<PAGE> 1
As filed with the Securities and Exchange Commission on July 25, 1997
Registration No. 333-28655
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------------------------------
SYNTEL, INC.
(Exact name of Registrant as specified in its charter)
Michigan
(State or other jurisdiction of
incorporation or organization)
7371
(Primary Standard Industrial
Classification Code Number)
38-2312018
(I.R.S. Employer
Identification No.)
2800 Livernois--Suite 400
Troy, Michigan 48083
(248) 619-2800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
BHARAT DESAI
President and Chief Executive Officer
2800 Livernois--Suite 400
Troy, Michigan 48083
(248) 619-2800
(Name and address, including zip code, and telephone number, including area
code, of agent for service)
------------------------------
COPIES TO:
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D. RICHARD McDONALD, ESQ. DANIEL M. MOORE, ESQ. KEVIN F. BLATCHFORD, ESQ.
Dykema Gossett PLLC Syntel, Inc. Sidley & Austin
1577 North Woodward Avenue--Suite 300 2800 Livernois--Suite 400 One First National Plaza
Bloomfield Hills, Michigan 48304 Troy, Michigan 48083 Chicago, Illinois 60603-2279
(248) 203-0859 (248) 619-3508 (312) 853-2076
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]____________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]____________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 25, 1997
PROSPECTUS
- ----------------
3,000,000 SHARES
SYNTEL LOGO
COMMON STOCK
All of the 3,000,000 shares of Common Stock offered hereby are being sold
by Syntel,(R) Inc. ("Syntel" or the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price will be between $9.00 and
$11.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Common Stock
has been approved for quotation on the Nasdaq National Market under the symbol
SYNT.
------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 7.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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===============================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Per Share.................. $ $ $
- ---------------------------------------------------------------------------------------------------------------
Total (3).................. $ $ $
===============================================================================================================
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company, estimated at $600,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to the Public, Underwriting Discount and Proceeds to the Company will be
$ , $ , and $ , respectively. See "Underwriting."
------------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997, at the office of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST
PRUDENTIAL SECURITIES INCORPORATED
ROBERTSON, STEPHENS & COMPANY
, 1997
<PAGE> 3
[A diagram on this page includes the following:
Syntel corporate logo ("Syntel") and two branded Company icons
("TeamSourcing" and "IntelliSourcing")
Beneath each logo a description of the Company's services
- TeamSourcing: "Professional IT Staffing Services and Systems
Specification, Design, Development, Implementation and Maintenance."
- IntelliSourcing: "Outsourcing Services for Ongoing Applications
Management, Development and Maintenance of Customer Systems, Best
Practices, Tools and Methodologies, Experienced Management Team, Global
Service Delivery and Year 2000 Compliance Services."
Several photographs intended to represent Company employees at work.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
------------------
Syntel(R) is a registered trademark, and Method2000(sm) is a registered
service mark, of the Company. All other trademarks, service marks and trade
names referred to in this Prospectus are the property of their respective
owners.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements, including the Notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information
contained in this Prospectus: (i) assumes no exercise of the Underwriters'
over-allotment option; and (ii) has been adjusted to give retroactive effect to
a 22,000-for-1 split of the shares of the Company's common stock (the "Common
Stock"). See "Description of Capital Stock" and "Underwriting." Unless otherwise
indicated, references herein to the "Company" or "Syntel" refer to Syntel, Inc.
and its affiliated corporation, Syntel Software Private Limited ("Syntel
India"), which the Company will acquire upon consummation of this offering.
Unless otherwise indicated, references to historical financial information of
the Company refer only to the historical financial information of Syntel, Inc.
See "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Syntel India Acquisition" and "Certain
Transactions." The Common Stock offered hereby involves a high degree of risk.
See "Risk Factors."
THE COMPANY
Syntel is a worldwide provider of professional information technology
("IT") staffing and outsourcing services to Fortune 1000 companies, as well as
to government entities. The Company's service offerings include TeamSourcing,
consisting of professional IT staffing services, and IntelliSourcing, consisting
of outsourcing services for ongoing management, development and maintenance of
business applications, including Year 2000 compliance 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 TeamSourcing, Syntel provides professional IT staffing 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. For the year ended December 31, 1996 and
for the six months ended June 30, 1997, TeamSourcing accounted for approximately
64% and 54% of revenues, respectively.
Through IntelliSourcing, Syntel provides higher-value outsourcing 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 methodology of
activities, processes and tools, known as IntelliTransfer, 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(sm) solution. For the year ended December 31, 1996 and for the six
months ended June 30, 1997, IntelliSourcing accounted for approximately 36% and
46% of revenues, 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 its Mumbai
(formerly Bombay), India location. 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.
The Company is expanding its Global Development Center in Mumbai, India and is
establishing a new Global Development Center in Chennai (formerly Madras),
India.
3
<PAGE> 5
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 1996, based on revenues, were American
International Group, Inc., Ford Motor Co., AT&T Corp., Dayton Hudson Corp. and
Chrysler Corporation. The Company has been chosen as a preferred vendor by
several of its customers and has been recognized for its quality and
responsiveness. The Company has a focused sales effort that includes a strategy
of migrating existing TeamSourcing customers to higher-value IntelliSourcing
services. The Company recently realigned its resources to focus on 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
rapidly and efficiently expand its IT professional staff in response to customer
needs. This scalable business model has enabled the Company to grow
significantly in recent years. The Company's revenues increased from $29.7
million in 1992 to $92.2 million in 1996. As of June 1, 1997, Syntel's worldwide
billable headcount consisted of 1,402 IT professionals.
THE OFFERING
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Common Stock offered by the Company......................... 3,000,000 shares
Common Stock to be outstanding after the offering........... 25,000,000 shares(1)
Use of proceeds............................................. Purchase of Syntel India; payment of
undistributed S corporation taxable
income; and general corporate
purposes, including working capital
and possible future acquisitions.
Proposed Nasdaq National Market symbol...................... SYNT
</TABLE>
- ------------------------------
(1) Excludes (i) 2,000,000 shares of Common Stock reserved for issuance under
the Company's Stock Option Plan, which include options outstanding on the
date hereof to purchase 608,750 shares at a weighted average exercise price
of $5.85 per share and options to purchase approximately 42,000 additional
shares which will be granted upon the consummation of this offering at an
exercise price equal to the initial offering price of the Common Stock
offered hereby, and (ii) 1,000,000 shares of Common Stock reserved for
issuance under the Company's Employee Stock Purchase Plan. See
"Capitalization," "Management--Stock Option Plan" and "--Employee Stock
Purchase Plan" and "Shares Eligible for Future Sale."
4
<PAGE> 6
AFFILIATE TRANSACTIONS
Bharat Desai and Neerja Sethi are the Company's President and Chief
Executive Officer and the Company's Vice President, Corporate Affairs,
respectively, and together they beneficially own substantially all of the
outstanding Common Stock of the Company. Mr. Desai and Ms. Sethi are husband and
wife. See "Management" and "Principal Shareholders."
Mr. Desai and Ms. Sethi also own all of the outstanding capital stock of
Syntel Software Private Limited ("Syntel India"), a corporation organized under
the laws of India. Syntel India provides offshore software development services
to the Company and derives substantially all of its revenues from the Company.
Upon the consummation of this offering, the Company will acquire all of the
outstanding capital stock of Syntel India for $7.0 million. The purchase price
will be paid from a portion of the net proceeds of this offering. See "Use of
Proceeds" and "Certain Transactions."
The Company has elected to be treated as an S corporation and, as a result,
the income of the Company has been taxed for federal and state tax purposes
directly to the Company's shareholders, rather than to the Company. Prior to
completion of this offering, the Company will terminate its S corporation
status, and, thereafter, will be subject to federal and state income taxes on
its earnings. The Company's taxable income through the date of termination will
be taxed directly to the Company's shareholders. Accordingly, prior to
completion of this offering, the Company will declare a distribution to Mr.
Desai, Ms. Sethi and the Company's other shareholders in an amount equal to the
Company's undistributed S corporation taxable income through the date
immediately preceding the date of termination, which the Company estimates will
be approximately $7.0 million (the "S Corporation Distribution"). The S
Corporation Distribution will be paid from a portion of the net proceeds of this
offering. The Company distributed $7.0 million in the aggregate to Mr. Desai and
Ms. Sethi from cash in the second quarter of 1997 relating to undistributed S
corporation taxable income through December 31, 1996. See "Use of Proceeds,"
"Prior S Corporation Status and Distribution" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
The Company was incorporated under the laws of the State of Michigan in
1980. The Company maintains its principal executive offices at 2800 Livernois,
Suite 400, Troy, Michigan 48083, and its telephone number is (248) 619-2800. The
Company's web site is http://www.syntelinc.com. The Company's web site is not a
part of this Prospectus.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in the Prospectus, the words
"anticipates," "believes," "estimates," "expects," and similar expressions as
they relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievement could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include those discussed under the caption "Risk Factors."
5
<PAGE> 7
SUMMARY FINANCIAL INFORMATION
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SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF INCOME
DATA:
Revenues...................... $29,717 $45,345 $67,247 $90,326 $92,237 $44,558 $55,259
Gross profit.................. 6,920 6,336 11,310 18,788 22,454 10,810 13,192
Income from operations........ 721 1,122 3,101 5,479 4,193 2,122 2,876
Net income(1)................. $ 935 $ 1,021 $ 3,032 $ 5,237 $ 4,171 $ 2,260 $ 2,901
Pro forma net income(2)....... $ 1,881 $ 3,503 $ 2,775 $ 1,431 $ 1,870
======= ======= ======= ======= =======
Pro forma net income
per share................... $ 0.09 $ 0.16 $ 0.13 $ 0.07 $ 0.09
======= ======= ======= ======= =======
Pro forma weighted average
common shares outstanding... 22,000 22,000 22,000 22,000 22,000
======= ======= ======= ======= =======
PRO FORMA CONSOLIDATED STATEMENT OF
INCOME DATA(3):
Revenues...................... $67,340 $90,326 $92,330 44,558 $55,325
Gross profit.................. 12,025 20,312 25,247 11,962 15,584
Income from operations........ 3,422 6,403 5,976 2,855 4,437
Net income.................... $ 2,203 $ 4,421 $ 4,379 2,183 $ 3,490
======= ======= ======= ======= =======
Net income per share.......... $ 0.09 $ 0.17 $ 0.17 $ 0.08 $ 0.13
======= ======= ======= ======= =======
Weighted average common shares
outstanding(4).............. 25,380 25,710 25,820 25,820 25,820
======= ======= ======= ======= =======
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JUNE 30, 1997
----------------------------
ACTUAL AS ADJUSTED(5)
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(IN THOUSANDS)
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BALANCE SHEET DATA:
Working capital........................................ $ 9,773 $28,872
Total assets........................................... 28,804 48,090
Long-term debt......................................... -- --
Total shareholders' equity............................. 12,818 30,645
</TABLE>
- ------------------------------
(1) For all periods shown, 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. See
"Prior S Corporation Status and Distribution."
(2) Historical 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.
(3) Pro forma consolidated statement of income data reflect: (i) 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 and (ii) the
results of operations of Syntel India, as if the acquisition of Syntel India
had occurred as of January 1, 1994. See "Pro Forma Consolidated Financial
Statements."
(4) The weighted average number of common shares outstanding used to calculate
pro forma net income per share includes the number of shares which, when
multiplied by an assumed initial public offering price of $10.00 per share,
would have been sufficient to replace the capital in excess of earnings
withdrawn as distributions. See Note (c) to Pro Forma Consolidated Financial
Statements.
(5) As adjusted to give effect to: (i) the sale by the Company of 3,000,000
shares of Common Stock offered hereby at an assumed public offering price of
$10.00 per share and the application of the estimated net proceeds
therefrom; (ii) the recording of $3.4 million, or $0.14 per share, of
deferred tax liability as a result of the termination of the Company's S
corporation election as if terminated on June 30, 1997 (the Company
estimates that this deferred tax liability will be approximately $2.5
million, or $0.10 per share, at the time of consummation of this offering);
(iii) the distribution to the Company's shareholders of undistributed S
corporation taxable income of $3.9 million as of June 30, 1997 (the Company
estimates that undistributed S corporation taxable income will be
approximately $7.0 million at the time of consummation of this offering);
and (iv) the acquisition of Syntel India for $7.0 million and the
elimination of the intercompany balance of $2.2 million between the Company
and Syntel India. See "Use of Proceeds," "Prior S Corporation Status and
Distribution," "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Syntel India Acquisition," "--Net Charge
Resulting from S Corporation Termination" and "--Liquidity and Capital
Resources" and "Certain Transactions."
6
<PAGE> 8
RISK FACTORS
In addition to the other information contained in this Prospectus,
investors should consider carefully the following factors in evaluating an
investment in the shares of the Common Stock offered hereby.
Recruitment and Retention of IT Professionals. The Company's business of
delivering professional IT services is labor intensive, and, accordingly, its
success depends upon its ability to attract, develop, motivate, retain and
effectively utilize highly-skilled IT professionals. The Company believes that
both in the United States and in India there is a growing shortage of, and
significant competition for, IT professionals who possess the technical skills
and experience necessary to deliver the Company's services, and that such IT
professionals are likely to remain a limited resource for the foreseeable
future. The Company believes that, as a result of these factors, it operates
within an industry that experiences a significant rate of annual turnover of IT
personnel. The Company's business plans are based on hiring and training a
significant number of additional IT professionals each year to meet anticipated
turnover and increased staffing needs. The Company's ability to maintain and
renew existing engagements and to obtain new business depends, in large part, on
its ability to hire and retain qualified IT professionals. Historically, the
Company has performed a significant portion of its employee recruiting in
foreign countries, particularly in India. Any perception among the Company's
recruits or foreign IT professionals, whether or not well-founded, that the
Company's ability to assist them in obtaining permanent residency status in the
United States has been diminished could result in increased recruiting and
personnel costs or lead to significant employee attrition or both. There can be
no assurance that the Company will be able to recruit and train a sufficient
number of qualified IT professionals or that the Company will be successful in
retaining current or future employees. Failure to hire and train or retain
qualified IT professionals in sufficient numbers could have a material adverse
effect on the Company's business, results of operations and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and "Business --Human Resources" and "--Competition."
Government Regulation of Immigration; DOL Consent Decree. 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 June 1, 1997, approximately 59% of Syntel's U.S. workforce
(42% 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. Since September 29, 1995, the Company
has been subject to a consent decree with the U.S. Department of Labor relating
to its H-1B employees. As a result of the consent decree, the Company did not
seek any new H-1B visas during the fourth quarter of 1995, significantly
curtailed its H-1B hiring from April 1995 through September 1996, and
significantly increased its U.S. domestic recruiting and hiring efforts
throughout 1996. While the Company believes that these steps adversely affected
revenue growth in 1995 and 1996, the Company believes that it has fully complied
with the consent decree and that continued compliance through the expiration of
the decree in September 1997 will not have a material adverse effect on the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview" and "Business--Human Resources--DOL Consent
Decree." The failure of the Company to comply with applicable laws and
regulations, any changes in the interpretation of existing laws and regulations
or the adoption of new laws and regulations making it more difficult to hire
foreign nationals, or limiting the ability of the Company to retain foreign
employees,
7
<PAGE> 9
could have a material adverse effect on the Company's business, results of
operations and financial condition.
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.
Although fixed-price engagements have not contributed significantly to revenues
and earnings to date, operating results may be adversely affected in the future
by 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. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Selected Quarterly Results of Operations."
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 81%, 78% and 75% of revenues for the
years ended December 31, 1995 and 1996 and for the six months ended June 30,
1997, respectively. The Company's largest customer is American Home Assurance
Company and certain other subsidiaries of American International Group Inc.
(collectively, "AIG"). AIG accounted for approximately 38%, 34% and 31% of
revenues for the years ended December 31, 1995 and 1996 and for the six months
ended June 30, 1997, respectively. Ford Motor Company ("Ford"), the Company's
next largest customer, accounted for approximately 14%, 12% and 10% of revenues
for the years ended December 31, 1995 and 1996 and for the six months ended June
30, 1997, respectively. The volume of work performed for specific customers is
likely to vary from year to year, and a significant customer in one year may not
provide the same level of revenues in any subsequent year. Because many of its
engagements involve functions that are critical to the operations of its
customer's businesses, any failure by Syntel to meet a customer's expectations
could result in cancellation or 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business--Customers."
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 June 1, 1997, the
Company had approximately 29% of its 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview" and "-- Results of Operations
- -- Syntel India." In the
8
<PAGE> 10
past, India has experienced significant inflation and shortages of foreign
exchange, and has been subject to civil unrest. No assurance can be given that
the Company will not be adversely affected by changes in inflation, interest
rates, taxation, social stability or other political, economic or diplomatic
developments in or affecting India in the future. In addition, the Indian
government is significantly involved in and exerts significant influence over
its economy. In the recent past, the Indian government has provided significant
tax incentives and relaxed certain regulatory restrictions in order to encourage
foreign investment in certain sectors of the economy, including the technology
industry. Certain of these benefits that directly benefitted the Company
included, among others, tax holidays, liberalized import and export duties and
preferential rules on foreign investment. After acquiring Syntel India, the
Company plans to treat any Syntel India earnings as permanently invested in
India. If the Company decides to repatriate any earnings of Syntel India, 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Income Tax Matters." Changes in the business or regulatory climate of India
could have a material adverse effect on the Company's business, results of
operations and financial condition.
Intense Competition. The IT services industry is intensely competitive,
highly fragmented and subject to rapid change and evolving industry standards.
The Company competes with a variety of other companies, depending on the IT
services it offers. The Company's primary competitors for professional IT
staffing engagements include participants from a variety of market segments,
including "Big Six" accounting firms, systems consulting and implementation
firms, applications software development and maintenance firms, service groups
of computer equipment companies and temporary staffing firms. In applications
outsourcing services, the Company competes primarily with Electronic Data
Systems Corp., IBM Global Solutions (ISSC), Andersen Consulting and Computer
Sciences Corporation. The Company's principal competitors for Year 2000
compliance engagements include IBM Global Solutions (ISSC), Cap Gemini and
Andersen Consulting. Many of the Company's competitors have substantially
greater financial, technical and marketing resources and greater name
recognition than the Company. As a result, they may be able to compete more
aggressively on pricing, respond more quickly to new or emerging technologies
and changes in customer requirements, or devote greater resources to the
development and promotion of IT services than the Company. In addition, there
are relatively few barriers to entry into the Company's markets and the Company
has faced, and expects to continue to face, additional competition from new IT
service providers. Further, there is a risk that the Company's customers may
elect to increase their internal resources to satisfy their IT services needs as
opposed to relying on a third-party vendor such as the Company. The IT services
industry is also undergoing consolidation which may result in increased
competition in the Company's target markets. Increased competition could result
in price reductions, reduced operating margins and loss of market share, any of
which could have a material adverse effect on the Company. The Company also
faces significant competition in recruiting and retaining IT professionals which
could result in higher labor costs or shortages. There can be no assurance that
the Company will compete successfully with existing or new competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, results of operations or financial condition. See
"Business--Competition."
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 $29.7 million in 1992 to $92.2 million in 1996, and the number of worldwide
billable employees has increased from 481 as of December 31, 1992 to 1,402 as of
June 1, 1997. The Company established a sales office in London, England in 1996,
opened a sales and service office in Singapore in May 1997, is expanding its
Global Development Center in Mumbai, India and is establishing a new Global
Development Center in Chennai, India. See "Business--Global Service Delivery
Model." 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,
9
<PAGE> 11
financial and other management processes and systems. Failure to manage growth
effectively could have a material adverse effect on the quality of the Company's
services and engagements, its ability to attract and retain IT professionals,
its business prospects, and its results of operations and financial condition.
The Company has historically derived most of its revenues from professional IT
staffing services. In the second half of 1996, the Company realigned personnel
and resources to focus more attention on outsourcing services for ongoing
applications management, development and maintenance and Year 2000 compliance
services. A key factor in the Company's growth strategy is to substantially
increase outsourcing service engagements with new and existing customers. The
Company is less experienced in marketing, developing and performing such
outsourcing services, which have a longer sales cycle (up to 12 months) and
generally require approval by more senior levels of management within the
customer's organization, as compared to more traditional IT staffing services.
There can be no assurance that the Company's increased focus on outsourcing
services will 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. See "Business--Strategies."
Fixed-Price Engagements. The Company undertakes, from time to time, certain
engagements billed on a fixed-price basis, as distinguished from the Company's
principal method of billing on a time-and-materials basis. In addition, the
Company offers its Year 2000 compliance services on a fixed-price basis in
contrast to most other compliance service providers who charge customers on a
time-and-materials basis. Furthermore, the Company has a strategy to increase
its percentage of revenue from fixed-price outsourcing. The Company's failure to
estimate accurately the resources and time required for an engagement or its
failure to complete fixed-price engagements within budget, on time and to the
required quality levels would expose the Company to risks associated with cost
overruns and, in certain cases, penalties, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview" and "Business--Services--IntelliSourcing."
Potential Liability to Customers. Many of the Company's engagements involve
IT services that are critical to the operations of its customers' businesses.
The Company's failure or inability to meet a customer's expectations in the
performance of its services could result in a claim for substantial damages
against the Company, regardless of the Company's responsibility for such
failure. Although the Company attempts to limit contractually its liability for
damages arising from negligent acts, errors, mistakes or omissions in rendering
its IT services, there can be no assurance the limitations of liability set
forth in its service contracts will be enforceable in all instances or would
otherwise protect the Company from liability for damages. Although the Company
maintains general liability insurance coverage, including coverage for errors
and omissions, there can be no assurance that such coverage will continue to be
available on reasonable terms or will be available in sufficient amounts to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim. The successful assertion of one or more large claims
against the Company that are uninsured, exceed available insurance coverage or
result in changes to the Company's insurance policies, including premium
increases or the imposition of large deductible or co-insurance requirements,
could adversely affect the Company's business, results of operations and
financial condition.
Dependence on Principal. The success of the Company is highly dependent on
the efforts and abilities of Bharat Desai, the Company's founder, Chief
Executive Officer and President. Mr. Desai is subject to an employment agreement
with the Company with a term ending December 31, 1999, which contains
noncompetition, nonsolicitation and nondisclosure covenants during the term of
the agreement and for two years following termination of employment. The loss of
the services of this key executive for any reason could have a material adverse
effect on the Company's business, operating results and financial condition. The
Company does not maintain key man life insurance on Mr. Desai. See
"Management--Executive Officers and Directors."
Control by and Benefits to Existing Shareholders. Upon completion of this
offering, Bharat Desai and Neerja Sethi, who are husband and wife, will
beneficially own in the aggregate approximately 88% of the Company's Common
Stock (approximately 86% if the Underwriters' over-allotment is exercised
10
<PAGE> 12
in full). As a result, Mr. Desai and Ms. Sethi will be able to elect the entire
Board of Directors, and will retain the voting power to control all matters
requiring shareholder approval, including approval of significant corporate
transactions, provided that they vote together on such matters. Such a
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company, and may also impede or preclude transactions
in which shareholders might otherwise receive a premium for their shares over
then-current market prices. In addition, Mr. Desai and Ms. Sethi will receive
material benefits in connection with this offering, including dedication of a
portion of the net proceeds to the payment of the $7.0 million purchase price
for Syntel India and payment of an estimated $7.0 million of undistributed S
corporation taxable income through the date of termination of the Company's S
corporation status. Mr. Desai and Mr. Sethi have a nominal basis in the stock of
Syntel India and substantially all of the purchase price will represent profit
to them. This offering will establish a public market for the Common Stock and
provide significantly increased liquidity to Mr. Desai and Ms. Sethi for the
shares of Common Stock they will own after this offering. See "Use of Proceeds,"
"Dilution," "Management--Executive Officers and Directors," "Principal
Shareholders" and "Certain Transactions."
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. While the Company from time to time
considers acquisition opportunities, it has never acquired a business, and as of
the date of this Prospectus, has no existing agreements, understandings or
commitments to effect any acquisitions, with the exception of the acquisition of
Syntel India. 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. See "Business--Strategies" and
"Certain Transactions."
Limited Intellectual Property Protection. The Company's success depends in
part upon certain methodologies, practices, tools and technical expertise it
utilizes in designing, developing, implementing and maintaining applications and
other proprietary intellectual property rights. The Company is also developing
proprietary conversion tools specifically tailored to address the Year 2000
problem. In order to protect its proprietary rights in these various
intellectual properties, the Company relies upon a combination of nondisclosure
and other contractual arrangements and trade secret, copyright and trademark
laws which afford only limited protection. The Company also generally enters
into confidentiality agreements with its employees, consultants, customers and
potential customers and limits access to and distribution of its proprietary
information. India is a member of the Berne Convention, an international treaty,
and has agreed to recognize protections on intellectual property rights
conferred under the laws of foreign countries, including the laws of the U.S.
