<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1997 or
------------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
------------- --------------
Commission file number 0-22903
Syntel, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-2312018
----------------------------------------------- -----------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2800 Livernois Road, Suite 400, Troy, Michigan 48083
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(Address of Principal Executive Offices) (Zip Code)
(248) 619-2800
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, no par value: 25,450,000 shares issued and outstanding as of
November 10, 1997.
<PAGE> 2
SYNTEL, INC.
INDEX
Page
----
Part I Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis of 9
Financial Condition and Results of Operation
Part II Other Information 11
Signatures 13
Index to Exhibits 14
2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
SYNTEL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
3 MONTHS 9 MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
----------------------- ------------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $33,596 $23,482 $88,921 $68,041
Cost of revenues 23,681 17,048 63,422 49,644
------- ------- ------- -------
Gross profit 9,915 6,434 25,499 18,396
Selling, general and administrative expenses 6,276 5,019 17,423 14,125
------- ------- ------- -------
Income from operations 3,639 1,415 8,076 4,271
Other income, principally interest 299 39 522 263
------- ------- ------- -------
Income before income taxes 3,938 1,454 8,598 4,535
Income taxes 1,836 * 74 1,976 * 253
------- ------- ------- -------
Net income $ 2,102 $ 1,380 $ 6,622 $ 4,282
======= ======= ======= =======
PRO FORMA INFORMATION:
Income before income taxes $ 3,938 $ 1,454 $ 8,598 $ 4,535
Pro forma adjustment for income taxes** 1,030 353 2,200 1,251
------- ------- ------- -------
Pro forma net income $ 2,908 $ 1,101 $ 6,398 $ 3,284
======= ======= ======= =======
Pro forma net income per share $ 0.11 $ 0.04 $ 0.24 $ 0.13
======= ======= ======= =======
Weighted average common shares
outstanding 25,992 26,245 26,160 26,245
======= ======= ======= =======
</TABLE>
* - In connection with the termination of its S corporation status, the Company
changed its method of accounting for tax reporting purposes from the cash
method to the accrual method, resulting in a one time charge of $1,090 to
income taxes.
** - Represents the income taxes, as if the company had been a C corporation
during all periods presented.
The accompanying notes are an integral part of the financial statements
-3-
<PAGE> 4
SYNTEL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,309 $ 7,332
Accounts receivable, net 23,916 20,752
Advance billings and other assets 5,218 605
---------- ----------
Total current assets 51,443 28,689
Property and equipment 8,834 7,551
Less accumulated depreciation 4,674 3,248
---------- ----------
Property and equipment, net 4,160 4,303
---------- ----------
$ 55,603 $ 32,992
========== ==========
LIABILITIES
Current liabilities:
Accrued payroll and related costs $ 8,599 $ 8,019
Accounts payable and other accrued liabilities 5,616 3,541
Dividend/distribution payable 400 14,000
Deferred revenue 4,000 1,287
---------- ----------
Total current liabilities 18,615 26,847
Income taxes payable 979 -
---------- ----------
Total liabilities 19,594 26,847
SHAREHOLDERS' EQUITY
Common stock, no par value per share,
40 million shares authorized, 25.45 million
shares issued and outstanding at 9/30/97,
22 million shares issued and outstanding at 12/31/96 - -
Paid-in capital 34,643 -
Retained earnings 1,377 6,145
Cumulative translation adjustment (11) -
---------- ----------
Total shareholders' equity 36,009 6,145
---------- ----------
Total liabilities and shareholders' equity $ 55,603 $ 32,992
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-4-
<PAGE> 5
SYNTEL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30
--------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,622 $ 4,282
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,426 1,074
Compensation expense related to
stock options 22 -
Changes in assets and liabilities:
Accounts receivable, net (3,164) (3,841)
Advance billing and other assets (4,612) (496)
Accounts payable and accrued liabilities 3,054 1,480
Accrued payroll and related costs 580 124
Deferred revenues 2,713 256
-------- --------
Net cash provided by operating activities 6,641 2,879
Cash flows used in investing activities,
property and equipment expenditures (1,283) (1,255)
Cash flows from financing activities:
Net proceeds from issuance of stock 34,627 -
Dividend/distribution payments (25,000) (5,000)
-------- --------
Net cash provided by (used in) financing activities 9,627 (5,000)
Effect of foreign currency exchange rate changes on cash (8) (6)
-------- --------
Net increase (decrease) in cash and cash equivalents 14,977 (3,382)
Cash and cash equivalents, beginning of period 7,332 8,539
Cash and cash equivalents, end of period $ 22,309 $ 5,157
======== ========
Cash paid during the period for income taxes $ 1,033 $ 511
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
-5-
<PAGE> 6
PART 1 - FINANCIAL INFORMATION
SYNTEL, INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying condensed consolidated financial statements have been prepared
by management, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
accompanying unaudited, condensed consolidated financial statements contain all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the financial position of Syntel, Inc. and it's subsidiary as of
September 30, 1997 and December 31, 1996, the results of its operations for the
three month and nine month periods ended September 30, 1997 and September 30,
1996, and cash flows for the nine months ended September 30, 1997 and September
30, 1996. These financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the
Company's Registration Statement on Form S-1, dated August 11, 1997.
Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
2. PRINCIPLES OF CONSOLIDATION AND ORGANIZATION
The condensed consolidated financial statements include all the accounts of the
company and its subsidiary. All intercompany accounts and transactions have
been eliminated.
Prior to the initial public offering, the Company agreed to acquire 100%
ownership of Syntel Software Private Limited (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 all 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 11, 1997, or $1.5 million was accounted for as a reduction of additional
paid in capital.
3. INITIAL PUBLIC OFFERING
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.
6
<PAGE> 7
4. CASH EQUIVALENTS
Cash equivalents, including a portion of the net cash proceeds from the
initial public offering, are invested in short term municipal bonds and notes
with maturity dates of less than thirty days.
5. 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. This obligation includes $.7 million
resulting from the tax effect of temporary differences between financial
statement and tax reporting carrying amounts as required by the provisions of
Statement of Accounting Standards No. 109, "Accounting for Income Taxes". The
Consolidated statements of income for three months and nine months ended
September 30, 1997 reflect state taxes which preceeded the S corporation
termination, federal and state taxes for the period starting August 12, 1997,
and the one time charge of $1.1 million resulting from the change in accounting
method for income taxes.
The Pro forma net income in the consolidated statements of income have been
presented after a provision for income taxes to reflect net income as if the
Company was subject to federal and state income taxes for all periods
presented. 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.
6. EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings per Share", was
issued in February 1997. The Company will be required to adopt the new
standard for the year and the quarter ended December 31, 1997. Early adaption
of this standard is not permitted. The primary requirements of this standard
are; the replacement of primary earnings per share with basic earnings per
share, which eliminates the dilutive effect of options and warrants; use of
average share price in applying the treasury method to compute dilution for
options and warrants for diluted earnings per share; and certain disclosures of
the earnings per share calculations. The effect of this accounting change on
pro forma net income per share is as follows:
7
<PAGE> 8
<TABLE>
<CAPTION>
Three Months ended
September 30,
------------------
1997 1996
------------------
Per share amounts
<S> <C> <C>
Pro forma net income per common share as reported $.11 $.04
Effect of SFAS No. 128 .01 .00
----- ----
Pro forma basic net income per common share $.12 $.04
===== ====
Pro forma diluted net income per common share $.11 $.04
===== ====
<CAPTION>
Nine Months ended
September 30,
-----------------
1997 1996
-----------------
Per share amounts
Pro forma net income per common share as reported $.24 $.13
Effect of SFAS No. 128 .02 .00
----- ----
Pro forma basic net income per common share $.26 $.13
===== ====
Pro forma diluted net income per common share $.24 $.13
===== ====
</TABLE>
8
<PAGE> 9
PART 1 - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SYNTEL INC. AND SUBSIDIARY
RESULTS OF OPERATIONS
Revenues. The Company's revenues consist of fees derived from its TeamSourcing
and IntelliSourcing business units. Total revenues increased to $33.6 million
for the three month period ended September 30, 1997, representing an increase
of 43% over revenues of $23.5 million for the three months ended September 30,
1996. The revenue growth was primarily attributable to an increase in
average TeamSourcing billing rates of approximately 8%, growth in existing
engagements, the addition of 18 new IntelliSourcing engagements, and new
TeamSourcing business. Worldwide billable headcount, including personnel
employed by Syntel India, as of September 30, 1997 increased to 1,593,
compared to 1,172 as of September 30, 1996.
