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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, 1997
Commission File Number 0-22903
SYNTEL, INC.
(Exact name of Registrant as specified in its charter)
Michigan 38-2312018
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2800 Livernois Road, Suite 400, Troy, Michigan 48084
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 619-2800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
--------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the Registrant
has been required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant as of March 13, 1998, based on the last sale price of $31.625 per
share for the Common Stock on the NASDAQ National Market on such date, was
approximately $107,724,400.
As of March 13, 1998, the Registrant had 25,450,000 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders to be held on or about May 18, 1998 are incorporated by reference
into Part III hereof.
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PART I
ITEM 1. BUSINESS.
References herein to the "Company" or "Syntel" refer to Syntel, Inc. and its
wholly owned subsidiaries in India, the UK, and Singapore on a consolidated
basis.
OVERVIEW
Syntel is a worldwide provider of professional information technology
("IT") consulting and applications management services to Fortune 1000
companies, as well as to government entities. The Company's service offerings
include IntelliSourcing(sm), consisting of outsourcing services for ongoing
management, development and maintenance of business applications, including
Year 2000 compliance services, and TeamSourcing(sm), consisting of
professional IT consulting services. Syntel believes that its service offerings
are distinguished by its Global Service Delivery Model, 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 IntelliSourcing, Syntel provides higher-value applications
management services for ongoing management, development and maintenance of
customers' business applications. Syntel assumes responsibility for and
manages selected application support functions of the customer. Utilizing its
developed methodologies, processes and tools, known as IntelliTransfer(sm),
the Company is able to assimilate the business process knowledge of its
customers to develop and deliver services specifically tailored for that
customer. The Company also provides Year 2000 compliance services to customers
using its proprietary Method2000(R) solution. IntelliSourcing accounted for
approximately 36% and 51% of revenues, for the years ended December 31, 1996
and 1997, 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
64% and 49% of revenues, for the years ended December 31, 1996 and 1997,
respectively.
The Company's Global Service Delivery Model provides Syntel with
flexibility to deliver to each customer a unique mix of services on-site at the
customer's location, off-site at its U.S. locations and offshore at Global
Development Centers in Mumbai and Chennai, India. The benefits to the customer
from this customized service approach include responsive delivery based on an
in-depth understanding of the specific processes and needs of the customer,
quick turnaround, access to the most knowledgeable personnel and best practices,
resource depth, 24-hour support seven days a week and cost-effectiveness. By
linking each of its service locations together through a dedicated data and
voice network, Syntel provides a seamless service capability to its customers
around the world largely unconstrained by geographies, time zones and cultures.
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Syntel provides its services to a broad range of Fortune 1000 companies
principally in the financial services, manufacturing, retail, transportation and
information/communications industries, as well as to government entities. Its
five largest customers during 1997, based on revenues, were American
International Group, Inc., Dayton Hudson Corp., Ford Motor Co., AT&T Corp., and
Chrysler Corporation. 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 IntelliSourcing
services. During recent years the Company has focused on increasing its
resources in the development, marketing and sales of its IntelliSourcing
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, trains recent college graduates and other recruits 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. This scaleable business model has enabled the Company to grow
significantly in recent years. As of December 31, 1997, Syntel's worldwide
billable headcount consisted of 1,746 it consultants providing professional
services to Syntel's customers. The Company was incorporated under Michigan law
on April 15, 1980.
FORWARD LOOKING STATEMENTS / RISK FACTORS
Certain statements contained in this Report are forward looking
statements within the meaning of the Securities Exchange Act of 1934. In
addition, the Company from time to time may publish other forward looking
statements. Such forward looking statements are based on management's estimates,
assumptions and projections and are subject to risks and uncertainties that
could cause actual results to differ materially from those discussed in the
forward looking statements. Factors which could affect the forward looking
statements include those listed below. The Company does not intend to update
these forward looking statements.
Recruitment and Retention of IT Professionals. The Company's business
of delivering professional IT services is labor intensive, and, accordingly, its
success depends upon its ability to attract, develop, motivate, retain and
effectively utilize highly-skilled IT professionals. The Company believes that
both in the United States and in India there is a growing shortage of, and
significant competition for, IT professionals who possess the technical skills
and experience necessary to deliver the Company's services, and that such IT
professionals are likely to remain a limited resource for the foreseeable
future. The Company believes that, as a result of these factors, it operates
within an industry that experiences a significant rate of annual turnover of IT
personnel. The Company's business plans are based on hiring and training a
significant number of additional IT professionals each year to meet anticipated
turnover and increased staffing needs. The Company's ability to maintain and
renew existing engagements and to obtain new business depends, in large part, on
its ability to hire and retain qualified IT professionals. Historically, the
Company has performed a significant portion of its employee recruiting in
foreign countries, particularly in India. Any perception among the Company's
recruits or foreign IT professionals, whether or not well-founded, that the
Company's ability to assist them in obtaining permanent residency status in the
United States has been diminished could result in
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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, 1997, approximately 63% of Syntel's U.S. workforce (43% of
Syntel's worldwide workforce) worked under H-1B visas (permitting temporary
residence while employed in the U.S.). Pursuant to United States federal law,
the Department of Immigration and Naturalization Services (the "INS") limits the
number of new H-1B visas to be approved in any government fiscal year. In years
in which this limit is reached, the Company may be unable to obtain enough H-1B
visas to bring a sufficient number of foreign employees to the U.S. If the
Company were unable to obtain sufficient H-1B employees, the Company's business,
results of operations and financial condition could be materially and adversely
affected. Furthermore, Congress and administrative agencies have periodically
expressed concerns over the levels of legal immigration into the U.S. These
concerns have often resulted in proposed legislation, rules and regulations
aimed at reducing the number of work visas, including H-1B visas, that may be
issued. From September 29, 1995 through September 30, 1997, the Company was
subject to a consent decree with the U.S. Department of Labor relating to its
H-1B employees. The Company believes that it fully complied with the consent
decree. (See "Overview - Management's discussion and analysis of Financial
condition and results of operations.")
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 IntelliSourcing engagements; customers' budget cycles;
and investment time for training. Because a significant percentage of the
Company's selling, general and administrative expenses are relatively fixed,
variations in revenues may cause significant variations in operating results. As
fixed price engagements grow in revenue and percent of total revenue, operating
results may be adversely affected in the future if there are cost overruns on
fixed-price engagements. In addition, it is possible that in some future quarter
the Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected. No assurance can be given that
quarterly results will not fluctuate causing a material adverse effect on the
Company's financial condition.
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
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ten largest customers represented approximately 81%, 78% and 75% of revenues for
the years ended December 31, 1995, 1996 and 1997, respectively. The Company's
largest customer is American Home Assurance Company and certain other
subsidiaries of American International Group Inc. (collectively, "AIG"). AIG
accounted for approximately 38%, 34% and 31% of revenues for the years ended
December 31, 1995, 1996, and 1997, respectively. Ford Motor Company ("Ford"),
the Company's next largest customer in 1995 and 1996, accounted for
approximately 14%, 12% and 9% of revenues for the years ended December 31, 1995,
1996 and 1997, respectively. For the year ended December 31, 1997, Dayton Hudson
Corporation became the Company's second largest customer, accounting for 12% of
total revenues, and for the year ended December 31, 1996 was the Company's
fourth largest customer, accounting for 5% of total revenues. The volume of work
performed for specific customers is likely to vary from year to year, and a
significant customer in one year may not provide the same level of revenues in
any subsequent year. Because many of its engagements involve functions that are
critical to the operations of its customer's businesses, any failure by Syntel
to meet a customer's expectations could result in cancellation or nonrenewal of
the engagement and could damage Syntel's reputation and adversely affect its
ability to attract new business. Most of the Company's contracts are terminable
by the customer with limited notice and without penalty. An unanticipated
termination of a significant engagement could result in the loss of substantial
anticipated revenues and could require the Company to either maintain or
terminate a significant number of unassigned IT professionals. The loss of any
significant customer or engagement could have a material adverse effect on the
Company's business, results of operations and financial condition.
Exposure to Regulatory and General Economic Conditions in India. A
significant element of the Company's business strategy is to continue to develop
and expand offshore Global Development Centers in India. As of December 31,
1997, the Company had approximately 27% of its billable workforce in India, and
anticipates that this percentage will increase over time. While wage costs in
India are significantly lower than in the U.S. and other industrialized
countries for comparably skilled IT professionals, wages in India are increasing
at a faster rate than in the U.S., and could result in the Company incurring
increased costs for IT professionals. In the past, India has experienced
significant inflation and shortages of foreign exchange, and has been subject to
civil unrest. No assurance can be given that the Company will not be adversely
affected by changes in inflation, 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 plans to treat any earnings from its operations in India
as permanently invested in India. If the Company decides to repatriate any of
such earnings, it will incur a "border" tax, currently 10%, under Indian tax law
and be required to pay U.S. corporate income taxes on such earnings. Changes in
the business or regulatory climate of India could have a material adverse effect
on the Company's business, results of operations and financial condition.
Intense Competition. The IT services industry is intensely competitive,
highly fragmented and subject to rapid change and evolving industry standards.
The Company competes with a variety of other companies, depending on the IT
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services it offers. The Company's primary competitors for professional IT
staffing engagements include participants from a variety of market segments,
including "Big Six" accounting firms, systems consulting and implementation
firms, applications software development and maintenance firms, service groups
of computer equipment companies and temporary staffing firms. In applications
outsourcing services, the Company competes primarily with Electronic Data
Systems Corp., IBM Global Solutions (ISSC), Andersen Consulting and Computer
Sciences Corporation. The Company's principal competitors for Year 2000
compliance engagements include IBM Global Solutions (ISSC), Cap Gemini and
Andersen Consulting. 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. 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. The Company's business has experienced rapid
growth over the years that has placed significant demands on the Company's
managerial, administrative and operational resources. Revenues have increased
from $45.3 million in 1993 to $124.3 million in 1997, and the number of
worldwide billable employees has increased from 689 as of December 31, 1993 to
1,746 as of December 31, 1997. The Company established a sales office in London,
England in 1996, opened a sales and service office in Singapore in May 1997, is
expanding its Global Development Center in Mumbai, India and has established a
new Global Development Center in Chennai, India. The Company's future growth
depends on recruiting, hiring and training IT professionals, increasing its
international operations, expanding its U.S. and offshore capabilities, adding
effective sales and management staff and adding service offerings. Effective
management of these and other growth initiatives will require the Company to
continue to improve its operational, financial and other management processes
and systems. Failure to manage growth effectively could have a material adverse
effect on the quality of the Company's services and engagements, its ability to
attract and retain IT professionals, its business prospects, and its results of
operations and financial condition. The Company has historically derived most of
its revenues from professional IT staffing services. In the second half of 1996,
the Company realigned personnel and resources to focus more attention on
outsourcing services for ongoing applications management, development and
maintenance and Year 2000 compliance services. A key factor in the Company's
growth strategy is to substantially increase outsourcing service engagements
with new and existing customers. The Company is less experienced in marketing,
developing and performing such outsourcing services, which have a longer sales
cycle (up to 12 months) and generally require approval by more senior levels of
management within the
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customer's organization, as compared to more traditional IT staffing services.
While the Company has achieved some initial success as a result of its
realignment, there can be no assurance that the Company's increased focus on
outsourcing services will continue to be successful, and any failure of such
strategy could have a material adverse effect on the Company's business, results
of operations and financial condition.
Fixed-Price Engagements. The Company undertakes, from time to time, certain
engagements billed on a fixed-price basis, as distinguished from the Company's
principal method of billing on a time-and-materials basis. In addition, the
Company offers its Year 2000 compliance services on a fixed-price basis in
contrast to most other compliance service providers who charge customers on a
time-and-materials basis. Furthermore, the Company has a strategy to increase
its percentage of revenue from fixed-price outsourcing. The Company's failure to
estimate accurately the resources and time required for an engagement or its
failure to complete fixed-price engagements within budget, on time and to the
required quality levels would expose the Company to risks associated with cost
overruns and, in certain cases, penalties, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition. Fixed price revenues represented approximately 3% and 12% of total
revenues for the years ended December 31, 1996 and 1997, respectively.
Potential Liability to Customers. Many of the Company's engagements involve
IT services that are critical to the operations of its customers' businesses.
The Company's failure or inability to meet a customer's expectations in the
performance of its services could result in a claim for substantial damages
against the Company, regardless of the Company's responsibility for such
failure. Although the Company attempts to limit contractually its liability for
damages arising from negligent acts, errors, mistakes or omissions in rendering
its IT services, there can be no assurance the limitations of liability set
forth in its service contracts will be enforceable in all instances or would
otherwise protect the Company from liability for damages. Although the Company
maintains general liability insurance coverage, including coverage for errors
and omissions, there can be no assurance that such coverage will continue to be
available on reasonable terms or will be available in sufficient amounts to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim. The successful assertion of one or more large claims
against the Company that are uninsured, exceed available insurance coverage or
result in changes to the Company's insurance policies, including premium
increases or the imposition of large deductible or co-insurance requirements,
could adversely affect the Company's business, results of operations and
financial condition.