The Company believes that laws, rules, regulations and treaties in effect in the
U.S. and India are adequate to protect it from misappropriation or unauthorized
use of its intellectual property. However, there can be no assurance that such
laws will not change and, in particular, that the laws of India will not change
in ways that may prevent or restrict the transfer of software components,
libraries and toolsets from India to the U.S. There can be no assurance that the
steps taken by the Company will be adequate to deter misappropriation of its
intellectual property, or that the Company will be able to detect unauthorized
use and take appropriate steps to enforce its rights. Although the Company
believes that its intellectual property rights do not infringe on the
intellectual property rights of others, there can be no assurance
11
<PAGE> 13
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) and
Method2000(sm). The Company has submitted federal trademark applications to
register certain names for its service offerings, including the IntelliSourcing
and TeamSourcing names. There can be no assurance, however, that the Company
will be successful in obtaining federal trademarks for these trade names. See
"Business--Intellectual Property Rights."
No Prior Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock of the Company.
The initial public offering price per share of the Common Stock will be
determined by negotiations between management of the Company and the
representatives of the Underwriters and may bear no relationship to the market
price of the Common Stock after the offering. Although the Common Stock has been
approved for quotation on the Nasdaq National Market, there can be no assurance
that an active public market in the Company's Common Stock will develop or be
sustained. The prices at which the Common Stock trades will be determined by the
marketplace and influenced by many factors, including the Company's operating
and financial performance, the depth and liquidity of the market for the Common
Stock, future sales of Common Stock, including sales by Mr. Desai and Ms. Sethi,
investor perceptions of the Company and its prospects, the Company's dividend
policy and general economic conditions. The stock market has from time to time
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of particular companies. In
addition, factors such as announcements of technological innovations, new
products or services or new customer engagements by the Company or its
competitors or third parties, as well as market conditions in the IT services
industry, may have a significant impact on the market price of the Company's
Common Stock. See "Underwriting."
Anti-Takeover Provisions. The Company's Restated Articles of Incorporation
(the "Articles") and Bylaws and the Michigan Business Corporation Act ("MBCA")
include provisions that may be deemed to have anti-takeover effects; may delay,
deter or prevent a takeover attempt that shareholders might consider in their
best interests; and will effectively make it more difficult for a third party to
acquire control of the Company by means of a tender offer or a proxy contest for
the election of directors or otherwise. The Articles provide for 5,000,000
authorized shares of Preferred Stock ("Preferred Stock"), the rights,
preferences, qualifications, limitations and restrictions of which may be fixed
by the Board of Directors without any vote or action by the shareholders. The
rights of the holders of the Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that may
be issued in the future. Preferred Stock, if issued, may be senior in rights to
dividends and liquidation preferences to holders of Common Stock and could have
voting rights that may substantially dilute the voting rights of Common Stock
holders. The Company has no present plans to issue any shares of Preferred
Stock. The Articles provide for a classified Board of Directors consisting of
three classes selected to serve staggered three year terms, and members of the
Board of Directors may be removed only for cause upon the affirmative vote of
holders of a majority of shares entitled to vote. In addition, the number of
directors which constitutes the whole Board of Directors may be changed only by
the vote of at least two-thirds of the directors then in office. The Company's
Bylaws reserve the authority to call a special shareholders meeting to the Board
of Directors, the Chairman of the Board, or the President, and require advance
notice by a shareholder of a proposal or director nomination which such
shareholder desires to present at any annual or special meeting of shareholders.
Chapter 7A of the MBCA provides, with certain exceptions, that business
combinations between a Michigan corporation and an "interested shareholder"
generally require the approval of 90% of the votes of each class of stock
entitled to vote, and not less than 2/3 of the votes of each class of stock
entitled to vote, excluding shares owned by such interested shareholder. An
"interested shareholder" is a person directly or indirectly owning 10% or more
of the corporation's outstanding voting power, or an affiliate of the
corporation who at any time within two years prior to the date in question
directly or indirectly owned 10% or more of such voting power. Chapter 7B of the
MBCA provides that "control shares" of the Company acquired in a control share
acquisition have no rights
12
<PAGE> 14
except as granted by the shareholders of the Company. Control shares are shares
that, when added to shares previously owned by a shareholder, increase such
shareholder's ownership of voting stock to at least 20%, at least 33 1/3% or a
majority of the outstanding voting power of the Company. With certain
exceptions, a control share acquisition must be approved by a majority of the
votes cast by holders of stock entitled to vote excluding shares owned by the
acquiror and certain officers and directors. These factors may have the effect
of delaying or preventing a change in control of the Company without action by
the shareholders, may discourage bids for the Common Stock at a premium over the
market price and may deter efforts to obtain control of the Company, each of
which could adversely affect the market price of the Common Stock. See
"Description of Capital Stock."
Shares Eligible for Future Sale. Sales of substantial amounts of the
Company's Common Stock in the public market following this offering could
adversely affect the market price of the Common Stock. Immediately after
completion of this offering, the Company will have 25,000,000 shares of Common
Stock outstanding, of which 3,000,000 shares sold pursuant to this offering will
be freely tradable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), except those shares
held by affiliates of the Company. The Company and its current shareholders have
agreed not to offer, sell, or otherwise dispose of any shares of Common Stock,
options, or warrants to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock during the 180-day
period following the date of this Prospectus. However, Hambrecht & Quist, LLC,
in its sole discretion, may release the shareholders from these lock-up
agreements, in whole or in part, at any time and without notice. Following the
180-day lock-up period, all of the restricted securities will become eligible
for sale, subject to the manner of sale, volume, notice and information
requirements of Rule 144 of the Securities Act. Promptly following consummation
of this offering, the Company expects to file a registration statement on Form
S-8 with the Securities and Exchange Commission registering 2,000,000 shares of
Common Stock reserved for issuance under the Company's Stock Option Plan. The
Company granted options to purchase 140,000 shares on April 1, 1997, 468,750
shares on June 2, 1997 and, upon consummation of this offering, intends to grant
options to its employees to purchase in the aggregate approximately 42,000
additional shares. Such options vest in increments of 10%, 20%, 30% and 40% of
the shares subject to the option on the first, second, third and fourth
anniversaries, respectively, of the grant date of the option. Promptly following
consummation of the offering, the Company also intends to file a registration
statement on Form S-8 with the Commission registering 1,000,000 shares of Common
Stock reserved for issuance under the Company's Employee Stock Purchase Plan.
Sales of substantial amounts of such shares in the public market or the
availability of such shares for future sales could adversely affect the market
price of the shares of Common Stock and the Company's ability to raise
additional capital at a price favorable to the Company. See "Shares Eligible for
Future Sale" and "Underwriting."
Immediate and Substantial Dilution. The initial public offering price per
share of Common Stock is substantially higher than the net tangible book value
per share of the Common Stock. At an assumed initial public offering price of
$10.00 per share, purchasers of shares of Common Stock in this offering will
experience immediate and substantial dilution of $8.77 in the pro forma net
tangible book value per share of Common Stock. See "Dilution."
Management Discretion as to Use of Unallocated Net Proceeds. A substantial
portion of the anticipated net proceeds of this offering will be allocated to
general corporate purposes and working capital and have not been designated for
specific uses. Therefore, the Board of Directors will have broad discretion with
respect to the use of a substantial portion of the net proceeds of this
offering. See "Risk Factors--Risks Related to Possible Acquisitions," and "Use
of Proceeds."
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<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby, after deducting the underwriting discount and
estimated offering expenses payable by the Company, are estimated to be
approximately $27,300,000 (approximately $31,485,000 if the Underwriters'
overallotment option is exercised in full), assuming an initial offering price
of $10.00 per share.
The Company expects to use the net proceeds from this offering for: (i)
payment of approximately $7.0 million in the aggregate to Bharat Desai and
Neerja Sethi for the acquisition of Syntel India; (ii) payment to Mr. Desai, Ms.
Sethi and the Company's other shareholders of undistributed S corporation
taxable income through the date of termination of the Company's S corporation
election, estimated to be approximately $7.0 million; and (iii) general
corporate purposes, including working capital and possible future acquisitions.
See "Prior S Corporation Status and Distribution," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Syntel India
Acquisition" and "Certain Transactions."
The Company may use a portion of the net proceeds from this offering to
make one or more acquisitions of, or investments in, businesses and technologies
that are complementary to those offered by the Company. Except for the
acquisition of Syntel India described in this Prospectus, the Company has no
specific agreements, understandings or commitments with respect to any such
acquisition. See "Risk Factors--Risks Related to Possible Acquisitions" and
"Business--Strategies."
Pending such uses, the Company intends to invest the remaining net proceeds
from this offering in short-term, investment grade, interest-bearing
instruments.
PRIOR S CORPORATION STATUS AND DISTRIBUTION
The Company has elected to operate under Subchapter S of the Internal
Revenue Code of 1986, as amended (the "Code"), and comparable provisions of
certain state income tax laws. An S corporation generally is not subject to
income tax at the corporate level (with exceptions under certain state income
tax laws). Instead, the S corporation's income generally passes through to the
shareholders and is taxed on their personal income tax returns. Prior to
completion of this offering, the Company will terminate its S corporation
status. The Company's earnings through the date of termination of the Company's
S corporation status will continue to be taxed for federal and state income tax
purposes, with certain exceptions, directly to the Company's shareholders.
Subsequent to the termination of its S corporation status, the Company will be
subject to federal and state income taxes on its earnings.
Prior to the completion of this offering, the Company will declare a
distribution to Mr. Desai, Ms. Sethi and the Company's other shareholders in an
amount equal to the Company's undistributed S corporation taxable income through
the date of termination of the Company's S corporation election (the "S
Corporation Distribution"). The amount of the S Corporation Distribution is
estimated to be approximately $7.0 million. The S Corporation Distribution will
be paid from a portion of the net proceeds of this offering. The Company
distributed $7.0 million in the aggregate to Mr. Desai and Ms. Sethi from cash
in the second quarter of 1997 relating to undistributed S corporation taxable
income through December 31, 1996. See "Risk Factors--Benefits of Offering to
Existing Shareholders," "Use of Proceeds," "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Certain Transactions."
Prior to the consummation of this offering, the Company will enter into an
S corporation termination, tax allocation and indemnification agreement with its
shareholders relating to the distribution of undistributed S corporation taxable
income to the shareholders and to the mutual indemnification arrangements among
such shareholders and the Company for certain tax liabilities. See "Certain
Transactions."
In connection with the termination of its S corporation status, the Company
will be required by the Code to change its method of accounting for tax
reporting purposes from the cash method to the
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<PAGE> 16
accrual method, resulting in a net charge to earnings which the Company
estimates will be approximately $2.5 million ($3.4 million at June 30, 1997).
This charge will be recognized in the quarter in which this offering is
consummated, but will be paid in four equal annual installments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Net Charge Resulting from S Corporation Termination."
DIVIDEND POLICY
Other than the S Corporation Distribution, the Company does not intend to
declare or pay cash dividends in the foreseeable future. Management anticipates
that future earnings will be retained to fund the growth and development of its
business. The payment of future dividends, if any, will be at the discretion of
the Company's Board of Directors and will depend on various factors, including
the Company's operating results, current and anticipated cash needs for working
capital and capital expenditures, general financial condition, restrictions
imposed by financing agreements, if any, and any other factors the Company's
Board of Directors deems relevant. Currently, the Company is not a party to any
agreements that restrict its ability to pay dividends.
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<PAGE> 17
CAPITALIZATION
The following table sets forth at June 30, 1997: (i) the actual
capitalization of the Company; (ii) the pro forma capitalization of the Company
after giving effect to the deferred tax liability resulting from the termination
of the S corporation election; and (iii) the pro forma capitalization of the
Company as further adjusted to reflect the issuance and sale by the Company of
3,000,000 shares of Common Stock offered hereby at an assumed offering price of
$10.00 per share and the application of the estimated net proceeds therefrom.
See "Use of Proceeds." This table should be read in conjunction with the
Company's Financial Statements, including the Notes thereto.
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------------------
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt...................................... $ -- $ -- $ --
------- ------ -------
Shareholders' equity:
Preferred stock, no par value; no shares
authorized or issued (actual and pro forma);
5,000,000 shares authorized, no shares issued
(as adjusted)(1)............................... -- -- --
Common stock, no par value; 1,000 shares
authorized, 1,000 shares issued (actual);
40,000,000 shares authorized, 22,000,000 shares
issued (pro forma); 40,000,000 shares
authorized, 25,000,000 shares issued (as
adjusted)(1)(2)................................ 1 1 1
Additional paid-in capital.......................... -- 5,471 30,644
Retained earnings................................... 12,817 -- --
------- ------ -------
Total shareholders' equity........................ 12,818 5,472 30,645
------- ------ -------
Total capitalization........................... $12,818 $5,472 $30,645
======= ====== =======
</TABLE>
- ------------------------------
(1) In May 1997, the Company amended its Articles of Incorporation to, among
other things: (i) increase the number of authorized shares of Common Stock
to 40,000,000; (ii) split each existing share of Common Stock into 22,000
shares of Common Stock; and (iii) create a class of preferred stock and
authorized 5,000,000 shares of such class. See "Description of Capital
Stock."
(2) Shares issued excludes (i) 2,000,000 shares of Common Stock reserved for
issuance under the Stock Option Plan, which include options outstanding on
the date hereof to purchase 608,750 shares at a weighted average exercise
price of $5.85 per share and options to purchase approximately 42,000
additional shares which will be granted upon consummation of this offering
at an exercise price equal to the initial offering price of the Common Stock
offered hereby, and (ii) 1,000,000 shares of Common Stock reserved for
issuance under the Company's Employee Stock Purchase Plan. See
"Management--Stock Option Plan," "--Employee Stock Purchase Plan," and
"--Director Compensation."
(3) Pro forma data give effect to: (i) deferred income taxes of $3.4 million
recorded as a result of the termination of the S corporation election as if
terminated on June 30, 1997 (the Company estimates that this deferred tax
liability will actually be approximately $2.5 million at the time of
consummation of this offering); (ii) a distribution to the Company's
shareholders of undistributed S corporation taxable income of $3.9 million
as of June 30, 1997 (the Company estimates that undistributed S corporation
taxable income will be approximately $7.0 million at the time of
consummation of this offering); and (iii) reclassification of remaining
accumulated earnings to additional paid-in capital.
(4) As adjusted data give effect to: (i) the issuance and sale by the Company of
the 3,000,000 shares of Common Stock offered hereby, after deducting
estimated underwriting discount and offering expenses; and (ii) payment of
approximately $7.0 million to Bharat Desai and Neerja Sethi in conjunction
with the Syntel India acquisition, which will be accounted for on the
carryover basis of accounting, resulting in a $2.1 million reduction in
equity. See "Use of Proceeds" and "Certain Transactions."
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<PAGE> 18
DILUTION
As of June 30, 1997, the pro forma net tangible book value of the Company
was approximately $5,472,000 or $0.25 per share of Common Stock. Pro forma net
tangible book value per share represents the amount of the Company's total
tangible assets less total liabilities on a pro forma basis to give effect to
the termination of the S corporation election and distribution to the Company's
shareholders of undistributed S corporation taxable income, divided by the
aggregate number of shares of Common Stock outstanding. After giving effect to
the sale by the Company of the 3,000,000 shares of Common Stock offered hereby
at an assumed initial public offering price of $10.00 per share and the
application of the estimated net proceeds therefrom, the adjusted pro forma net
tangible book value of the Company at June 30, 1997, would have been $30,645,000
or $1.23 per share of Common Stock. This amount represents an immediate increase
in such pro forma net tangible book value of $0.98 per share of Common Stock to
existing shareholders and an immediate dilution in pro forma net tangible book
value of $8.77 per share to new investors. The following table illustrates this
per share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $10.00
Pro forma net tangible book value per share as of June
30, 1997.............................................. $0.25
Increase in pro forma net tangible book value per share
attributable to new investors(1)...................... $0.98
-----
Adjusted pro forma net tangible book value per share after
the offering(2)........................................... $ 1.23
------
Dilution per share to new investors......................... $ 8.77
======
</TABLE>
- ------------------------------
(1) Includes a reduction in equity of $2.1 million in connection with the
acquisition of Syntel India.
(2) Does not include earnings subsequent to June 30, 1997, nor does it reflect
the related S corporation distribution of taxable income to the Company's
shareholders, which is estimated to be $7.0 million at the date of
consummation of this offering.
The dilution table set forth above does not include the effect of (i)
2,000,000 shares of Common Stock reserved for issuance under the Company's Stock
Option Plan, of which options to purchase (a) 140,000 shares were granted on
April 1, 1997 at an exercise price of $2.00 per share, (b) 468,750 shares were
granted on June 2, 1997 at an exercise price of $7.00 per share, and (c)
approximately 42,000 shares will be granted upon the consummation of this
offering at an exercise price equal to the initial offering price of the Common
Stock offered hereby, and (ii) 1,000,000 shares of Common Stock reserved for
issuance under the Company's Employee Stock Purchase Plan.
17
<PAGE> 19
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Financial Statements, including the Notes thereto,
appearing elsewhere in this Prospectus. The financial data for each of the four
years ended December 31, 1996 are derived from the Company's audited Financial
Statements, which are included elsewhere in this Prospectus. Financial data for
the year ended December 31, 1992 and for the six months ended June 30, 1997 are
derived from unaudited financial statements which, in the opinion of management,
have been prepared on the same basis as the audited financial statements and
include all adjustments (all of which are of a normal recurring nature) that are
necessary for a fair presentation of the results for the year. Except as noted,
the following selected financial data does not reflect financial data for Syntel
India.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues................................... $29,717 $45,345 $67,247 $90,326 $92,237 $44,558 $55,259
Cost of revenues........................... 22,797 39,009 55,937 71,538 69,783 33,748 42,067
------- ------- ------- ------- ------- ------- -------
Gross profit............................... 6,920 6,336 11,310 18,788 22,454 10,810 13,192
Selling, general and administrative
expenses................................. 6,199 5,214 8,209 13,309 18,261 8,688 10,316
------- ------- ------- ------- ------- ------- -------
Income from operations..................... 721 1,122 3,101 5,479 4,193 2,122 2,876
Other income (expense), net................ 214 (101) (69) 186 299 193 150
------- ------- ------- ------- ------- ------- -------
Income before income taxes................. 935 1,021 3,032 5,665 4,492 2,315 3,026
State income taxes......................... -- -- -- 428 321 55 125
------- ------- ------- ------- ------- ------- -------
Net income(1).............................. $ 935 $ 1,021 $ 3,032 $ 5,237 $ 4,171 $ 2,260 $ 2,901
======= ======= ======= ======= ======= ======= =======
Pro forma net income(2).................... $ 1,881 $ 3,503 $ 2,775 $ 1,431 $ 1,870
======= ======= ======= ======= =======
Pro forma net income per share(2).......... $ 0.09 $ 0.16 $ 0.13 $ 0.07 $ 0.09
======= ======= ======= ======= =======
Pro forma weighted average common shares
outstanding.............................. 22,000 22,000 22,000 22,000 22,000
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, AS ADJUSTED
--------------------------------------------------- JUNE 30, JUNE 30,
1992 1993 1994 1995 1996 1997 1997(3)
------- ------- ------- ------- ------- --------- -----------
(IN THOUSANDS, EXCEPT OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................. $ 8,228 $ 8,948 $11,638 $14,785 $ 6,544 $ 9,773 $28,872
Total assets..................... 11,821 15,974 22,190 27,878 29,649 28,804 48,090
Long-term debt................... -- -- -- -- -- -- --
Total shareholders' equity....... 8,443 9,465 12,497 17,734 9,905 12,818 30,645
OTHER DATA:
Billable headcount in U.S. ...... 454 670 1,097 1,029 1,103 1,170
Billable headcount in India...... 37 19 83 107 190 314
------- ------- ------- ------- ------- -------
Total billable headcount......... 491 689 1,180 1,136 1,293 1,484
======= ======= ======= ======= ======= =======
</TABLE>
- ------------------------------
(1) For all periods shown, 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. See
"Prior S Corporation Status and Distribution."
(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. See "Prior S Corporation Status and Distribution."
(3) As adjusted to give effect to: (i) the sale by the Company of 3,000,000
shares of Common Stock offered hereby at an assumed public offering price of
$10.00 per share and the application of the estimated net proceeds
therefrom; (ii) the recording of $3.4 million, or $0.14 per share, of
deferred tax liability as a result of the termination of the Company's S
corporation election as if terminated on June 30, 1997 (the Company
estimates that this deferred tax liability will be approximately $2.5
million, or $0.10 per share, at the time of consummation of this offering);
(iii) the distribution to the Company's shareholders of undistributed S
corporation taxable income of $3.9 million as of June 30, 1997 (the Company
estimates that undistributed S corporation taxable income will be
approximately $7.0 million at the time of consummation of this offering);
and (iv) the acquisition of Syntel India for $7.0 million and the
elimination of the intercompany balance of $2.2 million between the Company
and Syntel India. See "Use of Proceeds," "Prior S Corporation Status and
Distribution", "Management's Discussion and Analysis of Financial Condition
and Results of Operation--Syntel India Acquisition," "--Net Charge resulting
from S Corporation Termination" and "--Liquidity and Capital Resources" and
"Certain Transactions."
18
<PAGE> 20
PRO FORMA CONSOLIDATED STATEMENT OF INCOME DATA
The following unaudited Pro Forma Consolidated Statement of Income Data
give effect to the acquisition of Syntel India and the Company's conversion from
an S corporation to a C corporation for federal and state income tax purposes.
Such data are derived from the audited Financial Statements of the Company and
Syntel India for the years ended December 31, 1994, 1995 and 1996, which are
included elsewhere in this Prospectus, and from the unaudited financial
statements of the Company and Syntel India for the six months ended June 30,
1997, which, in the opinion of management, have been prepared on the same basis
as the audited financial statements and include all adjustments (all of which
are of a normal recurring nature) that are necessary for a fair presentation.
The Consolidated Pro Forma Statement of Income Data are presented for
informational purposes only and may not be indicative of the results of
operations had the acquisition occurred on January 1, 1994 and had the Company
been subject to corporate income taxes, nor do they purport to indicate the
future results of operations of the Company. The following Consolidated Pro
Forma Statement of Income Data should be read in conjunction with the Pro Forma
Consolidated Financial Statements, appearing elsewhere in this Prospectus.
Management believes that all adjustments necessary to present fairly such Pro
Forma Consolidated Statement of Income Data have been made. See "Pro Forma
Consolidated Financial Statements."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------- SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1997
---- ---- ---- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues................................... $67,340 $90,326 $92,330 $55,325
Cost of revenues........................... 55,315 70,014 67,083 39,741
------- ------- ------- -------
Gross profit............................... 12,025 20,312 25,247 15,584
Selling, general and administrative
expenses................................. 8,603 13,909 19,271 11,147
------- ------- ------- -------
Income from operations..................... 3,422 6,403 5,976 4,437
Other income (expense), net................ (67) 188 149 223
------- ------- ------- -------
Income before
income taxes............................. 3,355 6,591 6,125 4,660
Income taxes............................... 1,152 2,170 1,746 1,170
------- ------- ------- -------
Net income(1).............................. $ 2,203 $ 4,421 $ 4,379 $ 3,490
======= ======= ======= =======
Net income per share....................... $ 0.09 $ 0.17 $ 0.17 $ 0.13
======= ======= ======= =======
Pro forma weighted average common shares
outstanding(2)........................... 25,380 25,710 25,820 25,820
======= ======= ======= =======
</TABLE>
- ------------------------------
(1) After acquiring Syntel India, the Company plans to treat any Syntel India
earnings as permanently invested in India. Accordingly, pro forma
consolidated net income does not reflect any additional income taxes
attributable to the earnings of Syntel India. If the Company decides to
repatriate any earnings of Syntel India, 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Income Tax Matters."
(2) The weighted average number of common shares outstanding used to calculate
pro forma net income per share includes the number of shares which, when
multiplied by an assumed initial public offering price of $10.00 per share,
would have been sufficient to replace the capital in excess of earnings
withdrawn as distributions. See Note (c) to Pro Forma Consolidated Financial
Statements.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements, including the
Notes thereto, included elsewhere in this Prospectus. Except for information
relating to Syntel India included under the captions "Syntel India Acquisition"
and "Results of Operations - Syntel India," references to "Syntel" or the
"Company" in the following discussion and analysis refer only to Syntel, Inc.
