service to be provided by
the independent auditors, and such policies and procedures do not permit the
Audit Committee to delegate its responsibilities under the Securities Exchange
Act of 1934, as amended, to management. The Audit Committee pre-approved fees
for all audit and non-audit services provided by the independent audit firm
during the fiscal year ended December 31, 2003 as required by the Sarbanes-Oxley
Act of 2002.
The Audit Committee has considered whether the provision of the non-audit
services is compatible with maintaining the independent auditor's independence,
and has advised the Company that, in its opinion, the activities performed by
Ernst & Young on the Company's behalf are compatible with maintaining the
independence of such auditors.
49
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 filed as an Exhibit to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2002, and incorporated herein by reference.
10.2 Lease, dated October 24, 2001, between Big Beaver / Kilmer
Associates L.L.C. and the Registrant filed as an Exhibit to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2002, and incorporated herein by reference.
10.3 Lease Agreement, dated November 30, 1994, between the Registrant
and NationsBank of North Carolina, NA., as Trustee for the Public
Employees Retirement System of Ohio, filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 dated June 6,
1997, and incorporated herein by reference.
10.4 First Amendment, dated October 19, 1998, between the Registrant
and Corning Road, L.L.C. (successor to First Union National Bank
of North Carolina as Trustee,
50
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.
10.9 Amendment to Credit Agreement dated August 25, 2003, between the
Registrant and Bank One, NA.
14 Code of Ethics.
51
21 SUBSIDIARIES OF THE REGISTRANT.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32 Section 1350 Certification of Chief Executive Officer and Chief
Financial Officer
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.
52
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 10, 2004 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 10, 2004
Bharat Desai (Principal Executive Officer)
/s/ Keshav Murugesh Chief Financial Officer March 10, 2004
- --------------------------- (Principal Financial and
Keshav Murugesh Accounting Officer)
/s/ Neerja Sethi Director and Vice President, March 10, 2004
- --------------------------- Corporate Affairs
Neerja Sethi
/s/ Paritosh K. Choksi Director March 10, 2004
- ---------------------------
Paritosh K. Choksi
/s/ Douglas Van Houweling Director March 10, 2004
- ---------------------------
Douglas Van Houweling
/s/ George R. Mrkonic Director March 10, 2004
- ---------------------------
George R. Mrkonic
/s/ Vasant Raval Director March 10, 2004
- ---------------------------
Vasant Raval
53
CONTENTS
PAGE(S)
-------
REPORT OF INDEPENDENT AUDITORS
Report of Independent Auditors as of December 31, 2003 and 2002 and for the
years then ended...................................................................55
Report of Independent Auditors for the year ended December 31, 2001................56
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets........................................................57
Consolidated Statements of Income..................................................58
Consolidated Statements of Shareholders' Equity....................................59
Consolidated Statements of Cash Flows..............................................60
Notes to Consolidated Financial Statements......................................61-80
54
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of Syntel, Inc.
We have audited the accompanying consolidated balance sheets of Syntel, Inc. and
Subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related
consolidated statements of income, shareholders' equity and cash flows for the
years 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 audits.
We conducted our audits 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 audits provide 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, 2003 and 2002, and the consolidated results of their operations and
their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States.
Detroit, Michigan /s/ Ernst & Young LLP
February 20, 2004
55
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of Syntel, Inc.
In our opinion, the accompanying consolidated statements of income,
shareholders' equity and cash flows present fairly, in all material respects,
the results of operations and cash flows of Syntel, Inc. and subsidiaries for
the year 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 audit. We
conducted our audit 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 audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
March 25, 2002
56
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $110,699 $134,976
Short term investments, principally marketable securities 26,137 5,737
Accounts receivable, net of allowances of $809 and $3,551
at December 31, 2003 and 2002, respectively 26,483 22,724
Revenue earned in excess of billings 5,946 1,605
Deferred income taxes and other current assets 5,617 8,173
-------- --------
Total current assets 174,882 173,215
Property and equipment 25,617 20,950
Less: Accumulated depreciation 18,502 15,801
-------- --------
Property and equipment, net 7,115 5,149
Goodwill 906 906
Deferred income taxes and other non-current assets 3,178 4,302
-------- --------
$186,081 $183,572
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 2,518 2,026
Accrued payroll and related costs 11,851 11,885
Income taxes payable 6,507 2,530
Accrued liabilities 4,942 6,101
Deferred revenue 4,456 5,286
Dividends payable 2,401 --
Metier related liabilities -- 900
-------- --------
Total current liabilities 32,675 28,728
-------- --------
Total liabilities 32,675 28,728
-------- --------
SHAREHOLDERS' EQUITY
Common stock, no par value per share, 100,000,000 shares
authorized; 40,016,194, and 39,067,943 shares issued and
outstanding at December 31, 2003 and 2002, respectively 1 1
Additional paid-in capital 54,038 43,184
Accumulated other comprehensive income (loss) 1,519 (516)
Retained earnings 97,848 112,175
-------- --------
Total shareholders' equity 153,406 154,844
-------- --------
Total liabilities and shareholders' equity $186,081 $183,572
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
57
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
------------------------------
2003 2002 2001
-------- -------- --------
Net Revenues $179,507 $161,507 $172,283
Cost of revenues 101,699 94,010 106,943
------------------------------
Gross profit 77,808 67,497 65,340
Selling, general and administrative expenses 28,278 31,421 34,522
Capitalized development cost impairment -- -- 1,624
Reduction in reserve requirements applicable to
Metier transaction (882) (5,698) --
------------------------------
Income from operations 50,412 41,774 29,194
Other income, principally interest 3,168 3,191 3,780
------------------------------
Income before income taxes and loss from 53,580 44,965 32,974
equity investments and investment write-off
Provision for income tax 13,242 12,338 8,636
------------------------------
Net income before loss from equity investments and
investment write-offs 40,338 32,627 24,338
Loss from equity investment and investment write
offs, net of tax benefit of $2,000 in 2001 34 141 3,893
------------------------------
Net income $ 40,304 $ 32,486 $ 20,445
==============================
DIVIDENDS PER SHARE $ 1.37 $ -- $ --
EARNINGS PER SHARE:
Basic $ 1.02 $ 0.84 $ 0.53
Diluted $ 0.99 $ 0.81 $ 0.52
Weighted average common shares outstanding:
Basic 39,609 38,733 38,220
Diluted 40,797 39,917 38,987
The accompanying notes are an integral part of the consolidated financial
statements.