Dependence on Principal. The success of the Company is highly dependent on
the efforts and abilities of Bharat Desai, the Company's founder, Chief
Executive Officer and President. Mr. Desai is subject to an employment agreement
with the Company with a term ending December 31, 1999, which contains
noncompetition, nonsolicitation and nondisclosure covenants during the term of
the agreement and for two years following termination of employment. The loss of
the services of this key executive for any reason could have a material adverse
effect on the Company's business, operating results and financial condition. The
Company does not maintain key man life insurance on Mr. Desai.
Risks Related to Possible Acquisitions. The Company may expand its
operations through the acquisition of additional businesses. Financing of any
future acquisition could require the incurrence of indebtedness, the issuance
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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. In December, 1997, the Company
acquired substantially all of the business interests of Waypointe Information
Technologies, Inc. (WIT) including hiring certain WIT employees and taking over
performance of WIT's consulting contracts. WIT was engaged in the business of
providing IT consulting services, including the Enterprise Resource Planning
"ERP" practice area. 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.
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. The Company is continuing to
develop proprietary conversion tools specifically tailored to address the Year
2000 problem. In order to protect its proprietary rights in these various
intellectual properties, the Company relies upon a combination of nondisclosure
and other contractual arrangements and trade secret, copyright and trademark
laws which afford only limited protection. The Company also generally enters
into confidentiality agreements with its employees, consultants, customers and
potential customers and limits access to and distribution of its proprietary
information. India is a member of the Berne Convention, an international treaty,
and has agreed to recognize protections on intellectual property rights
conferred under the laws of foreign countries, including the laws of the U.S.
The Company believes that laws, rules, regulations and treaties in effect in the
U.S. and India are adequate to protect it from misappropriation or unauthorized
use of its intellectual property. However, there can be no assurance that such
laws will not change and, in particular, that the laws of India will not change
in ways that may prevent or restrict the transfer of software components,
libraries and toolsets from India to the U.S. There can be no assurance that the
steps taken by the Company will be adequate to deter misappropriation of its
intellectual property, or that the Company will be able to detect unauthorized
use and take appropriate steps to enforce its rights. Although the Company
believes that its intellectual property rights do not infringe on the
intellectual property rights of others, there can be no assurance that such a
claim will not be asserted against the Company in the future or what impact any
such claim, would have on the Company's business, results of operation or
financial condition. The Company presently holds no patents or registered
copyrights, trademarks or servicemarks other than Syntel(R), Method2000(R),
IntelliTransfer(sm), Pilot2000(sm), Recover2000(sm), Implement2000(sm) and
Consider IT Done(sm). The Company has submitted federal trademark applications
to register certain names for its service offerings, including the
IntelliSourcing and TeamSourcing names. There can be no assurance, however, that
the Company will be successful in obtaining federal trademarks for these trade
names.
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INDUSTRY BACKGROUND
Increasing globalization, technological innovation and deregulation are
creating an increasingly competitive business environment that is requiring
companies to change fundamentally 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, implementing and maintaining IT solutions requires
highly skilled individuals trained in diverse technologies. However, there is a
growing shortage of these individuals and many companies are reluctant to expand
their IT departments through additional staffing, particularly at a time when
they are attempting to minimize their fixed costs and reduce workforces. The
Company believes that many organizations are concluding that using outside
specialists to address their 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. In addition, many organizations face a significant
challenge because many of their existing computer systems run software programs
which cannot properly process dates after 1999. Without a resolution of this
Year 2000 problem, these software programs will fail due to an inability to
correctly interpret dates in the year 2000 and thereafter.
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. At the same time, IT service
providers focused on project oriented professional services, with a finite
beginning and end, or "deliverables," do not typically
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provide ongoing maintenance services and management of IT functions. As a
result, the Company believes there is a significant opportunity to provide
outsourcing services to customers for ongoing IT management, development and
maintenance of their business applications.
SYNTEL SOLUTION
Syntel provides IntelliSourcing services consisting of applications
management services for ongoing management, development and maintenance of
business applications, including Year 2000 compliance services, and
TeamSourcing services consisting of professional IT consulting services. The
Company believes that its IntelliSourcing 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 TeamSourcing and IntelliSourcing
service offerings are distinguished by its Global Service Delivery Model, 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 Service Delivery Model. 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 Service Delivery Model 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 Service
Delivery Model, the Company currently has four Global Development Centers
located in Cary, North Carolina; Mumbai, India; Chennai, India; and Santa Fe,
New Mexico.
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. For the years ended December 31, 1995, 1996, and 1997, over 90%
of the Company's revenues were from customers for whom the Company provided
services during the previous period. At engagement initiation, Syntel's services
are typically based on expertise in the software life-cycle and underlying
technologies. Over time, however, as Syntel develops an in-depth knowledge of a
customer's business processes, IT applications and industry, Syntel gains a
competitive advantage to perform higher-value IT services for that customer.
Proven Intellectual Capital. Over its 18-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
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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 ongoing management, development and maintenance of their IT systems by
utilizing its Global Service Delivery Model, intellectual capital and customer
service orientation. The Company plans to continue to pursue the following
strategies to achieve this objective:
Leverage Global Service Delivery Model. 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
Service Delivery Model 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.
Focus Resources on IntelliSourcing Services. Through IntelliSourcing, the
Company markets its higher value applications management services for ongoing
applications management, development, maintenance and Year 2000 compliance
functions. In recent years, the Company has significantly increased its
investment in IntelliSourcing services. The Company recently realigned its
resources to focus on the development, marketing and sales of its
IntelliSourcing services, including the hiring of additional salespeople and
senior managers, redirecting personnel experienced in the sale of higher value
contracts, developing proprietary methodologies, such as Year 2000 offerings
and services, increasing marketing efforts, and redirecting organizational
support in the areas of finance and administration, human resources and legal.
As a result, IntelliSourcing revenues have increased from $33.3 million for
the year ended December 31, 1996, to $63.9 million for the year ending
December 31, 1997; representing a 92% increase.
Expand Customer Base and Role with Current Customers. The Company's sales
efforts focus on its strategy of migrating existing TeamSourcing customers to
higher value IntelliSourcing services. Traditionally, the Company has formed
strong relationships with customers through its high quality and responsive
TeamSourcing services. The Company's emphasis on customer service and long-term
relationships has enabled the Company to generate recurring revenues from
existing customers. These long-term relationships also provide the opportunity
for the Company to cross-sell IntelliSourcing services which, in some cases,
represent a natural extension of work initially performed under the TeamSourcing
engagement. Cross selling engagements with existing clients generated
incremental revenues of $10.4 million for the year ended December 31, 1997. 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
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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 Asia, and the UK.
Enhance Proprietary Knowledge Base and Expertise. The Company believes that
its "intellectual capital" of methodologies, practices, tools and technical
expertise is an important part of its competitive advantage. The Company strives
to continually enhance this knowledge base by creating competencies in emerging
technical fields such as Internet/intranet applications, client/server
applications and object-oriented software. The Company continually develops new
methodologies and toolsets such as its package of Year 2000 services, building
skills in enterprise resource planning (ERP), 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 in India, Canada, Europe, Singapore, the Philippines,
Australia and New Zealand, (ii) trains recent college graduates and other
recruits through its four training centers, two of which are located in the U.S.
and two of which are located in India, and (iii) maintains a broad range of
employee support programs, including relocation assistance, a comprehensive
benefits package, career planning 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 Acquisition Opportunities. Given the highly fragmented
nature of the IT services market, the Company believes that opportunities exist
to expand through the selective acquisitions of IT services firms to either
augment its technical expertise or provide opportunities to cross sell services.
SERVICES
Syntel provides a broad range of IT services through its IntelliSourcing
and TeamSourcing service offerings. Through IntelliSourcing, the Company
provides applications management services for ongoing management, development
and maintenance of customer applications, including Year 2000 compliance
services. Through TeamSourcing, the Company provides professional IT
consulting services. The Company believes that its established TeamSourcing
customers represent an attractive base from which to grow its IntelliSourcing
services and, as such, during the past year has increased the personnel and
resources dedicated to the development, marketing and sales of its
IntelliSourcing services. TeamSourcing and IntelliSourcing 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, 1996 and December 31,
1997, IntelliSourcing accounted for approximately 36% and 51%, respectively,
of the Company's revenues and TeamSourcing represented approximately 64% and
49%, respectively, of the Company's revenues.
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IntelliSourcing(sm)
Syntel provides higher-value applications management services for ongoing
management, development and maintenance of business applications, including
Year 2000 compliance services. Over the last two years, the Company has made
significant investments in IntelliSourcing, including the hiring of additional
sales people and senior managers, redirecting personnel experienced in the
sale of higher-value contracts, developing proprietary methodologies,
including a package of Year 2000 offerings and services, increasing marketing
efforts, and realigning organizational support in the areas of finance,
administration, human resources and legal. The Global Service Delivery model
is central to Syntel's delivery of IntelliSourcing 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.
Business Applications Outsourcing. Through IntelliSourcing, Syntel assumes
responsibility for and manages selected application support functions of the
customer. Rather than being responsible for an entire IT department, including
computers, other hardware, networks and all IT functions, IntelliSourcing
focuses solely on providing professional services for selected IT applications.
IntelliSourcing is fundamentally different than facilities management, which is
cost-intensive and involves the ownership of hardware. IntelliSourcing is a more
flexible alternative to traditional full-scale outsourcing, as it permits the
customer to maintain control of its IT resources and establish priorities.
IntelliSourcing permits the customer to select the applications best-suited to
remain managed in-house, while still benefiting from Syntel's expertise and
resource availability. The benefits of IntelliSourcing also include reliable
maintenance and up-keep of systems on which the business depends, reduced
operating costs, availability of IT personnel and access to best-practice
solutions, while allowing the customer to focus on its core competencies.
Syntel has developed methodologies, processes and tools to effectively
integrate and execute IntelliSourcing engagements. Referred to as
"IntelliTransfer," this methodology is implemented in three stages of planning,
transition and launch. Syntel first focuses on the customer's personnel,
processes, technology and culture to develop a plan to effectively assimilate
the business process knowledge of the customer. Syntel then begins to learn the
business processes of the customer, and, finally, seeks to assume responsibility
for performance of a particular customer application 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.
At engagement initiation, Syntel's services are based on its expertise in
the software life-cycle and underlying technologies, and are thus focused on
technical solutions. For most new engagements, the Company starts by performing
functions primarily revolving around production control, application systems
maintenance, development of new and changed systems functionality, and 24-hour
help desk support. As IntelliSourcing engagements progress, the Company
typically provides an increasing proportion of software development services
offshore, allowing Syntel to reduce its overall cost of service and improve
responsiveness.
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Because providing IntelliSourcing 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 application 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
IntelliSourcing services from other outsourcing services.
Year 2000 Compliance Services. As a component of its IntelliSourcing
services, the Company has invested substantial resources in developing a package
of Year 2000 offerings and services. The Company intends to use its Year 2000
capabilities to expand its role with existing TeamSourcing customers, gain new
customers and market its IntelliSourcing services. All of Syntel's Year 2000
service packages are based on Method2000(R), a proprietary solution developed by
Syntel. Method2000(R) is a second generation solution aimed at innovative
business processes, methodologies, techniques and tools, and maximizing the use
of lower-cost offshore resources.
The Method2000(R) service packages are: Pilot2000(sm), Implement2000(sm)
and Recover2000(sm). Using the Pilot2000 service package, Syntel identifies a
small representative portion of the customer's application systems portfolio,
and executes an entire Year 2000 compliance project on the representative
sample. In addition to constituting an effective "proof of concept," this
provides specific customer environment knowledge to Syntel. With this specific
knowledge, Syntel seeks to offer fixed-price solutions for additional
applications beyond the pilot using the offering Implement2000. The Company is
also marketing a Recover2000 service package in which Syntel assumes
responsibility for in-progress Year 2000 compliance projects previously
performed by the customer or another IT service provider.
Syntel markets its applications outsourcing services as a follow-on to its
Year 2000 compliance services. The Company believes that such follow-on services
will be an attractive offering in the coming years based on the current trend of
most Year 2000 service providers not to provide warranties or services to fix
any Year 2000 failures that may result from limitations, if any, of their
services. Syntel believes that the most efficient way for customers to achieve
Year 2000 compliance is to have key team members from the Year 2000 compliance
project fully employed in ongoing maintenance and development of the same
applications portfolio.