Except for the historical information contained herein, the discussion in this
Prospectus contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors," as
well as those discussed elsewhere herein.
OVERVIEW
Syntel is a worldwide provider of professional IT staffing and outsourcing
services to Fortune 1000 companies, as well as to government entities. The
Company's service offerings include TeamSourcing, consisting of professional IT
staffing services, and IntelliSourcing, consisting of outsourcing services for
ongoing management, development and maintenance of business applications,
including Year 2000 compliance services.
The Company's revenues are generated from professional services fees
provided through TeamSourcing and IntelliSourcing engagements. For the year
ended December 31, 1996 and the six months ended June 30, 1997, the percentage
of revenues generated by TeamSourcing engagements was 64% and 54%, respectively.
Historically, the majority of the Company's revenues have been generated from
TeamSourcing engagements. 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 has invested
significantly in developing its ability to sell and deliver IntelliSourcing
services, and is seeking to shift a larger portion of its business to
IntelliSourcing engagements which the Company believes have higher gross margin
potential. For the year ended December 31, 1996 and for the six months ended
June 30, 1997, the percentage of revenues generated by IntelliSourcing
engagements was 36% and 46%, 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, although a significant portion of IntelliSourcing
engagements have been historically on a time-and-materials basis. Syntel
recognizes revenues from fixed-price engagements on the percentage of completion
method. See "Risk Factors--Fixed Price Engagements."
The Company's most significant cost is personnel cost, which consists of
compensation, benefits and other related costs for its IT professionals. The
Company strives to maintain its gross margin by controlling engagement costs and
offsetting increases in salaries and benefits with increases in billing rates.
The Company has established a human resource allocation team whose purpose is to
staff IT professionals on engagements that efficiently utilize their technical
skills and allow for optimal billing rates. Approximately $4.1 million, or 5.9%,
and $3.4 million, or 8.1% of the Company's cost of revenues for the year ended
December 31, 1996 and for the six months ended June 30, 1997, respectively,
consisted of the cost of services provided by Syntel India. Syntel India derives
substantially all of its revenues from providing software development services
to the Company from Mumbai, India, where salaries of IT professionals are
comparatively lower than in the U.S. The Company will acquire all of the
outstanding equity of Syntel India upon consummation of the offering. See
"--Syntel India Acquisition." Upon consummation of the acquisition, Syntel India
will be a wholly-owned subsidiary of the Company, and its results of operations
will be consolidated with those of the Company.
20
<PAGE> 22
The Company has performed a significant portion of its employee recruiting
in other countries. As of June 1, 1997, approximately 59% of Syntel's U.S.
workforce (42% of Syntel's worldwide workforce) worked under H-1B temporary work
visas in the U.S. To resolve a 1994 investigation of the Company by the U.S.
Department of Labor ("DOL") for failing to meet prevailing wage requirements for
certain H-1B employees, the Company voluntarily entered into a two-year consent
decree with the DOL. In response to the consent decree, the Company did not seek
any new H-1B visas during the fourth quarter of 1995, significantly curtailed
its H-1B hiring from April 1995 through September 1996, and significantly
increased its U.S. domestic recruiting and hiring efforts throughout 1996. As a
result, the Company believes that it was unable to increase billable IT
personnel during 1995 and 1996 to levels that it would have otherwise expected
in the absence of these factors. Because the Company's revenues are closely
related to the number of billable IT professionals it employs, the Company
believes that these developments adversely affected revenue growth in 1995 and
1996. From June 30, 1995, to June 30, 1996, the total number of U.S. billable IT
personnel declined from 1,137 to 1,019, but the Company has increased billable
IT personnel significantly beginning in the fourth quarter of 1996. As of June
1, 1997, total billable U.S. headcount had increased to 1,123. The Company
believes that it has fully complied with the consent decree and that continued
compliance through the expiration of the decree in September 1997 will not have
a material adverse effect on the Company. See "Risk Factors--Government
Regulation of Immigration; DOL Consent Decree" and "Business--Human
Resources--DOL Consent Decree."
The Company has made substantial investments in infrastructure since 1995,
including: (i) establishing the Company's Global Development Center in Cary,
North Carolina to support up to 400 IT professionals; (ii) establishing a
dedicated telecommunications link between the Company's United States operations
and those in Mumbai, India; (iii) relocating the Company's headquarters to
larger offices in Troy, Michigan; (iv) 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; (v) hiring additional experienced senior management; and (vi)
expanding global recruiting and training capabilities.
Through its strong relationships with customers, the Company has been able
to generate recurring revenues from repeat business. For the years ended
December 31, 1995 and 1996 and for the six months ended June 30, 1997, over 90%
of Syntel's revenues were derived from customers served in the prior period.
These strong relationships also have resulted in the Company generating a
significant percentage of revenues from key customers. The Company's top ten
customers accounted for approximately 81%, 78% and 75% of revenues for the years
ended December 31, 1995 and 1996 and for the six months ended June 30, 1997. The
Company does not believe there is any material collectibility exposure among its
top ten customers. The Company's top two customers are AIG and Ford. AIG
accounted for approximately 38%, 34% and 31% of revenues for the years ended
December 31, 1995 and 1996 and for the six months ended June 30, 1997. Ford
accounted for approximately 14%, 12% and 10% of revenues for the years ended
December 31, 1995 and 1996 and for the six months ended June 30, 1997. Although
the Company does not currently foresee a credit risk associated with accounts
receivable from these customers, credit risk is affected by conditions or
occurrences within the economy and the specific industries in which these
customers operate. Furthermore, while the Company does not anticipate the loss
of any significant customer or engagement, any such loss could have a material
adverse effect on the Company's business, results of operations and financial
condition.
SYNTEL INDIA ACQUISITION
Bharat Desai and Neerja Sethi are the sole beneficial shareholders of
Syntel India. Syntel India provides offshore software development services to
the Company and derives substantially all of its revenues from the Company.
Prior to the offering, the Company will enter into an agreement pursuant to
which the Company will acquire 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 is based on a valuation performed
21
<PAGE> 23
by independent chartered accountants in India pursuant to guidelines established
by the Reserve Bank of India for acquisitions of Indian corporations. The
purchase price will be paid from a portion of the net proceeds of this offering.
This acquisition will be closed upon consummation of this offering, and the
portion of the purchase price in excess of the carrying value of the net assets
acquired ($3.0 million) will be accounted for as a reduction in shareholders'
equity. See "Certain Transactions."
INCOME TAX MATTERS
The Company has elected to operate as an S corporation under the Code. An S
corporation generally is not subject to income taxes at the corporate level
(with exceptions under certain state income tax laws). Prior to completion of
this offering, the Company will terminate its S corporation status and,
thereafter, will be subject to federal and state income taxes on its earnings.
See "Prior S Corporation Status and Distribution."
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. After the Company acquires Syntel India, the Company plans to
treat any Syntel India earnings as permanently invested in India and does not
anticipate repatriating any of these earnings to the U.S. If the Company decides
to repatriate any earnings of Syntel India, it will incur a "border" tax,
currently 10%, under Indian tax law and will be required to pay U.S. corporate
income taxes on such earnings. See "Risk Factors--Exposure to Regulatory and
General Economic Conditions in India."
NET CHARGE RESULTING FROM S CORPORATION TERMINATION
In connection with the termination of its S corporation status, the Company
is required by the Code to change its method of accounting for tax reporting
purposes from the cash method to the accrual method. This change will result in
a net charge to earnings in the quarter in which this offering closes resulting
from differences in the tax treatment of certain of the Company's assets and
liabilities under the cash and accrual methods of accounting and will be
reflected through an increase in current and deferred income tax liabilities.
Based upon current estimates, the Company anticipates the net charge to earnings
as a provision for current and deferred income taxes will be approximately $2.5
million. The actual net charge to earnings could be greater, depending upon the
Company's results of operations and financial condition through and as of the
date of termination of the Company's S corporation status. This tax liability
will be recognized in the quarter in which this offering is consummated, but
will be paid in four equal annual installments. See "Prior S Corporation Status
and Distribution" and "Use of Proceeds."
22
<PAGE> 24
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. The percentages
set forth below do not reflect the results of operations of Syntel India. See
"--Syntel India Acquisition."
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
-------------------------------------------------------------
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- -------------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues.............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues...................... 83.2 79.2 75.7 75.7 76.1
----- ----- ----- ----- -----
Gross profit.......................... 16.8 20.8 24.3 24.3 23.9
Selling, general and
administrative expenses............. 12.2 14.7 19.8 19.5 18.7
----- ----- ----- ----- -----
Income from operations................ 4.6% 6.1% 4.5% 4.8% 5.2%
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Revenues. The Company's revenues consist of fees derived from its
TeamSourcing and IntelliSourcing business units. Total revenues increased to
$55.3 million for the six months ended June 30, 1997, representing an increase
of 24% over revenues of $44.6 million for the six months ended June 30, 1996.
TeamSourcing Revenues. For the six months ended June 30, 1997, TeamSourcing
revenues increased to $29.9 million, or 54.1% total revenues, from $28.3
million, or 63.4% of total revenues for the six months ended June 30, 1996. The
increase in the TeamSourcing revenues was primarily attributable to an increase
in average billing rates per person of approximately 14.8% for the first half of
1997 as compared to the first half of 1996.
IntelliSourcing Revenues. For the six months ended June 30, 1997,
IntelliSourcing revenues increased to $25.4 million, or 45.9% of total revenues,
compared to $16.3 million, or 36.6% of total revenues, for the six months ended
June 30, 1996. The increase in revenues was primarily attributable to the
addition of 15 new IntelliSourcing engagements, of which eleven were added in
the six months ended June 30, 1997.
The worldwide billable headcount, including personnel employed by Syntel
India, as of June 30, 1997 increased to 1,484 compared to 1,145 as of June 30,
1996.
Cost of Revenues. Cost of revenues consist primarily of salaries, payroll
taxes, benefits, relocation costs, immigration costs, finders fees, trainee
compensation and payments for offshore services. Cost of revenues were $42.1
million for the six months ended June 30, 1997, representing 76.1% of revenues,
compared to $33.7 million or 75.7% of revenues for the six months ended June 30,
1996. The increase in cost of revenues as a percentage of revenues was primarily
attributable to a one-time health insurance refund of $0.6 million in the first
half of 1996 which did not recur in 1997, and, to a lesser extent, to additional
compensation adjustments in the first half of 1997.
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 expenses for the six months ended June 30, 1997 increased to
$10.3 million, or 18.7% of total revenues, from $8.7 million, or 19.5% of total
revenues, for six months ended June 30, 1996. The $1.6 million increase in
selling, general and administrative expenses was the result of annual
compensation increases and increased benefit costs of
23
<PAGE> 25
approximately $0.8 million and increased facility, infrastructure and
communication costs of approximately $0.8 million as a result of growth in
revenues.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues. Total revenues increased to $92.2 million in 1996 from $90.3
million in 1995. The primary cause of this growth was an increase in
TeamSourcing revenues, which offset a decline in IntelliSourcing revenues. The
Company believes that actions taken in 1995 and 1996 in response to the DOL
consent decree adversely affected revenue growth in the last quarter of 1995 and
in 1996. See "Risk Factors--Government Regulation of Immigration," "--Overview"
and "Business--Human Resources--DOL Consent Decree."
TeamSourcing Revenues. TeamSourcing revenues in 1996 increased to $59.0
million, or 64.0% of total revenues, from $53.6 million, or 59.3% of total
revenues in 1995. The increase in TeamSourcing revenues was primarily
attributable to a substantial increase in the scope of services provided to two
of the Company's largest customers, including maintenance services and the
development of new applications. The increase in TeamSourcing revenues was also
the result of an increase in the average billing rates for IT professionals.
IntelliSourcing Revenues. IntelliSourcing revenues in 1996 decreased to
$33.3 million, or 36.0% of total revenues, from $36.8 million, or 40.7% of total
revenues in 1995, despite an increase in the number of IntelliSourcing
customers. The number of the Company's IntelliSourcing customers increased to
five in 1996 from two in 1995, but the Company recorded minimal revenues from
these new engagements as they commenced in the fourth quarter of 1996.
Approximately $1.9 million of the $3.5 million decrease in the Company's
IntelliSourcing revenues was attributable to a significant reduction in the
funding for a state government project. The remainder of the decrease was the
result of the Company increasing the efficiency of services provided under a
time-and-materials based contract to its largest customer, which enabled the
Company to maintain the customer's applications with fewer employees.
The Company's total revenues were less dependent upon its largest customers
in 1996 as compared to 1995. The top two customers accounted for 45% of total
revenues in 1996, down from 52% of total revenues in 1995.
The worldwide billable headcount, including personnel employed by Syntel
India, as of December 31, 1996 increased to 1,293 compared to 1,136 as of
December 31, 1995.
Cost of Revenues. Cost of revenues in 1996 decreased to $69.8 million, or
75.7% of revenues, from $71.5 million, or 79.2% of revenues in 1995. The
decrease in cost of revenues was primarily attributable to reduced health
benefit costs resulting from a self-insurance program the Company instituted in
the second half of 1995, and to an increase in the billing rates of certain IT
professionals performing IntelliSourcing services for a major customer which
occurred in the second half of 1995. To a lesser extent, the decrease in cost of
revenues was attributable to the migration of work to the Company's offshore
facility in India where the salaries of IT professionals are lower as a
percentage of professional service fees. The number of billable IT professionals
in India increased to 190 at December 31, 1996, compared to 107 at December 31,
1995. In addition, the Company incurred one-time costs of approximately $0.5
million for the relocation of employees to its Cary, North Carolina Global
Development Center in 1995 which did not recur in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1996 increased to $18.3 million, or 19.8% of
revenues, from $13.3 million, or 14.7% of revenues in 1995.
The $5.0 million increase in selling, general and administrative expenses
resulted primarily from $2.1 million in additional personnel cost to strengthen
the IntelliSourcing sales and support staff and $0.9 million to develop the
Company's proprietary Method2000(sm) solution for its Year 2000 compliance
service offering, reflecting the Company's focus on increasing revenues from its
IntelliSourcing business unit. In addition, the increase in selling, general and
administrative expenses was attributable
24
<PAGE> 26
to $1.5 million in additional personnel cost to strengthen the TeamSourcing
sales and support staff and $0.5 million increased facilities costs.
The $3.6 million aggregate personnel cost to build the TeamSourcing and
IntelliSourcing sales and support staff consisted primarily of hiring additional
sales executives, account executives, recruiting personnel and operational
support personnel.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994
Revenues. Total revenues in 1995 increased to $90.3 million from $67.2
million in 1994. This increase in total revenues was principally the result of a
significant IntelliSourcing engagement with the Company's largest customer that
commenced in late 1994. The Company believes that actions taken in 1995 in
response to the DOL consent decree adversely affected revenue growth in 1995.
See "Risk Factors -- Government Regulation of Immigration," "-- Overview" and
"Business -- Human Resources -- DOL Consent Decree."
TeamSourcing Revenues. The Company's TeamSourcing revenues in 1995
decreased to $53.6 million, or 59.3% of total revenues, from $59.4 million, or
88.4% of total revenues in 1994. This decline was attributable to the Company's
characterization of revenues for services performed for the Company's largest
customer as IntelliSourcing revenues in 1995, versus TeamSourcing revenues in
1994. This change in the characterization of revenue was the result of changes
in the contractual terms, scope and manner of delivering services to this
customer which occurred in the later part of 1994.
IntelliSourcing Revenues. IntelliSourcing revenues in 1995 increased to
$36.8 million, or 40.8% of total revenues, from $7.8 million, or 11.6% of total
revenues in 1994. This increase in revenues was attributable to work performed
under the terms of a contract signed in September 1994 with the Company's
largest customer.
The Company's total revenues were more dependent upon its largest customers
in 1995 as compared to 1994. The top two customers accounted for 52% of total
revenues in 1995, up from 39% of total revenues in 1994.
The worldwide billable headcount, including personnel employed by Syntel
India, as of December 1995 decreased to 1,136 compared to 1,180 as of December
1994.
Cost of Revenues. Cost of revenues in 1995 increased to $71.5 million, or
79.2% of revenues, from $55.9 million, or 83.2% of revenues in 1994. The
decrease in cost of revenues as a percentage of revenues was primarily
attributable to an increase in average billing rates, relative to compensation
rate increases, for IT professionals performing both TeamSourcing and
IntelliSourcing services. The decrease in cost of revenues as a percentage of
revenues was also attributable to the Company's ability to migrate an increased
percentage of work to the Company's Global Development Center in India, where
salaries of IT professionals are comparatively lower than in the U.S. The hiring
of entry-level IT professionals throughout 1995, with a correspondingly lower
compensation cost, also contributed to the decreased percentage. A $0.5 million
one-time charge to relocate employees to the Company's Cary, North Carolina
Global Development Center partially offset this decreased percentage.
Selling, General and Administrative Expenses. The Company's selling,
general and administrative expenses in 1995 increased to $13.3 million, or 14.7%
of total revenues, from $8.2 million, or 12.2% of revenues in 1994. This
increase in selling, general and administrative expenses primarily was the
result of the expansion of the Company's sales and support staff and increased
facilities and equipment expenses at the Cary, North Carolina Global Development
Center. In addition, the Company incurred additional compensation expenses as a
result of strengthening senior management by hiring a chief financial officer,
vice president of marketing, vice president of human resources and three
assistant vice presidents, all of whom were hired in late 1994 or in 1995.
RESULTS OF OPERATIONS--SYNTEL INDIA
Syntel India provides offshore software development services to the Company
and derives substantially all of its revenues from the Company. Syntel India's
revenues are the result of negotiated intercompany billing rates between Syntel
India and the Company based upon competitive market
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<PAGE> 27
rates, demand for services and volume considerations. These intercompany billing
rates are dollar denominated, whereas operating expenses of Syntel India are
paid in local currency.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 AND 1996--SYNTEL INDIA
Revenues. Syntel India's revenues for the six months ended June 30, 1997
increased to $3.5 million from $1.8 million for the six months ended June 30,
1996. The increase in revenues was primarily attributable to the transfer of
additional work to Syntel India by the Company. Billable headcount for Syntel
India increased to 314 as of June 30, 1997 compared to 126 as of June 30, 1996.
Increases in intercompany billing rates also contributed to the increase in the
revenues.
Cost of Revenues. Syntel India's cost of revenues consists primarily of
compensation expenses and benefits for its IT professionals and is affected
primarily by increases in wage rates in India. Cost of revenues increased to
$1.1 million, or 31.1%, of revenues for the six months ended June 30, 1997
compared to $0.6 million, or 35.0%, of revenues for the six months ended June
30, 1996. The decrease in the cost of revenues as a percentage of revenues was
mainly attributable to improvement in the utilization rate of billable personnel
during the six months ended June 30, 1997 to 54%, compared to 40.0% during the
six months ended June 30, 1996. This improvement was partially offset by an
increase in compensation expenses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of salaries and benefits for finance,
administration and corporate staff, travel, telecommunications and various
facilities costs. Selling, general and administrative expenses as a percentage
of revenues increased to 23.9% during the six months ended June 30, 1997 from
23.6% during the six months ended June 30, 1996. The marginal increase in
selling, general and administrative expenses was primarily attributable to an
increase in facility costs due to the acquisition of additional space in Mumbai
and Chennai during 1997.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 AND 1995--SYNTEL INDIA
Revenues. Syntel India's revenues in 1996 increased to $4.2 million from
$2.5 million in 1995. The increase in Syntel India's revenues was primarily
attributable to the transfer of additional work to Syntel India by the Company,
which resulted in an increase in Syntel India's billable headcount to 190 at
December 31, 1996 compared to 107 at December 31, 1995.
Cost of Revenues. Cost of revenues increased to $1.4 million, or 33% of
revenues, in 1996, from $1.0 million, or 40% of revenues, in 1995. The decrease
in cost of revenues as a percentage of revenues was attributable to the
improvement in utilization rate of billable personnel in 1996 to 54% from 47% in
1995, partially offset by increases in compensation expenses. The average
increase in compensation for existing employees was 36% in 1996 compared to 33%
in 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of revenues in both years ended December
31, 1996 and 1995 were approximately 24%.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 AND 1994--SYNTEL INDIA
Revenues. Syntel India's revenues increased by 68% to $2.5 million in 1995
from $1.5 million in 1994. The increase in revenues was primarily attributable
to an increase in the transfer of work to Syntel India by the Company. Billable
headcount at Syntel India increased to 107 at December 31, 1995 from 83 at
December 31, 1994.
Cost of Revenues. Cost of revenues in 1995 increased to $1.0 million, or
40% of revenues, compared to $0.8 million, or 52% of revenues, in 1994. The
decrease in the cost of revenues as a percentage of revenues was mainly due to
improvement in the utilization rate of billable personnel to 47% in 1995
compared to 31% in 1994, partially offset by increases in compensation expenses.
The average increase in compensation for existing employees was 33% in 1995
compared to 15% in 1994.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of revenues decreased to 24% in 1995
compared to 26% in 1994, due to an increase in revenues without a corresponding
increase in non-billable personnel.
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<PAGE> 28
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly income statement
data for each of the ten quarters beginning January 1, 1995 and ended June 30,
1997, and the percentage of the Company's total revenues represented by each
item in the respective quarter. Results of operations shown below do not reflect
the operations of Syntel India. See "--Syntel India Acquisition." In the opinion
of management, this information has been presented on the same basis as the
Company's Financial Statements appearing elsewhere in this Prospectus 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, when read in conjunction with the Financial Statements of the
Company, including the Notes thereto, contained elsewhere in this Prospectus.
The results of operations for any quarter are not necessarily indicative of the
results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------------
1995 1996 1997
-------------------------------------- -------------------------------------- -----------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
------- ------- -------- ------- ------- ------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $22,646 $22,709 $22,915 $22,056 $21,862 $22,696 $23,433 $24,246 $26,262 $28,997
Cost of revenues..... 18,540 18,880 17,491 16,627 16,746 17,002 17,760 18,275 19,894 22,173
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit......... 4,106 3,829 5,424 5,429 5,116 5,694 5,673 5,971 6,368 6,824
Selling, general and
administrative
expenses........... 2,407 2,618 3,726 4,558 4,075 4,612 4,790 4,784 5,060 5,256
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from
operations......... 1,699 1,211 1,698 871 1,041 1,082 883 1,187 1,308 1,568
Other income
(expense), net..... (11) (20) 54 163 124 69 16 90 75 75
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.............. 1,688 1,191 1,752 1,034 1,165 1,151 899 1,277 1,383 1,643
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues..... 81.9 83.1 76.3 75.4 76.6 74.9 75.8 75.4 75.8 76.5
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit......... 18.1 16.9 23.7 24.6 23.4 25.1 24.2 24.6 24.2 23.5
Selling, general and
administrative
expense............ 10.6 11.5 16.3 20.7 18.6 20.3 20.4 19.7 19.3 18.1
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from
operations......... 7.5 5.4 7.4 3.9 4.8 4.8 3.8 4.9 4.9 5.4
Other income
(expense), net..... 0.0 (0.1) 0.2 0.7 0.6 0.3 0.0 0.4 0.3 0.3
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.............. 7.5% 5.3% 7.6% 4.6% 5.4% 5.1% 3.8% 5.3% 5.2% 5.7%
</TABLE>
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.
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<PAGE> 29
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. Although fixed-price engagements
have not contributed significantly to revenues and earnings to date, operating
results may be adversely affected in the future by cost overruns on fixed-price
engagements. See "Risk Factors--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 could potentially 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. See "Risk Factors--Variability of Quarterly Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
The Company generally has financed its working capital needs through
operations, occasionally supplemented by borrowings under a line of credit with
a commercial bank. Both the Mumbai and Chennai expansion programs are expected
to be financed from internally generated funds from Syntel India's operations.
See "Business -- Global Service Delivery Model."
Net cash provided by operating activities was $0.4 million, $11.0 million
and $4.2 million and $3.3 million for the years ended December 31, 1994, 1995
and 1996 and for the six months ended June 30, 1997, respectively. Net cash
provided by operating activities in 1994 was affected by a $7.1 million increase
in accounts receivable due from the Company's largest customer. The increase in
net cash provided by operating activities in 1995 over 1994 primarily reflected
a net $4.3 million reduction in accounts receivable from this customer. The
decrease in net cash provided by operating activities in 1996 over 1995 was
attributable to a $3.75 million increase in accounts receivable due to: a $2.1
million increase in fourth quarter revenue in 1996 over fourth quarter revenue
in 1995, which resulted in an increase in accounts receivable at year end due to
the normal delay in receiving payment on revenue billed; $1.3 million in
deferred revenue recorded in 1996; and a one-time $600,000 receivable which
arose out of the Company moving to a self-funded health insurance program.