58
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
- --------------------------------------------------------------------------------
ACCUMULATED OTHER
COMPREHENSIVE
INCOME (LOSS)
------------------------
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY TOTAL
------------------ PAID-IN RETAINED UNREALIZED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS GAIN ADJUSTMENT EQUITY
------- -------- ---------- -------- ---------- ----------- -------------
BALANCE, JANUARY 1, 2001 38,199 $ 1 $ 33,607 $ 59,244 -- $ (907) $ 91,945
Net income 20,445 20,445
Unrealized gain on investments,
net of tax 33 33
Translation adjustments (703) (703)
------------------------------------------------
Comprehensive income 20,445 33 (703) 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 of tax 644 644
Translation adjustments 417 417
------------------------------------------------
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
----------------------------------------------------------------------------------
Net income 40,304 40,304
Unrealized gain on investments,
net of tax 136 136
Translation adjustments 1,899 1,899
------------------------------------------------
Total comprehensive income,
net of tax 40,304 136 1,899 42,339
------------------------------------------------
Common stock repurchases (10) (160) (160)
Employee stock purchase plan 61 696 696
Exercised stock options 687 5,842 5,842
Tax benefit on stock options
exercised 2,699 2,699
Warrants issued as sales incentive
converted into common stock 210 1,777 1,777
Dividends paid, $1.31 per share (52,260) (52,260)
Dividends payable, $0.06 per share (2,401) (2,401)
Other 30 30
----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 40,016 $ 1 $ 54,038 $ 97,848 $813 $ 706 $153,406
The accompanying notes are an integral part of the consolidated financial
statements.
59
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
------------------------------
2003 2002 2001
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 40,304 $ 32,486 $ 20,445
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 2,522 2,176 1,800
Reduction in reserve requirements applicable to the
Metier transaction (882) (5,698) --
Goodwill Amortization -- -- 76
Realized (gains) losses on sales of available-for-sale
securities (1,015) (727) 72
Deferred income taxes 3,940 (345) 4,468
Stock warrants sales incentive 1,777 2,903 --
Capitalized development cost - impairment -- -- 1,624
Investments impairment -- -- 5,141
Compensation expense related to stock options -- -- 41
Loss on equity investments 34 141 752
Changes in assets and liabilities:
Accounts receivable and revenue earned in excess of
billings, net (6,329) 5,266 (602)
Other current assets 232 (406) 1,574
Accrued payroll and other liabilities 4,411 (2,933) (984)
Deferred revenue (851) (165) 217
------------------------------
Net cash provided by operating activities 44,143 32,698 34,624
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment expenditures (4,226) (2,078) (2,071)
Equity and other investments 223 -- (1,386)
Purchase of available-for-sale securities (52,313) (15,228) (32,952)
Proceeds from sales of available-for-sale securities 33,924 28,084 15,677
------------------------------
Net cash provided by (used in) investing activities (22,392) 10,778 (20,732)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock 6,538 6,616 2,557
Common stock repurchases (160) (3,361) (2,060)
Dividends paid (52,260) -- --
------------------------------
Net cash provided by (used in) financing activities (45,882) 3,255 497
------------------------------
Effect of foreign currency exchange rate changes on cash (146) 235 143
Net (decrease) increase in cash and cash equivalents (24,277) 46,966 14,532
Cash and cash equivalents, beginning of period 134,976 88,010 73,478
------------------------------
Cash and cash equivalents, end of period $110,699 $134,976 $ 88,010
==============================
NON CASH INVESTING AND FINANCING ACTIVITIES Cash dividend for fourth quarter of
2003 declared but
unpaid as on December 31, 2003 $ 2,401 $ -- $ --
Cash paid for income taxes $ 5,582 $ 10,100 $ 5,356
==============================
The accompanying notes are an integral part of the consolidated financial
statements.
1. BUSINESS
60
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. These services may be provided on either a time-and-material basis or
on a fixed price basis.
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, 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.
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.
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) Ltd. ("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") an Ontario 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,
Syntel (Australia) Pty. Limited ("Syntel Australia"), an Australian limited
liability company, Syntel Delaware LLC ("Syntel Delaware") a Delaware limited
liability company, and SkillBay.com, Inc., a Michigan corporation. All
significant inter-company balances and transactions have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenues from TeamSourcing services provided through time
and material contracts as the services are performed.
