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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, 1998
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 18, 1999, based on the last sale price of $8.688 per
share for the Common Stock on the NASDAQ National Market on such date, was
approximately $44,133,675.
As of March 18, 1999, the Registrant had 38,135,973 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders to be held on or about June 2, 1999 are incorporated by reference
into Part III hereof.
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PART I
ITEM 1. BUSINESS.
References herein to the "Company" or "Syntel" refer to Syntel, Inc. and its
wholly owned subsidiaries in India, the UK, Singapore, Mauritius, and Australia
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
are grouped into two segments, IntelliSourcing(sm) and TeamSourcing(R).
IntelliSourcing(sm) consists of outsourcing services for ongoing management,
development and maintenance of business applications, including Year 2000
compliance services. TeamSourcing(R) consists 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 51% and 62%
of revenues, for the years ended December 31, 1997 and 1998, 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
49% and 38% of revenues, for the years ended December 31, 1997 and 1998,
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 1998, based on revenues, were American
International Group, Inc., Dayton Hudson Corp., Ford Motor Co., Borders Group,
Inc., and Daimler-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. As
of December 31, 1998, Syntel's worldwide billable headcount consisted of 1,581
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
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 increased recruiting and personnel costs or lead to
significant employee attrition or both. There can be no
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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, 1998, approximately 67% of Syntel's U.S. workforce (45% 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.
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 ten
largest customers represented approximately 78%, 75% and 70% of revenues for the
years ended December 31, 1996, 1997 and 1998, 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 34%, 31% and 26% of revenues for the years ended
December 31, 1996, 1997, and 1998, respectively.
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The three largest clients for the years ended December 31, 1996, 1997 and 1998
are as follows:
Syntel's Largest Three Customers
Percent of Total Revenues
1996 1997 1998
----------------- ---------------- ----------------
% of %of & of
Ttl Rev Rank Ttl Rev Rank Ttl Rev Rank Segment
------- ---- ------- ---- ------- ---- -------
American In't Group 34% 1 31% 1 26% 1 Intellisourcing
Dayton Hudson Group * 12% 2 14% 2 Intellisourcing
Ford Motor Company 12% 2 9% 3 9% 3 Intellisourcing &
TeamSourcing
Intellisourcing
AT&T 9% 3 * * Teamsourcing
--------- -------- -----
55% 52% 49%
*THE CUSTOMER RECEIVED SERVICES BUT WAS NOT ONE OF THE TOP THREE.
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 customers
businesses, any failure by Syntel to meet a customers' 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,
1998, the Company had approximately 26% of its billable workforce in India, and
anticipates that this percentage will increase over time. While wage costs in
India are significantly lower than in the U.S. and other industrialized
countries for comparably skilled IT professionals, wages in India are increasing
at a faster rate than in the U.S., and could result in the Company incurring
increased costs for IT professionals. In the past, India has experienced
significant inflation and shortages of foreign exchange, and has been subject to
civil unrest. No assurance can be given that the Company will not be adversely
affected by changes in inflation, exchange rate fluctuations, interest rates,
taxation, social stability or other political, economic or diplomatic
developments in or affecting India in the future. In addition, the Indian
government is significantly involved in and exerts significant influence over
its economy. In the recent past, the Indian government has provided significant
tax incentives and relaxed certain regulatory restrictions in order to encourage
foreign investment in certain sectors of the economy, including the technology
industry. Certain of these benefits that directly benefited the Company
included, among others, tax holidays, liberalized import and export duties and
preferential rules on foreign investment. The Company treats most of the
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.
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INTENSE COMPETITION. The IT services industry is intensely competitive,
highly fragmented and subject to rapid change and evolving industry standards.
The Company competes with a variety of other companies, depending on the IT
services it offers. The Company's primary competitors for professional IT
staffing engagements include participants from a variety of market segments,
including "Big Five" accounting firms, systems consulting, enterprise solution
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
Keane, IBM Global Solutions, Andersen Consulting and Computer Sciences
Corporation. The Company's principal competitors for Year 2000 compliance
engagements include IBM Global Solutions, Cap Gemini, and Keane. 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 $168.0 million in 1998, and the number of
worldwide billable employees has increased from 689 as of December 31, 1993 to
1,581 as of December 31, 1998. The Company established a sales office in London,
England in 1996, opened a sales and service office in Singapore in May 1997, has
expanded 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 (TeamSourcing). However, in
recent years the Company has realigned existing personnel and resources, and has
invested incrementally in the development of its IntelliSourcing business
segment, with increased focus on outsourcing services for ongoing applications
management, development, and maintenance, and Year 2000 compliance services. A
key factor in the Company's
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growth strategy is to increase outsourcing service engagements with new and
existing customers. This strategy was evidenced by a shift in the revenue mix
from TeamSourcing to IntelliSourcing for the years ended 1996, 1997 and 1998, as
well as the improvement in the Company's direct margins. However, these services
generally require a longer sales cycle (up to 12 months) and generally require
approval by more senior levels of management within the customer's organization,
as compared with traditional IT staffing services.
While the Company has strengthened its experience and strength in
marketing, developing and performing such outsourcing services, 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 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%, 12% and 22% of total revenues for the
years ended December 31, 1996, 1997, and 1998 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
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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 of
equity (common or preferred) or a combination thereof. There can be no assurance
that the Company will be able to identify, acquire or profitably manage
additional businesses or successfully integrate any acquired businesses into the
Company without substantial expense, delays or other operational or financial
risks and problems. Furthermore, acquisitions may involve a number of special
risks, including diversion of management's attention, failure to retain key
acquired personnel, unanticipated events or legal liabilities and amortization
of acquired intangible assets, any of which could have a material adverse effect
on the Company's business, results of operations and financial condition.
Customer satisfaction or performance problems within an acquired firm could have
a material adverse impact on the reputation of the Company as a whole. In
addition, there can be no assurance that acquired businesses, if any, will
achieve anticipated revenues and earnings. The failure of the Company to manage
its acquisition strategy successfully could have a material adverse effect on
the Company's business, results of operations and financial condition.
LIMITED INTELLECTUAL PROPERTY PROTECTION. The Company's success depends in
part upon certain methodologies, practices, tools and technical expertise it
utilizes in designing, developing, implementing and maintaining applications and
other proprietary intellectual property rights. In order to protect its
proprietary rights in these various intellectual properties, the Company relies
upon a combination of nondisclosure and other contractual arrangements and trade
secret, copyright and trademark laws which afford only limited protection. The
Company also generally enters into confidentiality agreements with its
employees, consultants, customers and potential customers and limits access to
and distribution of its proprietary information. India is a member of the Berne
Convention, an international treaty, and has agreed to recognize protections on
intellectual property rights conferred under the laws of foreign countries,
including the laws of the U.S. The Company believes that laws, rules,
regulations and treaties in effect in the U.S. and India are adequate to protect
it from misappropriation or unauthorized use of its intellectual property.
However, there can be no assurance that such laws will not change and, in
particular, that the laws of India will not change in ways that may prevent or
restrict the transfer of software components, libraries and toolsets from India
to the U.S. There can be no assurance that the steps taken by the Company will
be adequate to deter misappropriation of its intellectual property, or that the
Company will be able to detect unauthorized use and take appropriate steps to
enforce its rights. Although the Company believes that its intellectual property
rights do not infringe on the intellectual property rights of others, there can
be no assurance that such a claim will not be asserted against the Company in
the future or what impact any such claim, would have on the Company's business,
results of operation or financial condition. The Company presently holds no
patents or registered copyrights, trademarks or servicemarks other than
Syntel(R), Consider IT Done(R), Method 2000(R), IntelliSourcing (SM),
IntelliTransfer (SM), TeamSourcing(R), MapperQuest (SM), Syntel Y2K Consultant
Online (SM), Pilot 2000 (SM), Implement 2000 (SM), and Recover 2000 (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
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assurance, however, that the Company will be successful in obtaining federal
trademarks for these trade names.
YEAR 2000. The Year 2000 issue is the result of date-sensitive devices,
systems, and computer programs that were deployed using two digits rather than
four to define the applicable year. Any such technologies may recognize a year
containing "00" as 1900 rather than the year 2000. This could result in system
failure or a temporary inability to process transactions or engage in similar
normal business operations.
The Company has a Year 2000 project plan designed to identify and assess
the risks of non-compliance associated with its information systems, operations,
suppliers, and customers; and to develop and implement remediation and
contingency plans to mitigate the risks.
The Company's remediation project is well underway with a targeted
completion date in the early fall of 1999. The plan includes validated
assurances from suppliers that year 2000 issues will not impact service levels
and validated assurances from key customers that year 2000 issues will not
impact their service requirements. However, there are no assurances that
validations will be adequate, and if problems are identified, that they will be
addressed in a timely and satisfactory manner. The inability of a key supplier
to provide adequate services, or the inability of a customer to meet their
contractual obligations could result in a material adverse impact on the
Company's results of operations and financial condition, as well as business
interruptions. The Company believes that it's greatest potential financial and
operational risks are associated with service level interruptions from key
communications and utilities vendors; however, as the year 2000 project
continues, additional problems may be discovered or the Company may find that
the cost of remediation exceeds current expectations. In addition, even if the
Company, in a timely manner, completes all of its assessments, implements and
tests all remediation plans believed to be adequate, and develops all
contingency plans believed to be adequate, some problems may not be identified
or corrected in time to prevent material adverse consequences or business
interruptions to the Company.