Net cash used in investing activities was $0.6 million, $3.0 million and
$1.6 million and $0.4 million for the years ended December 31, 1994, 1995 and
1996 and for the six months ended June 30, 1997, respectively. Cash used in
investing activities in 1995 included $2.7 million to establish the Company's
Cary, North Carolina Global Development Center. Cash used in investing
activities in 1996 included $0.9 million for the relocation of the Company's
worldwide headquarters to the Troy, Michigan Global Development Center and $0.5
million invested in recruiting and training software.
Net cash used in financing activities was $0.1 million, $0.3 million, and
$5.0 million and $7.0 million in 1994, 1995, 1996 and for the six months ended
June 30, 1997, respectively. Net cash used in financing activities in 1994 and
1995 reflects net payments on the bank's line of credit. Net cash used in
financing activities in 1996 reflects a dividend paid to the Company's
shareholders. The Company distributed $7.0 million to the Company's shareholders
from cash in the second quarter of 1997 relating to undistributed S corporation
taxable income through December 31, 1996. See "Prior S Corporation Status and
Distribution."
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 matures 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 July 1, 1997,
there was no indebtedness outstanding under the line of credit. Borrowings under
the line of credit bear interest at the lower
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<PAGE> 30
of the Eurodollar rate plus the applicable Eurodollar margin, the bank's prime
rate or a negotiated rate established by the bank at the time of borrowing.
In addition to the bank line of credit, the Company has a $10.0 million
facility with NBD Bank to finance acquisitions which terminates on 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 proceeds from this offering,
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.
29
<PAGE> 31
BUSINESS
OVERVIEW
Syntel is a worldwide provider of professional information technology
("IT") staffing and outsourcing services to Fortune 1000 companies, as well as
to government entities. The Company's service offerings include TeamSourcing,
consisting of professional IT staffing services, and IntelliSourcing, consisting
of outsourcing services for ongoing management, development and maintenance of
business applications, including Year 2000 compliance 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 TeamSourcing, Syntel provides professional IT staffing services
directly to customers. TeamSourcing services include systems specification,
design, development, implementation and maintenance of complex IT applications
involving diverse computer hardware, software, data and networking technologies
and practices. TeamSourcing services are provided by individual professionals
and teams of professionals dedicated to assisting customer IT departments with
systems projects and ongoing functions. TeamSourcing accounted for approximately
64% and 54% of revenues, for the year ended December 31, 1996 and the six months
ended June 30, 1997, respectively.
Through IntelliSourcing, Syntel provides higher-value outsourcing 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, 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(sm) solution.
IntelliSourcing accounted for approximately 36% and 46% of revenues, for the
year ended December 31, 1996 and the six months ended June 30, 1997,
respectively.
The Company's Global Service Delivery Model provides Syntel with
flexibility to deliver to each customer a unique mix of services on-site at the
customer's location, off-site at its U.S. locations and offshore at its Mumbai,
India location. 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. The Company is expanding
its Global Development Center in Mumbai, India and is establishing a new Global
Development Center in Chennai, India.
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 1996, based on revenues, were American
International Group, Inc., Ford Motor Co., AT&T Corp., Dayton Hudson Corp. and
Chrysler Corporation. The Company has been chosen as a preferred vendor by
several of its customers and has been recognized for its quality and
responsiveness. The Company has a focused sales effort that includes a strategy
of migrating existing TeamSourcing customers to higher-value IntelliSourcing
services. The Company recently realigned its resources to focus on 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
30
<PAGE> 32
professional staff in response to customer needs. This scalable business model
has enabled the Company to grow significantly in recent years. The Company's
revenues increased from $29.7 million in 1992 to $92.2 million in 1996. As of
June 1, 1997, Syntel's worldwide billable headcount consisted of 1,402 IT
professionals.
INDUSTRY BACKGROUND
Increasing globalization, technological innovation and deregulation are
creating an increasingly competitive business environment that is requiring
companies to change fundamentally their business processes. This change is
driven by increasing demand from customers for increased quality, lower costs,
faster turnaround, and highly responsive and personalized service. To effect
these changes and adequately address these needs, companies are focusing on
their core competencies and cost-effectively utilizing IT solutions to improve
productivity, lower costs and manage operations more effectively.
Designing, developing, implementing and maintaining IT solutions requires
highly skilled individuals trained in diverse technologies. However, there is a
growing shortage of these individuals and many companies are reluctant to expand
their IT departments through additional staffing, particularly at a time when
they are attempting to minimize their fixed costs and reduce workforces. The
Company believes that many organizations are concluding that using outside
specialists to address their IT requirements enables them to develop better
solutions in shorter time frames and to reduce implementation risks and ongoing
maintenance costs. Those outside specialists best positioned to benefit from
these trends have access to a pool of skilled technical professionals, have
demonstrated the ability to manage IT resources effectively, have low-cost
offshore software development facilities, and can efficiently expand operations
to meet customer demands.
Demand for IT services has grown significantly as companies seek ways to
outsource not only specific projects for the design, development and integration
of new technologies, but also ongoing management, development and maintenance of
existing IT systems. According to Gartner Group, the worldwide market for
professional IT services, excluding Year 2000 compliance services, was $118
billion in 1995 and is projected to grow to $258 billion by the year 2000. 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
31
<PAGE> 33
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 TeamSourcing services consisting of professional IT
staffing services, and IntelliSourcing services consisting of outsourcing
services for ongoing management, development and maintenance of business
applications, including Year 2000 compliance services. The Company believes that
its IntelliSourcing approach to IT services outsourcing, which involves assuming
responsibility for management of selected applications rather than taking over
an entire IT department or providing facilities management, provides significant
differentiation from its competitors in the IT services market. Syntel believes
that its TeamSourcing and IntelliSourcing service offerings are distinguished by
its Global Service Delivery Model, a corporate culture focused on customer
service and responsiveness and its internally developed "intellectual capital,"
comprised of a proven set of methodologies, practices and tools for managing the
IT functions of its customers.
Global Service Delivery Model. Syntel performs its services on-site at the
customer's location, off-site at Syntel's U.S. locations and offshore at its
Indian location. 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 two primary Global Development Centers
located in Cary, North Carolina and Mumbai, India, and two additional Global
Development Centers located in Troy, Michigan and Santa Fe, New Mexico. The
Company is establishing another Global Development Center in Chennai, India,
which is anticipated to be active by the end of 1997. See "Risk Factors --
Exposure to Regulatory and General Economic Conditions in India."
Focus on Customer Service. The Syntel corporate culture reflects a
"customer for life" philosophy which emphasizes flexibility, responsiveness,
cost-consciousness and a tradition of excellence. The Company recognizes that
its best source for new business opportunities comes from existing customers and
believes its customer service is a significant factor in Syntel's high rate of
repeat business. For the years ended December 31, 1995 and 1996 and for the six
months ended June 30, 1997, over 90% of the Company's revenues were from
customers for whom the Company provided services during the previous period. See
"Risk Factors -- Customer Concentration; Risk of Termination." 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 17-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.
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SYNTEL STRATEGY
The Company's objective is to become a strategic partner with its customers
in the ongoing management, development and maintenance of their IT systems by
utilizing its Global Service Delivery Model, intellectual capital and customer
service orientation. The Company plans to continue to pursue the following
strategies to achieve this objective:
Leverage Global Service Delivery Model. The ability to deliver a seamless
service capability virtually anywhere in the world from its domestic and
offshore facilities gives the Company an effective ability to meet customer
needs for technical expertise, best practice IT solutions, resource
availability, responsive turnaround and cost-effective delivery. The Company
strives to leverage this capability to provide reliable and cost-effective
services to its existing customers, expand services to existing customers and to
attract new customers. Moreover, the flexibility and capacity of the Global
Service Delivery Model and the Company's worldwide recruitment and training
programs enhance the ability of the Company to expand its business as the number
of customers grows and their IT demands increase. The Company intends to expand
the capacity of its Global Development Centers worldwide.
Focus Resources on IntelliSourcing Services. Through IntelliSourcing, the
Company markets its higher value outsourcing services for ongoing applications
management, development, maintenance and Year 2000 compliance functions. In
recent years, the Company has significantly increased its investment in
IntelliSourcing Services. The Company recently realigned its resources to focus
on the development, marketing and sales of its IntelliSourcing services,
including the hiring of additional salespeople and senior managers, redirecting
personnel experienced in the sale of higher value contracts, developing
proprietary methodologies, such as Year 2000 offerings and services, increasing
marketing efforts, and redirecting organizational support in the areas of
finance and administration, human resources and legal. As a result, the Company
has increased its IntelliSourcing opportunities.
Expand Customer Base and Role with Current Customers. The Company's sales
efforts focus on its strategy of migrating existing TeamSourcing customers to
higher value IntelliSourcing services. Traditionally, the Company has formed
strong relationships with customers through its high quality and responsive
TeamSourcing services. The Company's emphasis on customer service and long-term
relationships has enabled the Company to generate recurring revenues from
existing customers. These long-term relationships also provide the opportunity
for the Company to cross-sell IntelliSourcing services which, in some cases,
represent a natural extension of work initially performed under the TeamSourcing
engagement. 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 also intends to increase its marketing efforts in other parts of the
world, particularly in Asia.
Enhance Proprietary Knowledge Base and Expertise. The Company believes that
its "intellectual capital" of methodologies, practices, tools and technical
expertise is an important part of its competitive advantage. The Company strives
to continually enhance this knowledge base by creating competencies in emerging
technical fields such as Internet/intranet applications, client/server
applications and object-oriented software. The Company continually develops new
methodologies and toolsets such as its package of Year 2000 services, building
skills in enterprise resource planning (ERP), and acquiring a broad knowledge
and expertise in the IT functions of specific industries. Through these efforts,
the Company becomes more valuable to the customer, is often able to expand the
scope of its work to existing customers, and is able to offer industry-specific
expertise.
Attract and Retain Highly Skilled IT Professionals. The Company believes
that its human resources are its most valuable asset. Accordingly, its success
depends in large part upon its ability to attract, develop, motivate, retain and
effectively utilize highly skilled IT professionals. Over the years, the Company
has developed a worldwide recruiting network, logistical expertise to relocate
its personnel, and programs for human resource retention and development. The
Company (i) employs 17 professional recruiters who recruit qualified
professionals throughout the U.S. and in India, Canada, Europe,
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<PAGE> 35
Singapore, the Philippines, Australia and New Zealand, (ii) trains recent
college graduates and other recruits through its four training centers, three of
which are located in the U.S. and one of which is located in India, and (iii)
maintains a broad range of employee support programs, including relocation
assistance, a comprehensive benefits package, career planning and incentive
plans. The Company believes that its management structure and human resources
organization is designed to maximize the Company's ability to efficiently expand
its professional IT staff in response to customer needs. See "Risk Factors --
Recruitment and Retention of IT Professionals" and "-- Ability to Manage
Growth."
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 smaller regional IT services
firms with established customers. The Company may also consider potential
acquisition candidates to augment its technical expertise. While the Company
from time to time considers acquisition opportunities, it currently has no
agreements, understandings or commitments to effect any acquisitions, except for
the acquisition of Syntel India. See "Risk Factors -- Risks Related to Possible
Acquisitions."
SERVICES
Syntel provides a broad range of IT services through its TeamSourcing and
IntelliSourcing service offerings. Through TeamSourcing, the Company provides
professional IT staffing services. Through IntelliSourcing, the Company provides
outsourcing services for ongoing management, development and maintenance of
customer applications, including Year 2000 compliance services. The Company
believes that its established TeamSourcing customers represent an attractive
base from which to grow its IntelliSourcing services and, as such, has recently
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 year ended December 31, 1996 and the
six months ended June 30, 1997, TeamSourcing accounted for approximately 64% and
54%, respectively, of the Company's revenues and IntelliSourcing represented
approximately 36% and 46%, respectively, of the Company's revenues.
TeamSourcing
Syntel offers professional IT staffing services directly to its customers
and, to a lesser degree, in partnership with other service providers. The
professional IT staffing 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,
responsiveness, 24-hour support seven days a week and cost-effective delivery.
Through its flexible service delivery, Syntel is able not only to deliver more
effective services to the customer, but also to more efficiently utilize its IT
professionals.
By focusing on customer satisfaction and the delivery of quality services
to TeamSourcing customers, the Company believes it is able to generate
opportunities to provide its TeamSourcing customers with higher value
application outsourcing services and Year 2000 compliance services. The Company
has recently realigned its TeamSourcing sales people on an account basis within
each sales region in an effort to further enhance customer relationships and
marketing to larger, more complex
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businesses. The effectiveness of its TeamSourcing services and its focus on
customer service is evidenced by the high level of repeat business from existing
customers and the quality awards its customers have bestowed on Syntel. During
1996, Syntel received the Q-1 rating from Ford Motor Company and became a
Preferred Supplier to Chrysler Corporation receiving the highest rating in each
customer service category. The Q-1 rating from Ford Motor Company and the
Preferred Supplier designation from Chrysler Corporation are the highest
facility supplier quality ratings awarded by each of these principal customers.
The Company is also a Microsoft Certified Solution Provider. For the years ended
December 31, 1995 and 1996 and the six months ended June 30, 1997, over 90% of
Syntel's annual revenues were from customers for whom the Company provided
services during the previous period.
In order to continue to enhance its TeamSourcing services expertise, Syntel
has enhanced its capabilities in enterprise resource planning (ERP), including
the implementation of software packages from SAP and Oracle. The Company has
also developed expertise in emerging technologies such as Internet/intranet
applications, client/server applications and object-oriented software.
IntelliSourcing
Syntel also provides higher-value outsourcing services for ongoing
management, development and maintenance of business applications, including Year
2000 compliance services. Over the last 18 months, 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. See "Risk Factors -- Ability to Manage Growth." The Global
Service Delivery Model is central to Syntel's delivery of IntelliSourcing
services. It enables the Company to respond to customers' needs for ongoing
service and flexibility and has provided the capability to become productive
quickly on a cost-effective basis to meet timing and resource demands for
mission critical applications.
Business Applications Outsourcing. Through IntelliSourcing, Syntel assumes
responsibility for and manages selected application support functions of the
customer. Rather than being responsible for an entire IT department, including
computers, other hardware, networks and all IT functions, IntelliSourcing
focuses solely on providing professional services for selected IT applications.
IntelliSourcing is fundamentally different than facilities management, which is
cost-intensive and involves the ownership of hardware. IntelliSourcing is a more
flexible alternative to traditional full-scale outsourcing, as it permits the
customer to maintain control of its IT resources and establish priorities.
IntelliSourcing permits the customer to select the applications best-suited to
remain managed in-house, while still benefiting from Syntel's expertise and
resource availability. The benefits of IntelliSourcing also include reliable
maintenance and up-keep of systems on which the business depends, reduced
operating costs, availability of IT personnel and access to best-practice
solutions, while allowing the customer to focus on its core competencies.
Syntel has developed methodologies, processes and tools to effectively
integrate and execute IntelliSourcing engagements. Referred to as
"IntelliTransfer," this methodology is implemented in three stages of planning,
transition and launch. Syntel first focuses on the customer's personnel,
processes, technology and culture to develop a plan to effectively assimilate
the business process knowledge of the customer. Syntel then begins to learn the
business processes of the customer, and, finally, seeks to assume responsibility
for performance of a particular customer application system or systems. As the
Company develops an in-depth knowledge of the customer's personnel, processes,
technology and culture, Syntel acquires a competitive advantage to pursue more
value-added services. The Company believes its approach to providing these
services results in a long-term customer relationship involving a key Syntel
role in the business processes and applications of the customer.
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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 has invested substantial resources in developing a package
of Year 2000 offerings and services. The Company intends to use its Year 2000
capabilities to expand its role with existing TeamSourcing customers, gain new
customers and market its IntelliSourcing services. All of Syntel's Year 2000
service packages are based on Method2000(sm), a proprietary solution developed
by Syntel. Method2000(sm) 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(sm) service packages are: Pilot2000, Implement2000 and
Recover2000. 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. See "Risk Factors--Fixed-Price
Engagements." The Company is also marketing a Recover2000 service package in
which Syntel assumes responsibility for in-progress Year 2000 compliance
projects previously performed by the customer or another IT service provider.
Syntel markets its applications outsourcing services as a follow-on to its
Year 2000 compliance services. The Company believes that such follow-on services
will be an attractive offering in the coming years based on the current trend of
most Year 2000 service providers not to provide warranties or services to fix
any Year 2000 failures that may result from limitations, if any, of their
services. Syntel believes that the most efficient way for customers to achieve
Year 2000 compliance is to have key team members from the Year 2000 compliance
project fully employed in ongoing maintenance and development of the same
applications portfolio.
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 and Method2000(sm),
creating reusable software components to enhance quality and value on customer
assignments, and educating Syntel's personnel to improve marketing, sales and
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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
1996, the Company provided services to over 100 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 1996 or 1997, include:
<TABLE>
<CAPTION>
FINANCIAL SERVICES MANUFACTURING RETAIL
------------------ ------------- ------
<S> <C> <C>
American International Ford Motor Co. Dayton Hudson Corp.
Group, Inc. Chrysler Corporation Safeway, Inc.
World Bank International Business Mervyn's
Colonial Management Machines Corp. Kmart Corp.
CitiBank Unisys Corp. Lucky Stores
CIGNA Corp. New Venture Gear
First Union Corp. Meldisco
Hewlett-Packard Corp.
Xerox Corp.
Westinghouse Electric
Corp.
</TABLE>
<TABLE>
<CAPTION>
INFORMATION/
TRANSPORTATION COMMUNICATIONS GOVERNMENT
-------------- -------------- ----------
<S> <C> <C>
Norfolk Southern Corp. AT&T Corp. New Mexico
Allied Van Lines Consolidated Communication New York
Burlington Northern, Inc. Directories Malta
Yellow Technologies Intellisoft West Virginia
Northwest Airlines Corp. McDonnell Douglas Illinois
Information Systems
LM Ericsson Telephone Co.
</TABLE>
For the years ended December 31, 1995 and 1996 and for the six months ended
June 30, 1997, the Company's top ten customers accounted for approximately 81%,
78% and 75% of the Company's revenues, respectively. American International
Group, Inc. and Ford Motor Co., the Company's largest customers, represented
approximately 38% and 14% of revenue for the year ended December 31, 1995,
respectively, approximately 34% and 12% of revenue for the year ended December
31, 1996, respectively, and 31% and 10% of revenues for the six months ended
June 30, 1997, respectively. The Company recently entered into an outsourcing
contract with Ford Motor Co. The Company also recently entered into Year 2000
engagements with American International Group, Inc., Northwest Airlines Corp.,
Yellow Technologies and Norfolk Southern Corp. Most of the Company's contracts
are terminable by the customer with limited notice and without penalty. See
"Risk Factors -- Customer Concentration; Risk of Termination."
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 to over 450 Syntel
professionals as of June 1, 1997. The Company supports AIG systems throughout
the U.S. and in selected countries around the world. Both the Company's Cary,
North Carolina and Mumbai, India Global Development Centers 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. Its applications development
services focus on providing customized solutions and applications in support of
policy underwriting, claims management and financial reporting and encompass
both mainframe and client/server environments. The Company also provides Year
2000 conversion services to AIG on a fixed-price basis. The Company's
applications maintenance
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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 and manage its
IT resource allocation and simplified management of AIG's IT functions. Syntel
has also delivered to AIG greater resource availability, 24-hour support, fast
turnaround and the capacity to address AIG enterprise needs in other parts of
the world. The Company has a four-year contract with AIG which commenced in 1994
and expires in December 1998. It may be terminated by AIG in 1997 upon payment
of a monetary penalty and in 1998 without penalty.
Syntel's service delivery to AIG is an integrated effort involving on-site,
off-site and offshore service teams. Initially, the on-site team gained
knowledge of the particular AIG applications and systems to be supported.
Management support of these applications and systems was then shifted to the
off-site team at the Company's Cary, North Carolina Global Development Center
with certain underlying work functions ultimately migrating to the offshore team
at the Company's Mumbai, India Global Development Center. Currently, Syntel
coordinates the AIG customer relationship using a number of on-site project
management teams which interface with AIG management teams at the AIG location
for each principal IT support function. As a result, AIG maintains management
control of its IT planning and priorities while at the same time benefiting from
Syntel's expertise, practices and resource availability for the cost-efficient
execution of AIG plans and priorities.
GLOBAL SERVICE DELIVERY MODEL
Syntel's Global Service Delivery Model gives the Company the flexibility
and resources to perform services on-site at the customer's location, off-site
at the Company's U.S. locations and offshore at the Company's Indian locations.
By linking each of its service locations together through a dedicated data and
voice network, Syntel provides a seamless service capability to its customers.
The Global Service Delivery Model gives the Company the flexibility to deliver
to each customer a customized mix of integrated on-site, off-site and offshore
services to meet varying customer needs for direct interaction with Syntel
personnel, access to technical expertise and best practices, resource
availability and cost-effective delivery.
Through on-site service delivery at the customer's location, the Company is
able to gain comprehensive knowledge concerning the customer's personnel,
processes, technology and culture, and maintain direct customer contact to
facilitate project management, problem solving and integration of Syntel
services. Off-site service delivery at the Company's U.S. locations provides the
customer with access to the diverse skill base and technical expertise resident
at different regional centers, availability of resources, and cost-effective
delivery due to the savings in transportation, facilities and relocation costs
associated with on-site work. Offshore service delivery at the Company's Indian
location provides the customer with the capacity to receive around the clock
attention to applications maintenance and project development for faster
turnaround, greater availability of resources, expertise resident in India and
more cost-effective delivery than the Company's off-site services.
The Company has developed global recruiting and training programs which
have efficiently provided skilled IT professionals to meet customer needs. In
addition, the Company's sales, solutions and delivery functions are closely
integrated in the Global Service Delivery Model so that appropriate resources
can be provided to the customer at the right time and at the most advantageous
location. Each customer is tracked and serviced through a multi-stage customer
care process. Weekly meetings are held with key project management, sales,
technical, legal and finance personnel to monitor progress, identify issues and
discuss solutions. As engagements evolve and customer needs change, the Company
can reallocate resources responsively from among these locations as necessary.
The Company's two primary Global Development Centers located in Cary, North
Carolina and Mumbai, India, two additional Global Development Centers located in
Troy, Michigan and Santa Fe,
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New Mexico, and the Global Development Center being established in Chennai,
India support the Company's Global Service Delivery Model.
The Cary, North Carolina Global Development Center, which employs over 350
persons, serves as the hub for the Company's telecommunications, project
management, technical training and professional development programs. Its
support functions include administration of a dedicated data and voice network,
a 24-hour customer assistance center which coordinates problem resolution
worldwide, and a development center for the sharing of knowledge and expertise
among IT professionals. Moreover, due to its proximity to a large number of
major universities, the Cary, North Carolina Global Development Center has
access to a relatively large talent pool.
The Mumbai, India Global Development Center, which employed over 525
persons as of June 1, 1997, serves as the hub of the Company's Indian
operations. This Global Development Center provides substantial resource depth
to meet customer needs around the world, low-cost service delivery, a 24-hour
customer assistance center and development of technical solutions and expertise.
Mumbai also serves as a principal recruiting and training center for the Company
due to the large resource pool of skilled IT professionals and college
graduates.
The Company is in the process of expanding its operations in India. The
Company believes that it has developed considerable skill in the operation of
offshore facilities and expects its Indian expansion to significantly increase
its offshore capabilities. The Mumbai Center, which has been in operation for
four years, is being expanded to accommodate an additional 300 persons. Such
expansion is expected to be completed by the end of 1997. The Company also has
leased space for a new Global Development Center in Chennai, India. This Center
is intended to provide additional resources and will include a training and
development center. The Company has already begun staffing the Chennai Center
and will continue to incrementally increase staffing over time in response to
customer needs. Once fully developed and operational, the Chennai Center will be
able to accommodate up to 600 persons. Both the Mumbai and Chennai expansion
programs are expected to be financed from internally generated funds from the
Company's Indian operations. See "Risk Factors -- Exposure to Regulatory and
General Economic Conditions in India."
The Troy, Michigan Global Development Center serves as the Company's world
headquarters, sales and marketing center, training and development center, and
is the hub of its Southeastern Michigan operations, which employs over 300
people. The Santa Fe, New Mexico Global Development Center, which employs over
30 people, serves as a training and development center.