Revenue from fixed-price applications management, maintenance and support
engagements is recognized as earned which generally results in straight-line
revenue recognition as services are performed continuously over the term of
61
the engagement.
Revenue on fixed-price, applications development and integration projects in the
Company's application outsourcing and E-Business segments are measured using the
proportional performance method of accounting. Performance is generally measured
based upon the efforts incurred to date in relation to the total estimated
efforts to the completion of the contract. The Company monitors estimates of
total contract revenues and cost on a routine basis throughout the delivery
period. The cumulative impact of any change in estimates of the contract
revenues or costs is reflected in the period in which the changes become known.
In the event that a loss is anticipated on a particular contract, provision is
made for the estimated loss. The Company issues invoices related to fixed price
contracts based on either the achievement of milestones during a project or
other contractual terms. Differences between the timing of billings and the
recognition of revenue based upon the proportional performance method of
accounting are recorded as revenue earned in excess of billings or deferred
revenue in the accompanying financial statements.
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 of $1.5 million as revenues in 2001.
CASH AND CASH EQUIVALENTS
For the purpose of reporting Cash and Cash Equivalents, the Company considers
all liquid investments purchased with maturity of three months or less to be
cash equivalents. At December 31, 2003 and 2002, approximately $29.1 million and
$65.6 million respectively, represent corporate bonds and treasury notes held by
Bank One, for which "AAA" rated letters of credit have been provided by the
bank. The remaining amounts of cash and cash equivalents are invested in money
market accounts with various banking and financial institutions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's current assets and current liabilities
approximate their carrying values because of their short maturity. Such
financial instruments are classified as current and are expected to be
liquidated within the next twelve months.
CONCENTRATION OF CREDIT 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. 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 our assessment of the probable collection
from specific customer accounts, the aging of the accounts receivable, analysis
of credit data, bad debt write-offs, and other known factors.
62
SHORT-TERM INVESTMENTS, PRINCIPALLY MARKETABLE SECURITIES
The Company's short-term investments consist principally of short-term mutual
funds, which 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, net of taxes, on available-for-sale securities are
reported as a separate component of accumulated other comprehensive income
(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
these 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. When factors
indicate that such costs should be evaluated for possible impairment, 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. No assets were impaired in 2003.
OTHER INCOME
Other Income includes interest and dividend income, gains and losses from sale
of securities and other investments.
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
Depreciation expense for the years ended December 31, 2003, 2002 and 2001 was
$2.5 million, $ 2.2 million and $ 1.8 million, respectively.
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". In accordance with SFAS No. 142, as of
January 1, 2002, the Company is no longer amortizing goodwill but evaluates
goodwill for impairment annually. Goodwill amortization expense was $0.076
million in 2001.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make
63
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Such estimates include, but are not limited to
allowance for doubtful accounts, impairment of goodwill, contingencies and
litigation, the recognition of revenues and profits based on the proportional
performance method and potential tax liabilities. Actual results could differ
from those estimates and assumptions used in the preparation of the accompanying
financial statements.
During 2003, in connection with settlements and other changes in estimates for
underlying litigation and related legal costs, the Company reduced its accrued
liabilities and Metier related liabilities by $2.9 million, net of amounts paid.
The Company also reduced its allowance for doubtful accounts by $0.5 million
primarily on account of the successful collection of overdue debts. Also, in
2003 management revised its estimate of 2002 bonus compensation and reversed
$0.8 million of previously recorded accruals. The revision in estimates noted
above had an after tax impact of increasing the diluted earnings per share for
the year ended December 31, 2003 by $0.06 per share.
During 2002, the Company recorded a downward revision of $2.8 million pertaining
to their estimate of employee bonus for the prior year. In addition, the Company
recorded recoveries of $.8 million and $1.3 million in the second and fourth
quarters of 2002, respectively relating to receivables that had previously been
reserved for. The Company also reversed $1.3 million in connection with a change
in an internal policy with respect to unused employee vacation. These revisions
in estimates had an after tax impact of increasing the diluted earnings per
share for the year ended December 31, 2002 by $0.09 per share.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries use the currency
of the primary economic environment in which they operate 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 period-end exchange rates with
the effects of these cumulative translation adjustments being reported as a
separate component of accumulated other comprehensive income in shareholders'
equity. Transaction gains and losses, which were not significant in the years
presented are reflected within `Selling, general and administrative expenses' in
the consolidated statements of income.
EARNINGS PER SHARE
Basic and diluted earnings per share are computed in accordance with SFAS No,
128 "Earnings per share".
Basic earnings per share are 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 the basic earnings per share. Diluted earnings per share are calculated using
the treasury stock method for the dilutive effect of shares which have been
granted pursuant to the stock option plan, by dividing the net income by the
weighted average number of shares outstanding during the period adjusted for
these potentially dilutive options, except when the results would be
anti-dilutive. The potential tax benefits on exercise of stock options is
considered as additional proceeds while computing dilutive earnings per share
using the treasury stock method.
64
EMPLOYEE BENEFITS
The Company maintains a 401(k) retirement plan that covers 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, 2003, 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 gratuity, a defined retirement benefit 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.