TeamSourcing(sm)
Syntel offers professional IT consulting services directly to its customers
and, to a lesser degree, in partnership with other service providers. The
professional IT consulting services include individual professionals and teams
of professionals dedicated to assisting customer systems projects and ongoing IT
functions. This service responds to the demand from internal IT departments for
additional expertise, technical skills and personnel. The Company's wide range
of TeamSourcing services include IT applications systems specification, design,
development, implementation and maintenance, which involve diverse computer
hardware, software, data and
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networking technologies and practices. Syntel also provides professional IT
staffing services to state governments, principally in the area of state welfare
automation services. Services to state governments are provided directly by
Syntel and in partnership with Deloitte & Touche and with Unisys. In providing
its TeamSourcing services, Syntel utilizes its Global Service Delivery Model,
primarily through international recruiting, training and relocation, to meet
customer needs for resource depth, expertise, and responsiveness.
By focusing on customer satisfaction and the delivery of quality services
to TeamSourcing customers, the Company believes it is able to generate
opportunities to provide its TeamSourcing customers with higher value
application outsourcing services and Year 2000 compliance services. The Company
has recently realigned its TeamSourcing sales people on an account basis within
each sales region in an effort to further enhance customer relationships and
marketing to larger, more complex businesses. The effectiveness of its
TeamSourcing services and its focus on customer service is evidenced by the high
level of repeat business from existing customers and the quality awards its
customers have bestowed on Syntel. During 1996, Syntel received the Q-1 rating
from Ford Motor Company and became a Preferred Supplier to Chrysler Corporation
receiving the highest rating in each customer service category. The Q-1 rating
from Ford Motor Company and the Preferred Supplier designation from Chrysler
Corporation are the highest facility supplier quality ratings awarded by each of
these principal customers. During 1997, Ford extended Syntels Q-1 rating for
another year after successful completion of a Q-1 standards audit. The Company
is also a Microsoft Certified Solution Provider. For the years ended December
31, 1995, 1996, and 1997, over 90% of Syntel's annual revenues were from
customers for whom the Company provided services during the previous period.
In order to continue to enhance its TeamSourcing services expertise, Syntel
has enhanced its capabilities in enterprise resource planning (ERP), including
the implementation of software packages from SAP and Oracle. The Company also
enhanced its ERP practice through the acquisition of substantially all of the
business interests of Waypointe Information Technologies Inc. in December, 1997.
The Company has also developed expertise in emerging technologies such as
Internet/intranet applications, client/server applications and object-oriented
software.
Technical Services Group
The Company seeks to gain a competitive advantage through its
methodologies, tools and technical expertise. The Company employs a team of
professionals in its Technical Services Group whose mission is to develop and
formalize Syntel's "intellectual capital" for use by the entire Syntel
organization. The Technical Services Group focuses on monitoring industry
trends, creating competencies in emerging technical fields, developing new
methodologies, techniques and tools such as IntelliTransfer(sm) and
Method2000(R), creating reusable software components 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.
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CUSTOMERS
Syntel provides its services to a broad range of Fortune 1000 companies
principally in the financial services, manufacturing, retail, transportation and
information/communications industries, as well as to government entities. During
1997, the Company provided services to over 140 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 1997, include:
FINANCIAL SERVICES MANUFACTURING RETAIL
- ------------------ ------------- ------
American International Ford Motor Co. Dayton Hudson Corp.
Group, Inc. Chrysler Corporation Safeway, Inc.
World Bank International Business Mervyn's
Colonial Management Machines Corp. Kmart Corp.
CitiBank Unisys Corp. Lucky Stores
CIGNA Corp. New Venture Gear
First Union Corp. Meldisco
Prudential Insurance Hewlett-Packard Corp.
American Annuities Group Xerox Corp.
Westinghouse Electric
Corp.
Lucent Technologies
INFORMATION/
TRANSPORTATION COMMUNICATIONS GOVERNMENT
- -------------- -------------- ----------
Norfolk Southern Corp. AT&T Corp. New Mexico
Allied Van Lines Consolidated Communication New York
Burlington Northern, Inc. Directories Malta
Yellow Technologies Intellisoft West Virginia
Northwest Airlines Corp. McDonnell Douglas Illinois
Information Systems
LM Ericsson Telephone Co.
For the years ended December 31, 1995, 1996, and 1997, the Company's top
ten customers accounted for approximately 81%, 78% and 75% of the Company's
revenues, respectively. American International Group, Inc. and Ford Motor Co.,
the Company's largest customers, for the years ended December 31, 1995 and
December 31, 1996, represented approximately 38% and 14% of revenue for the year
ended December 31, 1995, respectively, and approximately 34% and 12% of revenue
for the year ended December 31, 1996. For the year ended December 31, 1997,
American International Group remained the Company's largest client with 31% of
the revenues while Dayton Hudson Corporation grew to the second largest client
with 12% of the revenues. Ford Motor Company was the third largest client for
the year ended December 31, 1997 with 9% of the revenues.
American International Group. The Company's largest customer is American
Home Assurance Company, and certain other subsidiaries of American International
Group, Inc. (collectively, "AIG"). This customer relationship began with the
placement of a single IT professional in 1989 and has grown continuously through
December 31, 1997. The Company supports AIG systems throughout the U.S. and in
selected countries around the world. Both the Company's Cary, North Carolina and
Mumbai, India Global Development Centers
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were initially established to support AIG. As the Company has become more
knowledgeable about AIG's personnel, processes, technology and culture, it has
had the opportunity to expand the range of its services beyond contract minimums
and to play an increasingly valuable role in project management and systems
design.
Currently, the Company provides applications development and maintenance
services in support of various AIG subsidiaries through integrated service teams
located onsite, offsite, and offshore. Its applications development services
focus on providing customized solutions and applications in support of policy
underwriting, claims management and financial reporting and encompass both
mainframe and client/server environments. The Company also provides Year 2000
conversion services to AIG on a fixed-price basis. The Company's applications
maintenance services focus on enhancing existing business systems, including
24-hour management of data processing functions and a 24 hour customer
assistance center. The Company is responsible for complete production support,
maintenance and related activities for over 250 applications. Through its
long-term relationship with AIG, Syntel has enabled AIG to better control,
manage, and plan its IT resource allocation and to simplify management of IT
functions while benefiting from Syntel's expertise, practices and resource
availability for the cost-efficient execution of their plans and priorities.
Syntel has also delivered to AIG 24-hour support, fast turnaround and the
capacity to address AIG enterprise needs in other parts of the world. The
Company recently signed a contract renewal with AIG to provide IT services
through December 31, 2000. AIG may terminate the contract upon six months
written notice and payment of an early termination penalty.
GLOBAL SERVICE DELIVERY MODEL
Syntel's Global Service Delivery Model 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 Service Delivery Model gives the Company the flexibility to deliver
to each customer a customized mix of integrated on-site, off-site and offshore
services to meet varying customer needs for direct interaction with Syntel
personnel, access to technical expertise and best practices, resource
availability and cost-effective delivery.
Through on-site service delivery at the customer's location, the Company is
able to gain comprehensive knowledge concerning the customer's personnel,
processes, technology and culture, and maintain direct customer contact to
facilitate project management, problem solving and integration of Syntel
services. Off-site service delivery at the Company's U.S. locations provides the
customer with access to the diverse skill base and technical expertise resident
at different regional centers, availability of resources, and cost-effective
delivery due to the savings in transportation, facilities and relocation costs
associated with on-site work. Offshore service delivery at the Company's Indian
location 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.
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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 Service Delivery Model 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. Weekly meetings are held with key project management, sales,
technical, legal and finance personnel to monitor progress, identify issues and
discuss solutions. As engagements evolve and customer needs change, the Company
can reallocate resources responsively from among these locations as necessary.
The Company's four Global Development Centers located in Cary, North
Carolina, Mumbai, India, Chennai, India and Santa Fe, New Mexico support the
Company's Global Service Delivery Model.
The Cary, North Carolina Global Development Center, which employs over 350
persons, serves as the hub for the Company's telecommunications, project
management, technical training and professional development programs. Its
support functions include administration of a dedicated data and voice network,
a 24-hour customer assistance center which coordinates problem resolution
worldwide, and a development center for the sharing of knowledge and expertise
among IT professionals. Moreover, due to its proximity to a large number of
major universities, the Cary, North Carolina Global Development Center has
access to a relatively large talent pool.
The Mumbai, India Global Development Center, which employed over 670
persons as of December 31, 1997, 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 a principal recruiting and training center for the Company
due to the large resource pool of skilled IT professionals and college
graduates. The Mumbai Center, which has been in operation for over four years,
is being expanded to accommodate a capacity in excess of 700 people. Such
expansion is expected to be completed by mid 1998.
The Company also has leased space for a new Global Development Center in
Chennai, India. This Center is intended to provide additional resources and will
include a training and development center. The Company has begun staffing the
Chennai Center and will continue to incrementally increase staffing over time in
response to customer needs. Once fully operational in mid 1998, the Chennai
Center will be able to accommodate up to 600 persons. Both the Mumbai and
Chennai expansion programs are expected to be financed from internally generated
funds from the Company's Indian operations.
The Santa Fe, New Mexico Global Development Center, which employs over 30
people, serves as a training and development center.
During 1997, the Company established wholly owned subsidiaries in London
England and Singapore with a total investments of $0.1 million.
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 Oakbrook, Illinois; Dallas, Texas; Jacksonville, Florida;
San Ramon, California; Minneapolis, Minnesota; New York, New York; Troy,
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Michigan; Woodbridge, New Jersey; Pittsburgh, Pennsylvania; London, England; and
Singapore. In early 1997, the Company realigned its sales staff into two sales
forces, one for TeamSourcing services and one for IntelliSourcing services.
During recent years the Company has focused on increasing its staffing of
professional salespeople in IntelliSourcing both by dedicating internal sales
professionals to this service offering and through outside hiring of
professionals experienced in marketing outsourcing engagements. The sales cycle
for IntelliSourcing engagements ranges from 6 to 12 months depending on the
complexity of the engagement. Due to this longer sales cycle, IntelliSourcing
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 IntelliSourcing 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 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. A significant amount of TeamSourcing
engagements are developed from existing customers. During both 1996 and 1997,
over 90% of TeamSourcing revenues were from customers who received services
during the prior period.
Syntel's marketing organization seeks to promote brand identities for its
TeamSourcing, IntelliSourcing and Method2000(R) services and to generate sales
leads. The Company's current marketing efforts consist of direct mail, trade
shows, publications and public relations campaigns targeted to CEOs, CFOs and
CIOs of Fortune 500 organizations and CIOs of government agencies. In addition,
Syntel maintains relationships with key industry research groups such as the
Gartner Group, Meta Group, Giga Group, and the Information Technology
Association of America.
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, 1997 the Company had 2,190 full time
employees. Of this total, the U.S. operations employed 1,481 persons, including
1,323 IT professionals; the Indian operation employed 699 persons, including 575
IT professionals; and the Company employed an additional 10 persons in various
remote locations, including the U.K. and Singapore. Of the 1,481 persons
employed in the U.S. operation 936 held H-1 visas (permitting temporary
residency in the U.S.)
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
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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 a recruiting team based
in the U.S. which recruits primarily across the U.S., India, Canada, Europe,
Singapore, the Philippines, Australia and New Zealand. The Company also has an
international-based recruiting team, with recruiters in Mumbai, Chennai and
Banglore, India, and Australia, to recruit for the Company's needs in India, as
well as for the Company's U.S. operations. The Company uses a standardized
global selection process that includes interviews and reference checks.
Among the Company's other recruiting techniques are the placement of
advertisements on its web site, 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 utilizing the Resumix database
system, which is an automated tool for managing all phases of recruiting. This
system directly downloads resumes from the Internet, directly loads faxed
resumes and currently stores approximately 40,000 resumes. This system enhances
the ability of the Company's recruiters to select appropriate candidates and can
distribute resumes directly to the recruiters.
Training. The Company uses a number of established training delivery
mechanisms in its efforts to provide a consistent and reliable source for
qualified IT professionals. Recent college graduates and other recruits selected
by the Company participate in Syntel's Technical and Professional Development
("TPD") program which is delivered in both the U.S. and India. The TPD program
consists of 8-12 weeks of training programs, including classroom lectures,
hands-on experience, exercises, projects and tests. Another entry-level training
program is the Syntel Management Trainee Program. As part of this program,
Syntel selects graduates from leading universities who are suited for corporate
and regional positions within Syntel in account management, sales, recruiting
and other management areas. Syntel also maintains a comprehensive Computer-Based
Training program ("CBT"), with over 200 training modules, which Syntel employees
can use at their convenience. The CBT topics cover the latest client/server
areas, local-area and wide-area networks, relational data base management
systems, object-oriented systems, Microsoft products, in addition to a number of
management and related developmental areas. The Company has been accepted as a
Microsoft Certified Solution Partner and sponsors the Microsoft Certification
Program at its Cary, North Carolina Global Development Center, and provides
opportunities for cross-training of its professionals in emerging technologies.