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
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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 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
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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, 1996, 1997, and 1998, over 90%
of the Company's TeamSourcing 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 19-year history, Syntel has developed
a proven set of methodologies, practices, tools and technical expertise for the
development and management of its customers' information systems. This
"intellectual capital" of Syntel includes methodologies for the selection of
appropriate customer IT functions for management by Syntel, tools for the
transfer to Syntel of the systems knowledge of the customer, and techniques for
providing systems support improvements to the customer. Syntel also offers to
its customers well-trained personnel backed by a proven, extensive employee
training and continuing development program. The Company believes its
intellectual capital enhances its ability to understand customer needs, design
customized solutions and provide quality services on a timely and cost-effective
basis.
SYNTEL STRATEGY
The Company's objective is to become a strategic partner with its customers
in the 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
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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.
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 and 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 $64.0
million for the year ending December 31, 1997, representing a 92% increase; and
increased to $103.9 million for the year ended December 31, 1998, representing a
62% increase.
EXPAND CUSTOMER BASE AND ROLE WITH CURRENT CUSTOMERS. The Company's sales
efforts includes a 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 $20.5 million for the year ended December 31, 1998. The
Company also seeks to expand its customer base by leveraging its expertise in
providing services to the financial services, manufacturing, retail,
transportation and information/communications industries, as well as to
government entities. With the expansion of the Company's Indian operations, the
Company is increasing its marketing efforts in Asia, while also continuing its
marketing efforts in other parts of the world, particularly the UK.
ENHANCE PROPRIETARY KNOWLEDGE BASE AND EXPERTISE. The Company believes that
its "intellectual capital" of methodologies, practices, tools and technical
expertise is an important part of its competitive advantage. The Company strives
to continually enhance this knowledge base by creating competencies in emerging
technical fields such as Internet/intranet applications, client/server
applications, object-oriented software, E-commerce, and data warehousing
technology. The Company continually develops new methodologies and toolsets
building skills in Enterprise Solutions, 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
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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, 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, a qualified stock purchase
program, and incentive plans. The Company believes that its management structure
and human resources organization is designed to maximize the Company's ability
to efficiently expand its professional IT staff in response to customer needs.
PURSUE SELECTIVE 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, expand geographically, or provide opportunities
to cross-sell services. The Company has increased focus on the identification
and pursuit of acquisition candidates.
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, 1997 and December 31, 1998,
IntelliSourcing accounted for approximately 51% and 62%, respectively, of the
Company's revenues and TeamSourcing represented approximately 49% and 38%,
respectively, of the Company's revenues.
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
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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 upkeep 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.
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 invested substantial resources in developing a package of
Year 2000 offerings and services. The Company used its Year 2000 capabilities to
expand its role with existing TeamSourcing customers, gain new
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customers and market its IntelliSourcing services. All of Syntel's Year 2000
service packages are based on Method2000(R), a proprietary ITAA (International
Technology Association of America)certified 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). The Recover2000 service package enables Syntel to assume
responsibility for in-progress Year 2000 compliance projects previously
performed by the customer or another IT service provider. 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 has adapted a strategy of selectively accepting only Year 2000
engagements which provide the potential for an expanded strategic or long term
relationship. While this strategy protects and enhances long term revenue
potential it has limited the amount of short term Year 2000 revenues. As a
result, Year 2000 revenues accounted for only 18% of total revenues for the year
ended December 31, 1998.
TEAMSOURCING(R)
Syntel offers professional IT consulting services directly to its customers
and, to a lesser degree, in partnership with other service providers. The
professional IT consulting services include individual professionals and teams
of professionals dedicated to assisting customer systems projects and ongoing IT
functions. This service responds to the demand from internal IT departments for
additional expertise, technical skills and personnel. The Company's wide range
of TeamSourcing services include IT applications systems specification, design,
development, implementation and maintenance, which involve diverse computer
hardware, software, data and networking technologies and practices. 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.
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, Oracle, and Peoplesoft. 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, Front-office applications,
Data Warehousing technologies, and E-commerce technologies, client/server
applications and object-oriented software.
By focusing on customer satisfaction and the delivery of quality
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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
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
Syntel's Q-1 rating for another year after successful completion of a Q-1
standards audit. During 1998, the Company received ISO 9001 Certification in its
Chennai and Mumbai Global Development Centers, and received the "Best Business
Partner Award for Excellence in Execution" from the Dayton Hudson Corporation.
The Company is also a Microsoft Certified Solution Provider. For the years ended
December 31, 1996, 1997, and 1998, over 90% of the Company's TeamSourcing
revenues were from customers for whom the Company provided services during the
previous period.
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.
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
1998, the Company provided services to over 200 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 1998, include:
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FINANCIAL SERVICES MANUFACTURING RETAIL
- ------------------ ------------- ------
American Int'l Group, Inc. Boeing Dayton Hudson Co
Blue Cross/Blue Shield of GA Ford Motor Co. Safeway, Inc.
Colonial Management Daimler-Chrysler Corp. Mervyn's
CitiBank Int'l Business Machines Corp. Kmart Corp.
CIGNA Corp. Unisys Corp. Lucky Stores
First Union Corp. New Venture Gear Borders
Prudential Insurance Honeywell
American Annuities Group Hewlett-Packard Corp.
CNA Insurance Xerox Corp.
Kemper Insurance Westinghouse Electric Corp.
Lucent Technologies
Cummins
Dell Computer
INFORMATION/
TRANSPORTATION COMMUNICATIONS GOVERNMENT
- -------------- -------------- ----------
Norfolk Southern Corp. AT&T Corp. New Mexico
Allied Van Lines Consolidated Communication New York
Ryder Directories Malta
Yellow Technologies Intellisoft West Virginia
Northwest Airlines Corp. MCI Illinois
LM Ericsson Telephone Co.
Nortel
Sprint
For the years ended December 31, 1996, 1997, and 1998, the Company's top
ten customers accounted for approximately 78%, 75%, and 70% of the Company's
revenues, respectively. American International Group, Inc. and Dayton Hudson
Corporation, the Company's largest customers for the years ended December 31,
1997 and December 31, 1998, represented approximately 31% and 12% of the revenue
for the year ended December 31, 1997, respectively, and approximately 26% and
14% of revenue for the year ended December 31, 1998, respectively. For the year
ended December 31, 1996, American International Group was the Company's largest
customer with 34% of the Company's revenues while the Ford Motor Company was the
second largest customer with 12% of the Company's 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, 1998. 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 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
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of policy underwriting, claims management and financial reporting and encompass
both mainframe and client/server environments. During 1998, the Company
successfully completed 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. During the first quarter of 1998, the Company 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
locations provides the customer with the capacity to receive around the clock
attention to applications maintenance and project development for faster
turnaround, greater availability of resources, expertise resident in India and
more cost-effective delivery than the Company's off-site services.
The Company has developed global recruiting and training programs which
have efficiently provided skilled IT professionals to meet customer needs. In
addition, the Company's sales, solutions and delivery functions are closely
integrated in the Global 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.
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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 260
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 approximately
500 persons as of December 31, 1998, 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 five years,
was expanded to accommodate a capacity in excess of 700 people. The expansion
was completed in the third quarter of 1998.
During 1998 the Company opened a new training and development center in
Chennai, India which provides accommodations for an additional 600 persons.
While staffing began in early 1998, the center was essentially completed in the
third quarter. As it is only staffed at 23% of capacity, the facility provides
Syntel the ability to respond quickly to customer and project staffing needs.
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 investment 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,
Michigan; Woodbridge, New Jersey; Pittsburgh, Pennsylvania; London, England; and
Singapore. The sales staff is integrated, with specialists for TeamSourcing and
IntelliSourcing included with each sales team.
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
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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 1996, 1997 and 1998,
over 90% of TeamSourcing revenues were from customers who received services
during the prior period.
Syntel's marketing organization seeks to build awareness of its
IntelliSourcing and TeamSourcing (including Enterprise Solutions) brands to help
generate sales leads. The Company's current marketing efforts include trade
shows/conferences, direct mail, publications, public relations, and print/web
advertising targeted to CEOs, CIOs, CFOs of Fortune 500 companies and CIOs of
government agencies. In addition, Syntel maintains relationships with key
industry analyst groups such as Giga Information Group, Gartner Group, Meta
Group and Yankee Group, among others.
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, 1998 the Company had 2,076 full time
employees. Of this total, the U.S. operations employed 1,404 persons, including
1,234 IT professionals; the Indian operation employed 635 persons, including 555
IT professionals; and the Company employed an additional 37 persons in various
remote locations, including the U.K. and Singapore. Of the 1,404 persons
employed in the U.S. operation 924 held H-1B 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
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 and New Zealand. The Company also has an
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international-based recruiting team, with recruiters in Mumbai, Chennai,
Hyderabad, Delhi and Banglore, India, 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 weeks of training including classroom lectures, hands-on exercises
and program development, tests and team projects.
During 1998 the Company implemented a Project Manager Training program. The
objective of the program is to develop certified project managers to ensure
consistent and quality delivery of the Company's engagements on a worldwide
basis. The 12 to 18 month program consists of lecture style classroom work,
computer based training, and on the job apprenticeships. The program trains
students on industry "best practices" as well as Syntel specific methods and
processes. Program participants must receive certification from the Project
Management Institute ("PMI") before receiving Syntel branded certification.
Syntel also maintains an Internet-based global Computer-Based Training
("CBT") program with over 200 training courses from which Syntel employees can
select to enhance and develop their skills. The CBT topics cover the latest
Client/Server topics including Object Oriented Programming, local-area and
wide-area networking, E-Commerce, various Microsoft products, and Web-based
solutions in addition to management and related developmental areas.