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 Chicago, Illinois; Dallas, Texas; Durham, North Carolina;
Fremont, California; Minneapolis, Minnesota; New York, New York; Troy, Michigan;
Woodbridge, New Jersey; and London, England. The Company recently realigned its
sales staff into two sales forces, one for TeamSourcing services and one for
IntelliSourcing services. Each sales region has a separate TeamSourcing and
IntelliSourcing sales staff with specific sales executives assigned to each
account.
The TeamSourcing sales organization consists of approximately 18 account
executives. 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, over 90% of
TeamSourcing revenues were from customers who received services during 1995.
TeamSourcing account executives are paid a base salary plus quarterly incentive
compensation based upon specified profit targets.
Syntel's IntelliSourcing sales organization consists of 10 sales
executives. Since 1995, when it had four sales executives, Syntel has increased
its professional salespeople in IntelliSourcing both by
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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 3 to 12
months depending on the complexity of the engagement. Due to this longer sales
cycle, IntelliSourcing sales executives follow an integrated sales process for
the development of engagement proposals and solutions, and receive ongoing input
from the Company's technical services, delivery, finance and legal departments
throughout the sales process. The IntelliSourcing sales process also typically
involves a greater number of customer personnel at more senior levels of
management than the TeamSourcing sales process. IntelliSourcing account
executives are paid a base salary plus quarterly incentive compensation based on
reaching specified profit targets on closed contracts.
Syntel's marketing organization seeks to promote brand identities for its
TeamSourcing, IntelliSourcing and Method2000(sm) services and to generate sales
leads. The Company's current marketing efforts consist of direct mail, trade
shows, publications and public relations campaigns targeted to CEOs, CFOs and
CIOs of Fortune 500 organizations and CIOs of government agencies. In addition,
Syntel maintains relationships with key industry research groups such as the
Gartner Group, Meta Group, Giga Group, and the Information Technology
Association of America.
HUMAN RESOURCES
The Company believes that its human resources are its most valuable asset.
Accordingly, the Company's success depends in large part upon its ability to
attract, develop, motivate, retain and effectively utilize highly skilled IT
professionals. The Company has developed a number of processes, methodologies,
technologies and tools for the recruitment, training, development and retention
of its employees. As of June 1, 1997, the Company employed in its U.S.
operations 1,318 persons, including 1,179 IT professionals, 28 in sales and
marketing, and 111 in general and administrative positions. Of these, 523 were
U.S. citizens and permanent residents, 776 held H-1B visas (permitting temporary
residency in the U.S.), 5 held F-1 visas (permitting foreign students to work in
the U.S.) and 14 held TN visas (permitting Canadians to work in the U.S.). As of
June 1, 1997, the Company employed in its Indian operations 529 persons,
including 461 IT professionals, 2 in sales and marketing, and 66 in general and
administrative positions.
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. See "Risk Factors --
Recruitment and Retention of IT Professionals" and "-- Ability to Manage
Growth."
Recruiting. The Company has developed a recruiting methodology and
organization which is a core competency. The Company has a 15-person U.S.-based
recruiting team, 11 of whom primarily recruit from across the U.S., and 4 of
whom primarily recruit international candidates from India, Canada, Europe,
Singapore, the Philippines, Australia and New Zealand. The Company also has a 4-
person international-based recruiting team, one each in Mumbai, Chennai and
Banglore, India and one in Australia, to recruit for the Company's needs in
India, as well as for the Company's U.S. operations. The Company uses a
standardized global selection process that includes interviews and reference
checks.
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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. The TPD program consists of 8-13 weeks of training programs,
including classroom lectures, hands-on experience, exercises, projects and
tests. Another entry-level training program is the Syntel Management Trainee
Program. As part of this program, Syntel selects graduates from leading
universities who are suited for corporate and regional positions within Syntel
in account management, sales, recruiting and other management areas. Syntel also
maintains a comprehensive Computer Based Training program ("CBT"), with over 200
training modules, which Syntel employees can use at their convenience. The CBT
topics cover the latest client/server areas, local-area and wide-area networks,
relational data base management systems, object-oriented systems, Microsoft
products, in addition to a number of management and related developmental areas.
The Company has been accepted as a Microsoft Certified Solution Partner and
sponsors the Microsoft Certification Program at its Cary, North Carolina Global
Development Center, and provides opportunities for cross-training of its
professionals in emerging technologies.
Support and Retention. The Company seeks to provide meaningful support to
its employees which the Company believes leads to improved employee retention
and better quality services to its customers. Traditionally, a significant
percentage of the Company's employees have been recruited from outside the U.S.
and relocated to the U.S. This has resulted in the need to provide a higher
level of initial support to its employees than is common for U.S.-based
employees. As a result of these activities, Syntel has developed a significant
knowledge base in making foreign professionals comfortable and quickly
productive in the U.S. and Europe. The Company also conducts regular career
planning sessions with its employees, and seeks to meet their career goals over
a long-term planning horizon. As part of its retention strategy, the Company
strives to provide a competitive compensation and benefits package, including
relocation reimbursement and support, health insurance, auto 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 intends to offer stock options to substantially all of its employees
under the Stock Option Plan upon consummation of the offering, and to offer
substantially all of its employees an opportunity to purchase the Company's
Common Stock at a discount to fair market value under the Employee Stock
Purchase Plan. See "Management--Stock Option Plan" and "--Employee Stock
Purchase Plan."
DOL Consent Decree. To resolve an investigation of the Company by the U.S.
Department of Labor for failure to meet prevailing wage requirements for certain
H-1B employees, the Company voluntarily entered into a two-year consent decree
with the DOL on September 29, 1995. Under the consent decree, the Company agreed
not to file any new H-1B petitions for 90 days after the date of the decree, to
invest an additional $1 million to train its U.S. domestic employees as IT
professionals, to increase by ten percentage points its proportion of U.S.
domestic workers employed in positions in which H-1B workers are used, and to
interview and offer employment to all qualified displaced workers whenever the
Company places 25 or more employees at a facility where H-1B workers may be
used. While the Company believes that the steps taken to comply with the consent
decree adversely affected revenue growth during 1995 and 1996, the Company
believes that it has fully complied with the decree and that continued
compliance with the decree through its expiration in September 1997
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will not have a material adverse effect on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
COMPETITION
The IT services industry is intensely competitive, highly fragmented and
subject to rapid change and evolving industry standards. The Company competes
with a variety of other companies, depending on the IT services it offers. The
Company's primary competitors for professional IT staffing engagements include
participants from a variety of market segments, including "Big Six" accounting
firms, systems consulting and implementation firms, applications software
development and maintenance firms, service groups of computer equipment
companies and temporary staffing firms. In applications outsourcing services,
the Company competes primarily with Electronic Data Systems Corp., IBM Global
Solutions (ISSC), Andersen Consulting and Computer Sciences Corporation. The
Company's principal competitors for Year 2000 compliance engagements include IBM
Global Solutions (ISSC), Cap Gemini and Andersen Consulting. Many of the
Company's competitors have substantially greater financial, technical and
marketing resources and greater name recognition than the Company. As a result,
they may be able to compete more aggressively on pricing, respond more quickly
to new or emerging technologies and changes in customer requirements, or devote
greater resources to the development and promotion of IT services than the
Company. In addition, there are relatively few barriers to entry into the
Company's markets and the Company has faced, and expects to continue to face,
additional competition from new IT service providers. Further, there is a risk
that the Company's customers may elect to increase their internal resources to
satisfy their IT services needs as opposed to relying on a third-party vendor
such as the Company. The IT services industry is also undergoing consolidation
which may result in increased competition in the Company's target markets.
Increased competition could result in price reductions, reduced operating
margins and loss of market share, any of which could have a material adverse
effect on the Company. The Company also faces significant competition in
recruiting and retaining IT professionals which could result in higher labor
costs or shortages. There can be no assurance that the Company will compete
successfully with existing or new competitors or that competitive pressures
faced by the Company will not materially adversely affect its business, results
of operations or financial condition. See "Risk Factors--Intense Competition."
INTELLECTUAL PROPERTY
The Company's business includes the development of custom software
applications and other deliverables in connection with specific customer
engagements. Ownership of such software and associated deliverables created for
customers is generally retained by or assigned to the customer. The Company also
develops software components and libraries that can be reused in application
software development, and certain software toolsets and proprietary
methodologies, most of which remain the property of the Company.
In order to protect its proprietary rights in these various intellectual
properties, the Company relies upon a combination of trade secret, nondisclosure
and other contractual arrangements, and copyright and trademark laws. The
Company 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, and has agreed to recognize protection on intellectual property
rights conferred under the laws of other member countries, including the U.S.
The Company believes that the 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.
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<PAGE> 44
Although the Company believes that its services and products 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. See "Risk Factors -- Limited Intellectual Property Protection."
FACILITIES
The Company's headquarters and principal administrative, sales and
marketing, and system development operations are located in approximately 24,900
square feet of leased space in Troy, Michigan. The Company occupies these
premises under a lease expiring on November 30, 2001. The Company's primary
training and development center is located in approximately 50,240 square feet
of leased space in Cary, North Carolina, under a lease which expires March 31,
1999. The Company also leases regional office facilities in Dallas, Texas;
Fremont, California; Oakbrook, Illinois; Minneapolis, Minnesota; Durham, North
Carolina; Santa Fe, New Mexico; Woodbridge, New Jersey; and London, England.
Syntel India leases approximately 20,210 square feet of office space in
Mumbai, India, under four leases expiring on various dates from October 14, 1997
to September 30, 1998, each of which is expected to be renewed for a period of
five years upon expiration. This leased space is in the process of being
expanded by approximately 13,000 square feet. Syntel India's IT professionals,
as well as its senior management, administrative personnel, human resources and
sales and marketing functions are housed in this facility. Syntel has leased
substantially all of an office building in Chennai, India consisting of
approximately 33,000 square feet. The lease terms expire May 2003, subject to
the Company's option to renew for an additional period of three years.
The Company believes that these facilities are adequate for its currently
anticipated future needs.
LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings or
governmental investigation and is not aware of any threatened litigation or
governmental investigation. Since September 29, 1995, the Company has been
subject to a consent decree with the U.S. Department of Labor relating to its
H-1B employees. The Company believes that it has fully complied with the consent
decree and that continued compliance through the expiration of the decree in
September 1997 will not have a material adverse effect on the Company. See "Risk
Factors -- Government Regulation of Immigration; DOL Consent Decree" and
"Business -- Human Resources -- DOL Consent Decree."
43
<PAGE> 45
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers, directors and prospective directors, who
have agreed to serve as directors upon consummation of this offering, are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Bharat Desai..................... 44 President, Chief Executive Officer and Director
Neerja Sethi..................... 42 Vice President, Corporate Affairs and Director
John Andary...................... 47 Chief Financial Officer and Treasurer
Ken Kenjale...................... 47 Chief Technology Officer
Daniel M. Moore.................. 43 General Counsel, Secretary and Vice President,
Benefits and Policy Administration
Richard Baldyga.................. 36 Vice President, Global Delivery Services
John Kennedy..................... 56 Vice President, Sales and Relationship
Management
Jay Clark........................ 34 Vice President, Global Infrastructure and
Career Administration
Venkat Mallya.................... 36 Assistant Vice President, TeamSourcing
Paritosh K. Choksi............... 44 Prospective Director
Douglas Van Houweling............ 53 Prospective Director
</TABLE>
- ------------------------------
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 holds an M.B.A. in Systems and Finance from the University of Michigan and
a Bachelor of Technology degree in Electrical Engineering from the Indian
Institute of Technology in Mumbai, India. Mr. Desai is the spouse of Ms. Sethi.
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 holds an M.S. in
Computer Science from Oakland University, an M.B.A. in Operations Research from
Delhi University, and a B.S. in Mathematics from Delhi University. 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. Mr. Andary has a B.A. in
Accountancy from Walsh College and is a Certified Public Accountant.
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. Mr. Kenjale holds a Bachelor of Engineering degree and a Master of
Technology degree in Computer Science from the Indian Institute of Technology in
Kanpur, India.
Daniel M. Moore has served the Company as General Counsel and Secretary
since March 1996, and Vice President, Benefits and Policy Administration since
July 1997. From June 1996 to June 1997, Mr. Moore served as the Company's Acting
Vice President, Human Resources. From June 1992 to March 1996, Mr. Moore served
as Vice President and Senior Corporate Counsel with Comerica Incorporated, and
he was Vice President and Managing Commercial Counsel with Manufacturers
National Corporation prior to its merger with Comerica Incorporated. Mr. Moore
has a B.A. in Accounting from Michigan State University and a J.D. from the
Detroit College of Law.
Richard Baldyga has served the Company as Vice President, Global Delivery
since February 1997. From July 1994 to February 1997, Mr. Baldyga served as the
Company's Vice President, Operations.
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<PAGE> 46
From 1984 to July 1994, Mr. Baldyga served in various positions at EDS. Mr.
Baldyga holds a B.S. in Engineering Technology from the New Jersey Institute of
Technology.
John Kennedy has served the Company as Vice President, Sales and
Relationship Management of the Company since February 1997. From August 1995 to
February 1997, Mr. Kennedy served as the Company's Assistant Vice President,
National Accounts and Sales. From April 1993 to August 1995, Mr. Kennedy served
as Director of Corporate Accounts at Kelly Services, Inc. From July 1981 to
March 1993, Mr. Kennedy served as a Business Unit Executive at IBM Corporation.
Mr. Kennedy holds a B.S. in Mechanical Engineering, an M.B.A. in Business
Administration, and a Certificate of Advanced Engineering Study, all from
Cornell University.
Jay Clark has served the Company as Vice President, Global Infrastructure
and Career Administration since July 1997. From August 1994 to July 1997, Mr.
Clark served as Assistant Vice President, Outsourcing Solutions of the Company.
From January 1985 to August 1994, Mr. Clark served in various positions at EDS.
Mr. Clark holds a degree in Management Information Systems from Tennessee
Technological University.
Venkat Mallya has served the Company as Assistant Vice President,
TeamSourcing of the Company since February 1997. From June 1992 through February
1997, Mr. Mallya served in various positions with the Company, most recently as
a Branch Manager and a Director, Sales. From 1990 to 1992, Mr. Mallya served as
Group Marketing Manager for Onward Technology Group. Mr. Mallya holds a Masters
in Commerce and Finance and an M.B.A. in Marketing/Management, both from Bombay
University.
Paritosh K. Choksi has been associated with the Phoenix American group of
companies since 1977 and is currently Phoenix American's Senior Vice President,
Chief Financial Officer and Treasurer and a director. He has significant
experience in corporate finance, debt and equity placements and mergers and
acquisitions. Mr. Choksi has an M.B.A. from the University of California,
Berkeley in Finance and Marketing, and a Bachelor of Technology degree in
Mechanical Engineering from Indian Institute of Technology in Mumbai, India.
Douglas E. Van Houweling has served as Dean for Academic Outreach since
1995, and as Vice Provost for Information and Technology since 1984, at the
University of Michigan. As Vice Provost for Information and Technology, Dr. Van
Houweling is responsible for the University's strategic direction in the
information technology arena. At the University, Dr. Van Houweling holds
professorial appointments in the School of Information, the Business School and
the Department of Political Science in the College of Literature, Science and
the Arts. Dr. Van Houweling holds an undergraduate degree from Iowa State
University and a Ph.D in Government from Indiana University.
The Company's Board of Directors currently consists of two members. Upon
completion of this offering, the Board of Directors will be increased to five
members. The Board is divided into three classes, each of whose members serve
for staggered three-year terms. Mr. Desai is a Class III Director and will serve
an initial three-year term. Ms. Sethi is a Class II Director and will serve an
initial two-year term. The Class I directorship, which will be for an initial
one-year term, is currently vacant. There are also vacancies for one Class II
Director and one Class III Director. The three vacancies on the Board will be
filled by appointment by the current Board of Directors, with Mr. Choksi serving
as a Class III Director, and Mr. Van Houweling serving as a Class II Director.
The vacancy in the Class I directorship will be filled after completion of this
offering. At each annual meeting of shareholders after this offering, the
appropriate number of directors will be elected for a three-year term to succeed
the directors of the same class whose terms are then expiring.
BOARD COMMITTEES
In the past, the Company has not maintained any committees of the Board of
Directors. Upon completion of this offering, the Board of Directors will
establish an Audit Committee and a Compensation Committee.
45
<PAGE> 47
The Audit Committee will be responsible for reviewing with management the
financial controls and accounting and reporting activities of the Company. The
Audit Committee will review the qualifications of the Company's independent
auditors, make recommendations to the Board of Directors regarding the selection
of independent auditors, review the scope, fees and results of any audit and
review non-audit services and related fees. The members of the Audit Committee
have not yet been appointed. All members of the Audit Committee will be
non-employee directors.
The Compensation Committee will be responsible for the administration of
all salary and incentive compensation plans for the officers and key employees
of the Company, including bonuses. The Compensation Committee will also
administer the Company's Stock Option and Incentive Plan. The members of the
Compensation Committee have not yet been appointed. All members of the
Compensation Committee will be non-employee directors.
The Board of Directors does not have a Nominating Committee. The selection
of nominees to the Board of Directors will be made by the entire Board of
Directors.
DIRECTOR COMPENSATION
Directors who are not employees of the Company will be paid $2,000 per
Board meeting and $500 per Committee meeting, and all directors will be
reimbursed for travel expenses incurred in connection with attending Board and
Committee meetings. Each non-employee director will be granted an option to
purchase 1,000 shares of the Company's Common Stock under the Stock Option Plan
at the first Board meeting that he or she attends, which will vest on the first
anniversary of the grant date, and thereafter will be granted an annual option
to purchase 1,000 shares of the Company's Common Stock at the first Board
meeting of the year he or she attends.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee prior to this offering.
Accordingly, Mr. Desai and Ms. Sethi, the Company's President and Chief
Executive Officer and Vice President, Corporate Affairs, respectively, had
responsibility for all decisions with respect to executive officer compensation.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid for the year ended December 31, 1996 to the Company's Chief Executive
Officer and each of the Company's four other most highly compensated executive
officers whose total salary plus bonus exceeded $100,000 for the year ended
December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)
- -------------------------------------------------- ------------ --------
<S> <C> <C>
Bharat Desai, President and Chief Executive
Officer......................................... $420,000 $350,000
Neerja Sethi, Vice President, Corporate Affairs... $360,000 $250,000
Richard Baldyga, Vice President, Global Delivery
Services........................................ $180,000 $ 20,000
Jay Clark, Vice President, Global Infrastructure
and Career Administration....................... $145,000 $ 17,500
John Kennedy, Vice President, Sales and
Relationship Management......................... $140,000 $ 14,000
</TABLE>
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<PAGE> 48
EMPLOYMENT AGREEMENTS
The Company is a party to employment agreements with Mr. Desai and Ms.
Sethi through December 31, 1999, pursuant to which they will continue to serve
the Company in their current positions, at initial salaries of $300,000 and
$96,000, respectively. Salaries during calendar year 1999 will be determined by
the Compensation Committee of the Board of Directors, as will annual bonuses
throughout the employment term. The agreements provide that upon termination of
employment by the Company for reasons other than for cause (as defined in the
agreements), or death, disability or incapacity, the Company shall pay the
executive for his or her then salary for the remaining term of the agreement,
without reduction for any compensation received from other sources. Under the
agreements, Mr. Desai and Ms. Sethi are subject to noncompetition,
nonsolicitation and nondisclosure covenants during the employment term and for
two years following termination of employment.
STOCK OPTION PLAN
The Company's Stock Option and Incentive Plan (the "Stock Option Plan")
became effective on April 1, 1997. The aggregate number of shares reserved for
issuance under the Stock Option Plan is 2,000,000 shares. Options granted under
the Stock Option Plan typically vest in increments of 10%, 20%, 30%, and 40% of
the shares subject to the option on the first, second, third and fourth
anniversaries, respectively, of the grant date of the option. The purpose of the
Stock Option Plan is to provide incentives for employees and non-employee
directors to promote the success of the Company, and to enhance the Company's
ability to attract and retain the services of such persons. Options granted
under the Stock Option Plan may be either: (i) options intended to qualify as
"incentive stock options" under Section 422 of the Code; or (ii) non-qualified
stock options. The Stock Option Plan also permits the grant of stock
appreciation rights in connection with the grant of stock options, and the grant
of restricted stock awards, performance shares and annual incentive awards.
Stock options and stock awards may be granted under the Stock Option Plan to all
employees and non-employee directors of the Company, or of any present or future
subsidiary or parent of the Company.
The Stock Option Plan is administered by the Board of Directors, which may,
and is expected to, delegate administrative responsibility for the Stock Option
Plan to the Compensation Committee. The Compensation Committee has the authority
to determine exercise prices applicable to the option, the eligible officers,
directors or employees to whom options may be granted, the number of shares of
the Company's Common Stock subject to each option and the extent to which
options may be exercisable. The Compensation Committee also has the authority to
determine the recipients and the terms of grants of stock appreciation rights,
restricted stock awards, performance share awards and annual incentive awards
under the Stock Option Plan. The Compensation Committee is empowered to
interpret the Stock Option Plan and to prescribe, amend and rescind the rules
and regulations pertaining to the Stock Option Plan. No option is transferable
by the optionee other than by will or the laws of descent and distribution, and
each option is exercisable, during the lifetime of the optionee, only by such
optionee.
Any incentive stock option that is granted under the Stock Option Plan may
not be granted at a price less than the fair market value of the Company's
Common Stock on the date of grant (or less than 110% of fair market value in the
case of holders of 10% or more of the total combined voting power of all classes
of stock of the Company or a subsidiary or parent of the Company). Non-qualified
stock options may be granted at the exercise price established by the
Compensation Committee, which may be less than the fair market value of the
Company's Common Stock on the date of grant. The annual incentive awards are
based on pre-established objective performance goals. Non-qualified stock
options, stock appreciation rights and annual incentive awards are intended to
comply with the requirements of Section 162(m) of the Code to ensure that such
incentive compensation is fully tax deductible.
Each option granted under the Stock Option Plan is exercisable for a period
not to exceed ten years from the date of grant (or five years in the case of a
holder of more than 10% of the total
47
<PAGE> 49
combined power of all classes of stock of the Company or of a subsidiary or
parent of the Company) and shall lapse upon expiration of such period, or
earlier upon termination of the recipient's employment with the Company, or as
determined by the Compensation Committee.
Options to purchase 608,750 shares are outstanding under the Stock Option
Plan, of which 140,000 options were granted at an exercise price of $2.00 per
share on April 1, 1997 and 468,750 options were granted at an exercise price of
$7.00 per share on June 2, 1997. As approved by the Company's Board of
Directors, the fair value of the Common Stock on April 1, 1997 was $5.00 per
share and the fair value of the Common Stock on June 2, 1997 was $7.23 per
share. Accordingly, compensation expense of $420,000 related to the options
granted on April 1, 1997 ($3.00 multiplied by 140,000 shares) and $107,812
related to the options granted on June 2, 1997 ($0.23 multiplied by 468,750
shares) will be recognized over the four year vesting period to the extent that
recipients of such options are employed by the Company at the end of each year
comprising the vesting period. Of these options, 10,000 were granted to each of
Mr. Baldyga, Mr. Clark and Mr. Kennedy at exercise prices of $2.00 per share. In
addition, upon consummation of the offering, the Company intends to grant
options to substantially all other employees to purchase in the aggregate
approximately 42,000 additional shares at an exercise price equal to the initial
offering price of Common Stock offered hereby. Prior to this offering no shares
of Common Stock will have been issued upon exercise of options granted under the
Stock Option Plan.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Stock Purchase Plan") will
become effective upon consummation of the offering. A total of 1,000,000 shares
of the Company's Common Stock have been reserved for issuance under the Stock
Purchase Plan. The Stock Purchase Plan is intended to qualify under Section 423
of the Code. An employee electing to participate in the Stock Purchase Plan must
authorize a stated dollar amount or percentage of the employee's regular pay to
be deducted by the Company from the employee's pay for the purpose of purchasing
shares of Common Stock over a period of 6 to 27 months, such period to be set by
the Compensation Committee of the Board of Directors. The price at which
employees may purchase Common Stock will be set by the Compensation Committee at
not less than the lesser of 85% of the fair market value of the Common Stock on
the Nasdaq National Market on the first day of the purchase period or 85% of the
fair market value of the Common Stock on the last day of the purchase period.