Support and Retention. The Company seeks to provide meaningful support to
its employees which the Company believes leads to improved employee retention
and better quality services to its customers. Traditionally, a
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significant percentage of the Company's employees have been recruited from
outside the U.S. and relocated to the U.S. This has resulted in the need to
provide a higher level of initial support to its employees than is common for
U.S.-based employees. As a result of these activities, Syntel has developed a
significant knowledge base in making foreign professionals comfortable and
quickly productive in the U.S. and Europe. The Company also conducts regular
career planning sessions with its employees, and seeks to meet their career
goals over a long-term planning horizon. As part of its retention strategy, the
Company strives to provide a competitive compensation and benefits package,
including relocation reimbursement and support, health insurance, 24-hour
on-call nurse consulting, a 401(K) plan, life insurance, dental options, a
vision eye-care program, long-term disability coverage, short-term disability
options, tuition subsidy plan, PC purchase plan and an employee referral plan.
The Company offered stock options to substantially all of its employees under
the Stock Option Plan at consummation of its initial public offering in 1997,
and intends to offer substantially all of its employees an opportunity to
purchase the Company's Common Stock at a discount to fair market value under the
Employee Stock Purchase Plan.
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 Six" accounting
firms, systems consulting and implementation firms, applications software
development and maintenance firms, service groups of computer equipment
companies and temporary staffing firms. In applications outsourcing services,
the Company competes primarily with Electronic Data Systems Corp., IBM Global
Solutions (ISSC), Andersen Consulting and Computer Sciences Corporation. The
Company's principal competitors for Year 2000 compliance engagements include IBM
Global Solutions (ISSC), Cap Gemini and Andersen Consulting. 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. 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.
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ITEM 2. PROPERTIES.
The Company's headquarters and principal administrative, sales and
marketing, and system development operations are located in approximately 24,900
square feet of leased space in Troy, Michigan. The Company occupies these
premises under a lease expiring on November 30, 2001. The Company's primary
training and development center is located in approximately 50,240 square feet
of leased space in Cary, North Carolina, under a lease which expires March 31,
1999. The Company also leases regional office facilities in Dallas, Texas; San
Ramon, California; Oakbrook, Illinois; Minneapolis, Minnesota; Santa Fe, New
Mexico; Jacksonville, Florida; Woodbridge, New Jersey; Pittsburgh, Pennsylvania;
London, England; and Singapore
Syntel leases approximately 20,210 square feet of office space in Mumbai,
India, under four leases expiring on various dates from October 14, 1997 to
September 30, 1998, each of which is expected to be renewed for a period of five
years upon expiration. This leased space is in the process of being expanded by
approximately 13,000 square feet. Syntel's IT professionals in India, as well as
its senior management, administrative personnel, human resources and sales and
marketing functions are housed in this facility. Syntel has leased substantially
all of an office building in Chennai, India consisting of approximately 33,000
square feet. The lease terms expire May 2003, subject to the Company's option to
renew for an additional period of three years. This facility is projected to
accommodate approximately 600 IT professionals once improvements are completed
in mid 1998.
The Company believes that these facilities 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, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
(a) The Registrant's common stock is traded on the NASDAQ National Market
under the symbol "SYNT." The common stock commenced trading on NASDAQ on August
12, 1997 in connection with the underwritten initial public offering of shares
of the Company's common stock at an initial price to the public of $11.00 per
share. Quarterly stock prices were as follows:
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1997 High Low
- --------------------------------------------------------------------------------
August 12, 1997 through
September 30, 1997 18.25 12.0
Fourth Quarter 16.625 8.5
(b) There were approximately 85 shareholders of record and 3972 beneficial
holders on March 16, 1998.
(c) During the years ended December 31, 1997 and 1996, the Company declared
dividends of $11,400,000 and $12,000,000, respectively. The 1997 dividends
included distributions, to the shareholders of the Company prior to the
Company's initial public offering, equal to the Company's undistributed S
corporation earnings through the date of termination of the company's S
corporation status on August 12, 1997. The Company does not intend to declare
or pay cash dividends in the foreseeable future. Management anticipates that
all earnings and other cash resources of the Company, if any, will be retained
by the Company for investment in its business.
ITEM 6. SELECTED FINANCIAL DATA.
SYNTEL, INC. & Subsidiaries
FIVE-YEAR HIGHLIGHTS
(In thousands, except per share amounts)
The following tables set forth selected consolidated financial data and other
data concerning Syntel, Inc. for each of the last five years.
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenues................... $45,345 $67,340 $90,326 $92,330 $124,338
Cost of revenues........... 38,323 55,315 70,014 67,083 87,584
------- ------- ------- ------- --------
Gross profit.... .......... 7,022 12,025 20,312 25,247 36,754
Selling, general and
administrative expenses,. 5,523 8,603 13,909 19,271 23,547
------- ------- ------- ------- --------
Income from operations .... 1,499 3,422 6,403 5,976 13,207
Other income (expense), net. (127) (67) 188 149 730
------- ------- ------- ------- --------
Income before income taxes. 1,372 3,355 6,591 6,125 13,937
Income taxes......... -- 1 436 350 3,517
------- ------- ------- ------- --------
Net income................. $ 1,372 $ 3,354 $ 6,155 $ 5,775 $ 10,420
======= ======= ======= ======= ========
Pro forma net income....... $ 982 $ 2,203 $ 4,421 $ 4,379 $ 10,196
======= ======= ======= ======= ========
Pro forma net income
per share - diluted $ 0.04 $ 0.09 $ 0.17 $ 0.17 $ 0.39
======= ======= ======= ======= ========
Pro forma weighted average
shares outstanding (diluted) 26,145 25,845 26,145 26,245 26,055
======= ======= ======= ======= ========
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DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- ---------
(IN THOUSANDS, EXCEPT OTHER DATA)
BALANCE SHEET DATA:
Working capital........... $ 9,049 $11,999 $15,763 $ 1,842 $35,346
Total assets... ......... 16,377 22,928 29,140 32,992 65,232
Long-term debt............ -- -- -- -- --
Total shareholders' equity 9,847 13,201 19,209 6,145 39,585
OTHER DATA:
Billable headcount in U.S. 670 1,097 1,029 1,103 1,260
Billable headcount in India 19 83 107 190 478
Billable headcount in
other locations......... -- -- -- -- 8
------- ------- ------- ------- -------
Total billable headcount... 689 1,180 1,136 1,293 1,746
======= ======= ======= ======= =======
(1) For all periods shown through August 12, 1997, the Company elected to
be treated as an S corporation and, as a result, the income of the
Company has been taxed for federal and state purposes (with exceptions
under certain state income tax laws) directly to the Company's
shareholders rather than to the Company.
(2) Pro forma data reflect income tax provisions for the periods presented
for federal and additional state income taxes as if the Company had
been taxed as a C corporation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Syntel is a worldwide provider of professional IT consulting and
applications management services to Fortune 1000 companies, as well as to
government entities. The Company's service offerings include, IntelliSourcing,
consisting of applications management services for ongoing management,
development and maintenance of business applications, including Year 2000
compliance services, and TeamSourcing, consisting of professional IT
consulting services.
The Company's revenues are generated from professional services fees
provided through IntelliSourcing and TeamSourcing engagements. The Company has
invested significantly in developing its ability to sell and deliver
IntelliSourcing services, and has shifted a larger portion of its business to
IntelliSourcing engagements which the Company believes have higher gross margin
potential. For the years ended December 31, 1996 and 1997, the percentage of
revenues generated by IntelliSourcing engagements was 36% and 51%, respectively.
On IntelliSourcing engagements, the Company typically assumes responsibility for
engagement management and generally is able to allocate certain portions of the
engagement to on-site, off-site and offshore personnel. Syntel may bill the
customer on either a time-and-materials or fixed-price basis. While a
significant portion of IntelliSourcing engagements have been historically on a
time-and-materials basis most IntelliSourcing engagements started during 1997
have been on a fixed-price basis. For the years ended December 31, 1996 and
1997, fixed-price revenues comprised 7% and
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23% of total IntelliSourcing revenues respectively. Syntel recognizes revenues
from fixed-price engagements on the percentage of completion method. For the
years ended December 31, 1996 and 1997, the percentage of revenues generated by
TeamSourcing engagements was 64% and 49%, 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.
The Company's most significant cost is personnel cost, which consists of
compensation, benefits and other related costs for its IT professionals. The
Company strives to maintain its gross margin by controlling engagement costs and
offsetting increases in salaries and benefits with increases in billing rates.
The Company has established a human resource allocation team whose purpose is to
staff IT professionals on engagements that efficiently utilize their technical
skills and allow for optimal billing rates. Syntel India derives substantially
all of its revenues from providing software development services to the Company
from Mumbai, 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, 1997, approximately 63% of Syntel's U.S.
workforce (43% of Syntel's worldwide workforce) worked under H-1B temporary work
visas in the U.S. To resolve a 1994 investigation of the Company by the U.S.
Department of Labor ("DOL") for failing to meet prevailing wage requirements for
certain H-1B employees, the Company voluntarily entered into a two-year consent
decree with the DOL. In response to the consent decree, the Company did not seek
any new H-1B visas during the fourth quarter of 1995, significantly curtailed
its H-1B hiring from April 1995 through September 1996, and significantly
increased its U.S. domestic recruiting and hiring efforts throughout 1996. As a
result, the Company believes that it was unable to increase billable IT
personnel during 1995 and 1996 to levels that it would have otherwise expected
in the absence of these factors. Because the Company's revenues are closely
related to the number of billable IT professionals it employs, the Company
believes that these developments adversely affected revenue growth in 1995 and
1996. From June 30, 1995, to June 30, 1996, the total number of U.S. billable IT
personnel declined from 1,137 to 1,019, but the Company has increased billable
IT personnel significantly beginning in the fourth quarter of 1996. As of
December 31, 1997, total billable U.S. headcount had increased to 1,260. The
Company believes that it has fully complied with the consent decree which
expired in September 1997.
The Company has made substantial investments in infrastructure since 1995,
including: (i) establishing the Company's Global Development Center in Cary,
North Carolina to support up to 400 IT professionals; (ii) establishing a
dedicated telecommunications link between the Company's United States operations
and the Mumbai, India development center; (iii) establishing a Global
Development Center in Chennai, India; (iv) relocating the Company's headquarters
to larger offices in Troy, Michigan; (v) increasing IntelliSourcing sales and
delivery capabilities through significant expansion of the IntelliSourcing sales
force and the Technical Services Group, which develops and formalizes
proprietary methodologies, practices and tools for the entire Syntel
organization; (vi) hiring additional experienced senior management; and (vii)
expanding global recruiting and training capabilities.
Through its strong relationships with customers, the Company has been able
to generate recurring revenues from repeat business. For the years ended
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26
December 31, 1995 and 1996 and 1997, over 90% of Syntel's revenues were derived
from customers served in the prior period. 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 81%, 78%
and 75% of revenues for the years ended December 31, 1995, 1996, and 1997. The
Company does not believe there is any material collectibility exposure among its
top ten customers. American International Group, Inc. and Ford Motor Co., the
Company's largest customers, for the years ended December 31, 1995 and December
31, 1996, represented approximately 38% and 14% of revenue for the year ended
December 31, 1995, respectively, and approximately 34% and 12% of revenue for
the year ended December 31, 1996. For the year ended December 31, 1997, American
International Group remained the Company's largest client with 31% of the
revenues while Dayton Hudson Corporation grew to the second largest client with
12% of the revenues. Ford Motor Company was the third largest client for the
year ended December 31, 1997 with 9% of the revenues. Although the Company does
not currently foresee a credit risk associated with accounts receivable from
these customers, credit risk is affected by conditions or occurrences within the
economy and the specific industries in which these customers operate.
SYNTEL INDIA ACQUISITION
Before the Company's initial public offering in 1997, Bharat Desai and
Neerja Sethi, the Company's President, and Chief Executive Officer and the
Company's Vice President, Corporate Affairs, respectively, were the sole
beneficial shareholders of the Company's Indian subsidiary Syntel Software
Private Limited "Syntel India". Syntel India provides offshore software
development services to the Company. Prior to the offering, the Company entered
into an agreement pursuant to which the Company acquired Mr. Desai and Ms.
Sethi's combined 100% ownership interest in Syntel India for $7.0 million in
cash. The $7.0 million purchase price was based on a valuation performed by
independent chartered accountants in India pursuant to guidelines established by
the Reserve Bank of India for acquisitions of Indian corporations. The purchase
price was paid from a portion of the net proceeds of the initial public
offering. This acquisition was closed upon consummation of the offering, and the
portion of the purchase price in excess of the carrying value of the net assets
acquired ($1.5 million) was accounted for as a reduction in shareholders'
equity.