The amounts accrued under this plan are $0.7 million and $0.4 million as of
December 31, 2003 and 2002, respectively, and are included within `Accrued
payroll and related costs'.
VACATION PAY
The accrual for vacation pay is determined for the entire available leave
balance standing to the credit of the employees at year-end and eligible for
carry-forward, valued at gross compensation rates.
STOCK BASED COMPENSATION
As permitted by SFAS No. 123, 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" and has adopted the
disclosure requirements of SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123". 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 2003 2002 2001
------- ------- -------
(In thousands, except per share data)
Net Income as reported $40,304 $32,486 $20,445
Stock based compensation expense determined
under the fair value method, net of tax (1,216) (1,787) (2,142)
------- ------- -------
Pro forma Net Income $39,088 $30,699 $18,303
======= ======= =======
Earnings per share as reported
Basic $ 1.02 $ 0.84 $ 0.53
Diluted $ 0.99 $ 0.81 $ 0.52
Earnings per share, Pro forma
Basic $ 0.99 $ 0.79 $ 0.48
Diluted $ 0.96 $ 0.77 $ 0.47
Weighted Average Shares Outstanding
Basic 39,609 38,733 38,220
Diluted 40,797 39,917 38,987
Estimated fair value of options granted $ 5.61 $ 5.86 $ 3.83
65
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:
2003 2002 2001
----- ----- -----
Risk free interest rate 3.35% 3.25% 4.30%
Expected life 5.00 5.00 5.00
Expected volatility 75.80% 79.16% 80.40%
Expected dividend yield 0.97% 0.00% 0.00%
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which the temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax laws is recognized in income in the
period that includes the enactment date.
RECLASSIFICATIONS
Certain amounts in previously issued financial statements have been reclassified
to conform to the current year presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, "Amendment of SFAS No. 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"). SFAS 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 149 is effective for
contracts entered into or modified after June 30, 2003 and hedging relationships
designated after June 30, 2003. The Company currently does not hold derivative
financial instruments or engage in hedging activities and the adoption of SFAS
149 did not have a material impact on its financial condition or results of
operation.
66
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for
classifying and measuring as liabilities certain financial instruments that
embody obligations of the issuer and have characteristics of both liabilities
and equity. SFAS 150 is effective for the first interim period beginning after
June 15, 2003. The adoption of SFAS 150 did not have a material effect on the
Company's results of operations or financial position.
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF
00-21"). EITF 00-21 provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or rights
to use assets. The provisions of EITF 00-21 apply to revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The adoption of
EITF 00-21 did not have a material impact on the Company's results of operations
and financial condition.
In January 2003, the FASB issued Financial Accounting Standards Board
Interpretation No.46, "Consolidation of Variable Interest Entities" ("FIN 46").
In December 2003, FIN 46 was revised for clarifications and modification of the
effective dates. FIN 46 requires that if an entity has a controlling financial
interest in a variable interest entity, the assets, liabilities and results of
activities of the variable interest entity should be included in the
consolidated financial statements of the entity. FIN 46 shall be applied to all
variable interests held no later than the end of the first reporting period
after March 15, 2004. The Company has no contractual relationships or other
business relationships with any variable interest entities and, therefore, the
initial adoption of FIN 46 is not expected to have an effect on the Company's
results of operations or financial condition.
3. ACQUISITIONS
METIER, INC.
During 1999, the Company acquired substantially all the business and assets of
Metier, Inc. The consideration for the Metier acquisition in 1999 included a
$1.6 million dollar payment to the Metier shareholders, which was to be made in
April 2000, and 300,000 shares of Syntel stock, which were to be issued in
September 2000. During 2000, the Company entered into litigation with the former
shareholders of Metier and consequently, the $1.6 million dollar payment was not
made and the 300,000 shares were not issued. 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. Additionally, during the last
quarter of 2002, the Company also settled certain of the Metier related and
other litigation and in connection with these settlements, the Company reversed
an accrual of approximately $5.7 million of the accrued Metier liability during
2002 having an earnings per share impact of $0.08 per share. The final
settlements relating to the Metier liability were made during the third quarter
of 2003 and accordingly, the remaining accrual of approximately $0.9 million was
also reversed.
IMG, INC
During 1999, the Company acquired the business and assets of IMG, Inc. This
acquisition resulted in goodwill of $1.1 million that has been allocated to the
e-business reporting unit. In accordance with the provisions of SFAS No. 142 the
Company evaluates the carrying value of goodwill as of June 30 every year. The
Company has determined that the goodwill has not been impaired and
67
consequently no impairment has been recorded during the years 2002 or 2003. The
adjusted net income and earnings per share if goodwill had not been amortized
during 2001 is as follows:
(In thousands, except per share data)
Per Share
Net Income Basic Diluted
---------- ----- -------
Net income / EPS as reported $20,445 $0.53 $0.52
Goodwill amortization 76 -- --
------- ----- -----
Adjusted Net Income and earnings
per share - basic/diluted $20,521 $0.54 $0.53
======= ===== =====
4. INVESTMENT WRITE-OFFS
During the year ended December 31, 2001, the Company wrote-off $3.9 million, net
of a tax benefit of $2.0 million, related to its equity and cost method
investments.