The Company has been accepted as a Microsoft Certified Solution Partner and
sponsors the Microsoft Certification Program in its Cary, North Carolina, Global
Development Center and provides opportunities for cross-training of its
professionals in emerging technologies.
SUPPORT AND RETENTION. The Company seeks to provide meaningful support to
its employees which the Company believes leads to improved employee retention
and better quality services to its customers. Traditionally, a significant
percentage of the Company's employees have been recruited from outside the U.S.
and relocated to the U.S. This has resulted in the need to provide a higher
level of initial support to its employees than is common for U.S.-based
employees. As a result of these activities, Syntel has developed a significant
knowledge base in making foreign professionals comfortable and quickly
productive in the U.S. and Europe. The Company also conducts regular career
planning sessions with its employees, and seeks to meet their career goals over
a long-term planning horizon. As part of its retention strategy,
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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 has a stock option plan which offered stock options to substantially
all of its employees under the Stock Option Plan at consummation of its initial
public offering in 1997, and initiated a qualified stock purchase program during
the fourth quarter of 1998, providing all eligible employees the opportunity to
purchase the Company's Common Stock at a discount to fair market value.
COMPETITION
The IT services industry is intensely competitive, highly fragmented and
subject to rapid change and evolving industry standards. The Company competes
with a variety of other companies, depending on the IT services it offers. The
Company's primary competitors for professional IT staffing engagements include
participants from a variety of market segments, including "Big Five" accounting
firms, systems consulting, enterprise solutions 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 IBM Global Solutions,
Keane, Andersen Consulting and Computer Sciences Corporation. The Company's
principal competitors for Year 2000 compliance engagements include IBM Global
Solutions, Keane, and Cap Gemini.
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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................ 46 Chairman, President, Chief
Executive Officer and Director
Neerja Sethi................ 44 Vice President, Corporate Affairs
and Director
John Andary................. 49 Chief Financial Officer and
Treasurer
Ken Kenjale................. 49 Chief Technology Officer
Daniel M. Moore............. 44 Chief Administrative Officer and
Secretary
Jay Clark................... 36 Vice President, Global
Applications Management
Rajiv Tandon................ 40 Vice President, Global
Development Services
Marlin Mackey............... 48 Vice President, Global
Development Services
Anil Kumar.................. 38 Vice President, International
Business and Recruiting
- ------------------------------------------------------------------------------
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. Mr.
Desai became Chairman of the Board in February 1999.
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.
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 Chief Administrative Officer and
Secretary since August 1998. Mr. Moore also served as Chairperson of the
Company's Executive Committee since July, 1997. From March 1996 through August
1998, Mr. Moore served as General Counsel and Secretary and also served as Vice
President, Benefits and Policy Administration from July 1997 through August
1998. From June 1996 to June 1997, Mr. Moore served as the Company's acting Vice
President, Human Resources. 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.
Jay Clark has served the Company as Vice President, Global Applications
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Management since August 1998. From July 1997 through August 1998, Mr. Clark
served as Vice President, Global Infrastructure and Career Administration. 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.
Rajiv Tandon joined Syntel in January 1992, and has served the Company as
Vice President, Global Delivery East & Enterprise Solutions since January, 1999.
From April 1998 through January 1999, Mr. Tandon was Assistant Vice President,
Global Delivery Services and, from November 1996 through April 1998, Mr. Tandon
was Director of Operations for the AIG account. From January 1992 until November
1996, Mr. Tandon served in various other project management positions within the
Company.
Marlin Mackey has served the Company as Vice President, Global Delivery
West & Information Services since January 1999. From April 1998 through January
1999, Mr. Mackey was Assistant Vice President, Global Delivery Services and,
from November 1995 through April 1998, Mr. Mackey was a Deputy Engagement
Manager; both with the Company. From 1991 to November 1995, Mr. Mackey was
Project Director for the State of New Mexico's ONGARD project, a multi-million
dollar software development project.
Anil Kumar has served the Company as Vice President, International Business
Development and Recruiting since January 1999. From November 1996 through
January 1999, Mr. Kumar served as Assistant Vice President of International
Business Development. During the period of July 1995 through December 1996, Mr.
Kumar served as Vice President of Operations for Waypointe Information
Technologies. During the period of January 1994 through June 1995 Mr. Kumar
served as Assistant Vice President of Administration for Syntel.
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,
2004. 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 33,856 square feet of office space in Mumbai,
India, under several leases that have recently been renewed, with expiration
dates ranging from April, 2002 to September, 2003. This facility houses IT
professionals, as well as its senior management, administrative personnel, human
resources and sales and marketing functions. Additionally, 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.
The Company believes that these facilities are adequate for its currently
anticipated future needs.
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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, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
(a) The Registrant's common stock is traded on the NASDAQ National Market
under the symbol "SYNT." The following table sets forth, for the periods
indicated, the range of high and low bid information per share of the company's
common stock as reported on NASDAQ for each full quarterly period in 1998, and
for the last quarter and partial quarter of 1997, after the Company's initial
public offering. All prices give effect to a 3:2 stock split effective April 22,
1998.
1998 High Low
- --------------------------------------------------------------------------------
August 12, 1997 through
September 30, 1997 12.167 8.000
Fourth Quarter, 1997 11.083 5.667
First Quarter, 1998 27.333 9.875
Second Quarter, 1998 37.333 21.375
Third Quarter, 1998 31.5000 11.500
Fourth Quarter, 1998 20.625 10.438
(b) There were approximately 145 shareholders of record and 6,511
beneficial holders on March 18, 1999.
(c) During the year ended December 31, 1997, the Company declared a
dividend of $11,400,000. 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.
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ITEM 6. SELECTED FINANCIAL DATA.
SYNTEL, INC. & Subsidiaries
FIVE-YEAR HIGHLIGHTS
(In thousands, except per share amounts)
The following tables set fourth selected consolidated financial data and other
data concerning Syntel, Inc. for each of the last five years. The pro forma
weighted average shares outstanding for all periods shown give effect to a 3:2
stock split effective April 22, 1998.
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenues................... $67,340 $90,326 $92,330 $124,338 $167,975
Cost of revenues........... 55,315 70,014 67,083 87,584 104,971
------- ------- ------- ------- -------
Gross profit.... .......... 12,025 20,312 25,247 36,754 63,004
Selling, general and
administrative expenses,. 8,603 13,909 19,271 23,547 28,026
------- ------- ------- ------- -------
Income from operations .... 3,422 6,403 5,976 13,207 34,978
Other income (expense), net. (67) 188 149 730 2,077
------- ------- ------- ------- -------
Income before income taxes. 3,355 6,591 6,125 13,937 37,055
Income taxes.(1)..... 1 436 350 3,517 12,424
------- ------- ------- ------- -------
Net income................. $ 3,354 $ 6,155 $ 5,775 $ 10,420 $ 24,631
Net income per share (diluted) $ 0.09 $ 0.16 $ 0.15 $ 0.27 $ 0.63
======= ======= ======= ======= =======
Pro forma net income.(2)... $ 2,203 $ 4,421 $ 4,379 $ 10,196
======= ======= ======= ======= =======
Pro forma net income
per share $ 0.06 $ 0.11 $ 0.11 $ 0.26
======= ======= ======= ======= =======
Weighted average shares
Outstanding (diluted) 39,294
Pro forma weighted average =======
shares outstanding (diluted) 38,768 39,218 39,367 39,083
======= ======= ======= =======
(1) For all periods shown through August 12, 1997, the Company elected to be
treated as an S corporation and, as a result, the income of the Company
has been taxed for federal and state purposes (with exceptions under
certain state income tax laws) directly to the Company's shareholders
rather than to the Company.
(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.
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DECEMBER 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT OTHER DATA)
BALANCE SHEET DATA:
Working capital ................. $11,999 $15,763 $ 1,842 $35,346 $57,196
Total assets .................... 22,928 29,140 32,992 65,232 107,808
Long-term debt .................. -- -- -- -- --
Total shareholders' equity ...... 13,201 19,209 6,145 39,585 64,147
OTHER DATA:
Billable headcount in U.S. ...... 1,097 1,029 1,103 1,260 1,135
Billable headcount in India ..... 83 107 190 478 413
Billable headcount at
other locations .............. -- -- -- 8 33
------- ------- ------- ------- -------
Total billable headcount ........ 1,180 1,136 1,293 1,746 1,581
======= ======= ======= ======= =======
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, 1997 and 1998, the percentage of
revenues generated by IntelliSourcing engagements was 51%,and 62% 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
and 1998 have been on a fixed-price basis. For the years ended December 31, 1997
and 1998, fixed-price revenues comprised 23% and 36% of total IntelliSourcing
revenues respectively. Syntel recognizes revenues from fixed-price engagements
on the percentage of completion method.
For the years ended December 31, 1997 and 1998, the percentage of revenues
generated by TeamSourcing engagements was 49% and 38%, 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, recruiting, relocation and other related costs for its
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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 software development
services provided to the Company from Mumbai and Chennai, India, where salaries
of IT professionals are comparatively lower than in the U.S. The Company has
performed a significant portion of its employee recruiting in other countries.
As of December 31, 1998, approximately 67% of Syntel's U.S. workforce (45% of
Syntel's worldwide workforce) worked under H-1B temporary work visas in the U.S.