INCOME TAX MATTERS
Syntel India is eligible for certain favorable tax provisions provided
under Indian tax law including: (i) an exemption from payment of corporate
income taxes for a period of five consecutive years in the first eight years of
operation (the "Tax Holiday"); or (ii) an exemption from income taxes on the
profits derived from exporting computer software services from India (the
"Export Exemption"). The Export Exemption remains available after expiration of
the Tax Holiday. The Company plans to treat any Syntel India earnings as
permanently invested in India and does not anticipate repatriating any of these
earnings to the U.S. If the Company decides to repatriate any earnings of Syntel
India, it will incur a "border" tax, currently 10%, under Indian tax law and
will be required to pay U.S. corporate income taxes on such earnings.
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RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected pro forma
income statement data as a percentage of the Company's total revenues.
PERCENTAGE OF REVENUES
-----------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
----- ----- -----
Revenues................... 100.0% 100.0% 100.0%
Cost of revenues........... 77.5 72.6 70.5
----- ----- -----
Gross profit............... 22.5 27.4 29.5
Selling, general and
administrative expenses.. 15.4 20.9 18.9
----- ----- -----
Income from operations..... 7.1% 6.5% 10.6%
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues. Total consolidated revenues increased from $92.3 million in 1996
to $124.3 million in 1997, representing a 34.7% increase. The Company's total
revenues were less dependent upon its largest customers in 1997 as compared to
1996. The top two customers accounted for 43% of total revenues in 1997, down
from 46% of total revenues in 1996. Additionally, the top 10 customers accounted
for 75% of total revenues in 1997 as compared to 78% in 1996.
The worldwide billable headcount increased to 1,746 as of December 31, 1997
compared to 1,293 as of December 31, 1996.
IntelliSourcing Revenues. IntelliSourcing revenues in 1997 increased to $64.0
million, or 51% of total revenues, from $33.3 million, or 36% of total revenues
in 1996. The revenue increase was attributable primarily to the conversion of
TeamSourcing clients to long term IntelliSourcing engagements, new 1997
engagements, and growth in the existing base, contributing increased
IntelliSourcing revenues of $14.1 million, $9.3 million, and $7.2 million
respectively. The number of IntelliSourcing engagements increased from 5 as of
December 31, 1996 to 26 as of December 31, 1997.
TeamSourcing Revenues. TeamSourcing revenues in 1997 increased to $60.3 million,
or 49% of total revenues, from $59.0 million, or 64% of total revenues in 1996.
The increase in revenues was attributable primarily to bill rate increases and
growing ERP revenues, which more than offset a reduction in average billable
headcount. End of year average hourly bill rates increased to $52.70 as of
December 31, 1997 from $46.81 as of December 31, 1996. The reduction in average
billable headcount was due largely to the conversion of TeamSourcing engagements
to long term IntelliSourcing engagements.
Cost of Revenues. Consolidated cost of revenues consist of costs directly
associated with billable consultants in both the US and offshore, including
salaries, payroll taxes, benefits, relocation costs, immigration costs,
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finders fees, and trainee compensation. Consolidated cost of revenues in 1997
increased to $87.6 million in 1997 from $67.1 million, but decreased as a
percent of revenue from 72.7% in 1996 to 70.4% in 1997. The decrease in cost of
revenues as a percentage of revenues was attributable primarily to increased
TeamSourcing billing rates and new higher margin IntelliSourcing engagements,
partially offset by increased compensation, benefits, and other direct expenses.
TeamSourcing bill rate increases and new higher margin IntelliSourcing
engagements contributed 3% and 2.7% respectively to the overall improvement in
cost of revenues while increased compensation/benefits and other direct costs
partially offset the improvement with increases of 2.6% and .4% , respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of salaries, payroll taxes and
benefits for sales, finance, human resources, administrative, and corporate
staff, travel, communications, business promotions, marketing, and various
facility costs for the Company's Global Development Centers. Selling, general
and administrative expenses for the year ended December 31, 1997 increased to
$23.5 million, or 18.9% of total revenues, from $19.3 million, or 20.9% of total
revenues. The $4.2 million increase in selling, general, and administrative
costs was attributable primarily to facility expansion at the Company's Global
Development Centers of $1.0 million, fixed price reserves of $.8 million,
Company wide communication costs of $.4 million, compensation and benefits $.4
million, marketing costs of $.3 million, start-up costs of $.3 million and $1.1
million for other office and personnel expenses necessary to support the
increasing activity levels.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues. Total consolidated revenues increased to $92.3 million in 1996
from $90.3 million in 1995. The primary cause of this growth was an increase in
TeamSourcing revenues, which offset a decline in IntelliSourcing revenues. The
Company believes that actions taken in 1995 and 1996 in response to the DOL
consent decree adversely affected revenue growth in the last quarter of 1995 and
in 1996.
IntelliSourcing Revenues. IntelliSourcing revenues in 1996 decreased to
$33.3 million, or 36.0% of total revenues, from $36.8 million, or 40.7% of total
revenues in 1995, despite an increase in the number of IntelliSourcing
customers. The number of the Company's IntelliSourcing customers increased to
five in 1996 from two in 1995, but the Company recorded minimal revenues from
these new engagements as they commenced in the fourth quarter of 1996.
Approximately $1.9 million of the $3.5 million decrease in the Company's
IntelliSourcing revenues was attributable to a significant reduction in the
funding for a state government project. The remainder of the decrease was the
result of the Company increasing the efficiency of services provided under a
time-and-materials based contract to its largest customer, which enabled the
Company to maintain the customer's applications with fewer employees.
TeamSourcing Revenues. TeamSourcing revenues in 1996 increased to $59.0
million, or 64.0% of total revenues, from $53.6 million, or 59.3% of total
revenues in 1995. The increase in TeamSourcing revenues was primarily
attributable to a substantial increase in the scope of services provided to two
of the Company's largest customers, including maintenance services and the
development of new applications. The increase in TeamSourcing revenues was also
the result of an increase in the average billing rates for IT professionals.
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The worldwide billable headcount, as of December 31, 1996 increased to
1,293 compared to 1,136 as of December 31, 1995.
Cost of Revenues. Consolidated cost of revenues in 1996 decreased to $67.1
million, or 72.6% of revenues, from $70.0 million, or 77.5% of revenues in 1995.
The decrease in cost of revenues was primarily attributable to reduced health
benefit costs resulting from a self-insurance program the Company instituted in
the second half of 1995, and to an increase in the billing rates of certain IT
professionals performing IntelliSourcing services for a major customer which
occurred in the second half of 1995. To a lesser extent, the decrease in cost of
revenues was attributable to the migration of work to the Company's offshore
facility in Mumbai, India where the salaries of IT professionals are lower as a
percentage of professional service fees. The number of billable IT professionals
in India increased to 190 at December 31, 1996, compared to 107 at December 31,
1995. In addition, the Company incurred one-time costs of approximately $0.5
million for the relocation of employees to its Cary, North Carolina Global
Development Center in 1995 which did not recur in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1996 increased to $19.3 million, or 20.9% of
revenues, from $13.9 million, or 15.4% of revenues in 1995.
The $5.4 million increase in selling, general and administrative
expenses resulted primarily from $2.1 million in additional personnel cost to
strengthen the IntelliSourcing sales and support staff and $0.9 million to
develop the Company's proprietary Method2000(R) solution for its Year 2000
compliance service offering, reflecting the Company's focus on increasing
revenues from its IntelliSourcing business unit. In addition, the increase in
selling, general and administrative expenses was attributable to $1.5 million in
additional personnel cost to strengthen the TeamSourcing sales and support staff
and $0.9 million increased facilities costs.
The $3.6 million aggregate personnel cost to build the TeamSourcing and
IntelliSourcing sales and support staff consisted primarily of hiring additional
sales executives, account executives, recruiting personnel and operational
support personnel.
QUARTERLY RESULTS OF OPERATIONS
Note 11 of the audited financial statements sets forth certain
quarterly income statement data for each of the eight quarters beginning January
1, 1996 and ended December 31, 1997. 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 the
amounts stated below 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
fluctuated from quarter to quarter in the past and will likely fluctuate in the
future. Various factors causing such fluctuations include: 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
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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 IntelliSourcing engagements;
customers' budget cycles and investment time for training.
LIQUIDITY AND CAPITAL RESOURCES
The Company generally has financed its working capital needs through
operations, occasionally supplemented by borrowings under a line of credit with
a commercial bank. Both the Mumbai and Chennai expansion programs are expected
to be financed from internally generated funds.
Net cash provided by operating activities was $12.2 million, $5.9
million and $18.1 million for the years ended December 31, 1995, 1996, and 1997,
respectively. The decrease in net cash provided by operating activities in 1996
over 1995 was attributable to a $3.75 million increase in accounts receivable
due to: a $2.1 million increase in fourth quarter revenue in 1996 over fourth
quarter revenue in 1995, which resulted in an increase in accounts receivable at
year end due to the normal delay in receiving payment on revenue billed; $1.3
million in deferred revenue recorded in 1996; and a one-time $600,000 receivable
which arose out of the Company moving to a self-funded health insurance program.
The increase in cash provided by operating activities in 1997 over 1996 was
primarily attributable to a $4.6 million increase in net income, an improvement
of $3.8 million from a reduction in the days sales outstanding in accounts
receivable, and a $6.7 million increase in accrued payroll, operating costs, and
taxes, partially offset by a $3.5 million increase in advanced billings.
Net cash used in investing activities was $3.3 million, $2.1 million
and $8.7 million for the years ended December 31, 1995, 1996 and 1997,
respectively. Cash used in investing activities in 1995 included $2.7 million to
establish the Company's Cary, North Carolina Global Development Center. Cash
used in investing activities in 1996 included $0.9 million for the relocation of
the Company's worldwide headquarters, $0.5 million invested in recruiting and
training software, and $0.5 million for facility upgrades and equipment for the
Mumbai, India Global Development Center. Cash used in investing activities in
1997 of $8.7 million included $7.0 million for the India acquisition, and $1.7
million for computer equipment, software, and facility improvements at the
Company's Global Development Centers.
Net cash used in financing activities was $0.3 million and $5.0 million
in 1995 and 1996 respectively. Net cash provided by financing activities in 1997
was $16.5 million. Net cash used in financing activities in 1995 reflects net
payments on the bank's line of credit. Net cash used in financing activities in
1996 reflects a dividend paid to the Company's shareholders. In 1997 the company
received $34.6 million in net proceeds from the initial public offering. The net
proceeds were offset by pre-IPO shareholder distributions of $18.1 million
related to undistributed S corporation taxable income through August 12, 1997.
The Company has a line of credit with NBD Bank which provides for
borrowings up to $25.0 million. The line of credit matures on August 31, 1998.
The line of credit contains covenants restricting the Company from, among other
things, incurring additional debt, issuing guarantees and creating liens on the
Company's property, without the prior consent of the bank. The line of credit
also requires the Company to maintain certain tangible net worth levels and
leverage ratios. At December 31, 1997, there was no indebtedness outstanding
under the line of credit. Borrowings under the line of credit bear
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31
interest at the lower of the Eurodollar rate plus the applicable Eurodollar
margin, the bank's prime rate or a negotiated rate established by the bank at
the time of borrowing.
In addition to the bank line of credit, the Company has a $10.0 million
facility with NBD Bank to finance acquisitions which terminates on August 31,
1998. The Company has not borrowed any amounts under this facility. The Company
intends to extend both the $25 million and $10 million line of credit before the
expiration date.
The Company believes that the combination of present cash balances and
future operating cash flows will be sufficient to meet the Company's currently
anticipated cash requirements for at least the next 12 months.
YEAR 2000 DATE CONVERSION
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than year 2000. This could result in a system
failure or miscalculations causing disruptions of operations.
The Company has developed a plan and implemented initiatives to replace existing
network systems, computers, and financial systems with year 2000 compliant
computers and software. Management anticipates that these initiatives will be
completed before December 31, 1998 with no effect on customers or disruption to
business operations.
Cost of addressing year 2000 issues are reflected in the current year financial
budgets and are not anticipated to have a material adverse impact on the
Company's financial position or results of operations.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, is effective for fiscal year beginning after December 15,
1997. This statement requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This new accounting standard is not expected to have a
material impact of the Company's financial statements. The Company has adopted
this standard on January 1, 1998 as required.