5. INVESTMENTS, MARKETABLE SECURITIES
Investment in marketable securities (primarily Indian Mutual Funds) included the
following at December 31, 2003 and 2002:
2003 2002
------- -------
(In thousands)
Cost $25,220 $ 4,980
Unrealized gain, net 917 757
------- -------
Carrying value $26,137 $ 5,737
------- -------
Gross realized gains $ 1,015 $ 734
Gross realized losses -- (7)
Dividend income -- 84
Proceeds on sale of securities 33,924 28,084
Purchase of securities $52,313 $15,228
6. STOCK WARRANTS SALES INCENTIVE
During 2002, the Company granted to a significant customer immediately
exercisable warrants 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 ended on October 16, 2003. The customer exercised the warrant
in February 2003 and received 209,739 shares in a cashless exercise.
The customer earned the sales incentive as they met the performance milestone
over the specified performance period ended on October 16, 2003.
In accordance with EITF 01-09, "Accounting for Consideration Given by a Vendor
to a Customer or a Reseller of the Vendor's Products", the Company has recorded
the value of sales incentive as a reduction of revenues, to
68
the extent of revenues earned up to October 16, 2003.
The measurement of the sales incentive, which previously was based on the market
value of the Company's stock at each period end, was finalized based on sale of
the shares in quarter ended September 30, 2003 by the customer at an average
sale price of $22.31. Accordingly, the final value of the sales incentive was
$4.7 million. Cumulatively, the Company had recorded $2.9 million of the sales
incentive as a reduction of revenue up to December 31, 2002. The remaining sales
incentive of $1.8 million was recorded during the year 2003.
The Company has also 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. If and when the
Company estimates that such higher performance milestones will be met, the sales
incentive associated with the performance warrants will be recorded as a
reduction of revenue.
7. REVENUE EARNED IN EXCESS OF BILLINGS AND DEFERRED REVENUE
Revenue earned in excess of billings consists of:
2003 2002
------ ------
(In thousands)
Unbilled revenue for time and material projects $2,432 $1,133
Unbilled revenue for fixed price projects 3,514 472
------ ------
$5,946 $1,605
====== ======
Deferred revenue consists of:
2003 2002
------ ------
(In thousands)
Deferred revenue on uncompleted fixed price development
contracts $3,823 $3,595
Advance billing on application management & support
contracts 354 1,241
Other deferred revenue 279 450
------ ------
$4,456 $5,286
====== ======
8. PROPERTY AND EQUIPMENT
Cost of property and equipment at December 31, 2003 and 2002 is summarized as
follows:
2003 2002
------- -------
(In thousands)
Computer equipment and software $14,657 $11,925
Furniture, fixtures & other equipment 7,590 6,026
Vehicles 587 549
Leasehold improvements 1,244 1,274
Leasehold Land 1,282 1,001
69
Capital Advances / Work in Progress 257 175
------- -------
25,617 20,950
Accumulated depreciation and amortization 18,502 15,801
------- -------
$ 7,115 $ 5,149
======= =======
9. LINE OF CREDIT
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, 2004. The line of
credit has a sub-limit of $5.0 million for letters of credit, which bear a fee
of 1% per annum of the face value of each standby letter of credit issued.
Borrowings under the line of credit bear interest at (i) a formula approximating
the Eurodollar rate plus the applicable margin of 1.25%, or (ii) the bank's
prime rate plus 1.25%. No borrowings were outstanding at December 31, 2003 and
2002.
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, 2003 are as follows:
(In thousands)
2004 $1,730
2005 1,233
2006 909
2007 330
2008 276
------
$4,478
======
Total rent expense amounted to approximately $2.6 million; $2.4 million and $2.3
million for the years ended December 31, 2003, 2002, and 2001, respectively.
11. INCOME TAXES
Income before income taxes for the Company's U. S. and foreign operations was as
follows:
2003 2002 2001
------- ------- -------
(In thousands)
U. S $15,168 $21,357 $12,555
Foreign 38,412 23,608 20,419
------- ------- -------
$53,580 $44,965 $32,974
======= ======= =======
70
The provision for income taxes is as follows:
2003 2002 2001
------- ------- ------
(In thousands)
Current Provision
Federal $ 3,947 $ 7,389 $1,828
State 720 1,348 (382)
Foreign 4,634 3,946 2,722
------- ------- ------
Total current provision 9,302 12,683 4,168
------- ------- ------
Deferred
Federal 3,332 (292) 3,220
State 608 (53) 1,248
------- ------- ------
Total deferred provision
(benefit) 3,940 (345) 4,468
------- ------- ------
Total provision for income taxes $13,242 $12,338 $8,636
======= ======= ======
The components of the net deferred tax asset are as follows:
2003 2002
------- -------
(In thousands)
Deferred tax assets
Impairment of investments and capitalized development costs $ 2,632 $ 2,632
Accrued expenses and allowances 1,109 4,787
Advanced billing receipts 211 473
-----------------
Net deferred tax asset $ 3,952 $ 7,892
=================
Balance sheet classification of the net deferred tax asset is summarized as
follows:
2003 2002
------ ------
(In thousands)
Deferred tax asset, current $1,300 $5,187
Deferred tax asset, non-current 2,652 2,705
---------------
$3,952 $7,892
===============
Under the Indian Income Tax Act of 1961 (the "Act"), Syntel's software
development centers/units located in Mumbai, Chennai and Pune are eligible for
certain favorable tax provisions. Units in Mumbai are located in Special
Economic Zone (SEZ), the unit at Chennai is 100% Export Oriented Unit (EOU) and
units at Pune are registered with Software Technologies Park of India (STPI).