The Company has made substantial investments in infrastructure in recent
years, 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 and Chennai, India development centers; (iii) establishing
a Global Development Center in Chennai, India; (iv) adding additional space to
the Mumbai Global Development Center; (v) relocating the Company's headquarters
to larger offices in Troy, Michigan; (vi) 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; (vii) hiring additional experienced senior management; (viii)
expanding global recruiting and training capabilities, and replacement of
informal systems with highly integrated, Year 2000 compliant, Human Resource and
Financial Information Systems.
Through its strong relationships with customers, the Company has been able
to generate recurring revenues from repeat business. For the years ended
December 31, 1996, 1997, and 1998, over 90% of the Company's TeamSourcing
revenues were from customers for whom the Company provided services during the
previous period. These strong relationships also have resulted in the generation
of a significant percentage of revenues from key customers. The Company's top
ten customers accounted for approximately 78%, 75% and 70% of revenues for the
years ended December 31, 1996, 1997, and 1998. The Company does not believe
there is any material collectibility exposure among its top ten customers.
American International Group, Inc. and Dayton Hudson Corporation, the Company's
largest customers for the years ended December 31 1997 and December 31, 1998,
represented approximately 31% and 12% of the revenue for the year ended December
31, 1997, respectively, and approximately 26% and 14% of revenue for the year
ended December 31, 1998, respectively. For the year ended December 31, 1996,
American International Group was the Company's largest customer with 34% of the
Company's revenues while the Ford Motor Company was the second largest customer
with 12% of the Company's 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 occurences 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 Chairman, 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
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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 presently treats most of the 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 these earnings,
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.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected income
statement data as a percentage of the Company's total revenues.
PERCENTAGE OF REVENUES
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1997 1998
----- ----- -----
Revenues................... 100.0% 100.0% 100.0%
Cost of revenues........... 72.6 70.5 62.5
----- ----- -----
Gross profit............... 27.4 29.5 37.5
Selling, general and
administrative expenses.. 20.9 18.9 16.7
----- ----- -----
Income from operations..... 6.5% 10.6% 20.8%
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The company manages the sales and delivery of services through two Segments,
IntelliSourcing and TeamSourcing. The following table Sets forth selected
segment financial data for the periods indicated:
(In thousands, except percentages)
1996 1997 1998
------- -------- --------
Revenues
IntelliSourcing $ 33,355 $ 64,049 $103,906
TeamSourcing 58,975 60,289 64,069
-------- -------- --------
92,330 124,338 167,975
Gross Margin
IntelliSourcing 11,604 24,038 45,732
TeamSourcing 13,643 12,716 17,272
-------- -------- --------
25,247 36,754 63,004
Gross Margin %
IntelliSourcing 34.8% 37.5% 44.0%
TeamSourcing 23.1% 21.1% 27.0%
-------- -------- --------
27.3% 29.6% 37.5%
SG&A
IntelliSourcing 9,345 15,440 18,329
TeamSourcing 9,926 8,107 9,697
-------- -------- --------
19,271 23,547 28,026
SG&A %
IntelliSourcing 28.0% 24.1% 17.6%
TeamSourcing 16.8% 13.4% 15.1%
-------- -------- --------
20.9% 18.9% 16.7%
Operating Margin
IntelliSourcing 2,259 8,598 27,403
TeamSourcing 3,717 4,609 7,575
-------- -------- --------
5,976 13,207 34,978
Operating Margin %
IntelliSourcing 6.8% 13.4% 26.4%
TeamSourcing 6.3% 7.6% 11.8%
-------- -------- --------
6.5% 10.6% 20.8%
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues. Total consolidated revenues increased from $124.3 million in 1997
to $168.0 million in 1998, representing a 35% increase. The Company's total
revenues were less dependent upon its largest customers in 1998 as compared to
1997. The top two customers accounted for 40% of the total revenues in 1998,
down from 43% of total revenues in 1997. Additionally, the top 10 customers
accounted for 70% of the revenues in 1998 as compared to 75% in 1997. The
worldwide billable headcount decreased to 1,581 as of December 31, 1998 compared
to 1,746 as of December 31, 1997. The decreased headcount was due principally to
the completion of several development and Y2K projects in IntelliSourcing during
the second half of 1998, the ramp down in some TeamSourcing engagements, and
efficiency improvements in several fixed price IntelliSourcing engagements.
INTELLISOURCING
REVENUES. IntelliSourcing revenues increased to $103.9 million in 1998, or 62%
of total revenues, from $64.0 million, or 51% of total revenues in 1997. The
$39.9 million increase was attributable primarily to new engagements, growth in
the base, and bill rate increases in several major accounts, contributing
approximately $21 million, $10 million, and $9 million,
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respectively.
COST OF REVENUES. Cost of revenues consist of costs directly associated with
billable consultants in both the US and offshore, including salaries, payroll
taxes, benefits, relocation costs, immigration costs, finders fees, trainee
compensation, and warranty reserves. IntelliSourcing cost of revenues decreased
to 56.0% of total revenues in 1998, down from 62.5% in 1997. The decrease in
cost of revenues as a percent of revenues was attributable primarily to billing
rate increases, improved margins on existing engagements, and higher margins on
new engagements, each contributing approximately 5.0%, 2.0%, and 1.5%,
respectively, partially offset by pay rate increases and benefits of
approximately 1.9%.
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. IntelliSourcing
selling, general and administrative expenses for the year ended December 31,
1998 increased to $18.3 million, or 17.6% of total IntelliSourcing revenues,
from $15.4 million, or 24.1% of total IntelliSourcing revenues for the year
ended December 31, 1997. The $2.9 million increase is due principally to $1.1
million from the transfer of sales and account management professionals from
TeamSourcing, compensation increases of $0.7 million, offshore facility
expansion of $0.4 million, internal system development of $0.3 million, expanded
marketing programs of $0.2 million, and $0.3 million for other programs
necessary to support growing activity levels. It is anticipated that
IntelliSourcing selling, general, and administrative costs will continue to
increase as a percentage of revenue from 1998 levels due to additional
investments in sales personnel.
TEAMSOURCING
REVENUES. TeamSourcing revenues increased to $64.1 million in 1998, or 38% of
total revenues, from $60.2 million, or 49% of total revenues in 1997. The $3.8
million increase was attributable primarily to increased average billing rates,
the acquisition of the IT consulting base from Waypointe Information
Technologies in December 1997, and offshore growth in the UK and Singapore,
providing $5.7 million, $4.5 million, and $1.9 million to the revenue increase,
respectively; partially offset by a $5.3 million revenue decrease due to a
reduction in the average number of billable consultants and a $3.1 million
decrease due to the conversion of TeamSourcing customers to IntelliSouricng
engagements. End of year average hourly bill rates increased to $57.59 per hour
as of December 31, 1998, from $52.70 as of December 31, 1997.
COST OF REVENUES. Cost of revenues consist of costs directly associated with
billable consultants in the U.S., including salaries, payroll taxes, benefits,
relocation costs, immigration costs, finders fees, and trainee compensation.
TeamSourcing cost of revenues decreased to 73.0% of TeamSourcing revenues in
1998, down from 78.9% in 1997. The decrease in cost of revenues as a percent of
revenues was attributable primarily to bill rate increases and the increased
share of higher margin Enterprise Solutions revenues, contributing approximately
8.1% and 1.6%, respectively to the overall improvement while increased
compensation and benefits partially offset the improvement with a 3.8% increase.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. TeamSourcing sales, general, and
administrative expenses for the year ended December 31, 1998 increased to
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$9.7 million, or 15.1% of total TeamSourcing revenues, from $8.1 million, or
13.4% of total TeamSourcing revenues for the year ended December 31, 1997. The
$1.6 million increase was attributable principally to increased management and
sales staff in Enterprise Solutions of $1.0 million, increased marketing
expenses of $.5 million, growth in the UK and Singapore of $0.5 million,
compensation increases of $.4 million, and other expenses of $.2 million;
partially offset by the transfer of sales and account management professionals
to IntelliSourcing of $1.1 million
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 ten customers
accounted for 75% of total revenues in 1997 as compared to 78% in 1996.
INTELLISOURCING
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 customers 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.
COST OF REVENUES. IntelliSourcing cost of revenues decreased to 62.5% of total
revenues in 1997, down from 65.2% in 1996. The decrease in cost of revenues as a
percent of revenues was attributable primarily to new higher margin engagements
and efficiency improvements in existing engagements, contributing approximately
3.2% and 1.7%, respectively; partially offset by increases in compensation,
benefits, and other direct costs of approximately 2.2%.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. IntelliSourcing selling, general,
and administrative expenses for the year ended December 31, 1997 increased to
$15.4 million, or 24.1% of total IntelliSourcing revenues, from $9.3 million, or
28.0% of total IntelliSourcing revenues for the year ended December 31, 1996.
The $6.1 million increase is due principally to $1.8 million from the transfer
of sales and account management professionals from TeamSourcing, offshore
facility expansion of $1.0 million, fixed price reserves of $0.8 million,
communication expenses of $0.4 million, expanded marketing programs of $0.3
million, start-up expenses in the UK and Singapore of $0.3 million, compensation
and benefits of $0.3 million, and $1.2 million for other programs necessary to
support growing activity levels.
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TEAMSOURCING
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 revenue increase was attributable primarily to bill rate increases and
growing ERP revenues, which more than offset a reduction in average billable
headcount. Average hourly bill rates increased to $52.70 per hour 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. TeamSourcing cost of revenues increased to 78.9% of
TeamSourcing revenues in 1997, up from 76.9% in 1996. The increase in cost of
TeamSourcing revenues as a percent of TeamSourcing revenues was attributable
primarily to the migration of several higher margin engagements to
IntelliSourcing, increased compensation and benefits, and other direct costs,
contributing approximately 2.6%, 2.7%, and 1.7%, respectively to the increase in
the cost of revenues; which more than offset increased billing rates of
approximately 5.0%.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. TeamSourcing sales, general, and
administrative expenses for the year ended December 31, 1997 decreased to $8.1
million, or 13.4% of total TeamSourcing revenues, from $9.9 million, or 16.8% of
total TeamSourcing revenues for the year ended December 31, 1996. The $1.8
million decrease was attributable principally to the transfer of sales and
account management professionals to IntelliSourcing.