Statement of Financial Accounting standards No. 131, Disclosure about
Segments of an Enterprise and related Information, is effective for periods
beginning after December 15, 1997. This statement establishes standards for
reporting information about operation segments in annual financial statements
and requires that enterprises report selected information about operating
segments in interim financial reports. This new accounting standard is not
expected to have a material impact of the Company's financial statements. The
Company will adopt this standard on for fiscal 1998 as required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and schedules filed herewith are set forth on
the Index to Financial Statements and Financial Statement Schedules on page F-1
of the separate financial section which follows page 37 of this Report and are
incorporated herein by reference.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the first part of the section entitled
"Election of Directors" in the Registrant's Proxy Statement for the Annual
Shareholders' Meeting to be held May 18, 1998 (the "Proxy Statement"), and under
the caption "Certain Information Regarding Nominees" in such section of the
Proxy Statement is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Registrant, their ages, and the position
or office held by each, are as follows:
NAME AGE POSITION
---- --- --------
Bharat Desai................ 45 President, Chief Executive Officer
and Director
Neerja Sethi................ 42 Vice President, Corporate Affairs
and Director
John Andary................. 48 Chief Financial Officer and
Treasurer
Ken Kenjale................. 47 Chief Technology Officer
Daniel M. Moore............. 43 General Counsel, Secretary and
Vice President, Benefits and
Policy Administration
Bill McCarthy............... 43 Vice President, Sales and
Marketing Management
Jay Clark................... 34 Vice President, Global
Infrastructure and Career
Administration
Venkat Mallya............... 36 Assistant Vice President,
TeamSourcing
Tim Webb.................... 36 Vice President, Enterprise
Solutions
- ------------------------------------------------------------------------------
Bharat Desai is a co-founder of the Company and has served as its
President, Chief Executive Officer and Director since its formation in 1980.
Neerja Sethi is a co-founder of the Company and has served as a Vice
President, Corporate Affairs and Director since its formation in 1980 and as
Secretary and Treasurer from 1980 to March 1996. Ms. Sethi is the spouse of Mr.
Desai.
John Andary has served the Company as Chief Financial Officer since
August 1994 and as Treasurer since March 1996. From October 1992 to April 1994,
Mr. Andary was a General Manager of Automatic Data Processing and from May 1987
to October 1992 he was one of its Division Controllers.
32
33
Ken Kenjale has served the Company as Chief Technology Officer since
July 1995. From April 1988 to July 1995, Mr. Kenjale served in various positions
with the Company.
Daniel M. Moore has served the Company as General Counsel and Secretary
since March 1996, and Vice President, Benefits and Policy Administration since
July 1997. From June 1996 to June 1997, Mr. Moore served as the Company's Acting
Vice President, Human Resources. From June 1992 to March 1996, Mr. Moore served
as Vice President and Senior Corporate Counsel with Comerica Incorporated, and
he was Vice President and Managing Commercial Counsel with Manufacturers
National Corporation prior to its merger with Comerica Incorporated.
William T. McCarthy has served the Company as Vice President, Sales &
Marketing since December, 1997. From April, 1990 to December, 1997, Mr. McCarthy
served as Managing Director of Andersen Consulting's Americas Business
Integration Program headquartered in Chicago. From April, 1976 to March, 1990,
Mr. McCarthy served with IBM in a variety of executive sales, marketing, and
support roles in all the major industries.
Jay Clark has served the Company as Vice President, Global
Infrastructure and Career Administration since July 1997. From August 1994 to
July 1997, Mr. Clark served as Assistant Vice President, Outsourcing Solutions
of the Company. From January 1985 to August 1994, Mr. Clark served in various
positions at EDS.
Venkat Mallya has served the Company as Assistant Vice President,
TeamSourcing of the Company since February 1997. From June 1992 through February
1997, Mr. Mallya served in various positions with the Company, most recently as
a Branch Manager and a Director, Sales. From 1990 to 1992, Mr. Mallya served as
Group Marketing Manager for Onward Technology Group.
Tim Webb has served the Company as Vice President, Enterprise Solutions
since February, 1998. From June, 1995 to January, 1998, Mr. Webb served as
Regional Vice President and Senior Practice Director with Oracle Corporation's
Consulting Services Division. From July, 1983 to May, 1995, Mr. Webb served in a
variety of executive roles with Andersen Consulting.
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.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the section entitled "Executive
Compensation" in the Registrant's Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the captions "Principal Shareholders"
and "Security Ownership of Management" in the section entitled "Additional
Information" in the Registrant's Proxy Statement is incorporated herein by
reference.
33
34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Syntel India, the Company's Indian Subsidiary, was owned prior to the
Company's initial public offering in August 1997 by Mr. Desai and Ms. Sethi, the
President and CEO and Vice President, Corporate Affairs of the Company,
respectively. Prior to the offering, the Company engaged Syntel India as a
subcontractor to perform offshore software development projects. During 1997 and
until completion of the public offering, the Company purchased $4,602,000 of
services from Syntel India. Prior to the offering, the Company entered into an
agreement to purchase all of the shares of Syntel India from Mr. Desai and Ms.
Sethi for $7.0 million in cash. The $7.0 million purchase price was based on a
valuation performed by independent chartered accountants in India pursuant to
guidelines established by the Reserve Bank of India for acquisitions of Indian
corporations. The purchase price was paid from a portion of the net proceeds of
the public offering. This acquisition was closed upon consummation of the
offering.
Also in connection with the initial public offering, the Company, Mr. Desai, Ms.
Sethi and the Company's other shareholders entered into a mutual indemnification
agreement relating to income tax liabilities of the Company and the shareholders
in connection with the termination of the Company's S corporation status in
August 1997. The agreement provides that the shareholders, severally (according
to their relative percentage ownership of the Common Stock of the Company) and
not jointly, will indemnify the Company against any unpaid income tax liability
of the Company attributable to the period prior to the termination of the
Company's S corporation status. The agreement also provides that the Company
will indemnify the shareholders against any income tax liability they may incur
as a result of a final adjustment the taxable income of the Company for any
period ending after the termination date of the Company's S corporation status
which results in a decrease for any period in the Company's taxable income and a
corresponding increase in the taxable income of the shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The financial statements, supplementary financial information, and
financial statement schedules filed herewith are set forth on the Index to
Financial Statements and Financial Statement Schedules on page F-1 of the
separate financial section which follows page 37 of this Report, which is
incorporated herein by reference.
The following exhibits are filed as part of this Report. Those exhibits
with an asterisk(*) designate the Registrant's management contracts or
compensation plans or arrangements for its executive officers.
Exhibit No. Description
3.1 Restated Articles of Incorporation of the Registrant
filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 dated June 6, 1997, and
incorporated herein by reference.
3.2 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.
34
35
10.1 Credit Authorization Agreement, dated September 13,
1996, between the Registrant and NBD Bank filed as an
Exhibit to the Registrant's Registration Statement on
Form S-1 dated June 6, 1997, and incorporated herein
by reference.
10.2 Letter Agreement between the Registrant and NBD Bank
dated March 11, 1997 amending Credit Authorization
Agreement, filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 dated June 6,
1997, and incorporated herein by reference.
10.3 Letter Agreement between the Registrant and NBD Bank
dated March 25, 1997 amending Credit Authorization
Agreement, filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 dated June 6,
1997, and incorporated herein by reference.
10.4 Form of Stock Purchase Agreement between the
Registrant and the stockholders of Syntel Software
Private Limited, filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 dated
June 6, 1997, and incorporated herein by reference.
10.5 Lease, dated August 22, 1996, between WRC Properties,
Inc. and the Registrant, filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 dated
June 6, 1997, and incorporated herein by reference.
10.6 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.
10.7 Lease Agreement, dated June 7, 1995, between the
Registrant and Office Court Development Ltd. Co., a
New Mexico General Partnership, filed as an Exhibit
to the Registrant's Registration Statement on Form
S-1 dated June 6, 1997, and incorporated herein by
reference.
10.8 Indentures of Lease entered into between the
President of India and Syntel Software Pvt. Ltd. on
the dates and for the square footage indicated below
for the Mumbia 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:
October 11, 1993; 7825 sq. ft.
January 18, 1993; 3,443 sq. ft.
November 2, 1992; 3,443 sq. ft.
October 11, 1993; 5,502 sq. ft.
10.9 Rental Agreement, dated February 24, 1997, between
Syntel Software Pvt. Ltd. and the Landlords for the
Chennai Global Development Center, filed as an
Exhibit to the Registrant's Registration Statement on
Form S-1 dated June 6, 1997, and
35
36
incorporated herein by reference.
10.10** Agreement for Software Programming Services, dated
as of December 31, 1997, between the Registrant and
American Home Assurance Company.
10.11 PeopleNet Supplier Contract, effective as of April 1,
1996, between the Registrant and Geometric Results,
Incorporated (d/b/a "PeopleNet"), filed as an Exhibit
to the Registrant's Registration Statement on Form
S-1 dated June 6, 1997, and incorporated herein by
reference.
10.12* 1997 Stock Option and Incentive Plan, filed as an
Exhibit to the Registrant's Registration Statement on
Form S-1 dated June 6, 1997, and incorporated herein
by reference.
10.13* Employee Stock Purchase Plan, filed as an Exhibit
to the Registrant's Registration Statement on Form
S-1 dated June 6, 1997, and incorporated herein by
reference.
10.14* Employment Agreement, dated June 5, 1997, between
the Registrant and Bharat Desai, filed as an Exhibit
to the Registrant's Registration Statement on Form
S-1 dated June 6, 1997, and incorporated herein by
reference.
10.15* Employment Agreement, dated June 5, 1997, between
the Registrant and Neerja Sethi, filed as an Exhibit
to the Registrant's Registration Statement on Form
S-1 dated June 6, 1997, and incorporated herein by
reference.
10.16 Form of S Corporation Revocation, Tax Allocation and
Indemnification Agreement (the "Agreement") between
the Registrant and the shareholders of the Registrant
on the date of the Agreement, filed as an Exhibit to
the Registrant's Registration Statement on Form S-1
dated June 6, 1997, and incorporated herein by
reference.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
99.1 Proxy Statement for the Registrant's 1998 Annual
Meeting of Shareholders, filed by the Registrant
pursuant to Regulation 14A and incorporated herein by
reference.
(b) No report on Form 8-K was filed during the fourth quarter of the
year ended December 31, 1997.
** Portions of this document have been redacted pursuant to the Company's
request to the Secretary of the Commission for confidential treatment pursuant
to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
36
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SYNTEL, INC.
By: /s/Bharat Desai
---------------
Bharat Desai
Dated: March 23, 1998 President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/Bharat Desai President and Chief Executive Officer March 23, 1998
- ------------------- (Principal Executive Officer)
Bharat Desai
/s/John Andary Chief Financial Officer March 23, 1998
- -------------------- (Principal Financial and
John Andary and Accounting Officer)
/s/Neerja Sethi Director and Vice President, March 23, 1998
- -------------------- Corporate Affairs
Neerja Sethi
/s/Paritosh K. Choksi Director March 23, 1998
- --------------------
Paritosh K. Choksi
/s/Douglas VanHouweling Director March 23, 1998
- ----------------------
Douglas Van Houweling
/s/GEORGE R. MRKONIC Director March 23, 1998
- --------------------
George R. Mrkonic
37
38
SYNTEL, INC.
CONTENTS
PAGES
Report of Independent Accountants.......................................F-2
Consolidated Financial Statements:
Consolidated Statements of Income..................................F-3
Consolidated Balance Sheets........................................F-4
Consolidated Statements of Shareholders' Equity....................F-5
Consolidated Statements of Cash Flows..............................F-6
Notes to Consolidated Financial Statements......................F-7-F-17
F-1
39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Syntel, Inc.:
We have audited the accompanying consolidated balance sheets of Syntel, Inc. as
of December 31, 1997 and 1996, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1997. 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 generally accepted auditing
standards. 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, 1997 and 1996, and the consolidated results of its operations and
cash flows for the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Detroit, Michigan
February 18, 1998
F-2
40
SYNTEL, INC.
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1997, 1996 and 1995
(in thousands, except per share data)
1997 1996 1995
Revenues $124,338 $ 92,330 $ 90,326
Cost of revenues 87,584 67,083 70,014
-------- -------- --------
Gross profit 36,754 25,247 20,312
Selling, general and administrative expenses 23,547 19,271 13,909
-------- -------- --------
Income from operations 13,207 5,976 6,403
Other income, net, principally investment income 730 149 188
-------- -------- --------
Income before income taxes 13,937 6,125 6,591
Provision for income taxes 3,517 350 436
-------- -------- --------
Net income $ 10,420 $ 5,775 $ 6,155
======== ======== ========
Pro forma income data (unaudited):
Income before income taxes $ 13,937 $ 6,125 $ 6,591
Pro forma income tax expense* 3,741 1,746 2,170
-------- -------- --------
Pro forma net income $ 10,196 $ 4,379 $ 4,421
======== ======== ========
Pro forma net income per share:
Basic earnings per share $ 0.41 $ 0.18 $ 0.18
======== ======== ========
Diluted earnings per share $ 0.39 $ 0.17 $ 0.17
======== ======== ========
*Presentation of income tax expense as if the Company was a C-corporation during
the years presented.