Under the Act, the 100% EOU at Chennai, the units registered with STPI at Pune
and certain units located in SEZ are eligible for an exemption from payment of
corporate income taxes, for up to 10 years of operation, on the profits
generated from these undertakings. Certain units located in SEZ are eligible for
100% exemption from payment of corporate taxes for first five years of operation
and 50% exemption for the next 5 years. For the period commencing from 1st April
2002 and ending on 31st March 2003 the above mentioned exemption was restricted
to 90% of the income earned by way of software exports. However, with effect
from April 1, 2003, this exemption has been restored to 100%.
The benefit of the tax Holiday granted by the Indian authorities was $9.1
million, $5.9 million, and $5.6 million for the years 2003, 2002 and 2001,
respectively.
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. According to local
jurisdictions, the entire undistributed earnings of the foreign subsidiaries are
not repatriable. The unrecognized taxes on the undistributed repatriable
earnings are approximately $42.0 million at December 31, 2003.
71
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:
2003 2002 2001
-------- ------- --------
(In thousands)
Income before income taxes $ 53,580 $44,965 $ 32,974
-----------------------------
Statutory provision 35.0% 35.0% 35.0%
State taxes, net of federal benefit 1.0% 1.7% 1.3%
Tax-free investment income (0.6%) (0.9%) (1.6%)
Foreign effective tax rates
different from US Statutory Rate (16.4%) (9.6%) (13.4%)
Tax reserves 5.7% 1.6% 7.3%
Other, net 0.0% (0.4%) (2.4%)
-----------------------------
Total Provision 24.7% 27.4% 26.2%
-----------------------------
The Company records provisions for income taxes based on enacted tax laws and
rates in the various taxing jurisdictions in which it operates. In determining
the tax provisions, the Company also provides for tax contingencies based on the
Company's assessment of future regulatory reviews of filed tax returns. Such
reserves, which are recorded in income taxes payable, are based on management's
estimates and accordingly are subject to revision based on additional
information and are dependent upon the judgment of regulatory reviewers.
12. EARNINGS PER SHARE
The reconciliation of earnings per share computations for the years 2003, 2002,
and 2001 are as follows:
2003 2002 2001
--------------- -------------- ---------------
Per Per Per
Shares Share Shares Share Shares Share
------ ------ ------ ----- ------ ------
(In thousands, except per share data)
Basic earnings per
share (1) 39,609 $ 1.02 38,733 $0.84 38,220 $ 0.53
Potential dilutive effect
of stock options and
warrants outstanding 1,188 (0.03) 1,184 (.03) 767 (.01)
--------------- -------------- ------ ------
40,797 $ 0.99 39,917 $0.81 38,987 $ 0.52
=============== ============== ====== ======
(1) Represents weighted average number of common shares
As of December 31, 2003, 2002 and 2001, stock options to purchase 44,500, -0-
and 411,379 shares of common stock, respectively, at a weighted average price
per share of $25.00, $-0- and $12.57 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
anti-dilutive.
13. DIVIDEND
The Board of Directors at its meeting in July 2003 declared a one-time
72
special dividend of $1.25 per share payable to Syntel shareholders of record at
the close of business on August 29, 2003, which was paid on September 12, 2003.
In addition, the Board of Directors at the same meeting approved the initiation
of quarterly cash dividends. The initial dividend rate will be $0.06 per share
per quarter. The shareholders of record as of September 30, 2003 have been paid
$0.06 per share on October 13, 2003. The shareholders of record as of December
31, 2003 have been paid $0.06 per share on January 13, 2004.
Per share dividend paid for the year 2003 was $1.31. No dividends were paid
during 2002 and 2001.
14. 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. For the options granted thereafter, the Company grants the options
at the fair market value on the date of grant of the options. The Company
applies APB Opinion 25 and related Interpretations in accounting for this plan.
In accordance with APB Opinion 25, no compensation cost would need to be
recognized for the options granted post 1998 as the exercise price equaled the
fair value of value of the shares on the date of the grant.
73
Stock option activity during the years ended December 31, 2003, 2002 and 2001 is
as follows:
Weighted
Number Average
of Shares Price
--------- --------
Shares under option
Outstanding, January 1, 2001 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 9.07
Activity during 2003
Granted, price equals fair value 273,250 18.90
Exercised 694,858 8.39
Forfeited 587,127 11.55
Expired 14,329 10.92
-------------------
Outstanding, December 31, 2003 1,315,410 $10.33
===================
Exercisable, December 31, 2003 379,672 $ 7.94
===================
The following tables sets forth details of options outstanding and exercisable
at December 31, 2003:
- ------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (years) Price Exercisable Price
- ------------------------------------------------------------------------------------
$3.3191 - $6.6380 430,107 6.80 5.06 85,673 5.08
$6.6381 - $9.9570 328,955 6.10 8.34 254,376 8.31
$9.9571 - $13.2760 123,348 7.60 11.47 33,323 11.24
$13.2761 - $16.5950 312,900 8.70 14.78 5,600 13.87
$16.5951 - $19.9140 27,600 9.00 18.80 700 19.12
$19.9141 - $23.2330 3,000 9.10 21.99 0 0
$23.2331 - $26.5520 89,500 9.80 24.49 0 0
--------------------------------------------------------------
1,315,410 7.40 10.33 379,672 7.94
- ------------------------------------------------------------------------------------
74
The Company has an employee stock purchase plan, which provides for employees to
purchase pre-established amounts of the Company's common stock as determined by
the compensation committee. The price at which employees may purchase common
stock is set by the compensation committee as not less than the lesser of 85% of
the fair market value of the common stock on the NASDAQ National Market on the
first day of the purchase period or 85% of the fair market value of the common
stock on the last day of the purchase period. The Company has reserved 1.5
million shares of common stock for issuance under the Company's employee stock
purchase plan. Under the terms of the plan, eligible employees may elect to have
up to 5% of their regular base earnings withheld to purchase company stock, with
a maximum contribution value, which may not exceed $21,250 for each calendar
year in which a purchase period occurs. As of December 31, 2003 and 2002 the
Company has $0.5 million and $0.4 million, respectively of employee
withholdings, included in accrued payroll and related costs in the balance sheet
to be used to purchase company stock. As of December 31, 2003 and 2002, 917,218
and 978,232 shares of common stock were available under the plan.