QUARTERLY RESULTS OF OPERATIONS
Note 14 of the audited financial statements sets forth certain quarterly
income statement data for each of the eight quarters beginning January 1, 1997
and ended December 31, 1998. 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 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 has financed its working capital needs through operations. Both
the Mumbai and Chennai expansion programs, completed in mid 1998, were financed
from internally generated funds.
33
34
Net cash provided by operating activities was $5.9 million, $17.8 million
and $35.3 million for the years ended December 31, 1996, 1997, and 1998,
respectively. 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 $3.1 million increase in advanced
billings.
The increase in cash provided by operating activities in 1998 over 1997 was
primarily attributable to an increase in net income of $14.2 million, a
decreased in advanced billings of $6.9 million and a $2.0 million increase in
accounts payable and other accrued liabilities; partially offset by a $2.9
million increase in accounts receivable and a $2.8 million increase in deferred
tax assets. The $2.9 million increase in accounts receivable is attributable to
a 7 day reduction in days sales outstanding, resulting in a $3.0 million
reduction in accounts receivable, offset by an increase of $5.9 million
resulting from increased 1998 fourth quarter billings over the 1997 fourth
quarter billings.
Net cash used in investing activities was $2.1 million, $8.7 million and
$3.3 million for the years ended December 31, 1996, 1997 and 1998, respectively.
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
Syntel, India acquisition, and $1.7 million for the purchase of computer
equipment, software, and facility improvements at the Company's Global
Development Centers. Cash used in investment activities in 1998 of $3.3 million
included $2.1 million for completion of the facility expansion and improvement
programs at the Company's Global Development Centers in Mumbai and Chennai,
India, $0.7 million for computer equipment, and $0.5 million for new human
resource and financial information systems.
Net cash used in financing activities was $5.0 million in 1996, and $.2
million in 1998. Net cash provided by financing activities in 1997 was $16.5
million. 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. Net cash used in financing
activities in 1998 are attributable to a final distribution of S corporation
undistributed taxable profits.
The Company has a line of credit with NBD Bank which provides for
borrowings up to $30.0 million. The line of credit expires on August 31, 1999.
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, 1998, there was no indebtedness outstanding
under the line of credit. Borrowings under the line of credit bear 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 $15.0 million
34
35
facility with NBD Bank to finance acquisitions which expires on August 31, 1999.
The Company has not borrowed any amounts under this facility. The Company
intends to extend both the $30 million and $15 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
STATE OF READINESS. The Company has a Year 2000 project plan designed to
identify and assess the risks of non-compliance associated with its information
systems, operations, suppliers, and customers; and to develop and implement
remediation and contingency plans to mitigate the risks. The year 2000 project
plan consists of the following activities:
- - IT and non-IT systems.
- Complete inventory of all hardware, software, and firmware components.
- Impact assessment - identify and prioritize components that are not
Year 2000 compliant.
- Develop solution plan - determine and prioritize remediation procedures
for each non-compliant component, including decision to replace or
repair.
- Complete remediation and test systems
- Develop contingency plans
- - Third party confirmations
- Obtain written verification from key suppliers that services will not
be impacted by Year 2000 issues.
- Obtain representations from major customers that their ongoing service
requirements as well as accounts payable processes will not be impacted
by Year 2000 issues.
- - Develop contingency plans
The Year 2000 remediation project is being directed by the Manager of
Information Systems. Reporting to the manager is a Project Manager dedicated
full time to the project. The Project Manager is supported by an assistant
assigned full time to the project, as well as coordinators and subject matter
experts at each of the Company's Global Development Centers. The Manager of
Information Systems provides weekly status reports to the Company's senior
management team.
The Company's Internal IT and non-IT issues are minimized by the nature of
its service offerings. As an Information Technology company, Syntel's revenues
are driven by the extensive knowledge base of its professional IT consultants.
IT and non-IT Year 2000 issues are principally associated with the compliance of
personal computers, servers, communication equipment, and software residing on
both individual personal computers and on the servers.
Over 57% of the Company's IT professionals work on-site at the client
location. These consultants utilize client provided work stations and software.
Of approximately 1100 personal computers in operation at the Company's Global
Development Centers and various branch offices, less than 75 will require
replacement. All other non-compliant PCs have been or will be made Year 2000
compliant by means of a Bios upgrade. All PCs in the Cary
35
36
Development Center and the Troy headquarters have been upgraded and tested for
compliance.
All proprietary delivery software as well as internal "Syntranet" and
E-mail (Lotus Notes) applications are Year 2000 compliant. The Company is
currently implementing Year 2000 compliant, PeopleSoft financial and human
resources information systems. The human resource system will be placed into
live production in the early part of the second quarter of 1999 while the
financial information system is on track to be placed into production during the
third quarter of 1999. The financial information systems in Mumbai and Chennai,
India are fully Year 2000 compliant.
The following chart summarizes the project status as of March 1, 1999:
% completed Planned Completion
Task At 3/16/99 Date
---- ---------- ----
Create Y2K awareness 100% --
Equipment & software inventory 100% --
Critical Systems impact assessment 100% --
Develop plan (budget, priorities,
Resources) 100% --
Non-critical systems impact assessment 100% --
Supplier mailings & follow-up 50% May-99
Customer mailings & follow-up 5% May-99
Remediate non-compliant systems 30% Aug-99
Develop contingency plans 5% Aug-99
Project closure & review Sep-99
COSTS TO ADDRESS YEAR 2000 ISSUES. The Company anticipates total remediation
costs to be approximately $700,000. These costs include amounts necessary to
replace or upgrade hardware, replace phone systems, replace data communications
equipment, replace non-compliant software, and compensation costs of individuals
assigned full time to the project. The replacement of hardware costs will total
approximately $500,000, software will total approximately $80,000, and
compensation costs will total approximately $120,000. Costs to implement new
Human Resource and Financial Information Systems are not considered as Year 2000
costs as these projects were based on growing business needs independent of Year
2000 issues, and were not accelerated by Year 2000 remediation requirements. The
$700,000 has been fully reflected in the Company's 1999 operating plan and
forecasts.
The refocusing of resources to the Year 2000 has not caused any major
internal projects to be deferred; however, the completion of projects to
automate several internal processes have been slightly delayed. These delays
will not have any material impact on the financial condition or results of
operations.
MAJOR RISKS OF THE COMPANY'S YEAR 2000 ISSUES. The Company believes that its
greatest potential financial and operational risks are associated with service
interruptions from key communication and utility service providers. To fully
assess the extent of this risk, the Company has sent questionnaires to all key
service providers via certified mail; is following up with secondary mailings,
and is reviewing vendor web sites on the Internet for confirmation of Year 2000
compliance. To date, the Company has mailed approximately 290 confirmations to
key suppliers and has received approximately 25 responses, including positive
confirmation from its largest communications vendor, Sprint, as well as ADP, the
Company's payroll processor. The loss of communication capabilities would have
an immediate impact on the Company's ability to maintain operations as would the
loss of power at any of the Company's Global Development Centers. The occurrence
of either situation
36
37
could cause a material adverse effect on the Company's financial condition. The
Mumbai, India Global Development Center, the Company's largest development
center, is supported by a back-up power generator which could provide full power
to the center indefinitely, in the event of a power failure.
The next greatest potential risk is the potential for lost revenue should
the Company's customers encounter Year 2000 issues, forcing a reallocation of
resources from existing applications and projects. To fully assess the extent of
this risk, the Company is sending questionnaires to the major customers, will
explore customer readiness via direct communication by engagement and account
executives, and will monitor customer web sites for confirmation of Year 2000
compliance. This risk is partially mitigated by several factors, including: (1)
The Company has completed, tested, and delivered Year 2000 compliance services
to five of the projected top 10 customers based on projected revenue for 1999
and 2000. (2) The Company's revenue base is comprised primarily of revenues from
Fortune 1000 companies. Significant Year 2000 issues by these companies would
suggest widespread problems, which in turn would open opportunities to
selectively provide additional Year 2000 remediation services, potentially
offsetting revenues lost from the suspension of non-year 2000 application
support and development projects.
The next greatest potential risk is the inability to process payroll,
reduced or lost banking capabilities, and lost air travel capabilities. While
loss of these capabilities would not have an immediate impact on the Company's
ability to maintain normal operations, an extended loss of any of these
functions could have a material adverse effect on the Company's business,
results of operations, and financial condition. The Company receives payroll
services from ADP (Automatic Data Processing) and banking services from NBD
Bank. As indicated with other key service providers, the Company has requested
written confirmation of Year 2000 Compliance from these vendors, and will
follow-up with their account representatives to ensure receipt of confirmation.
YEAR 2000 CONTINGENCY PLANS. The Company is in the process of developing
contingency plans. Because the major risks (communications and utilities) are
associated with large, external service providers for which the Company has no
influence or control, and for which the implementation of substitute processes
are not practical, contingency plans are anticipated to consist of migrating
activity from vendors for which Year 2000 compliance has not been confirmed and
in shifting work to Global Development Centers for which Year 2000 compliance
for utilities and communications have been confirmed. In regard to air travel,
the Company will attempt to reduce the impact from a temporary termination of
services by assessing new customer placement requirements for early January
2000, and will suggest an earlier start date to ensure that key placements are
not delayed.