Employees of the Company who have completed six full months of service with the
Company and whose customary employment is more than 20 hours per week and five
or more months per calendar year are eligible to participate in the Stock
Purchase Plan. An employee may not be granted an option under the Stock Purchase
Plan if after the granting of the option such employee would be deemed to own 5%
or more of the combined voting power of value of all classes of stock of the
Company. No employee may be granted an option which, together with options
granted under all stock purchase plans of the Company and its subsidiaries,
permits the employee to accrue option rights in excess of $25,000 of the fair
market value of such shares for any calendar year in which an option is
outstanding. The maximum number of shares of Common Stock an employee may
purchase during a purchase period shall be determined by the Compensation
Committee, but may not exceed 30% of the employee's cash compensation during any
purchase period. As of June 1, 1997, approximately 1,318 employees were eligible
to participate in the Stock Purchase Plan. The Stock Purchase Plan will be
administered by the Compensation Committee.
CERTAIN TRANSACTIONS
Syntel India is an Indian corporation that the Company has engaged as a
subcontractor to perform offshore software development projects. Mr. Desai and
Ms. Sethi, the President and Vice President, Corporate Affairs, respectively,
and majority shareholders of the Company, own 100% of the capital stock of
Syntel India. Syntel India derives substantially all of its revenues from the
Company. For the year ended December 31, 1995 and 1996 and for the six month
period ended June 30, 1997, the Company purchased services from Syntel India in
the amounts of approximately $2,674,000, $4,066,000 and $3,408,000,
respectively. Syntel India's revenues are the result of negotiated intercompany
billing
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<PAGE> 50
rates between Syntel India and the Company based upon competitive market rates
for similar services, demand for services and volume considerations. The Company
believes that such rates are not materially different than those charged by
unaffiliated parties.
Prior to the offering, the Company will enter into a Stock Purchase
Agreement to purchase all of the shares of Syntel India from Mr. Desai and Ms.
Sethi for $7.0 million in cash. The $7.0 million purchase price is 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 for this acquisition will be paid from a
portion of the net proceeds of this offering. This acquisition will be completed
upon consummation of this offering. Upon consummation of the acquisition, Syntel
India will become a wholly-owned subsidiary of the Company. See "Use of
Proceeds" and "Management's Discussion and Analysis of Results of Operations and
Financial Condition--Syntel India Acquisition".
Prior to the consummation of this offering, the Company, Mr. Desai, Ms.
Sethi and the Company's other shareholders will enter into a mutual
indemnification agreement relating to income tax liabilities of the Company and
the shareholders in connection with the termination of the Company's S
corporation status. The agreement provides that the shareholders, severally
(according to their relative percentage ownership of the Common Stock) and not
jointly, will indemnify the Company against any unpaid income tax liability of
the Company attributable to the period prior to the termination of the Company's
S corporation status. The agreement also provides that the Company will
indemnify the shareholders against any income tax liability they may incur as a
result of a final adjustment to the taxable income of the Company for any period
ending after the termination date of the Company's S corporation status which
results in a decrease for any period in the Company's taxable income and a
corresponding increase in the taxable income of the shareholders.
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of June 30, 1997, and as adjusted to
reflect the sale of the shares offered by this Prospectus, by Mr. Desai and Ms.
Sethi, who each beneficially own in excess of 5% of the outstanding Common Stock
of the Company, Mr. Choksi, who will become a director upon the consummation of
this offering, and by all executive officers and directors of the Company as a
group.
<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY
NUMBER OF OWNED(1)
SHARES --------------------
BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNERS OWNED OFFERING OFFERING
----------------- ------------ -------- --------
<S> <C> <C> <C>
Neerja Sethi......................................... 13,187,500(2) 59.9% 52.8%
Bharat Desai......................................... 8,787,500(3) 39.9% 35.1%
Paritosh K. Choksi................................... 25,000(4) * *
All directors and executive officers as a group (9
persons)........................................... 22,000,000 100.0% 87.9%
</TABLE>
- ------------------------------
* Less than 1%.
(1) Assumes no exercise of the Underwriters' over-allotment option.
(2) Includes 7,100,000 shares of Common Stock held in several trusts for the
benefit of Ms. Sethi and her descendants, of which trusts Ms. Sethi is a
trustee. Ms. Sethi disclaims beneficial ownership of shares held by her
spouse, Mr. Desai. The business address of Ms. Sethi is Suite 400, 2800
Livernois, Troy, Michigan 48083.
(3) Includes 100,000 shares of Common Stock held in several trusts for the
benefit of Mr. Desai's descendants, of which trusts Mr. Desai is a trustee.
Mr. Desai disclaims beneficial ownership of shares held by his spouse, Ms.
Sethi. The business address of Mr. Desai is Suite 400, 2800 Livernois, Troy,
Michigan 48083.
(4) Includes 5,000 shares owned by Mr. Choksi's spouse, of which he disclaims
beneficial ownership.
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<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 40,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock. As of the consummation of
this offering, the Company will have outstanding 25,000,000 shares of Common
Stock (25,450,000 if the Underwriters' overallotment option is exercised in
full). In addition, the Company has reserved 2,000,000 shares under its Stock
Option Plan, of which 140,000 were granted at an exercise price of $2.00 per
share on April 1, 1997 and of which 468,750 were granted at an exercise price of
$7.00 per share on June 2, 1997. The Company intends to grant options to
substantially all of its employees to purchase in the aggregate approximately
42,000 additional shares at an exercise price equal to the initial offering
price of the Company's Common Stock offered hereby. Further, the Company has
reserved 1,000,000 shares for issuance under the Employee Stock Purchase Plan.
No shares of Preferred Stock have been designated or issued. The following
description of the capital stock of the Company is a summary and is qualified in
its entirety by the provisions of the Company's Articles of Incorporation
("Articles") and Bylaws, copies of which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
Subject to the rights of any holder of Preferred Stock, each holder of
Common Stock is entitled to one vote per share for the election of directors as
well as on other matters, to dividends as, when, and if declared by the
Company's Board of Directors, and upon liquidation to share in the net assets of
the Company pro rata in accordance with such shareholder's holdings. The Common
Stock has no preemptive, redemption, conversion or subscription rights, and all
outstanding shares of Common Stock are, and the shares of Common Stock offered
by the Company hereby will be, duly authorized, validly issued and fully paid
and nonassessable.
PREFERRED STOCK
The Articles authorize the issuance of Preferred Stock. The Board of
Directors has the power, without further action by the shareholders, to divide
any and all shares of Preferred Stock into series and to fix and determine the
relative rights and preferences of the Preferred Stock, such as the designation
of series and the number of shares constituting such series, dividend rights,
redemption and sinking fund provisions, liquidation and dissolution preferences,
conversion or exchange rights and voting rights, if any. Issuances of Preferred
Stock by the Board of Directors may result in such shares having senior dividend
and/or liquidation preferences to the holders of shares of Common Stock and may
dilute the voting rights of such holders. Issuances of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could, among other things, adversely affect the voting
rights of holders of the Common Stock. In addition, the issuance of Preferred
Stock could make it more difficult for a third party to acquire a majority of
the outstanding voting stock. Accordingly, the issuance of Preferred Stock may
be used as an "anti-takeover" device without further action on the part of the
shareholders of the Company. The Company has no present plans to issue any
shares of Preferred Stock. See "Risk Factors--Anti-Takeover Provisions."
CERTAIN PROVISIONS OF THE ARTICLES AND BYLAWS
Indemnification. The Articles and Bylaws provide that directors and
officers of the Company will be indemnified by the Company to the fullest extent
authorized by Michigan law against all expenses and liabilities reasonably
incurred in connection with service for or on behalf of the Company.
Limitation of Liability. The Articles provide that directors of the Company
will not be personally liable for monetary damages to the Company for certain
breaches of their fiduciary duty as directors, unless they violated their duty
of loyalty to the Company or its shareholders, acted in bad faith, knowingly or
intentionally violated the law, authorized illegal dividends or redemptions or
derived an improper personal benefit from their actions as directors. This
provision would have no effect on the availability of equitable remedies or
nonmonetary relief, such an injunction or rescission for breach of
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<PAGE> 52
the duty of care. In addition, the provision applies only to claims against a
director arising out of his role as a director and not in any other capacity
(such as an officer or employee of the Company). Further, liability of a
director for violations of the federal securities laws will not be limited by
this provision.
Classified Board; Removal for Cause. The Company's Restated Articles of
Incorporation provide that the directors of the Company shall be divided into
three classes and serve staggered three-year terms. As a result, approximately
one-third of the Board of Directors will be elected each year. Classification of
the Board of Directors expands the time required to change the composition of a
majority of Directors and may tend to discourage a proxy contest or other
takeover bid for the Company. In addition, the Company's Bylaws provide that
members of the Board of Directors may be removed by a majority of the
shareholders only for cause at a special meeting called for such purpose.
Special Meetings; Advance Notice. The Company's Bylaws reserve the
authority to call a special shareholder's meeting to the Board of Directors, the
Chairman of the Board or the President. In addition, the Company's Bylaws
establish an advance notice procedure for the nomination of candidates for
election as directors, as well as for other shareholder proposals to be
considered at annual shareholders meetings, notice of shareholder proposals and
director nominations must be given timely in writing to the Secretary of the
Company. Such notice, to be timely, must be received at the principal executive
offices of the Company not less than 60 days nor more than 90 days prior to the
first anniversary of the preceding year's annual meeting; however, in the event
that the date of the annual meeting is advanced by more than 30 days or delayed
by more than 60 days from such anniversary date, notice by the shareholder to be
timely must be so delivered not earlier than the 90th day prior to such annual
meeting and not later than the close of business on the later of the 60th day
prior to such annual meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made.
ANTI-TAKEOVER STATUTES
Upon the effectiveness of this offering, the Company will be subject to the
provisions of Chapter 7A and 7B of the Michigan Business Corporation Act
("MBCA"). Chapter 7A provides that business combinations between a Michigan
corporation which is subject to Chapter 7A and a beneficial owner of 10% or more
of the voting power of such corporation generally require the approval of 90% of
the votes of each class of stock entitled to be cast, and at least 2/3 of the
votes of each class of stock entitled to be cast other than shares owned by such
10% owner. Such requirements will not apply if: (i) the corporation's board of
directors approves the transaction prior to the time the 10% owner becomes such;
or (ii) the transaction satisfies certain fairness standards, certain other
conditions are met and the 10% owner has been such for at least five years.
Chapter 7B of the MBCA provides that "control shares" of a corporation
acquired in a control share acquisition have no rights except as granted by the
shareholders of the corporation. Control shares are shares that, when added to
shares previously owned by a shareholder, increase such shareholder's ownership
of voting stock to at least 20%, at least 33 1/3% or a majority of the
outstanding voting power of a corporation. A control share acquisition must be
approved by a majority of the votes cast by holders of stock entitled to vote
excluding shares owned by the acquiror and certain officers and directors. No
such approval is required, however, for gifts or acquisitions pursuant to a
merger to which the corporation is a party. If a corporation's articles of
incorporation or bylaws so provide, control shares acquired in a control share
acquisition with respect to which no acquiring person statement has been filed
may be redeemed at "fair value" by the corporation at any time during the period
ending 60 days after the last control share acquisition. In addition, if a
corporation's articles of incorporation or bylaws so provide, control shares may
be redeemed at fair value after an acquiring person statement has been filed and
after the meeting at which the voting rights of the control shares are submitted
to shareholders if the control shares are not accorded full voting rights. In
the event control shares acquired in a control share acquisition are accorded
full voting rights and the acquiring person has acquired a majority of all
voting power of the corporation, the shareholders of the
51
<PAGE> 53
corporation, other than the acquiring person, have dissenters' rights. Fair
value means a value not less than the highest price paid per share by the
acquiring person in the control share acquisition.
TRANSFER AGENT
Harris Trust and Savings Bank of Chicago, Illinois will be the Transfer
Agent for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be 25,000,000 shares of Common
Stock outstanding. The 3,000,000 shares (or up to 3,450,000 shares if the
Underwriters' over-allotment option is exercised in full) of Common Stock issued
and sold in this offering will be freely tradeable (other than by an "affiliate"
of the Company as such term is defined in the Securities Act) without
restriction under the Securities Act. The remaining shares of Common Stock then
outstanding will be deemed "restricted securities" within the meaning of Rule
144 under the Securities Act (the "Restricted Shares") and may be resold only in
compliance with the registration provisions of the Securities Act or an
exemption thereunder.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
Restricted Shares for at least one year from the later of the date such
Restricted Shares were acquired from the Company or (if applicable) from an
affiliate or the date on which they were fully paid, is entitled to sell within
any three-month period a number of shares that does not exceed the greater of 1%
of the then-outstanding shares of Common Stock or the average weekly trading
volume in the public market as reported through the Nasdaq National Market
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain requirements as to the manner and notice of sale and the
availability of public information concerning the Company.
Restricted Shares held by affiliates of the Company are subject to the
foregoing volume limitations, holding period and other restrictions under Rule
144. Affiliates may sell shares other than Restricted Shares in accordance with
the foregoing volume limitations and other restrictions, but without regard to
any holding period.
Further, under Rule 144(k), if a period of at least two years has elapsed
since the later of the date Restricted Shares were acquired from the Company or
from an affiliate of the Company or the date on which they were fully paid, a
holder of such Restricted Shares who is not an affiliate of the Company at the
time of the sale, and has not been an affiliate of the Company for at least
three months prior to the sale, would be entitled to sell the shares immediately
without regard to volume limitations and the other conditions described above.
Prior to this offering, there has been no market for the Common Stock and
no prediction can be made as to the effect, if any, that market sales of shares
or the availability of such shares for sale will have on the market price of the
Common Stock from time to time. Nevertheless, sales of substantial amounts of
Common Stock in the public market could have an adverse impact on such market
price and the Company's ability to raise additional equity capital.
The holders of all of the shares of Common Stock currently outstanding and
the Company have agreed that for a period of 180 days after the date of this
Prospectus they will not offer, sell or otherwise dispose of any shares of
Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into Common Stock, during the 180-day
period following the date of this Prospectus. However, Hambrecht & Quist, LLC,
in its sole discretion, may release the shareholders from these lock-up
agreements, in whole or in part, at any time without notice. Following the
180-day lock-up period, all of the restricted securities will become eligible
for sale, subject to the manner of sale, volume, notice and information
requirements of Rule 144 of the Securities Act. See "Risk Factors -- Shares
Eligible for Future Sale."
52
<PAGE> 54
UNDERWRITING
Subject to certain terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom Hambrecht & Quist LLC,
Prudential Securities Incorporated and Robertson, Stephens & Company LLC are
acting as representatives (the "Representatives"), have severally agreed to
purchase from the Company the following respective number of shares of Common
Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC.......................................
Prudential Securities Incorporated..........................
Robertson, Stephens & Company LLC...........................
---------
Total.................................................. 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow and such dealers may reallow
a concession not in excess of $ per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the Representatives. The Representatives have informed
the Company that the Underwriters do not intend to confirm sales to any accounts
over which they exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
that the number of shares of Common Stock to be purchased by it shown in the
table above bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The Company's shareholders have agreed that they will not, without the
prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose
of any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities exchangeable for or convertible into shares
53
<PAGE> 55
of Common Stock owned by them during the 180-day period following the date of
this Prospectus. The Company has agreed that it will not, without the prior
written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of
any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities or exchangeable for or convertible into shares of Common
Stock during the 180-day period following the date of this Prospectus, except
that the Company may grant options pursuant to the Company's Stock Option Plan
provided that, without the prior written consent of Hambrecht & Quist LLC, such
options shall not be exercisable during such period.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation among the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price are prevailing
market and economic conditions, revenues and earnings of the Company, market
valuations of other companies engaged in activities similar to the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, the Company's management and other
factors deemed relevant. The estimated initial public offering price range set
forth on the cover of this Prospectus is subject to change as a result of market
conditions and other factors.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq Stock Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby and certain other
legal matters will be passed upon for the Company by Dykema Gossett PLLC,
Bloomfield Hills, Michigan. Certain legal matters will be passed upon for the
Underwriters by Sidley & Austin, Chicago, Illinois.
EXPERTS
The balance sheets as of December 31, 1996 and 1995 and the statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1996 of Syntel, Inc. included in this Prospectus, have
been included herein in reliance upon the report of Coopers & Lybrand, L.L.P.,
independent accountants, given on the authority of that firm as experts in
auditing and accounting.
The balance sheets as of December 31, 1996 and 1995, and the statements of
income, stockholders' equity and cash flows for each of the two years ended
December 31, 1996 and 1995 of Syntel India included in this Prospectus, have
been included herein in reliance upon the report of Rajkamal Shah & Co., Mumbai,
India, independent chartered accountants, given on the authority of that firm as
experts in auditing and accounting.
The balance sheet as of December 31, 1994, and the statements of income,
stockholders' equity and cash flows for the year ended December 31, 1994 of
Syntel India included in this Prospectus, have been included herein upon the
report of H. H. Sachde & Co., Gondal, India, independent chartered accountants,
given on the authority of that firm as experts in auditing and accounting.
54
<PAGE> 56
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules thereto. The Registration
Statement, including the exhibits and schedules thereto, may be inspected
without charge at the principal office of the Commission, 450 Fifth Street,
N.W., Washington, DC 20549, the New York Regional Office located at 7 World
Trade Center, Suite 1300, New York, New York 10048, and the Chicago Regional
Office located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and copies of all or any part thereof may be obtained at prescribed rates from
the Commission's Public Reference Section at its principal office. The
Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's World Wide
Web site is http://www.sec.gov.
55
<PAGE> 57
INDEX TO FINANCIAL STATEMENTS
SYNTEL, INC. AND SYNTEL SOFTWARE PRIVATE LIMITED
<TABLE>
<CAPTION>
PAGES
-----------
<S> <C>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Basis of Presentation.................................. F-2
Pro Forma Consolidated Balance Sheet................... F-3
Pro Forma Consolidated Statement of Income............. F-4
Notes to Pro Forma Consolidated Financial Statements... F-5
FINANCIAL STATEMENTS
Report of Independent Accountants on the financial
statements of Syntel, Inc. as of December 31, 1995 and
1996 and for each of the three years in the period ended
December 31, 1996......................................... F-6
Syntel, Inc. Balance Sheet as of December 31, 1995,
1996 and June 30, 1997................................ F-7
Syntel, Inc. Statement of Income for the years ended
December 31, 1994, 1995,
1996 and for six months ended June 30, 1996 and
1997.................................................. F-8
Syntel, Inc. Statement of Shareholders' Equity for the
years ended December 31, 1994, 1995, 1996 and for six
months ended June 30, 1997............................ F-9
Syntel, Inc. Statement of Cash Flows for the years
ended December 31, 1994, 1995 and 1996 and for the six
months ended June 30, 1996 and 1997................... F-10
Syntel, Inc. Notes to Financial Statements............. F-11
Report of Independent Chartered Accountants on the financial
statements of Syntel Software Private Limited as of and
for the year ended December 31, 1994...................... F-14
Syntel Software Private Limited Balance Sheet as of
December 31, 1994..................................... F-15
Syntel Software Private Limited Statement of Income for
the year ended December 31, 1994...................... F-16
Syntel Software Private Limited Statement of
Stockholders' Equity for the year ended December 31,
1994.................................................. F-17
Syntel Software Private Limited Statement of Cash Flows
for the year ended December 31, 1994.................. F-18
Syntel Software Private Limited Notes Forming Part of
Accounts.............................................. F-19
Report of Independent Chartered Accountants on the financial
statements of Syntel Software Private Limited as of and
for each of the years ended December 31, 1995 and 1996.... F-21
Syntel Software Private Limited Balance Sheet as of
December 31, 1995 and 1996 and June 30, 1997.......... F-22
Syntel Software Private Limited Statement of Income for
the years ended December 31, 1995 and 1996 and for the
six months ended June 30, 1997........................ F-23
Syntel Software Private Limited Statement of
Stockholders' Equity for the years ended December 31,
1995 and 1996 and the six months ended June 30,
1997.................................................. F-24
Syntel Software Private Limited Statement of Cash Flows
for the years ended December 31, 1995 and 1996 and for
the six months ended June 30, 1997.................... F-25
Syntel Software Private Limited Notes Forming Part of
Accounts.............................................. F-26
</TABLE>
F-1
<PAGE> 58
SYNTEL, INC. AND SUBSIDIARY
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The following Pro Forma Consolidated Balance Sheet as of June 30, 1997 and
the Pro Forma Consolidated Statement of Income for the years ended December 31,
1994, 1995 and 1996 and the six months ended June 30, 1997 give effect to the
issuance and sale by the Company of 3,000,000 shares of Common Stock, the
application of estimated net proceeds therefrom, including the Syntel India
acquisition, and the Company's conversion from an S corporation to a C
corporation for U.S. federal and state income tax purposes. The acquisition of
Syntel India will be a merger of interests under common control. Upon
consummation of the acquisition, the historical financial statements of Syntel,
Inc. will be restated in a manner similar to a pooling of interests to include
the historical financial statements of Syntel India. The Pro Forma Consolidated
Balance Sheet as of June 30, 1997 is presented as if the application of
estimated net proceeds including the Syntel India acquisition and the conversion
from an S corporation to a C corporation for U.S. federal and state income tax
purposes had taken place on June 30, 1997. The Pro Forma Consolidated Statement
of Income for the years ended December 31, 1994, 1995 and 1996 and six months
ended June 30, 1997 presents the pro forma results of operations assuming the
acquisition of Syntel India and the S corporation to C corporation conversion.
The unaudited Pro Forma Consolidated Financial Statements have been
prepared based upon the historical financial statements of Syntel, Inc. and
Syntel India for the periods stated above. Such pro forma statements are
presented for informational purposes only and may not be indicative of the
results that would have occurred if the Syntel India acquisition and the
conversion from an S corporation to a C corporation for U.S. federal and state
income tax purposes had been consummated on the dates indicated, or of the
operating results that may be achieved in the future. The pro forma statements
should be read in conjunction with the financial statements and notes to
financial statements contained elsewhere herein.
F-2
<PAGE> 59
SYNTEL, INC. AND SUBSIDIARY
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------------------------------
SYNTEL PRO FORMA
SYNTEL, INC. INDIA ADJUSTMENTS CONSOLIDATED
------------ ------ ----------- ------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........... $ 1,143 $ 965 $27,300(a) $18,512
(7,000)(d)
(3,896)(f)
Accounts receivable, net............ 20,366 2,408 (2,381)(e) 20,393
Other current assets................ 4,250 631 (57)(e) 4,824
------- ------ ------- -------
Total current assets........... 25,759 4,004 13,966 43,729
Property and equipment................... 6,422 2,131 -- 8,553
Less accumulated depreciation....... 3,377 815 -- 4,192
------- ------ ------- -------
Property and equipment, net.... 3,045 1,316 -- 4,361
------- ------ ------- -------
$28,804 $5,320 $13,966 $48,090
======= ====== ======= =======
Current liabilities:
Accounts payable.................... $ 916 $ 402 $ (280)(e) $ 1,038
Accrued payroll and related costs... 6,182 -- -- 6,182
Other liabilities................... 5,134 -- (2,158)(e) 2,976
Deferred revenue.................... 3,754 -- -- 3,754
Income taxes payable................ -- 45 862(b) 907
------- ------ ------- -------
Total current liabilities...... 15,986 447 (1,576) 14,857
Income taxes payable..................... -- -- 2,588(b) 2,588
------- ------ ------- -------
Total liabilities.............. 15,986 447 1,012 17,445
======= ====== ======= =======
Common stock............................. 1 160 (160)(d) 1
Additional paid-in capital............... -- -- 5,471(c)
27,300(a) 30,644
(2,127)(d)
Retained earnings........................ 12,817 4,846 (5,471)(c)
(3,450)(b)
(3,896)(f)
(4,846)(d)
Cumulative translation adjustment........ -- (133) 133(d) --
------- ------ ------- -------
Total shareholders' equity..... 12,818 4,873 12,954 30,645
------- ------ ------- -------
$28,804 $5,320 $13,966 $48,090
======= ====== ======= =======
</TABLE>
- -------------------------
(a) Reflects the sale of shares of Common Stock by the Company and the
application of the estimated net proceeds of $27.3 million therefrom.
(b) Reflects the recording of the net current and deferred tax liabilities upon
termination of the Company's S corporation status.
(c) Reflects the transfer of undistributed accrual basis earnings to additional
paid-in capital.
(d) Reflects the acquisition of Syntel India for $7.0 million accounted for on
the carryover basis of accounting with the excess purchase price of
approximately $2.1 million treated as a reduction of additional paid-in
capital.
(e) Reflects the elimination of the intercompany balances between the Company
and Syntel India.
(f) Reflects the distribution of S corporation taxable undistributed income as
of June 30, 1997.