15. COMMITMENTS & CONTINGENCIES
The Indian subsidiary had commitments for capital expenditures (net of advances)
of $0.7 million related to a new facility being constructed at Pune, India, as
of December 31, 2003.
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 the resolution of such matters will not have a
material adverse effect upon the Company's consolidated financial position.
Syntel India's operations are carried out from their development centers/units
in Mumbai forming part of a Special Economic Zone (`SEZ') and in Chennai and
Pune, which are registered under the Software Technology Parks (`STP') scheme.
Under these schemes the registered units have export obligations, which are
based on the formula provided by the notifications/circulars issued by the STP
and SEZ authorities from time to time. The consequence of not meeting the above
commitments would be a retroactive levy of import duty on items previously
imported duty free for these units. Additionally the respective authorities have
rights to levy penalties for any defaults on a case-by-case basis. The Company
is confident of meeting these obligations.
16. EMPLOYEE BENEFIT PLANS
Provident Fund Contribution expense recognized by Syntel India was $0.2 million;
$0.1 million and $0.1 million for the years ended December 31, 2003, 2002 and
2001, respectively.
Expense recognized by Syntel India under the Gratuity Plan was $0.3 million;
$0.2 million and $0.1 million for the years ended December 31, 2003, 2002 and
2001, respectively.
17. ALLOWANCES FOR DOUBTFUL ACCOUNTS
The movement in the allowance for doubtful accounts for the years 2003,
75
2002 and 2001 are as follows:
2003 2002 2001
------- ------- ------
(In thousands)
Balance at beginning of year $ 3,551 $ 6,004 $3,309
Provisions (reductions), net (493) 518 2,001
Write-offs (2,267) (3,071) 0
Others 18 100 694
--------------------------
Balance at end of year $ 809 $ 3,551 $6,004
--------------------------
18. SEGMENT REPORTING
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprises and Related Information", which requires reporting information about
operating segments in annual financial statements. It has also established
standards for related disclosures about its business segments and geographic
areas. Operating segments are defined as components of an enterprise about which
separate financial information is available. This information is reviewed and
evaluated regularly by the management, in deciding how to allocate resources and
in assessing the performance.
The Company is organized geographically and by business segment. For management
purpose, the Company is primarily organized on a worldwide basis into three
business segments:
- - Application Outsourcing,
- - E-business, and
- - TeamSourcing.
These segments are the basis on which the Company reports its primary segment
information to the management.
Through Application Outsourcing, the Company provides higher-value applications
management services for ongoing management, development and maintenance of
customers' business applications.
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.
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.
76
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.
2003 2002 2001
--------- -------- --------
(In thousands)
Net Revenues
Application Outsourcing $ 136,424 $113,981 $108,274
E-business 33,795 31,951 41,449
TeamSourcing 9,288 15,575 22,560
-------------------------------
179, 507 161,507 172,283
Gross Profit
Application Outsourcing 62,282 54,053 46,225
E-business 14,389 11,429 14,276
TeamSourcing 1,137 2,015 4,839
-------------------------------
77,808 67,497 65,340
Selling, general and administrative
expenses 28,278 31,421 34,522
Reduction in reserve requirements
applicable to the Metier transaction (882) (5,698) --
Capitalized development cost impairment -- -- 1,624
-------------------------------
Income from operations $ 50,412 $ 41,774 $ 29,194
===============================
The Company's largest customer in 2003 and 2002 was American Express Corp, which
was the only customer who accounted for revenues in excess of 10% of total
consolidated revenues. Revenue from this customer was approximately $28.8
million and $28.6 million, contributing approximately 16% and 18% of total
consolidated revenues during 2003 and 2002, respectively. At December 31, 2003
and 2002 accounts receivable, from this customer was $2.0 million and $0
respectively. 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 i.e. 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 these
customers. All revenues from these customers were generated in the Applications
Outsourcing segment.