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
41
SYNTEL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(in thousands)
ASSETS 1997 1996
Current assets:
Cash and cash equivalents $ 32,945 $ 7,332
Accounts receivable 20,644 20,642
Advance billings and other current assets 6,897 715
-------- --------
Total current assets 60,486 28,689
Property and equipment 9,299 7,551
Less accumulated depreciation 5,060 3,248
-------- --------
Property and equipment, net 4,239 4,303
Deferred income taxes, noncurrent 507 -
-------- --------
$ 65,232 $ 32,992
======== ========
LIABILITIES
Current liabilities:
Accrued payroll and related costs $ 10,388 $ 8,020
Accounts payable and other accrued liabilities 7,382 3,541
Dividends/distribution payable 300 14,000
Income taxes payable 1,365 -
Deferred revenue 5,705 1,286
-------- --------
Total current liabilities 25,140 26,847
Income taxes payable 507 -
-------- --------
Total liabilities 25,647 26,847
SHAREHOLDERS' EQUITY
Commonstock, no par value per share, 40 million shares authorized, 25.45 million
shares issued and outstanding at December 31, 1997; 22 million shares
issued and outstanding at December 31, 1996 after stock split 1 1
Additional paid-in capital 34,659 -
Retained earnings 5,174 6,144
Cumulative foreign currency translation adjustment (249) -
-------- --------
Total shareholders' equity 39,585 6,145
-------- --------
$ 65,232 $ 32,992
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
42
SYNTEL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1997, 1996 and 1995
(in thousands)
CUMULATIVE
-------------------- FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
-------------------- PAID-IN RETAINED TRANSLATION SHAREHOLDERS'
SHARES* AMOUNT CAPITAL EARNINGS ADJUSTMENT EQUITY
-------- -------- ------------ ---------- ------------- -----------
Balance, January 1, 1995 22,000 $ 1 $ 6,214 $ 6,215
Net income 6,155 6,155
-------- -------- -------- -------- -------- --------
Balance, December 31, 1995 22,000 1 12,369 12,370
Net income 5,775 5,775
Dividends declared, paid $5,000 in
1996 and $7,000 in 1997 (12,000) (12,000)
-------- -------- -------- -------- -------- --------
Balance, December 31, 1996 22,000 1 6,144 6,145
Net income 10,420 10,420
Dividends declared (previously
undistributed S-Corporation earnings) (11,400) (11,400)
Termination of S-Corporation tax status $ 1,525 (1,525)
Shares issued in initial public
offering 3,450 34,627 34,627
Compensation expense related to
stock options 38 38
Acquisition of Syntel India (Note 3) (1,531) 1,531
Translation adjustments 4 $ (249) (245)
-------- -------- -------- -------- -------- --------
Balance, December 31, 1997 25,450 $ 1 $ 34,659 $ 5,174 $ (249) $ 39,585
======== ======== ======== ======== ======== ========
*Gives effect to the 22 million-for-one stock split declared in 1997.
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
43
SYNTEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
Cash flows from operating activities:
Net income $ 10,420 $ 5,775 $ 6,155
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 1,812 1,442 1,075
Deferred income taxes (507)
Compensation expense related to stock options 38
Changes in assets and liabilities:
Accounts receivable (2) (3,913) 3,429
Advance billings and other assets (6,182) (20) 710
Accounts payable and accrued liabilities 7,837 1,370 632
Deferred revenue 4,419 1,277 35
-------- -------- --------
Net cash provided by operating activities 17,835 5,931 12,036
Cash flows used in investing activities:
Property and equipment expenditures (1,749) (2,138) (3,320)
Acquisition of Syntel India (7,000)
-------- -------- --------
Net cash used in investing activities (8,749) (2,138) (3,320)
-------- -------- --------
Cash flows from financing activities:
Net payments on bank line of credit (340)
Net proceeds from issuance of stock 34,627
Dividend/distribution payments (18,100) (5,000)
-------- -------- --------
Net cash provided by (used in) financing activities 16,527 (5,000) (340)
-------- -------- --------
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 25,613 (1,207) 8,376
Cash and cash equivalents, beginning of year 7,332 8,539 163
-------- -------- --------
Cash and cash equivalents, end of year $ 32,945 $ 7,332 $ 8,539
======== ======== ========
Cash paid during the year for income taxes $ 3,411 $ 723
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
44
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS:
Syntel, Inc. and Subsidiaries (the "Company") provides information technology
services such as programming, systems integration, outsourcing and overall
project management. The Company provides services to customers primarily in the
financial, manufacturing, transportation, retail and information/communication
industries, as well as to government entities through two separate delivery
teams, IntelliSourcing and TeamSourcing.
Through IntelliSourcing, the Company provides higher-value outsourcing services
for ongoing management, development and maintenance of customers' business
applications. In most IntelliSourcing engagements, the Company assumes
responsibility for the management of customer development and support functions.
IntelliSourcing engagements are generally supported by multi year contracts. As
a percentage of total revenues, IntelliSourcing revenues grew from 36 percent in
1996 to 51 percent in 1997.
Through TeamSourcing, the Company provides professional information technology
services directly to the customer. TeamSourcing contracts are generally
terminable by the customer without penalty.
During the years ended December 31, 1997, 1996 and 1995, there were sales to two
customers that exceeded 10 percent of total revenues. The largest customer was
the same for 1997, 1996 and 1995, while the second largest customer was
different in 1997 than in 1996 and 1995. Sales to these customers approximated:
1997, $38,560,000 (31.1 percent) and $14,828,000 (11.9 percent); 1996,
$30,980,000 (33.6 percent) and $10,757,000 (11.7 percent); 1995, $34,084,000
(37.7 percent) and $12,455,000 (13.8 percent). At December 31, 1997 and 1996,
approximately 36 and 30 percent of accounts receivable, net were from these two
customers, respectively.
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES:
a. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Syntel, Inc. ("Syntel") and its wholly owned subsidiaries
Syntel Software Private Limited ("Syntel India"), an Indian limited
liability company, Syntel Singapore Ptd., Ltd., ("Syntel Singapore"), a
Singapore limited liability company, and Syntel ("Syntel U. K."), a United
Kingdom unlimited liability company. All significant intercompany balances
and transactions have been eliminated.
F-7
45
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
b. REVENUE RECOGNITION: The Company recognizes revenues from time and material
contracts as services are rendered and costs are incurred.
Revenue from fixed-price contracts are recognized on the
percentage-of-completion method, measured by the percentage of cost
incurred to date to the estimated total cost at completion. The cumulative
impact of any revision in estimates of the percentage complete or losses on
contracts is reflected in the period in which the changes become known.
c. CASH AND CASH EQUIVALENTS: For the purpose of reporting cash and cash
equivalents, the Company considers all liquid investments purchased with a
maturity of three months or less to be cash equivalents. Cash equivalents are
principally bonds and notes with maturity dates of less than 90 days.
d. WARRANTY COSTS: The Company provides limited warranties on certain of its
Year 2000 compliance contracts. A provision for warranty costs is made at the
time contract services are performed. At December 31, 1997, the warranty
accrual aggregated $818,000.
e. FINANCIAL INSTRUMENTS: The carrying amount of cash equivalents, trade
receivables and trade payables approximate fair value because of the
short-term nature of these instruments.
f. 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 of the assets ranging from three to seven years.
Upon sale or retirement, the cost of assets and related accumulated
depreciation is eliminated from the respective accounts, and the resulting
gain or loss is included in operations.
g. INCOME TAXES: Prior to August 12, 1997, the Company elected to operate as an
S-corporation under the Internal Revenue Code. An S-corporation is not
subject to income taxes at the corporate level (with exceptions under certain
state income tax laws). As part of the initial public offering, the Company
terminated its S-corporation status, and effective August 12, 1997, became
subject to federal and state income taxes on its earnings.
With the termination of the S-corporation status, the Company changed its
method of accounting for tax reporting purposes from the cash method to the
accrual method, resulting in an income tax obligation of $1.8 million, to
be paid in four equal annual installments. The obligation includes $.7
million resulting from the tax effect of temporary differences between
financial statement and tax reporting carrying amounts which was recognized
as a deferred tax asset.
F-8
46
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
h. PRO FORMA NET INCOME: To reflect the Company's pro forma net income
the provision for income taxes has been adjusted as if the Company had been
a taxable entity subject to federal and state income taxes at the marginal
rates applicable to such periods. The resulting apparent tax rate is less
than the federal statutory tax rate due principally to the tax exempt status
of the income generated by Syntel India.
i. ESTIMATES: Use of estimates, as determined by management, are required in
the preparation of financial statements in conformity with generally
accepted accounting principles. Actual results could differ from estimates.
j. FOREIGN CURRENCY TRANSLATION: The financial statements of the Company's
foreign operations utilize the functional currency of the country in which
business is conducted. Revenues, costs and expenses of the foreign
subsidiaries are translated to U. S. dollars at average - period exchange
rates. Assets and liabilities are translated to U. S. dollars at year-end
exchange rates with the effects of these translation adjustments being
reported as a separate component of shareholders' equity.
k. PER SHARE DATA: The Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings per Share", for the year ended December 31,
1997. The pro forma earnings per share for the years 1996 and 1995 have been
restated to comply with these standards.
Basic earnings per share is calculated by dividing pro forma net income by
the average number of shares outstanding during the applicable period.
The Company had stock options which are considered to be potentially
dilutive to common stock. Diluted earnings per share is calculated by
dividing pro forma net income by the average number of shares outstanding
during the applicable period adjusted for these potentially dilutive options.
The following table sets forth the computation of pro forma earnings per
share:
1997 1996 1995
---------------------- ----------------------- -------------------
EARNINGS EARNINGS EARNINGS
PER PER PER
SHARES SHARE SHARES SHARE SHARES SHARE
-------- --------- -------- ---------- -------- ---------
(in thousands, except per share earnings)
Basic earnings per share 25,175 $ 0.41 25,000 $ 0.18 25,000 $0.18
Net dilutive effect of stock options
outstanding 117
Shares assumed outstanding due to
excess distributions in 1997 763 1,245 1,145
------ ------- ------ ------ ------ -----
Diluted earnings per share 26,055 $ 0.39 26,245 $ 0.17 26,145 $0.17
====== ======= ====== ====== ====== =====
F-9
47
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
l. RECLASSIFICATIONS: Certain amounts in previously issued financial statements
have been reclassified to conform with the current year presentation.
3. INITIAL PUBLIC OFFERING BUSINESS COMBINATION:
In August 1997, the Company completed an initial public offering of 3,450,000
shares of common stock at a price of $11.00 per share. After underwriting
discounts and other issuance costs, net proceeds to the Company were
approximately $34.6 million.
Prior to the initial public offering, the Company agreed to acquire 100
percent ownership of Syntel India for $7 million in cash. The purchase
price was paid from available cash after the initial public offering. The
acquisition, which was a merger of interests under common control, is being
accounted for on the carryover basis of accounting similar to pooling of
interests with the historical financial statements of the Company restated
to include Syntel India. The portion of the purchase price in excess of the
carrying value of the net assets acquired at August 12, 1997, or $1.5
million was accounted for as a reduction of additional paid in capital.
A reconciliation of the period between January 1, 1997 and August 12, 1997
and the previously reported years ended December 31, 1996 and 1995, revenue
and net income is as follows:
JAN 1, 1997 -
AUG 12, 1997 1996 1995
------------- ---------- ----------
(in thousands)
Revenue $ 70,929 $ 92,237 $ 90,326
Syntel India revenue 4,668 4,159 2,520
Intercompany revenue elimination (4,602) (4,066) (2,520)
-------- -------- --------
Total revenue $ 70,995 $ 92,330 $ 90,326
======== ======== ========
Net income $ 4,561 $ 4,171 $ 5,237
Syntel India net income 2,240 1,604 918
-------- -------- --------
Total net income $ 6,801 $ 5,775 $ 6,155
======== ======== ========
F-10
48
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. PROPERTY AND EQUIPMENT:
Cost of property and equipment at December 31, 1997 and 1996 is summarized as
follows (in thousands):
1997 1996
Computer equipment and software $ 5,432 $ 4,084
Furniture and equipment 3,482 3,167
Leasehold improvements 385 300
--------- ---------
9,299 7,551
Accumulated depreciation 5,060 3,248
--------- ---------
$ 4,239 $ 4,303
========= =========
5. LINE OF CREDIT:
The Company has a line-of-credit arrangement with a bank which will expire
August 31, 1998, which provides for borrowings up to $25,000,000. Interest is
computed on the basis of the Company's option at (i) the Eurodollar rate plus
the applicable Eurodollar margin, (ii) the bank's prime rate or (iii) a
negotiated rate, as defined. The Company also has an additional line of
credit with the same bank which will expire August 31, 1998 which provides
for borrowings up to $10,000,000 to finance acquisitions.