Cost of Revenues. Cost of revenues consist of salaries, payroll taxes,
benefits, relocation costs, immigration costs, finders fees, trainee
compensation, and payments for offshore services. Costs of revenues were $23.7
million for the three months ended September 30, 1997, representing 70.5% of
revenues, compared to $17.0 million or 72.6% of revenues for the period ended
September 30, 1996. The decrease in cost of revenues as a percentage of
revenues was attributable to the increased TeamSourcing billing rates and new
higher margin Intellisourcing agreements, each contributing approximately 4% to
the decrease in costs as a percentage of revenues. This was partially offset
by increased compensation and benefits of approximately 6% as well as increased
trainee and other direct costs.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses consist primarily of salaries, payroll taxes and
benefits for sales, finance, administrative, and corporate staff, travel,
telecommunications, business promotions, marketing and various facility costs
for the company's Global Development Centers. Selling, general, and
administrative costs for the three months ended September 30, 1997 were $6.3
million, or 18.7% of total revenues, compared to $5.0 million, or 21.4% of
total revenues for the three months ended September 30, 1996. The $1.3 million
increase in selling, general, and administrative expenses was the result of
increased facility and communication cost of $.4 million, additional reserves
of $.3 million, marketing costs of $.2 million, taxes of $.2 million, and
training costs of $.1 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its working capital needs through operations. A
facilities expansion program, which is currently underway in both Mumbai and
Chennai, is expected to require additional outlays of approximately $4.5
million over the next 12 to 18 months; this outlay is expected to be financed
internally with funds generated from Syntel India's operations.
Net cash provided by operating activities was $6.6 million for the first nine
months of 1997 and $2.9 million for the first nine months of 1996. The
increase in net cash provided by operating activities was due primarily to
increased income as well as a five day improvement in the accounts receivable
days sales outstanding for the nine months ended September, 1997 over the same
period in 1996.
9
<PAGE> 10
Net cash used in investing activities was $1.3 million for the nine months
ended September 30, for both 1996 and 1997. Cash used for investing activities
for the nine months ended September 30, 1996 included $.9 million for computer
equipment and facility improvements and $.3 million for office expansion /
relocation. Cash used for investing activities for the nine months ended
September 30, 1997 included $1.1 million for computers, software, and facility
upgrades.
Net cash used in financing activities was $5 million for the nine month period
ending September 30, 1996, reflecting a dividend payment to the Company's
shareholders. Net cash provided by financing activities was $9.6 million
during the nine month period ended September 30, 1997, consisting of net
proceeds from the initial public offering on August 12, 1997 of $34.6 million,
the distribution of $18 million related to undistributed S corporation taxable
income, and $7 million for the acquisition of Syntel India.
The Company has a line of credit with NBD Bank with a commitment in an amount
equal to the lesser of $20.0 million or 80% of eligible accounts receivable.
The line of credit expires on December 31, 1997. The Company intends to renew
or replace this facility prior to the maturity date. 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. Borrowings under the line of credit are short-term and are
collateralized by the Company's eligible accounts receivable. At September 30,
1997, 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 $10.0 million
facility with NBD Bank to finance acquisitions which expires on December 31,
1997. The Company intends to renew or replace this facility prior to the
maturity date. The Company has not borrowed any amounts under this facility.
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.
10
<PAGE> 11
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Syntel, Inc. (the "Corporation") is currently not a party to any material
pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Use of Proceeds. The Corporation registered 3,450,000 shares of common stock
of the Corporation (the "Common Stock") pursuant to a Registration Statement on
Form S-1 which was effective on August 11, 1997. The Securities and Exchange
Commission file number for the registration was 333-28655. The offering date
for the Common Stock was August 12, 1997 and the offering terminated after the
sale of all the securities registered. The managing underwriters for the
offering were Hambrecht & Quist LLC, Prudential Securities Incorporated and
Robertson, Stephens & Company. A total of 3,450,000 shares of Common Stock
with an aggregate price of $38.0 million were registered, all of which have
been sold.