The Company has implemented a significant program to identify, evaluate,
and remediate Year 2000 issues; however, as the Year 2000 project continues,
additional Year 2000 issues may be discovered or the Company may find that the
costs of these activities exceed current expectations. In many cases the Company
must rely on assurances from suppliers that key services will be Year 2000
compliant. While the Company plans to validate representations wherever
possible, it cannot be sure that validations will be adequate, or that if
problems are identified, they will be addressed in a timely and satisfactory
manner. Even if the Company, in a timely manner, completes all of its
assessments, implements and tests all remediation plans believed to be adequate,
and develops contingency plans believed to be adequate, some problems may not be
identified or corrected in time to prevent material adverse consequences or
business interruptions to the Company.
37
38
ITEM 7A. MARKET RISKS
The Company is primarily exposed to the effects of changes in foreign
currency. Foreign currency exchange risk exists as costs are paid in local
currency and receipts are provided in U.S. dollars. This risk is partially
mitigated as the Company has sufficient capital resources in the local currency
to meet immediate requirements. The Company's holdings and positions in market
sensitive instruments do not subject the Company to material risk. These
exposures are monitored and managed by the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements 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 45 of this Report and are
incorporated herein by reference.
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 Two Directors" in the Registrant's Proxy Statement for the Annual
Shareholders' Meeting to be held June 2, 1999 (the "Proxy Statement") is
incorporated herein by reference.
The information set forth under the caption "Compliance with Section 16(a)
of The Exchange Act" in the section entitled "Additional Information" in the
Registrant's Proxy Statement is incorporated herein by reference. The
information set forth in the section entitled "Executive Officers of the
Registrant" in Item 1 of this report is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the section entitled "Executive
Compensation" in the Registrant's Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the captions "Principal Shareholders" and
"Security Ownership of Management" in the section entitled "Additional
Information" in the Registrant's Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
38
39
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 45 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 Statement on Form S-1
dated June 6, 1997, and incorporated herein by reference
3.2 Amendment to Articles of Incorporation of the Registrant
dated September 21, 1998.
3.3 Bylaws of the Registrant filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 dated June
6, 1997, and incorporated herein by reference.
10.1 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
39
40
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 First Amendment, dated October 19, 1998, between the
Registrant and Corning Road, L.L.C. [successor to First
Union National Bank of North Carolina as Trustee, successor
to NationsBank], to the Lease Agreement, dated November 30,
1994, between the Registrant and NationsBank.
10.8 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.
10.9 Indentures of Lease entered into between the President of
India and Syntel Software Pvt. Ltd. on various dates in 1992
and 1993 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.
10.10 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.
10.11 Agreement for Software Programming Services, dated as of
December 31, 1997, between the Registrant and American Home
Assurance Company, filed as an Exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1997 and incorporated herein by reference.
10.12 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.
10.13 * 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.
10.14 * 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.
10.15 * 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.
10.16 * Employment Agreement, dated June 5, 1997, between the
40
41
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.
10.17 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.
23 Consent of Pricewaterhouse Coopers LLP
27 Financial Data Schedule.
99.1 Proxy Statement for the Registrant's 1999 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, 1998.
41
42
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 Chairman, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/Bharat Desai Chairman, President and Chief March 23, 1998
- ------------------- Executive Officer
Bharat Desai (Principal Executive Officer)
/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
42
43
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-7-22
F-1
44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Syntel, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Syntel,
Inc., and its subsidiaries at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
February 19, 1999
F-2
45
SYNTEL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
FOR THE YEARS ENDED DECEMBER 31
---------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Revenues $ 167,975 $ 124,338 $ 92,330
Cost of revenues 104,971 87,584 67,083
------------- -------------- -------------
Gross profit 63,004 36,754 25,247
Selling, general and administrative expenses 28,026 23,547 19,271
------------- ------------- -------------
Income from operations 34,978 13,207 5,976
Other income, principally investment income 2,077 730 149
------------- ------------- -------------
Income before income taxes 37,055 13,937 6,125
Provision for income taxes 12,424 3,517 350
------------- ------------- -------------
Net income $ 24,631 $ 10,420 $ 5,775
============= ============= =============
Historical earnings per share:*
Basic $ 0.65 $ 0.28 $ 0.15
Diluted $ 0.63 $ 0.27 $ 0.15
1996 and 1997 pro forma net income:
Income before income taxes $ 13,937 $ 6,125
Pro forma income taxes ** 3,741 1,746
------------- -------------
Pro forma net income $ 10,196 $ 4,379
============= =============
1996 and 1997 pro forma earnings per share:*
Basic*** $ 0.27 $ 0.12
Diluted*** $ 0.26 $ 0.11
Weighted average common shares outstanding - diluted 39,294 39,083 39,368
============= ============= =============
*Gives effect to 3:2 stock split effective April 22, 1998.
**Presentation of income tax expense as if the Company was a C-corporation
during the years presented.
***Presentation of EPS 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
46
SYNTEL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 31
--------------------------------------
ASSETS 1998 1997
--------------- ----------------
Current assets:
Cash and cash equivalents $ 64,660 $ 32,945
Accounts receivable 23,581 20,644
Advance billings and other current assets 10,330 6,897
--------------- ----------------
Total current assets 98,571 60,486
Property and equipment 12,635 9,299
Less accumulated depreciation 7,037 5,060
--------------- ----------------
Property and equipment, net 5,598 4,239
Deferred income taxes, noncurrent 66 507
--------------- ----------------
$ 104,235 $ 65,232
=============== ================
LIABILITIES
Current liabilities:
Accounts payable $ 4,004 $% 2,355
Accrued payroll and related costs 15,258 10,388
Dividends payable 300
Income taxes payable 1,244 1,365
Accrued warranty costs 3,636 852
Accrued liabilities 5,125 4,175
Deferred revenue 10,442 5,705
--------------- ----------------
Total current liabilities 39,709 25,140
Income taxes payable 379 507
--------------- ----------------
Total liabilities 40,088 25,647
SHAREHOLDERS' EQUITY
Common stock, no par value per share,100 million shares authorized,
38.195 million
shares and 25.45 million shares issued and
outstanding at December 31, 1998
and 1997, respectively 1 1
Additional paid-in capital 34,784 34,659
Accumulated other comprehensive income (443) (249)
Retained earnings 29,805 5,174
--------------- ----------------
Total shareholders' equity 64,147 39,585
--------------- ----------------
$ 104,235 $ 65,232
=============== ================
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
47
SYNTEL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
ADDITIONAL CURRENCY
COMMON STOCK PAID-IN RETAINED TRANSLATION SHAREHOLDERS'
------------------
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT EQUITY
----- --------- --------- -------- -------- ---------
BALANCE, JANUARY 1, 1996 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
Comprehensive income:
Net income 10,420 10,420
Translation adjustments 4 (249) (245)
--------- -------- ---------
Total comprehensive income, 10,424 (249) 10,175
net of tax
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 38 38
options
Acquisition of Syntel India (Note 3) (1,531) 1,531
------ --------- ----------- ------- -------- -------
BALANCE, DECEMBER 31, 1997 25,450 1 34,659 5,174 (249) 39,585
Comprehensive income:
Net income 24,631 24,631
Translation adjustment (194) (194)
--------- -------- ---------
Total comprehensive income, 24,631 (194) 24,437
net of tax
Stock split, 3-for-2, April 22, 1998 12,725
Exercised Stock Options 20 66 66
Compensation expense related to stock 59 59
options
------ --------- ----------- --------- -------- ---------
Balance, December 31, 1998 38,195 $ 1 $ 34,784 $ 29,805 $ (443) $ 64,147
====== ========= =========== ========= ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
48
SYNTEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
FOR THE YEARS ENDED DECEMBER 31
---------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 24,631 $ 10,420 $ 5,775
Adjustments to reconcile net income to net cash
provided by
operating activities:
Depreciation 1,977 1,812 1,442
Deferred income taxes (3,368) (507)
Compensation expense related to stock 59 38
options
Changes in assets and liabilities:
Accounts receivable (2,937) (2) (3,913)
Advance billings and other assets 376 (6,182) (20)
Accounts payable and accrued 9,810 7,837 1,370
liabilities
Deferred revenue 4,737 4,419 1,277
------------- ------------- -------------
Net cash provided by operating activities 35,285 17,835 5,931
Cash flows used in investing activities:
Property and equipment expenditures (3,336) (1,749) (2,138)
Acquisition of Syntel India (7,000)
------------- ------------- -------------
Net cash used in investing activities (3,336) (8,749) (2,138)
------------- ------------- -------------
Cash flows from financing activities:
Net proceeds from issuance of stock 66 34,627
Dividend/distribution payments (300) (18,100) (5,000)
------------- ------------- -------------
Net cash provided by (used in) financing (234) 16,527 (5,000)
activities
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 31,715 25,613 (1,207)
Cash and cash equivalents, beginning of year 32,945 7,332 8,539
------------- ------------- -------------
Cash and cash equivalents, end of year $ 64,660 $ 32,945 $ 7,332
============= ============= =============
Cash paid during the year for income taxes $ 15,186 $ 3,411 $ 723
============= ============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
49
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. The Company's reportable operating segments consist of
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 multiyear contracts. As a percentage of total
revenues, IntelliSourcing revenues grew from 51 percent in 1997 to 62
percent in 1998.