F-3
<PAGE> 60
SYNTEL, INC. AND SUBSIDIARY
PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994 YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------- ----------------------------
PRO FORMA
SYNTEL, INC. SYNTEL INDIA ADJUSTMENTS CONSOLIDATED SYNTEL, INC. SYNTEL INDIA
------------ ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................. $67,247 $1,503 $(1,410)(a) $67,340 $90,326 $2,520
Cost of revenues......... 55,937 788 (1,410)(a) 55,315 71,538 996
------- ------ ------- ------- ------- ------
Gross profit............. 11,310 715 -- 12,025 18,788 1,524
Selling, general and
administrative
expenses................ 8,209 394 8,603 13,309 600
------- ------ ------- ------- ------- ------
Income from
operations.............. 3,101 321 3,422 5,479 924
Other income (expense),
net..................... (69) 2 (67) 186 2
------- ------ ------- ------- ------- ------
Income before income
taxes................... 3,032 323 3,355 5,665 926
Income taxes............. -- 1 1,151(b) 1,152 428 8
------- ------ ------- ------- ------- ------
Net income............... $ 3,032 $ 322 $(1,151) $ 2,203 $ 5,237 $ 918
======= ====== ======= ======= ======= ======
Net income per
share(c)................ $ 0.09
=======
Pro forma weighted
average common shares
outstanding............. 25,380
=======
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------
PRO FORMA
ADJUSTMENTS CONSOLIDATED
----------- ------------
<S> <C> <C>
Revenues................. $ 2,520(a) $90,326
Cost of revenues......... (2,520)(a) 70,014
------- -------
Gross profit............. -- 20,312
Selling, general and
administrative
expenses................ -- 13,909
------- -------
Income from
operations.............. -- 6,403
Other income (expense),
net..................... 188
------- -------
Income before income
taxes................... 6,591
Income taxes............. 1,734(b) 2,170
------- -------
Net income............... $(1,734) $ 4,421
======= =======
Net income per
share(c)................ $ 0.17
=======
Pro forma weighted
average common shares
outstanding............. 25,710
=======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------
PRO FORMA
SYNTEL, INC. SYNTEL INDIA ADJUSTMENTS CONSOLIDATED
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues................. $92,237 $4,159 $(4,066)(a) $92,330
Cost of revenues......... 69,783 1,366 (4,066)(a) 67,083
------- ------ ------- -------
Gross profit............. 22,454 2,793 25,247
Selling, general and
administrative
expenses................ 18,261 1,010 19,271
------- ------ ------- -------
Income from
operations.............. 4,193 1,783 5,976
Other income (expense),
net..................... 299 (150) -- 149
------- ------ ------- -------
Income before income
taxes................... 4,492 1,633 6,125
Income taxes............. 321 29 1,396(b) 1,746
------- ------ ------- -------
Net income............... $ 4,171 $1,604 $(1,396) $ 4,379
======= ====== ======= =======
Net income per
share(c)................ $ 0.17
=======
Pro forma weighted
average common shares
outstanding............. 25,820
=======
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
-----------------------------------------------------------
PRO FORMA
SYNTEL, INC. SYNTEL INDIA ADJUSTMENTS CONSOLIDATED
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues................. $55,259 $3,474 $(3,408)(a) $55,325
Cost of revenues......... 42,067 1,082 (3,408)(a) 39,741
------- ------ ------- -------
Gross profit............. 13,192 2,392 -- 15,584
Selling, general and
administrative
expenses................ 10,316 831 -- 11,147
------- ------ ------- -------
Income from
operations.............. 2,876 1,561 4,437
Other income (expense),
net..................... 150 73 -- 223
------- ------ ------- -------
Income before income
taxes................... 3,026 1,634 -- 4,660
Income taxes............. 125 14 1,031(b) 1,170
------- ------ ------- -------
Net income............... $ 2,901 $1,620 $(1,031) $ 3,490
======= ====== ======= =======
Net income per
share(c)................ $ 0.13
=======
Pro forma weighted
average common shares
outstanding............. 25,820
=======
</TABLE>
F-4
<PAGE> 61
SYNTEL, INC. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(a) Reflects the elimination of the intercompany transactions between the
Company and Syntel India.
(b) Reflects the provision for federal and state income taxes at the effective
income tax rate as if the Company had been taxed as a C corporation.
The tax provision was computed as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1996 1997
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Statutory U.S. federal income tax rate.... 34.0% 34.0% 34.0% 34.0%
State income taxes, net of federal tax
benefit................................. 2.5 3.2 2.7 2.4
Tax rate impact from foreign earnings,
exempt from foreign taxes............... (3.4) (4.7) (8.6) (11.7)
Other..................................... 1.2 0.4 0.4 0.4
--- --- --- -----
34.3% 32.9% 28.5% 25.1%
=== === === =====
</TABLE>
(c) Earnings per share are based on weighted average common shares outstanding.
The impact on earnings per share of unexercised stock options using the
treasury stock method did not have a material dilutive effect. Therefore,
the assumed additional shares outstanding have not been included in the
weighted average common shares outstanding. Pro forma weighted average
common shares outstanding is computed as follows:
<TABLE>
<CAPTION>
FOR 1996 (IN THOUSANDS)
<S> <C>
Common shares outstanding................................... 22,000
Common shares issued with offering.......................... 3,000
Additional shares assumed outstanding due to the planned
1997 distributions of $14 million (including $7.0 million
for the acquisition of Syntel India) in excess of 1996
earnings of the Company and Syntel India of $5.8 million.
These additional shares represent a net $8.2 million
divided by an assumed initial offering price per share of
$10.00.................................................... 820
------
Weighted average common shares outstanding for 1996......... 25,820
</TABLE>
<TABLE>
<CAPTION>
FOR 1995
<S> <C>
Less effect of earnings of $1.1 million in 1995 in excess of
distributions of $5 million paid in 1996.................. (110)
------
Weighted average common shares outstanding for 1995......... 25,710
</TABLE>
<TABLE>
<CAPTION>
FOR 1994
<S> <C>
Less effect of earnings of $3.3 million (no distributions
paid)..................................................... (330)
------
Weighted average common shares outstanding for 1994......... 25,380
======
</TABLE>
F-5
<PAGE> 62
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Syntel, Inc.:
We have audited the accompanying balance sheet of Syntel, Inc. as of
December 31, 1996 and 1995, and the related statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Syntel, Inc. as of December
31, 1996 and 1995, and the results of its operations and cash flows for the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Detroit, Michigan
February 28, 1997
F-6
<PAGE> 63
SYNTEL, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 7,681,748 $ 5,277,388 $ 1,143,111
Accounts receivable, net......................... 16,838,704 20,588,748 20,365,797
Advance billings................................. -- -- 3,249,162
Employee and other advances...................... 316,614 332,236 289,111
Deposits, deferred offering costs and other...... 90,812 90,101 712,293
----------- ----------- -----------
Total current assets........................ 24,927,878 26,288,473 25,759,474
Property and equipment................................ 4,413,299 6,001,087 6,421,638
Less accumulated depreciation.................... 1,463,390 2,640,313 3,377,241
----------- ----------- -----------
Property and equipment, net................. 2,949,909 3,360,774 3,044,397
----------- ----------- -----------
$27,877,787 $29,649,247 $28,803,871
=========== =========== ===========
LIABILITIES
Current liabilities:
Accounts payable................................. $ 1,084,574 $ 1,140,510 $ 915,612
Accrued payroll and related costs................ 7,698,352 8,019,218 6,181,927
Other liabilities................................ 1,360,524 2,127,779 2,975,897
Payable to affiliate............................. -- 179,695 2,157,920
Dividends payable................................ -- 7,000,000 --
Deferred revenue................................. -- 1,276,910 3,754,539
----------- ----------- -----------
Total current liabilities................... 10,143,450 19,744,112 15,985,895
SHAREHOLDERS' EQUITY
Common stock, no par value per share, 40 million
shares authorized, 22 million shares issued and
outstanding......................................... 1,000 1,000 1,000
Retained earnings..................................... 17,733,337 9,904,135 12,816,976
----------- ----------- -----------
Total shareholders' equity.................. 17,734,337 9,905,135 12,817,976
----------- ----------- -----------
$27,877,787 $29,649,247 $28,803,871
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE> 64
SYNTEL, INC.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------- --------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues....................... $67,247,016 $90,325,724 $92,236,968 $44,558,030 $55,259,198
Cost of revenues............... 55,936,542 71,537,550 69,783,193 33,747,829 42,066,605
----------- ----------- ----------- ----------- -----------
Gross profit................... 11,310,474 18,788,174 22,453,775 10,810,201 13,192,593
Selling, general and
administrative expenses...... 8,209,000 13,309,366 18,260,622 8,687,720 10,316,489
----------- ----------- ----------- ----------- -----------
Income from operations......... 3,101,474 5,478,808 4,193,153 2,122,481 2,876,104
Other income (expense), net.... (68,966) 186,286 299,122 192,561 150,339
----------- ----------- ----------- ----------- -----------
Income before income taxes..... 3,032,508 5,665,094 4,492,275 2,315,042 3,026,443
State income taxes............. -- 427,877 321,477 55,000 125,000
----------- ----------- ----------- ----------- -----------
Net income................ $ 3,032,508 $ 5,237,217 $ 4,170,798 $ 2,260,042 $ 2,901,443
=========== =========== =========== =========== ===========
Pro forma income data
(unaudited)(1):
Income before income taxes..... $ 3,032,508 $ 5,665,094 $ 4,492,275 $ 2,260,042 $ 2,901,443
Pro forma income taxes......... 1,151,000 2,162,000 1,717,000 829,000 1,031,000
----------- ----------- ----------- ----------- -----------
Pro forma net income......... $ 1,881,508 $ 3,503,094 $ 2,775,275 $ 1,431,042 $ 1,870,443
=========== =========== =========== =========== ===========
Pro forma net income per
share........................ $ 0.09 $ 0.16 $ 0.13 $ 0.07 $ 0.09
=========== =========== =========== =========== ===========
Pro forma weighted average
common shares
outstanding(2)............... 22,000,000 22,000,000 22,000,000 22,000,000 22,000,000
=========== =========== =========== =========== ===========
</TABLE>
- -------------------------
(1) Presentation as if the Company was a C corporation during the periods
presented.
(2) The impact of unexercised stock options did not have a material dilutive
effect.
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE> 65
SYNTEL, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND FOR SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------- RETAINED SHAREHOLDERS'
SHARES* AMOUNT EARNINGS EQUITY
---------- ------ ----------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1994.................... 22,000,000 $1,000 $ 9,463,612 $ 9,464,612
Net income.................................. -- -- 3,032,508 3,032,508
---------- ------ ----------- -----------
Balance, December 31, 1994.................. 22,000,000 1,000 12,496,120 12,497,120
Net income.................................. -- -- 5,237,217 5,237,217
---------- ------ ----------- -----------
Balance, December 31, 1995.................. 22,000,000 1,000 17,733,337 17,734,337
Net income.................................. -- -- 4,170,798 4,170,798
Dividends declared.......................... -- -- 12,000,000 12,000,000
---------- ------ ----------- -----------
Balance, December 31, 1996.................. 22,000,000 1,000 9,904,135 9,905,135
---------- ------ ----------- -----------
Net income for six months ended June 30,
1997 (unaudited).......................... -- -- 2,901,443 2,901,443
Additional paid-in capital related to stock
options................................... 11,398 11,398
---------- ------ ----------- -----------
Balance, June 30, 1997 (unaudited).......... 22,000,000 $1,000 $12,816,976 $12,817,976
========== ====== =========== ===========
</TABLE>
- ------------------------------
* Gives effect to a 22,000-for-one stock split, approved by the Board of
Directors in 1997.
The accompanying notes are an integral part of the financial statements.
F-9
<PAGE> 66
SYNTEL, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 3,032,508 $ 5,237,217 $ 4,170,798 $ 2,260,042 $ 2,901,443
----------- ----------- ----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation..................... 231,524 904,084 1,176,923 550,013 736,928
Compensation expense related to
stock options.................. -- -- -- -- 11,398
Changes in assets and
liabilities:
Accounts receivable, net..... (5,518,029) 3,338,475 (3,750,044) (595,324) 222,951
Advance billing.............. -- -- -- -- (3,249,162)
Employee and other
advances................... (414,271) 658,041 (15,622) (77,896) 43,125
Deposits and other assets.... (167,499) 88,332 711 (29,358) (622,192)
Accounts payable............. 1,310,076 (621,930) 55,936 (283,830) (224,898)
Accrued payroll and related
costs...................... 2,631,099 425,093 320,866 (1,520,478) (1,837,291)
Deferred revenue............. (766,856) 30,000 1,276,910 20,000 2,477,629
Other accrued liabilities.... 68,952 957,449 946,950 841,839 2,826,343
----------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities..................... 407,504 11,016,761 4,183,428 1,165,008 3,286,274
Cash flows used in investing activities,
property and equipment expenditures..... (574,168) (2,995,013) (1,587,788) (442,669) (420,551)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Net payments on bank line of credit... (60,000) (340,000) --
Dividend payments..................... -- -- (5,000,000) (5,000,000) (7,000,000)
----------- ----------- ----------- ----------- -----------
Net cash used in financing
activities..................... (60,000) (340,000) (5,000,000) (5,000,000) (7,000,000)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................. (226,664) 7,681,748 (2,404,360) (4,277,661) (4,134,277)
Cash and cash equivalents, beginning of
year.................................... 226,664 -- 7,681,748 7,681,748 5,277,388
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end of year.... -- $ 7,681,748 $ 5,277,388 $ 3,404,087 $ 1,143,111
=========== =========== =========== =========== ===========
Cash paid during the year for interest.... $ 69,918 $ 37,784 $ 928 -- --
=========== =========== =========== =========== ===========
Cash paid during the period for income
taxes................................... -- -- $ 723,003 $ 510,878 $ 38,681
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-10
<PAGE> 67
SYNTEL, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS:
Syntel, Inc. (the "Company") provides professional information technology
staffing and outsourcing services. The Company provides services to customers
principally throughout the United States primarily in the financial,
manufacturing, transportation, retail and information/communications industries,
as well as to government entities. While contracts with customers are generally
terminable by the customer without penalty, the Company's largest customer is
currently under contract. In addition, the Company has a history of repeat
business among its customer base.
During the years ended December 31, 1994, 1995 and 1996, there were sales
to two major customers that exceeded 10 percent of total revenues. Sales to
these customers approximated: 1994 Customer A, $12,018,000 (17.9 percent),
Customer B, $14,202,000 (21.1 percent); 1995 Customer A, $34,084,000 (37.7
percent), Customer B, $12,455,000 (13.8 percent) and 1996 Customer A,
$30,980,000 (33.6 percent), Customer B, $10,757,000 (11.7 percent). Receivables
arising from these sales are not collateralized. At December 31, 1995 and 1996,
approximately 31 and 30 percent of accounts receivable, net were from these two
customers, respectively. Although the Company does not currently foresee a
credit risk associated with these receivables, credit risk is affected by
conditions or occurrences within the economy and the specific industries in
which these customers operate. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific customers,
historical trends and other information. Although the Company does not
anticipate the loss of any significant customer or engagement, any such loss
could have a material adverse affect on the Company's business, operating
results and financial condition.
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES:
a. Interim Financial Information: The unaudited interim financial
statements as of June 30, 1997 and 1996 and for each of the six months then
ended include, in the opinion of management, all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the Company's
financial position, results of operations, and cash flows. Operating results for
the six months ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1997.
b. Revenue Recognition: The Company recognizes revenues from time and
material contracts as services are rendered and costs are incurred.
Revenues from fixed-price contracts are recognized on the
percentage-of-completion method, measured by the percentage of cost incurred to
date to the estimated total cost at completion. The cumulative impact of any
revision in estimates of the percentage complete or losses on contracts is
reflected in the year 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.
d. Financial Instruments: The carrying amount of cash equivalents, trade
receivables, trade payables and line-of-credit borrowings approximate fair value
because of the short-term nature of these instruments.
e. Property and Equipment: Property and equipment are stated at cost.
Maintenance and repairs are charged to expense when incurred. Depreciation is
computed primarily using the straight-line method over the estimated useful
lives of the assets ranging from three to five years.
Upon sale or retirement, the cost of assets and related accumulated
depreciation is eliminated from the respective accounts, and the resulting gain
or loss is included in operations.
F-11
<PAGE> 68
SYNTEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED):
f. Income Taxes: In January 1990 the Company elected to be taxed as an S
Corporation under Section 1361 of the Internal Revenue Code. Accordingly,
federal and certain state income taxes are not reflected in the financial
statements since the tax attributes of the Company flow directly to the
shareholders and are included in their individual tax returns.
g. 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.
3. PROPERTY AND EQUIPMENT:
Cost of property and equipment at December 31, 1995 and 1996 is summarized
as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Computer equipment and software............................. $2,613,672 $3,508,776
Furniture and equipment..................................... 1,718,814 2,462,341
Leasehold improvements...................................... 80,813 29,970
---------- ----------
4,413,299 6,001,087
Accumulated depreciation.................................... 1,463,390 2,640,313
---------- ----------
$2,949,909 $3,360,774
========== ==========
</TABLE>
4. LINE OF CREDIT:
The Company has a line of credit with a bank which will expire August 31,
1997 which provides for borrowings up to the lesser of $20,000,000 or 80 percent
of certain accounts receivable. Borrowings under the line of credit are
collateralized by accounts receivable. 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 a line of credit with a bank which will expire August 31, 1997
which provides for borrowings up to $10,000,000 to finance acquisitions.
5. LEASES:
The Company leases certain facilities and equipment under operating leases.
Current operating lease obligations are expected to be renewed or replaced upon
expiration. Future minimum payments under noncancelable leases as of December
31, 1996 are as follows:
<TABLE>
<S> <C>
1997........................................................ $1,571,567
1998........................................................ 1,541,580
1999........................................................ 851,112
2000........................................................ 539,440
2001........................................................ 445,118
----------
$4,948,817
==========
</TABLE>
Total rent expense charged to operations amounted to approximately
$385,000, $1,207,000 and $1,342,000 for the years ended December 31, 1994, 1995
and 1996, respectively.
6. RELATED PARTY:
The Company purchases services from Syntel Software Private Limited
("Syntel India"), an affiliated company through common ownership located in
Mumbai, India. The Company purchased approximately $1,410,000, $2,674,000,
$4,066,000 of services from Syntel India for the years ended December 31, 1994,
1995 and 1996, respectively. The amounts payable to this affiliate at December
31,
F-12
<PAGE> 69
SYNTEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. RELATED PARTY: -- (CONTINUED):
1996 and June 30, 1997 were $179,695 and $2,157,920 (unaudited), respectively.
There were no amounts due to the affiliate at December 31, 1995.
7. SUBSEQUENT EVENTS (UNAUDITED):
The Company is in the process of preparing an initial public offering
registration statement for the purpose of selling common stock securities.
In connection with the offering, related transactions will include the
acquisition of Syntel India, adoption of incentive stock plans (which will be
accounted for in accordance with APB No. 25 with appropriate disclosures being
made in accordance with SFAS No. 123) and the termination of the Company's S
corporation status.
F-13
<PAGE> 70
<TABLE>
<S> <C>
HONEY SACHDE H.H. SACHDE & CO.
B. Com., A.C.A. CHARTERED ACCOUNTANTS
- ------------------------------------------------------------ c/o Vishnji Hamraj Kanji
Opp. Chordi Gate
GONDAL - 360 311
Phone (O) : 49 (R) : 946
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Syntel Software Private Limited:
We have audited the accompanying balance sheet of Syntel Software Private
Limited as on December 31, 1994 and the related statements of income,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards applicable in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Syntel Software Private
Limited as on December 31, 1994 and the results of its operations and cash flows
for the year then ended, in conformity with generally accepted accounting
principles applicable in the United States.
For H.H. Sachde & Co.
H.H. Sachde
Proprietor,
Gondal, India
July 14, 1997
F-14
<PAGE> 71
SYNTEL SOFTWARE PRIVATE LIMITED
BALANCE SHEET
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $163,161
Accounts receivable.................................... 90,321
Employee and other advances............................ 122,554
Deposits and interest accrued.......................... 18,439
--------
Total current assets................................. 394,475
Property and equipment: 674,760
Less accumulated depreciation.......................... 171,295
--------
Property and equipment, net.......................... 503,465
--------
$897,940
========
LIABILITIES
Current liabilities:
Accounts payable....................................... $ 32,948
Accrued income tax..................................... 642
--------
Total current liabilities............................ 33,590
STOCKHOLDERS' EQUITY
Common stock, 500,000 shares issued, subscribed and paid
up........................................................ 160,411
Retained earnings........................................... 703,939
--------
Total stockholders' equity............................. 864,350
--------
$897,940
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-15
<PAGE> 72
SYNTEL SOFTWARE PRIVATE LIMITED
STATEMENT OF INCOME
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Revenues.................................................... $1,502,614
Cost of revenues............................................ 787,489
----------
Gross profit................................................ 715,125
Selling, general and administrative expenses................ 394,035
----------
Income from operations...................................... 321,090
Other income (expense)
Interest income........................................ 3,232
Miscellaneous income (expense)......................... (1,826)
Income tax expenses.................................... (640)
----------
Net income............................................. $ 321,856
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-16
<PAGE> 73
SYNTEL SOFTWARE PRIVATE LIMITED
STATEMENT OF STOCKHOLDERS' EQUITY
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
------------------------------------------------
COMMON STOCK
------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------- -------- -------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1994........................ 500,000 $160,411 $382,083 $542,494
Net income...................................... -- -- 321,856 321,856
------- -------- -------- --------
Balance, December 31, 1994...................... 500,000 $160,411 $703,939 $864,350
======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-17
<PAGE> 74
SYNTEL SOFTWARE PRIVATE LIMITED
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------------
<S> <C>
Cash flows from operating activities:
Net income............................................. $ 321,856
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation charges, net......................... 123,610
Changes in assets and liabilities:
Accounts receivable.......................... (90,321)
Employee and other advances, net............. (52,433)
Deposits and interest accrued................ (5,533)
Accounts payable............................. 7,561
Accrued income tax........................... 642
---------
Net cash provided by operating activities:.................. 305,382
Cash flow used in investing activities, purchases of
property
and equipment............................................. (185,709)
---------
Net increase in cash........................................ 119,673
Cash and cash equivalents, beginning of year................ 43,488
---------
Cash and cash equivalents, end of year...................... $ 163,161
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE> 75
SYNTEL SOFTWARE PRIVATE LIMITED
NOTES FORMING PART OF ACCOUNTS AS ON DECEMBER 31, 1994
1. BUSINESS:
Syntel Software Private Limited ("Syntel India") is engaged in the business
of software development, maintenance, support, conversion and consultancy
services. Substantially all of the revenues of Syntel India are attributable to
Syntel, Inc., an affiliated company through common ownership.
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES:
a. Provision for Income tax is made considering the deductions available to
Syntel India under Section 80 HHE of the Indian Income Tax Act 1961 in respect
of its export turnover and other relevant provisions of the Act.
b. Revenue from software exports is recognized based on contractual
obligations and as services are rendered and approved by customers.
c. Depreciation is charged to revenue using straight line method over
estimated useful life of the assets as follows.
- Computer Equipment and Software -- 3 years
- Furniture and Fixture -- 7 years
- Transport Equipment -- 3 years
- Leasehold Improvements comprise capital expenditure on renovating
leasehold premises, and are amortized proportionately over extended
leasehold option period which is 10 years.
d. Property and equipments are stated at cost and do not include equipment
received from Syntel, Inc. for execution of projects on no charge basis which
amounted to US $214,248 as on December 31, 1994. Upon sale or retirement, the
cost of assets and related accumulated depreciation is eliminated from the
respective accounts, and resulting gain or loss is included in general expenses.
e. Income from software exports is accounted at exchange rate at which
remittances are received.
f. For the purpose of translation from functional currency (Indian Rupees)
to reporting currency the weighted average rate is used for translating revenues
and expenses and the year end rate is used for translating assets and
liabilities. The common stock and retained earnings are translated at historical
rates.
3. PROPERTY AND EQUIPMENT:
Cost of property and equipment at December 31, 1994 is summarized as
follows:
<TABLE>
<CAPTION>
1994
US$
--------
<S> <C>
Computer equipment and software............................. $146,997
Furniture and fixture and other equipment................... 333,192
Leasehold improvements...................................... 175,429
Transport equipment......................................... 19,142
--------
Total....................................................... 674,760
Accumulated depreciation.................................... 171,295
--------
Balance..................................................... $503,465
========
</TABLE>
F-19
<PAGE> 76
SYNTEL SOFTWARE PRIVATE LIMITED
NOTES FORMING PART OF ACCOUNTS AS ON DECEMBER 31, 1994 -- (CONTINUED)
4. RELATED PARTY TRANSACTIONS:
Syntel India exports software to Syntel, Inc., an affiliated company
through common ownership. The software exports to Syntel, Inc. for the year
ended December 31, 1994 amounted to US$1,410,000.