77
19. GEOGRAPHIC INFORMATION
Customers of the Company are primarily situated in the United States. Net
revenues and net income (loss) from each geographic location were as follows:
2003 2002 2001
-------- -------- --------
(In thousands)
Net Revenues
North America, primarily United States $163,121 $148,326 $153,821
India 71,823 43,891 30,487
UK 15,303 12,182 16,731
Far East, primarily Singapore 907 830 1,328
Germany 720 85 --
Inter-company revenue elimination
(primarily India) (72,367) (43,807) (30,084)
------------------------------
Net Revenue $179,507 $161,507 $172,283
==============================
Net Income (loss)
North America, primarily United States $ 6,650 $ 12,824 $ 2,748
India 33,168 19,808 16,300
UK 895 324 1,662
Far East, primarily Singapore (114) (32) 61
Germany (295) (438) (326)
------------------------------
Net Income $ 40,304 $ 32,486 $ 20,445
==============================
Assets, December 31
North America, primarily united states $100,648 $125,932 $108,186
India 75,729 50,447 37,976
UK 9,015 6,808 5,383
Far East, primarily Singapore 80 363 446
Germany 609 22 256
------------------------------
$186,081 $183,572 $152,247
==============================
78
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected financial data by calendar quarter were as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter Full Year
------- ------- ------- ------- ---------
(In thousands, except per share data)
2003
Net Revenues (a) $44,078 $43,915 $44,105 $47,409 $179,507
Cost of revenues 25,080 24,156 25,738 26,725 101,699
------------------------------------------------
Gross profit 18,998 19,759 18,367 20,684 77,808
Selling, general and administrative expenses (b) 7,889 6,509 6,253 7,627 28,278
Reduction in reserve requirements applicable to
Metier transaction -- -- (882) -- (882)
------------------------------------------------
Income from operations 11,109 13,250 12,996 13,057 50,412
Other income, principally interest 615 845 632 1,076 3,168
------------------------------------------------
Income before income taxes 11,724 14,095 13,628 14,133 53,580
Provision for income tax 3,347 3,821 2,884 3,190 13,242
------------------------------------------------
Net income before loss from equity
investments 8,377 10,274 10,744 10,943 40,338
Loss from equity investments 25 22 13 0 34
------------------------------------------------
Net income $ 8,352 $10,252 $10,757 $10,943 $ 40,304
================================================
Earnings per share, diluted (c) $ 0.21 $ 0.25 $ 0.26 $ 0.27 $ 0.99
================================================
Weighted average shares outstanding, diluted 40,493 40,638 40,975 41,081 40,797
2002
Net Revenues (d) $40,490 $39,500 $42,126 $39,391 $161,507
Cost of revenues (e) 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 (f) 8,021 7,648 7,976 7,776 31,421
Reduction in reserve requirements applicable to
Metier transaction (g) -- -- -- (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 equity
investments 6,361 6,285 8,689 11,292 32,627
Loss from equity investments -- -- -- 141 141
------------------------------------------------
Net income $ 6,361 $ 6,285 $ 8,689 $11,151 $ 32,486
================================================
Earnings per share, diluted (c) $ 0.16 $ 0.16 $ 0.22 $ 0.28 $ 0.81
================================================
Weighted average shares outstanding, diluted (h) 40,088 39,768 39,509 40,304 39,917
================================================
79
a) As discussed in note 6, the Company recorded a $1.7 million stock warrant
sales incentive as a reduction of revenue during the year 2003. Quarterly
breakdown for which is as below
Q1-2003 - $(0.1)million
Q2-2003 - $ 0.1 million
Q3-2003 - $ 1.6 million
Q4-2003 - $ 0.1 million
b) Includes reversals on account of:
(i) Successful recovery of receivables previously provided for as
allowance for doubtful accounts of approximately $0.8 million and $0.5
million in the second and third quarter respectively, net of amounts
provided for in the first quarter of approximately $0.8 million.
(ii) Revision of the estimated reserve for various litigation and legal
fees due to settlements and other changes in estimates of underlying
legal costs of $0.5 million, $0.5 million, $1.7 million and $0.2
million in the first, second, third and fourth quarter respectively,
including $0.9 million related to Metier transaction in the third
quarter.
(iii)Downward revision of the 2002 estimates of bonus compensation of $0.8
million in the first quarter.
c) Earnings per share for the quarter are computed independently and may not
equal the earnings per share computed for the total year.
d) The Company recorded a $2.9 million stock warrant sales incentive as a
reduction of revenue in the fourth quarter of 2002.
e) During the fourth quarter of 2002, the Company reversed $1.3 million of
employee related expenses in connection with a change in an internal policy
related to unused employee vacation time.
f) Includes impact of the following:
(i) Recovery of receivables previously provided for as allowance for
doubtful accounts or written off of approximately $0.8 million and
$1.3 million in the second and fourth quarter, respectively.
(ii) Change in estimate of the payout on previously accrued discretionary
bonus for 2001 and reversed $1.0 million and $1.8 million in the first
and second quarter, respectively. Additionally, the Company also
recorded a provision for bonus for the year 2002 of approximately $0.8
million and $1.2 million in the first and second quarter,
respectively.
g) The Company reached a resolution with the Metier shareholders in the second
quarter of 2002 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 were settled
in the fourth quarter of 2002 and the Company reversed $5.7 million of the
accrued Metier liability.
80
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.9 Amendment to Credit Agreement dated August 23, 2003, between the
Registrant and Bank One, NA.
14 Code of Ethics
21 Subsidiaries of the Registrant.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32 Section 1350 Certification of Chief Executive Officer and Chief
Financial Officer
81