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, 1998, 1997 and 1996, there were sales
to two customers that exceeded 10 percent of total revenues. The largest
customer was the same for 1998, 1997 and 1996, while the second largest
customer was different in 1998 and 1997 than in 1996. Sales to these
customers approximated: 1998, $43,100,000 (25.7 percent) and $23,635,000
(14.1 percent); 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). At December 31, 1998 and 1997, approximately 22 and 36 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" PTE., Ltd.,
("Syntel Singapore"), a Singapore limited liability company, and
Syntel Europe, Ltd., ("Syntel U. K."), a United Kingdom limited
liability company. All significant intercompany balances and
transactions have been eliminated.
F-7
50
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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-priced Year 2000 remediation projects is recognized
on the percentage-of-completion method, measured by the percentage of
"lines" completed to the total contracted number. Revenue on other
fixed-price, fixed deliverable projects is measured by the percentage
of cost incurred to date to the estimated total cost at completion.
Revenue from fixed-price application management engagements is
recognized as earned. The cumulative impact of any change in estimates
of the percentage complete or losses on contracts is reflected in the
period in which the changes become known.
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 triple A rated corporate bonds and
treasury notes held by a bank 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.
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 as follows:
YEARS
-----------
Computer equipment and software 3
Furniture and fixtures 7
Telephone equipment 5
Leasehold improvements Life of lease
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.
F-8
51
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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 included $.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.
h. PRO FORMA NET INCOME: To reflect the Company's pro forma net income
for the years ended December 31, 1997 and 1996 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
accumulated other comprehensive income in shareholders' equity. The
change in the accumulated other comprehensive income account results
from translation adjustments recognized for the respective period.
k. PER SHARE DATA: In 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share," for all years
presented.
Basic earnings per share is calculated by dividing net income or pro
forma net income by the average number of shares outstanding during
the applicable period.
F-9
52
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
k. PER SHARE DATA, CONTINUED: The Company had stock options which are
considered to be potentially dilutive to common stock. Diluted
earnings per share is calculated by dividing net income or pro forma
net income by the average number of shares outstanding during the
applicable period adjusted for these potentially dilutive options.
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.
F-10
53
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND DEFERRED REVENUE:
The following summarizes activity for uncompleted, fixed price, fixed
deliverable projects:
1998 1997
(in thousands)
Direct costs incurred on uncompleted, fixed price, fixed
deliverable projects $ 8,660 $ 3,631
Direct margin estimated on uncompleted, fixed price, fixed 4,645 2,730
deliverable projects
--------------- ----------------
Revenues recognized on uncompleted projects 13,305 6,361
Less billings to date 18,857 7,009
--------------- ----------------
Deferred revenues on fixed price, fixed deliverable projects 5,552 648
Advanced billings on application management projects 4,438 4,818
Other deferred revenues 452 239
--------------- ----------------
Total deferred revenue as reported $ 10,442 $ 5,705
=============== ================
Projects with billings in excess of costs and estimated
earnings on
uncompleted fixed price, fixed deliverable $ 6,762 $ 689
projects
Projects with costs and estimated earnings in excess of
billings on
uncompleted fixed price, fixed deliverable 1,210 41
projects
--------------- ----------------
Total deferred revenues $ 5,552 $ 648
=============== ================
5. PROPERTY AND EQUIPMENT:
Cost of property and equipment at December 31, 1998 and 1997 is
summarized as follows (in thousands):
1998 1997
Computer equipment and software $ 7,170 $ 5,432
Furniture and equipment 4,811 3,482
Leasehold improvements 654 385
--------------- ----------------
12,635 9,299
Accumulated depreciation 7,037 5,060
--------------- ----------------
$ 5,598 $ 4,239
=============== ================
F-11
54
6. LINE OF CREDIT:
The Company has a line-of-credit arrangement with a bank which expires
August 31, 1999, which provides for borrowings up to $30,000,000.
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 expires August 31,
1999, which provides for borrowings up to $15,000,000 to finance
acquisitions.
7. LEASES:
The Company leases certain facilities and equipment under operating
leases. Current operating lease obligations are expected to be renewed or
replaced upon expiration. Future minimum lease payments under all
noncancelable leases expiring beyond one year as of December 31, 1998 are
as follows (in thousands):
1999 $ 1,752
2000 1,515
2001 1,331
2002 847
2003 819
---------
$ 6,264
=========
Total rent expense charged to operations amounted to approximately
$1,869, $1,678 and $1,352 for the years ended December 31, 1998, 1997
and 1996, respectively.
8. INCOME TAXES:
Income before income taxes for U. S. and foreign operations was as
follows (in thousands):
1998 1997 1996
U.S. $ 28,928 $ 9,663 $ 4,492
Foreign
8,127 4,274 1,633
---------- ----------- ---------
$ 37,055 $ 13,937 $ 6,125
========== =========== =========
F-12
55
8. INCOME TAXES, CONTINUED:
The provision for income taxes is as follows:
1998 1997 1996
Currently payable:
Federal $ 14,271 $ 3,839
State and local 1,350 474 $ 321
Foreign 171 2 29
------------- ------------- -------------
Total currently payable 15,792 4,315 350
Deferred:
Federal (3,002) (708)
State and local (366) (88)
------------- ------------- -------------
Total deferred (3,368) (796)
------------- ------------- -------------
Total provision for income taxes $ 12,424 $ 3,519 $ 350
============= ============= =============
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 1997 provision for
income taxes includes a $1.1 million nonrecurring expense resulting from
the termination of the S-corporation election.
The components of the net deferred tax asset are as follows (in
thousands):
1998 1997
Deferred tax assets:
Advance billing receipts $ 1,701 $ 331
Accrued warranty and other expenses 3,149 1,243
Property and equipment 66 (26)
--------------- ----------------
Net deferred tax asset $ 4,916 $ 1,548
=============== ================
Balance sheet classification of the net deferred tax asset is summarized
as follows (in thousands):
1998 1997
Deferred tax asset, current $ 4,850 $ 1,041
Deferred tax asset, noncurrent
66 507
---------- ----------
$ 4,916 $ 1,548
========== ==========
F-13
56
8. INCOME TAXES, CONTINUED:
Under the Indian Income Tax Act of 1961 (the "Act"), virtually all of
Syntel India's income is exempt from Indian Income Tax for 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 all of
the undistributed earnings of its foreign subsidiaries. For those
earnings considered to be indefinitely reinvested no provision for U. S.
federal and state income tax or applicable withholding tax has been
provided thereon. The unrecognized taxes on the undistributed earnings is
approximately $5 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 35 percent for 1998 and 34 percent for 1997
and 1996 to income before income taxes:
1998 1997 1996
(in thousands)
Statutory tax provision $ 12,969 $ 4,739 $ 2,083
State taxes, net of federal benefit 1,350 655 321
S-Corporation income not subject to federal (1,556) (1,527)
income taxes
Foreign income not subject to tax (2,470) (1,411) (527)
Termination of S-corporation status 1,090
Other 575
------------- ------------- -------------
Total provision for income taxes $ 12,424 $ 3,517 $ 350
============= ============= =============
F-14
57
9. EARNINGS PER SHARE:
The reconciliations of earnings per share computations for the fiscal
years 1998, 1997 and 1996 were as follows:
1998 1997 1996
----------------------- ----------------------- -----------------------
PRO PRO FORMA
FORMA PER
PER PER SHARE
SHARES SHARE SHARES SHARE SHARES
----- ------------ ------ ----------- ------ ------------
(in thousands, except per share earnings)
Basic earnings per 38,195 $ 0.65 37,763 $ 0.27 37,500 $ 0.12
share
Net dilutive effect 1,099 175
of stock options
outstanding
Shares assumed
outstanding due to
excess
distributions 1,145 1,868
in 1997
------ ------------ ------ ----------- ------ ------------
Diluted 39,294 $ 0.63 39,083 $ 0.26 39,368 $ 0.11
earnings
per share
====== ============ ====== =========== ====== ============
Stock options to purchase 44,500 shares of common stock at a weighted
average price per share of $18.21, were outstanding during 1998, but were
not included in the computation of diluted earnings per share. The
options' exercise price was greater than the average market price of the
common shares and were antidilutive. No such options were available in
1997 and 1996.
10. STOCK COMPENSATION PLANS:
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, 1998 aggregate 1,427,651 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 the other options granted in 1998 and
1997, the exercise price equaled the market price on the date of grant,
and therefore, no compensation expense was recognized.