In connection with the offering, the Corporation incurred actual expenses of
$2.7 million for the underwriting discount and $.7 million for other expenses.
Total expenses of the offering were $3.4 million. The other expenses include
approximately $8,000 paid to a director of the Corporation, while the remainder
of the total expenses were paid to third parties who are not directors,
officers, or general partners or associates of directors, officers, or general
partners of the Corporation.
The net offering proceeds to the Corporation after deducting the total expenses
was $34.6 million.
The net proceeds of the offering have been applied as follows:
1. Payment of $7 million for the acquisition of Syntel Software Private
Limited, an Indian corporation. The $7 million was distributed by payment
of $3.5 million to Bharat Desai, the President and Chief Executive
Officer, a director and a 10% or greater shareholder of the Corporation,
and the remaining $3.5 million was paid to Neerja Sethi, the Vice
President, Corporate Affairs, a director and a 10% or greater shareholder
of the Corporation.
2. Payment of $11 million to the shareholders of the Corporation prior to
the offering as a partial distribution of previously undistributed S
corporation taxable income through the date of termination of the
Corporation's S corporation election. All of this distribution was
received by Bharat Desai and Neerja Sethi except for $12,500 distributed
to Paritosh K. Choksi and his spouse. Mr. Choksi is a director of the
Corporation.
3. The remainder of the net offering proceeds have been placed, as a
temporary investment, into short term municipal bonds and notes.
11
<PAGE> 12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description
- -------------------------
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the three month
period ended September 30, 1997.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Syntel, Inc.
---------------------------
(Registrant)
Date November 11, 1997 By /s/ Bharat Desai
------------------ ---------------------------------------
Bharat Desai, President and
Chief Executive Officer
Date November 11, 1997 By /s/ John Andary
------------------ ----------------------------------------
John Andary, Chief Financial Officer
(principal financial and chief accounting officer)
13
<PAGE> 14
EXHIBIT INDEX
Sequentially
Numbered
Exhibit No. Description Page
-------------------------------------------------------------------------
11 Statement re: Computation of Per Share Earnings 15
27 Financial Data Schedule 16
14
<PAGE> 1
EXHIBIT 11
11. COMPUTATION OF EARNINGS PER SHARE
SYNTEL, INC. AND SUBSIDIARY
PRO FORMA NET INCOME PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1997 1996 1997 1996
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Pro forma weighted average number of shares of
common stock outstanding ----------------------- 25,244 25,000 25,082 25,000
Stock options issued during the 12 months
immediately preceeding the offering date
(using the treasury stock method and the
average daily trading value) -------------------- 180 60
Assumed issuance of additional stock to satisfy
excess distributions over earnings based on the
initial public offering price per share --------- 568 1,245 1,018 1,245
------- ------- ------- -------
Pro forma weighted average shares outstanding ------ 25,992 26,245 26,160 26,245
======= ======= ======= =======
Pro forma net income ------------------------------- $ 2,908 $ 1,101 $ 6,398 $ 3,284
======= ======= ======= =======
Pro forma net income per common share -------------- $ 0.11 $ 0.04 $ 0.24 $ 0.13
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 22,309
<SECURITIES> 0
<RECEIVABLES> 23,916
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 51,443
<PP&E> 8,834
<DEPRECIATION> 4,674
<TOTAL-ASSETS> 55,603
<CURRENT-LIABILITIES> 18,615
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 36,020
<TOTAL-LIABILITY-AND-EQUITY> 55,603
<SALES> 0
<TOTAL-REVENUES> 88,921
<CGS> 0
<TOTAL-COSTS> 63,422
<OTHER-EXPENSES> 17,423
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (522)
<INCOME-PRETAX> 8,598
<INCOME-TAX> 1,976
<INCOME-CONTINUING> 6,622
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,398<F1>
<EPS-PRIMARY> .24
<EPS-DILUTED> 0
<FN>
<F1>REFLECTS PRO FORMA NET INCOME FOR THE NINE MONTH PERIOD ENDING
SEPTEMBER 30, 1997.
</FN>
</TABLE>