6. 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 payments under noncancelable leases as of
December 31, 1997 are as follows (in thousands):
1,998 $ 1,825
1,999 1,112
2,000 789
2,001 490
2,002 18
--------
$ 4,234
========
Total rent expense charged to operations amounted to approximately $1,678,
$1,352 and $1,219 for the years ended December 31, 1997, 1996 and 1995,
respectively.
F-11
49
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES:
Income before income taxes for U. S. and foreign operations was as follows (in
thousands):
1997 1996 1995
U. S. $ 9,663 $ 4,492 $ 5,665
Foreign 4,274 1,633 926
--------- -------- --------
$ 13,937 $ 6,125 $ 6,591
========= ======== ========
The provision for income taxes is as follows:
1997 1996 1995
Currently payable
Federal $ 3,839 321 408
State and local 474 29 8
Foreign 2 $ - -
-------- ------- -------
Total currently payable provision for income taxes 4,313 350 436
Deferred:
Federal (708) - -
State and local (88) - -
Foreign - - -
-------- ------- -------
Total deferred (796) - -
-------- ------- -------
Total provision $ 3,517 $ 350 436
======== ======= =======
Upon termination of the S-Corporation election, as described in Note 2, current
and deferred income taxes of $1.8 million and ($.7) million, respectively, were
recognized. Accordingly, the above provision for income taxes includes a $1.1
million nonrecurring expense resulting from the termination of the S-Corporation
election. In accordance with the Internal Revenue Code, the Company will defer
the payment of 75 percent of the total tax obligation of $1.8 million over the
next three years.
The components of the net deferred tax asset are as follows (in thousands):
1997 1996
Deferred tax assets, accrued expenses $ 1,574 -
Deferred tax liabilities, property and equipment (26) -
---------- --------
Net deferred tax asset $ 1,548 -
========== ========
F-12
50
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES, CONTINUED:
Balance sheet classification of net deferred tax asset is summarized as follows
(in thousands):
1997 1996
Deferred tax asset, current $ 1,041 -
Deferred tax asset, noncurrent 507 -
-------- --------
$ 1,548 -
========= ========
Under the Indian Income Tax Act of 1961 (the "Act"), virtually all of Syntel
India's income is exempt from Indian Income Tax as profits attributable to
export operations. Under the Act, there are certain alternative minimum tax
provisions which impose tax on net profits at a rate of approximately 35
percent. These provisions are not currently applicable due to the tax holiday
expiring in March 2000 for the Mumbai operation and in March 2002 for the
Chennai operation.
The Company has not recorded deferred income taxes applicable to undistributed
earnings of Syntel India. Those earnings are considered to be indefinitely
reinvested and, accordingly, no provision for U. S. federal and state income tax
or India "border tax" of 10 percent has been provided thereon. The unrecognized
taxes on the undistributed earnings is approximately $3.8 million.
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 34 percent to income before income taxes:
1997 1996 1995
(in thousands)
Statutory tax provision $ 4,739 $ 2,083 $ 2,241
State taxes, net of federal benefit 655 321 428
S-Corporation income not subject to federal income taxes (1,556) (1,527) (1,926)
Foreign income not subject to tax (1,411) (527) (307)
Termination of S-corporation status 1,090 - -
---------- ---------- ----------
Total provision for income taxes $ 3,517 $ 350 $ 436
========== ========== ==========
F-13
51
NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. STOCK OPTION PLAN:
The Company established a stock option plan in 1997 under which 2 million shares
of common stock were reserved for issuance. The dates on which granted options
are first exercisable is 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 10 years from the date of grant. Options
available to grant under the plan at December 31, 1997 aggregate 919,420 shares.
For certain options granted during 1997, the exercise price was less than the
fair value of the Company's stock on the date of grant and, accordingly,
compensation expense is being recognized over the vesting period for such
difference. For certain other options granted in 1997, the exercise price
equaled the market price on the date of grant, and therefore, no compensation
expense was recognized.
The Company has elected to measure compensation cost using the intrinsic value
method, in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Had the fair value of each stock option granted in 1997 been
determined consistent with the methodology of SFAS 123, the pro forma impact on
the Company's net income and earnings per share would have been immaterial
The following table sets forth changes in options outstanding:
WEIGHTED
NUMBER AVERAGE
OF SHARES AMOUNT PRICE
------------ ------------- ------------
Shares under option:
Outstanding at beginning of year - - -
Granted
Price equals fair value 503,000 $ 4,536,000 $ 9.02
Price less than fair value 650,500 4,021,500 6.18
----------- -----------
Granted 1,153,500 8,557,500 7.42
Forfeited 72,920 501,120 6.87
----------- ------------ -----------
Outstanding at end of year 1,080,580 $ 8,056,380 7.46
=========== ============
Exercisable at end of year none
===========
F-14
52
NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. STOCK OPTION PLAN, CONTINUED:
The following table sets forth details of options outstanding at December 31,
1997:
OPTIONS OUTSTANDING
-------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE
PRICES OUTSTANDING LIFE PRICE
--------------------- --------------- -------------- ------------
$2.00 130,000 9.2 $ 2.00
$ 7.00 - $ 9.00 915,750 9.7 8.09
$ 11.00 - $ 12.00 34,830 9.6 11.09
--------------
$ 2.00 - $ 12.00 1,080,580 9.7 7.46
==============
The Company has also reserved one million shares of common stock for issuance
under the Company's employee stock purchase plan. The plan, which has not yet
been implemented, provides for employees to purchase pre-established amounts as
determined by the Compensation Committee. The price at which employees may
purchase common stock will be set by the Compensation Committee at not less than
the lesser of 85 percent of the fair market value of the common stock on the
NASDAQ National Market on the first day of the purchase period or 85 percent of
the fair market value of the common stock on the last day of the purchase
period. The purchase period will generally be one year or less.
F-15
53
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. SEGMENT INFORMATION:
Total revenues, income before income taxes and identifiable assets by geographic
location were as follows:
1997 1996 1995
(in thousands)
Revenues:
United States operations $ 124,157 $ 92,237 $ 90,326
Foreign operations 9,379 4,159 2,520
Intercompany revenue elimination (9,198) (4,066) (2,520)
----------- --------- ---------
Total revenue 124,338 92,330 90,326
Income before income taxes:
United States operations $ 9,663 $ 4,492 $ 5,665
Foreign operations 4,274 1,633 926
----------- --------- ---------
Total income before income taxes 13,937 6,125 6,591
Assets at December 31:
United States operations $ 58,574 $ 29,649 $ 27,878
Foreign operations 6,658 3,343 1,692
----------- --------- ---------
Total assets $ 65,232 $ 32,992 $ 29,570
=========== ========= =========
F-16
54
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Selected financial data by calendar quarter were as follows:
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
---------- --------- --------- ---------- ----------
(in thousands)
1997:
Revenues $ 26,294 $ 29,031 $ 33,596 $ 35,417 $ 124,338
Cost of revenues 18,892 20,849 23,681 24,162 87,584
--------- -------- -------- --------- ---------
Gross profit 7,402 8,182 9,915 11,255 36,754
Selling, general and administrative
expenses 5,395 5,752 6,276 6,124 23,547
--------- -------- -------- --------- ---------
Income from operations 2,007 2,430 3,639 5,131 13,207
Other income, net 121 102 299 208 730
--------- -------- -------- --------- ---------
Income before income taxes 2,128 2,532 3,938 5,339 13,937
Pro forma income taxes 541 629 1,030 1,541 3,741
--------- -------- -------- --------- ---------
Pro forma Net income $ 1,587 $ 1,903 $ 2,908 $ 3,798 $ 10,196
========= ======== ======== ========= =========
Pro forma earnings per share, diluted $ 0.06 $ 0.07 $ 0.11 $ 0.15 $ 0.39
========= ======== ======== ========= =========
Weighted average shares outstanding, diluted 25,820 26,245 25,992 25,737 26,055
========= ======== ======== ========= =========
1996:
Revenues $ 21,862 $ 22,697 $ 23,482 $ 24,289 $ 92,330
Cost of revenues 16,200 16,396 17,048 17,439 67,083
--------- -------- -------- --------- ---------
Gross profit 5,662 6,301 6,434 6,850 25,247
Selling, general and administrative
expenses 4,266 4,840 5,019 5,146 19,271
--------- -------- -------- --------- ---------
Income from operations 1,396 1,461 1,415 1,704 5,976
Other income (expense), net 138 86 39 (114) 149
--------- -------- -------- --------- ---------
Income before income taxes 1,534 1,547 1,454 1,590 6,125
Pro forma income taxes 452 446 353 495 1,746
--------- -------- -------- --------- ---------
Pro forma Net income $ 1,082 $ 1,101 $ 1,101 $ 1,095 $ 4,379
========== ========= ========= ========== ==========
Pro forma earnings per share, diluted $ 0.04 $ 0.04 $ 0.04 $ 0.04 $ 0.17
========= ======== ======== ========= =========
Weighted average shares outstanding, diluted 26,245 26,245 26,245 26,245 26,245
========= ======== ======== ========= =========
F-17
55
Exhibit No. Description
3.1 Restated Articles of Incorporation 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.
3.2 Bylaws of the Registrant filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 dated
June 6, 1997, and incorporated herein by reference.
10.1 Credit Authorization Agreement, dated September 13,
1996, between the Registrant and NBD Bank filed as an
Exhibit to the Registrant's Registration Statement on
Form S-1 dated June 6, 1997, and incorporated herein
by reference.
10.2 Letter Agreement between the Registrant and NBD Bank
dated March 11, 1997 amending Credit Authorization
Agreement, filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 dated June 6,
1997, and incorporated herein by reference.
10.3 Letter Agreement between the Registrant and NBD Bank
dated March 25, 1997 amending Credit Authorization
Agreement, filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 dated June 6,
1997, and incorporated herein by reference.
10.4 Form of Stock Purchase Agreement between the
Registrant and the stockholders of Syntel Software
Private Limited, filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 dated
June 6, 1997, and incorporated herein by reference.
10.5 Lease, dated August 22, 1996, between WRC Properties,
Inc. and the Registrant, filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 dated
June 6, 1997, and incorporated herein by reference.
10.6 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.
10.7 Lease Agreement, dated June 7, 1995, between the
Registrant and Office Court Development Ltd. Co., a
New Mexico General Partnership, filed as an Exhibit
to the Registrant's Registration Statement on Form
S-1 dated June 6, 1997, and incorporated herein by
reference.
38
56
10.8 Indentures of Lease entered into between the
President of India and Syntel Software Pvt. Ltd. on
the dates and for the square footage indicated below
for the Mumbia 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:
October 11, 1993; 7825 sq. ft.
January 18, 1993; 3,443 sq. ft.
November 2, 1992; 3,443 sq. ft.
October 11, 1993; 5,502 sq. ft.
10.9 Rental Agreement, dated February 24, 1997, between
Syntel Software Pvt. Ltd. and the Landlords for the
Chennai Global Development Center, filed as an
Exhibit to the Registrant's Registration Statement on
Form S-1 dated June 6, 1997, and incorporated herein
by reference.
10.10** Agreement for Software Programming Services, dated
as of December 31, 1997, between the Registrant and
American Home Assurance Company.
10.11 PeopleNet Supplier Contract, effective as of April 1,
1996, between the Registrant and Geometric Results,
Incorporated (d/b/a "PeopleNet"), filed as an Exhibit
to the Registrant's Registration Statement on Form
S-1 dated June 6, 1997, and incorporated herein by
reference.
10.12* 1997 Stock Option and Incentive Plan, filed as an
Exhibit to the Registrant's Registration Statement on
Form S-1 dated June 6, 1997, and incorporated herein
by reference.
10.13* Employee Stock Purchase Plan, filed as an Exhibit
to the Registrant's Registration Statement on Form
S-1 dated June 6, 1997, and incorporated herein by
reference.
10.14* Employment Agreement, dated June 5, 1997, between
the Registrant and Bharat Desai, filed as an Exhibit
to the Registrant's Registration Statement on Form
S-1 dated June 6, 1997, and incorporated herein by
reference.
10.15* Employment Agreement, dated June 5, 1997, between
the Registrant and Neerja Sethi, filed as an Exhibit
to the Registrant's Registration Statement on Form
S-1 dated June 6, 1997, and incorporated herein by
reference.
10.16 Form of S Corporation Revocation, Tax Allocation and
Indemnification Agreement (the "Agreement") between
the Registrant and the shareholders of the Registrant
on the date of the Agreement, filed as an Exhibit to
the Registrant's Registration Statement on Form S-1
dated June 6, 1997, and incorporated herein by
reference.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
39
57
99.1 Proxy Statement for the Registrant's 1998 Annual
Meeting of Shareholders, filed by the Registrant
pursuant to Regulation 14A and incorporated herein by
reference.
(b) No report on Form 8-K was filed during the
fourth quarter of the year ended December 31,
1997.
** Portions of this document have been redacted pursuant to the Company's
request to the Secretary of the Commission for confidential treatment pursuant
to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
40