F-15
58
10. STOCK COMPENSATION PLANS, CONTINUED:
The Company has elected to measure compensation cost using the intrinsic
value method, in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Had the fair value of each stock option
granted been determined consistent with the methodology of SFAS 123, the
pro forma impact on the Company's net income and earnings per share would
have been adjusted to the pro forma amounts listed below:
YEAR ENDED DEC 31,
--------------------------------------
1998 1997
--------------- ----------------
Net earnings:
As reported $ 24,631 $ 10,420
Impact of SFAS No. 123 (976) (385)
--------------- ----------------
Pro forma 23,655 10,035
Earnings per share, as reported:
Basic earnings per share 0.65 0.28
Diluted earnings per share 0.63 0.27
Earnings per share, pro forma:
Basic earnings per share 0.62 0.27
Diluted earnings per share 0.60 0.26
F-16
59
10. STOCK COMPENSATION PLANS, CONTINUED:
The following table sets forth changes in options outstanding:
NUMBER
OF WEIGHTED
SHARES AMOUNT AVERAGE PRICe
------ ------------- --------------
Shares under option:
Granted during 1997
Grant price less than fair value 826,125 $3,205,250 $ 3.88
Grant price equals fair value 794,745 4,851,130 6.10
---------- ---------- ---------
Outstanding, December 31, 1997 1,620,870 8,056,380 4.97
Granted, price equals fair value 513,500 8,843,933 17.22
Exercised 19,191 64,558 3.36
Forfeited 684,456 8,697,203 12.71
Expired 3,072 15,168 4.94
---------- ---------- ---------
Outstanding, December 31, 1998 1,427,651 $8,123,384 $ 5.69
========== ========== =========
Exercisable, December 31, 1998 112,843
==========
The following table sets forth details of options outstanding at December
31, 1998:
OPTIONS OUTSTANDING
----------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE
PRICES OUTSTANDING LIFE PRICE
---------------------------------------- -------- -------- -----------------
$1.33 157,500 8.2 $ 1.33
$ 4.67 - $ 8.00 1,143,651 8.7 5.44
$ 9.83 - $ 16.75 116,500 9.6 12.16
$ 26.38 - $ 33.19 10,000 9.6 29.10
--------
$ 1.33 - $ 33.19 1,427,651 8.7 5.69
========
F-17
60
10. STOCK COMPENSATION PLANS, CONTINUED:
Under SFAS No. 123, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions for grants in 1998 and 1997:
1998 1997
------------ -----------
Estimated fair value per $ 8.86 $ 2.82
option granted
Assumptions:
Risk-free interest rate 5.33% 6.18%
Expected life (years) 5 5
Expected volatility 51.26% 51.26%
Expected dividends 0.00% 0.00%
The Company has implemented an employee stock purchase plan. The plan
provides for employees to purchase pre-established amounts as determined
by the compensation committee. The price at which employees may purchase
common stock is set by the compensation committee as not less than the
lessor 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 Company has reserved 1.5 million shares of
common stock for issuance under the Company's employee stock purchase
plan. Under the terms of the plan, eligible employees may elect to have
up to 5 percent of their regular base earnings withheld to purchase
company stock, with a maximum contribution value which may not exceed
$21,250 for each calendar year in which a purchase period occurs.
The Company's first offering period, beginning October 1, 1998, will
extend 12 months to October 31, 1999. As of December 31, 1998, amounts
withheld towards the first offering totaled $383,382.
F-18
61
11. SEGMENT REPORTING:
The Company manages its operations through two segments, TeamSourcing and
IntelliSourcing. Through TeamSourcing, the Company provides professional
information technology consulting services directly to customers on a
staff augmentation basis. TeamSourcing services include systems
specification, design, development, implementation and maintenance of
complex information technology applications involving diverse computer
hardware, software, data and networking technologies and practices.
TeamSourcing consultants, whether working individually or as a team of
professionals, generally receive direct supervision from the customer's
management staff. TeamSourcing services are generally invoiced on a time
and material basis.
Through IntelliSourcing, the Company provides higher-value applications
management services for ongoing management, development and maintenance
of customers' business applications. The Company assumes responsibility
for, and manages selected application support functions for the customer.
Utilizing its developed methodologies, processes and tools, the Company
is able to assimilate the business process knowledge of its customers to
develop and deliver services specifically tailored for that customer. The
Company also provides Year 2000 compliance services to customers using
its Method 2000(R) solution. The Company's Global Service Delivery Model
provides the flexibility to deliver to each client a unique mix of
services on-site to the customer's location, off-site at its U. S.
development centers and offshore at development centers in Mumbai and
Chennai, India.
IntelliSourcing engagements are frequently supported by long-term
contractual agreements which generally provide for minimum resource
commitments, if billed on a time-and-materials basis, or a minimum
billing commitment for fixed-price engagements.
The accounting policies of the segments are the same as those presented
in Note 1. Management allocates all corporate expenses to the segments.
No balance sheet/identifiable assets data is presented since the company
does not segregate its assets by segment.
F-19
62
11. SEGMENT REPORTING, CONTINUED:
Key financial data for each segment for the years ended December 31,
1998, 1997 and 1996 is as follows:
1998 1997 1996
Revenues:
IntelliSourcing $ 103,906 $ 64,049 $ 33,355
TeamSourcing 64,069 60,289 58,975
------------ ----------- -----------
167,975 124,338 92,330
Gross profit
IntelliSourcing 45,732 24,038 11,604
TeamSourcing 17,272 12,716 13,643
------------ ----------- -----------
63,004 36,754 25,247
Selling, general and administrative expenses:
IntelliSourcing 18,329 15,440 9,345
TeamSourcing 9,697 8,107 9,926
------------ ----------- -----------
28,026 23,547 19,271
Income from operations:
IntelliSourcing 27,403 8,598 2,259
TeamSourcing 7,575 4,609 3,717
------------ ----------- -----------
$ 34,978 $ 13,207 $ 5,976
=========== ========== ==========
F-20
63
12. GEOGRAPHIC INFORMATION:
Total revenues, income before income taxes and identifiable assets by
geographic location were as follows:
1998 1997 1996
Revenues:
United States operations $ 166,046 $ 124,157 $ 92,237
India operations 14,400 9,264 4,159
Europe operations 1,632 61
Singapore operations 456 54
Intercompany revenue elimination (14,559) (9,198) (4,066)
------------- ------------- -------------
Total revenue $ 167,975 $ 124,338 $ 92,330
============= ============= =============
Income before income taxes:
United States operations $ 28,928 $ 9,663 $ 4,492
India operations 7,839 4,542 1,633
Europe operations 296 (211)
Singapore operations (8) (57)
------------- ------------- -------------
Total income before income taxes $ 37,055 $ 13,937 $ 6,125
============= ============= =============
Assets, December 31:
United States operations $ 90,884 $ 58,574 $ 29,649
India operations 12,084 6,401 3,343
Europe operations 985 93
Singapore operations 282 164
------------- ------------- -------------
Total assets $ 104,235 $ 65,232 $ 32,992
============= ============= =============
13. LITIGATION AND CLAIMS
Legal actions and other claims are pending or may be instituted or
asserted in the future against the Company. Although the amount of
liability at December 31, 1998 with respect to these matters cannot be
ascertained, the Company believes that any resulting liability should not
materially affect future consolidated financial position or results of
operations of the Company.
F-21
64
NOTES TO FINANCIAL STATEMENTS, CONTINUED
14. 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)
1998:
Revenues $ 41,592 $ 43,214 $ 43,607 $ 39,562 $167,975
Cost of revenues 27,047 27,096 27,772 23,056 104,971
-------- -------- -------- -------- --------
Gross profit 14,545 16,118 15,835 16,506 63,004
Selling, general and 6,093 6,931 7,423 7,579 28,026
administrative expenses
-------- -------- -------- -------- --------
Income from operations 8,452 9,187 8,412 8,927 34,978
Other income, net 398 425 680 574 2,077
-------- -------- -------- -------- --------
Income before income taxes 8,850 9,612 9,092 9,501 37,055
Income taxes 2,814 2,891 2,638 4,081 12,424
-------- -------- -------- -------- --------
Net income $ 6,036 $ 6,721 $ 6,454 $ 5,420 $ 24,631
======== ======== ======== ======== ========
Earnings per share, diluted $ 0.15 $ 0.17 $ 0.16 $ 0.14 $ 0.63
======== ======== ======== ======== ========
Weighted average shares 39,269 39,517 39,311 39,078 39,294
outstanding, diluted
======== ======== ======== ======== ========
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 5,395 5,752 6,276 6,124 23,547
administrative expenses
-------- -------- -------- -------- --------
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
Income taxes 13 127 1,836 1,541 3,517
-------- -------- -------- -------- --------
Net income $ 2,115 $ 2,405 $ 2,102 $ 3,798 $ 10,420
======== ======== ======== ======== ========
Earnings per share, diluted $ 0.05 $ 0.06 $ 0.05 $ 0.10 $ 0.26
======== ======== ======== ======== ========
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 $ 0.04 $ 0.05 $ 0.07 $ 0.10 $ 0.26
======== ======== ======== ======== ========
Weighted average shares 38,730 39,368 38,988 38,606 39,083
outstanding, diluted
======== ======== ======== ======== ========
Earnings per share for the quarter are computed independently and may not
equal the earnings per share computed for the total year.
F-22
65
Exhibit No. Description
3.1 Restated Articles of Incorporation of the Registrant filed
as an exhibit to the Registrant's Statement on Form S-1
dated June 6, 1997, and incorporated herein by reference
3.2 Amendment to Articles of Incorporation of the Registrant
dated September 21, 1998.
3.3 Bylaws of the Registrant filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 dated June
6, 1997, and incorporated herein by reference.
10.1 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 First Amendment, dated October 19, 1998, between the
Registrant and Corning Road, L.L.C. [successor to First
Union National Bank of North Carolina as Trustee, successor
to NationsBank], to the Lease Agreement, dated November 30,
1994, between the Registrant and NationsBank.
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66
10.8 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.
10.9 Indentures of Lease entered into between the President of
India and Syntel Software Pvt. Ltd. on various dates in 1992
and 1993 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.
10.10 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.
10.11 Agreement for Software Programming Services, dated as of
December 31, 1997, between the Registrant and American Home
Assurance Company, filed as an Exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1997 and incorporated herein by reference.
10.12 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.
10.13 * 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.
10.14 * 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.
10.15 * 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.
10.16 * 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.
10.17 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.
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67
23 Consent of Pricewaterhouse Coopers LLP
27 Financial Data Schedule.
99.1 Proxy Statement for the Registrant's 1999 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, 1998.
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