5. LEASES:
Syntel India has acquired premises measuring 1,919 square metres on leases
for a period of five years each, which are expected to be renewed upon
expiration, for further period of five years. Lease rental expenses charged to
operations amount to US$10,120 for the year ended December 31, 1994. The dates
of expiry of present leases are as follows.
<TABLE>
<CAPTION>
UNIT NO. AREA SQUARE METRES LEASE EXPIRY DATES
- -------- ------------------ ------------------
<C> <C> <C>
76A 320 October 14, 1997
76B 320 December 31, 1997
69 751 September 8, 1998
96 528 September 30, 1998
</TABLE>
6. RETIREMENT BENEFITS:
During the year 1994 provident fund and other retirement benefits were not
applicable for Syntel India.
F-20
<PAGE> 77
<TABLE>
<S> <C>
RAJKAMAL R. SHAH RAJKAMAL SHAH & CO.
B. Com. (Hons.) LL.B., F.C.A. CHARTERED ACCOUNTANTS
- ------------------------------------------------------------ 311 BHAVESHWAR MARKET,
M. G. ROAD GHATKOPAR (EAST),
BOMBAY-400 077,
Tel.: 512 72 56
Tel./Fax: 514 37 28
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Syntel Software Private Limited:
We have audited the accompanying balance sheet of Syntel Software Private
Limited as on December 31, 1996 and 1995 and the related statements of income,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards applicable in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Syntel Software Private
Limited as on December 31, 1996 and 1995 and the results of its operations and
cash flows for the year then ended, in conformity with generally accepted
accounting principles applicable in the United States.
For Rajkamal Shah & Co.
Rajkamal Shah
Proprietor,
Mumbai, India
March 20, 1997
F-21
<PAGE> 78
SYNTEL SOFTWARE PRIVATE LIMITED
BALANCE SHEET
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 857,015 $2,055,193 $ 964,718
Accounts receivable........................... -- 343,038 2,408,149
Employee and other advances................... 158,620 165,084 415,752
Deposits and interest accrued................. 18,909 17,893 215,847
---------- ---------- ----------
Total current assets........................ 1,034,544 2,581,208 4,004,466
Property and equipment: 1,000,053 1,549,771 2,131,027
Less accumulated depreciation................. 342,989 607,579 815,054
---------- ---------- ----------
Property and equipment, net................. 657,064 942,192 1,315,973
---------- ---------- ----------
$1,691,608 $3,523,400 $5,320,439
========== ========== ==========
LIABILITIES
Current liabilities:
Accounts payable.............................. $ 49,653 $ 242,715 $ 402,129
Accrued income tax............................ 1,482 30,960 45,285
Advance from customer......................... 5,472 9,771 --
---------- ---------- ----------
Total current liabilities................... 56,607 283,446 447,414
STOCKHOLDERS' EQUITY
Common stock, 500,000 shares issued, subscribed and
paid up.......................................... 160,411 160,411 160,411
Retained earnings.................................. 1,621,683 3,225,928 4,845,453
Accumulated translation adjustments................ (147,093) (146,385) (132,839)
---------- ---------- ----------
Total stockholders' equity.................... 1,635,001 3,239,954 4,873,025
---------- ---------- ----------
$1,691,608 $3,523,400 $5,320,439
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-22
<PAGE> 79
SYNTEL SOFTWARE PRIVATE LIMITED
STATEMENT OF INCOME
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 JUNE 30, 1997
----------------- ----------------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues............................. $2,519,852 $4,158,719 $3,474,196
Cost of revenues..................... 996,422 1,366,191 1,082,039
---------- ---------- ----------
Gross profit......................... 1,523,430 2,792,528 2,392,157
Selling, general and administrative
expenses........................... 599,992 1,010,078 831,252
---------- ---------- ----------
Income from operations............... 923,438 1,782,450 1,560,905
Other income (expense):
Interest income................. 3,628 71,200 29,933
Miscellaneous income
(expense)..................... (1,658) (2,836) 43,432
Income tax expense.............. (7,664) (28,888) (14,745)
Provision for doubtful loan..... -- (217,681) --
---------- ---------- ----------
Net income...................... $ 917,744 $1,604,245 $1,619,525
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-23
<PAGE> 80
SYNTEL SOFTWARE PRIVATE LIMITED
STATEMENT OF STOCKHOLDERS' EQUITY
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------- -------- ---------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995....................... 500,000 $160,411 $ 703,939 $ 864,350
Net income..................................... 917,744 917,744
Translation adjustments........................ (147,093) (147,093)
Balance, December 31, 1995..................... 500,000 160,411 1,474,590 1,635,001
Net income..................................... -- -- 1,604,245 1,604,245
Translation adjustments........................ -- -- 708 708
------- -------- ---------- ----------
Balance, December 31, 1996..................... 500,000 $160,411 $3,079,543 $3,239,954
======= ======== ========== ==========
Net income for six months ended June 30,
1997......................................... -- -- $1,619,525 $1,619,525
Translation adjustments........................ -- -- 13,546 13,546
------- -------- ---------- ----------
Balance, June 30, 1997 (unaudited)............. 500,000 $160,411 $4,712,614 $4,873,025
======= ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE> 81
SYNTEL SOFTWARE PRIVATE LIMITED
STATEMENT OF CASH FLOWS
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, ENDED
1995 1996 JUNE 30, 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 917,744 $1,604,245 $ 1,619,525
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation charges, net........... 171,694 264,590 207,475
Changes in assets and liabilities:
Accounts receivable............ 90,321 (343,038) (2,065,111)
Employee and other advances,
net.......................... (36,066) (6,464) (250,668)
Deposits and interest
accrued...................... (470) 1,016 (197,954)
Accounts payable............... 16,705 193,062 159,414
Accrued income tax............. 840 29,478 14,325
Advance from customer.......... 5,472 4,299 (9,771)
Translation adjustment........................ (147,093) 708 13,546
---------- ---------- -----------
Net cash provided by operating activities:.... 1,019,147 1,747,896 (509,219)
Cash flow used in investing activities,
purchases of property and equipment......... (325,293) (549,718) (581,256)
---------- ---------- -----------
Net increase in cash.......................... 693,854 1,198,178 (1,090,475)
Cash and cash equivalents, beginning of
year........................................ 163,161 857,015 2,055,193
---------- ---------- -----------
Cash and cash equivalents, end of period...... $ 857,015 $2,055,193 $ 964,718
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE> 82
SYNTEL SOFTWARE PRIVATE LIMITED
NOTES FORMING PART OF ACCOUNTS AS ON DECEMBER 31, 1996
1. BUSINESS:
Syntel Software Private Limited ("Syntel India") is engaged in the business
of software development, maintenance, support, conversion and consultancy
services. Substantially all of the revenues of Syntel India are attributable to
Syntel, Inc., an affiliated company through common ownership.
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES:
a. The unaudited interim financial statements as of June 30, 1997 and 1996
and for each of the six months then ended include, in the opinion of management,
all adjustments (consisting of normal recurring adjustments) necessary to
present fairly Syntel India's financial position, results of operations, and
cash flows. Operating results for the six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997.
b. Syntel India's software development center is located in a free trade
zone in India. Syntel India is, therefore, entitled to claim tax holiday for a
period of five years from April 1, 1995 through March 31, 2000, in respect of
its export profits. Income Tax expenses in respect of income from non-export
activities is accounted as per Indian Income Tax Laws.
c. Revenue from software exports is recognized based on contractual
obligations and as services are rendered and approved by customers.
d. Depreciation is charged to revenue using straight line method over
estimated useful life of the assets as follows.
- Computer Equipment and Software -- 3 years
- Furniture and Fixture -- 7 years
- Transport Equipment -- 3 years
- Leasehold Improvement comprise capital expenditure on renovating
leasehold premises, and are amortized proportionately over extended
leasehold option period which is 10 years.
e. Property and equipments are stated at cost and do not include equipment
received from Syntel, Inc. for execution of projects on no charge basis which
amounted to US$315,536 as on December 31, 1996 and US$216,233 as on December 31,
1995. Upon sale or retirement, the cost of assets and related accumulated
depreciation is eliminated from the respective accounts, and resulting gain or
loss is included in general expenses.
f. Income from software exports is accounted at exchange rate at which
remittances are received.
g. For the purpose of translation from functional currency (Indian Rupees)
to reporting currency the weighted average rate is used for translating revenues
and expenses and the year end rate is used for translating assets and
liabilities. The common stock and retained earnings are translated at historical
rates.
F-26
<PAGE> 83
SYNTEL SOFTWARE PRIVATE LIMITED
NOTES FORMING PART OF ACCOUNTS AS ON DECEMBER 31, 1996 -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Cost of property and equipment at December 31, 1995 and 1996 is summarized
as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
US$ US$
---------- ----------
<S> <C> <C>
Computer equipment and software............................. $ 304,649 $ 574,268
Furniture and fixture and other equipment................... 496,284 667,463
Leasehold improvement....................................... 182,306 269,610
Transport equipment......................................... 16,814 38,430
---------- ----------
Total....................................................... 1,000,053 1,549,771
Accumulated depreciation.................................... 342,989 607,579
---------- ----------
Balance..................................................... $ 657,064 $ 942,192
========== ==========
</TABLE>
4. RELATED PARTY TRANSACTIONS:
Syntel India exports software to Syntel, Inc., an affiliated company
through common ownership. The software exports to Syntel, Inc. for the years
ended December 31, 1996 and 1995 amounted to US$4,065,514 and US$2,519,852,
respectively. The net amounts receivable from Syntel, Inc. in respect of
software exports were US$179,695 and US$2,157,920 (unaudited) as on December 31,
1996 and June 30, 1997, respectively.
5. LEASES:
Syntel India has acquired premises measuring 1,919 square metres on leases
for a period of five years each, which are expected to be renewed upon
expiration, for further period of five years. Lease rental expenses charged to
operations amount to US$16,636 and US$11,993 for the year ended December 31,
1996 and 1995, respectively. The dates of expiry of present leases are as
follows.
<TABLE>
<CAPTION>
UNIT NO. AREA SQUARE METRES LEASE EXPIRY DATES
- -------- ------------------ ------------------
<C> <C> <C>
76A 320 October 14, 1997
76B 320 December 31, 1997
69 751 September 8, 1998
96 528 September 30, 1998
</TABLE>
6. RETIREMENT BENEFITS:
Syntel India has paid contributions to the Employee Provident Fund
amounting to US$19,145 and US$2,916 for the years ended December 31, 1996 and
1995, respectively, into the Government Provident Fund Account. Provision for
the other retirement benefits are not yet applicable to Syntel India as per
Indian Laws. The same will be provided out of revenue as and when they become
applicable.
F-27
<PAGE> 84
[A map of the world on this page depicts Syntel's Global Delivery Model which
identifies the locations of the Company's Global Development Centers and its
sales and service centers. The map is labeled to demonstrate the delivery of
services on-site at the customer's location, offsite at Syntel's U.S. locations
and offshore at Syntel's Indian locations.
Text beneath the map reads as follows:
IT professional services customized to meet varying customer needs for
* cost-effectiveness
* quick turnaround
* resource availability
* best practices
Syntel's Chennai facility is expected to be operational during the third
quarter of 1997.]
<PAGE> 85
============================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............... 3
Risk Factors..................... 7
Use of Proceeds.................. 14
Prior S Corporation Status and
Distribution................... 14
Dividend Policy.................. 15
Capitalization................... 16
Dilution......................... 17
Selected Financial Data.......... 18
Pro Forma Consolidated Statement
of Income Data................. 19
Management's Discussion and
Analysis of Financial Condition
and Results of Operations...... 20
Business......................... 30
Management....................... 44
Certain Transactions............. 48
Principal Shareholders........... 49
Description of Capital Stock..... 50
Shares Eligible for Future
Sale........................... 52
Underwriting..................... 53
Legal Matters.................... 54
Experts.......................... 54
Additional Information........... 55
Index to Financial Statements.... F-1
</TABLE>
------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
============================================================
============================================================
3,000,000 SHARES
SYNTEL LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
HAMBRECHT & QUIST
PRUDENTIAL SECURITIES INCORPORATED
ROBERTSON, STEPHENS & COMPANY
, 1997
============================================================
<PAGE> 86
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Amendment No. 2 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Troy, State of Michigan, on July 24, 1997.
SYNTEL, INC.
By: /s/ BHARAT DESAI
------------------------------------
Bharat Desai, President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the registration statement has been signed by the following persons in
the capacities indicated on July 24, 1997.
<TABLE>
<CAPTION>
TITLE
-----------------------------------------------------
<S> <C>
/s/ BHARAT DESAI President and Director
- ----------------------------------------------------- (principal executive officer)
Bharat Desai
/s/ NEERJA SETHI Vice President and Director
- -----------------------------------------------------
Neerja Sethi
/s/ JOHN ANDARY Chief Financial Officer and Treasurer
- ----------------------------------------------------- (principal financial and principal accounting
John Andary officer)
</TABLE>
<PAGE> 87
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1 *Underwriting Agreement.
3.1 **Restated Articles of Incorporation of the Company.
3.2 **Bylaws of the Company.
4.2 **Specimen Stock Certificate representing the Common Stock.
5.1 **Opinion of Dykema Gossett PLLC regarding the legality of
the securities being registered.
10.1 **Credit Authorization Agreement, dated September 13, 1996,
between the Company and NBD Bank.
10.2 **Letter Agreement between the Company and NBD Bank dated
March 11, 1997 amending Credit Authorization Agreement.
10.3 **Letter Agreement between the Company and NBD Bank dated
March 25, 1997 amending Credit Authorization Agreement.
10.4 **Form of Stock Purchase Agreement between the Company and
the stockholders of Syntel Software Private Limited.
10.5 **Lease, dated August 22, 1996, between WRC Properties, Inc.
and the Company.
10.6 **Lease Agreement dated November 30, 1994, between the
Company and NationsBank of North Carolina, N.A., as Trustee
for the Public Employees Retirement System of Ohio.
10.7 **Lease Agreement dated June 7, 1995, between the Company
and Office Court Development Ltd. Co., a New Mexico General
Partnership.
10.8 **Indentures of Lease entered into between the President of
India and Syntel Software Pvt. Ltd. on the dates and for the
square footage indicated below for the Mumbai Global
Development Center:
- October 11, 1993; 7,825 sq. ft.
- January 18, 1993; 3,443 sq. ft.
- November 2, 1992; 3,443 sq. ft.
- October 11, 1993; 5,502 sq. ft.
10.9 **Rental Agreement, dated February 24, 1997, between Syntel
Software Pvt. Ltd. and the Landlords for the Chennai Global
Development Center.
10.10 **/***Agreement for Software Programming Services, dated as
of September 6, 1994, between the Company and American Home
Assurance Company.
10.11 **/***PeopleNet Supplier Contract, effective as of April 1,
1996, between the Company and Geometric Results,
Incorporated (d/b/a "PeopleNet").
10.12 **Form of 1997 Stock Option and Incentive Plan.
10.13 **Company Employee Stock Purchase Plan.
10.14 **Employment Agreement dated June 5, 1997, between the
Company and Bharat Desai.
10.15 **Employment Agreement dated June 5, 1997, between the
Company and Neerja Sethi.
10.16 **Form of S Corporation Revocation, Tax Allocation and
Indemnification Agreement (the "Agreement"), between the
Company and the shareholders of the Company on the date of
the Agreement.
10.17 Letter agreement between the Company and NBD Bank dated July
22, 1997 amending Credit Authorization Agreement.
23.1 *Consent of Coopers & Lybrand, L.L.P.
23.2 *Consent of Rajkamal Shah & Co.
23.3 **Consent of Dykema Gossett PLLC (contained in the opinion
filed as Exhibit 5.1 hereto).
23.4 **Consent of Paritosh Choksi.
23.5 **Consent of Douglas Van Houweling.
</TABLE>
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
23.6 *Consent of H.H. Sachde & Co.
24.1 **Powers of Attorney (contained on the signature page to
Form S-1 filed June 6, 1997).
27 *Financial Data Schedule.
</TABLE>
- ------------------------------
* Filed herewith.
** Previously filed.
*** Portions of this document have been redacted pursuant to the Company's
request to the Secretary of the Commission for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933, as amended.
<PAGE> 1
EXHIBIT 1
SYNTEL, INC.
3,000,000 SHARES(1)
COMMON STOCK
UNDERWRITING AGREEMENT
, 1997
HAMBRECHT & QUIST LLC
PRUDENTIAL SECURITIES INCORPORATED
ROBERTSON, STEPHENS & COMPANY LLC
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Syntel, Inc., a Michigan corporation (herein called the Company), proposes
to issue and sell 3,000,000 shares of its authorized but unissued Common Stock,
no par value (herein called the Common Stock) (said 3,000,000 shares of Common
Stock being herein called the Underwritten Stock). The Company proposes to grant
to the Underwriters (as hereinafter defined) an option to purchase up to 450,000
additional shares of Common Stock (herein called the Option Stock and with the
Underwritten Stock herein collectively called the Stock). The Common Stock is
more fully described in the Registration Statement and the Prospectus
hereinafter mentioned.
The Company hereby confirms the agreements made with respect to the
purchase of the Stock by the several underwriters, for whom you are acting,
named in Schedule I hereto (herein collectively called the Underwriters, which
term shall also include any underwriter purchasing Stock pursuant to Section
3(b) hereof). You represent and warrant that you have been authorized by each of
the other Underwriters to enter into this Agreement on its behalf and to act for
it in the manner herein provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (herein called the Commission) a registration statement on
Form S-1 (No. 333-28655), including the related preliminary prospectus, for the
registration under the Securities Act of 1933, as amended (herein called the
Securities Act), of the Stock. Copies of such registration statement and of each
amendment thereto, if any, including the related preliminary prospectus (meeting
the requirements of Rule 430A of the rules and regulations of the Commission)
heretofore filed by the Company with the Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the Securities Act with
respect to the Stock (herein called a Rule 462(b) registration statement), and,
in the event of any amendment thereto after the effective date of such
registration statement (herein called the Effective Date), shall also mean (from
and after the effectiveness of such amendment) such registration statement as so
amended (including any Rule 462(b) registration statement). The term Prospectus
as used in this Agreement shall mean the prospectus relating to the Stock first
filed with the Commission pursuant to Rule 424(b) and Rule 430A (or if no such
filing is required, as included in the Registration Statement as of the
- ---------------
1 Plus an option to purchase from the Company up to 450,000 additional shares to
cover over- allotments.
<PAGE> 2
Effective Date) and, in the event of any supplement or amendment to such
prospectus after the Effective Date, shall also mean (from and after the filing
with the Commission of such supplement or the effectiveness of such amendment)
such prospectus as so supplemented or amended. The term Preliminary Prospectus
as used in this Agreement shall mean each preliminary prospectus included in
such registration statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company hereby represents and warrants as follows:
(i) Each of the Company and its affiliate, Syntel Software Private
Limited (herein called Syntel-India), has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has full corporate power and authority
to own or lease its properties and conduct its business as described in the
Registration Statement and the Prospectus and as being conducted, and is
duly qualified as a foreign corporation and in good standing in all
jurisdictions in which the character of the property owned or leased or the
nature of the business transacted by it makes qualification necessary
(except where the failure to be so qualified would not have a material
adverse effect on the business, properties, financial condition or results
of operations of the Company and Syntel-India, taken as a whole). The
Company does not own any capital stock or other equity securities of any
entity and has no agreement to acquire any such stock or equity securities,
except for the acquisition of Syntel-India.
(ii) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, properties, financial condition
or results of operations of the Company and Syntel-India, taken as a whole,
whether or not arising from transactions in the ordinary course of
business, other than as set forth in the Registration Statement and the
Prospectus, and since such dates, except in the ordinary course of
business, neither the Company nor Syntel-India has entered into any
material transaction not referred to in the Registration Statement and the
Prospectus.
(iii) The Registration Statement and the Prospectus comply, and on the
Closing Date (as hereinafter defined) and any later date on which Option
Stock is to be purchased, the Prospectus will comply, in all material
respects, with the provisions of the Securities Act and the rules and
regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material
fact and did not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date the Prospectus did not and, on the
Closing Date and any later date on which Option Stock is to be purchased,
will not contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that none of the representations and warranties in this
subparagraph (iii) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information furnished in writing to the Company by
Underwriters for use in the Registration Statement or the Prospectus.
(iv) The Stock, when issued and sold to the Underwriters as provided
herein, will be duly and validly issued, fully paid and nonassessable and
will conform to the description thereof in the Prospectus. No further
approval or authority of the shareholders or the Board of Directors of the
Company will be required for the issuance and sale of the Stock as
contemplated herein.
(v) The Company has filed a registration statement on Form 8-A
pursuant to Section 12(g) of the Securities Exchange Act of 1934, as
amended (herein called the Exchange Act), and the Stock
2
<PAGE> 3
to be issued and sold by the Company has been authorized for listing by The
Nasdaq National Market upon official notice of issuance.
(vi) Each of (a) the Company and Syntel-India has good and marketable
title to all material properties and assets described in the Prospectus as
owned by it, free and clear of any liens, charges, encumbrances or
restrictions other than such as are described in the Prospectus or are not
materially significant or materially important when taken in the aggregate,
(b) the agreements which are filed as Exhibits 10.10 and 10.11 of the
Registration Statement and are described in the Prospectus are valid and
enforceable by the Company except as enforcement may be limited by
applicable bankruptcy, insolvency and other similar laws affecting
creditors' rights and rules of law governing specific performance,
injunctive relief and other equitable remedies and, to the knowledge of the
Company, the other contracting party or parties thereto are not in breach
or default in any material respect under any of such agreements, and (c)
the Company and Syntel-India has valid and binding leases for the
properties described in the Prospectus as leased by it.
(vii) The Company has filed all necessary federal and state income and
franchise tax returns, and Syntel-India has filed all necessary foreign tax
returns, and each of the Company and Syntel-India has paid all taxes shown
thereon to the extent they are due or has received extensions for such
payment, and neither the Company nor Syntel-India has any tax deficiency
that has been or, to the knowledge of the Company or Syntel-India, might be
asserted against the Company or Syntel-India, as applicable, which would
materially and adversely affect the business or properties of the Company
and Syntel-India, taken as a whole; all tax liabilities accrued through the
date hereof have been adequately provided for on the books of the Company
in accordance with generally accepted accounting principles.
(viii) Each of the Company and Syntel-India is covered by insurance
underwritten by insurers of recognized financial responsibility in the
amounts and covering such risks as is customary in the business in which it
is engaged.
(ix) To the knowledge of the Company, no labor disturbance by the
employees of the Company or Syntel-India exists or is imminent.
(x) Except as described in the Prospectus, each of the Company and
Syntel-India owns, or if not owned has the right to use, all patents,
patent rights, inventions, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks, trade names, copyrights
and other intellectual property rights material to its business described
in the Prospectus. Neither the Company nor Syntel-India has received any
notice of infringement of or conflict with asserted rights of others with
respect to any of the foregoing that, singly or in the aggregate, if the
subject of any unfavorable decision, ruling or finding, would materially
adversely affect the business operations, financial conditions or income of
the Company and Syntel-India, taken as a whole.
(xi) Neither the Company nor Syntel-India has been advised, and has no
reason to believe, that it is not conducting business in compliance with
all applicable laws, rules and regulations of the jurisdiction in which it
is conducting business except where failure to be so in compliance would
not materially and adversely affect the business or properties of the
Company and Syntel-India, taken as a whole.
(xii) Except as may be described in the Prospectus, there is no
action, proceeding or investigation (of which the Company has been
notified) pending or, to the knowledge of the Company or Syntel-India,
threatened against the Company or Syntel-India before any court or
administrative agency which could reasonably be expected to result in any
material adverse change in the business or condition of the Company and
Syntel-India, taken as a whole.
(xiii) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the
3
<PAGE> 4
transactions herein contemplated (except such additional steps as may be
required by the National Association of Securities Dealers, Inc. (herein
called the NASD) or may be necessary under state securities or blue sky
laws in connection with the purchase and distribution of the Stock by the
Underwriters) has been obtained or made and is in full force and effect.
(xiv) Neither the Company nor Syntel-India has incurred any liability
for a fee, commission, or other compensation on account of the employment
of a broker or finder in connection with the transactions contemplated by
this Agreement other than as contemplated hereby.
(xv) The issued and outstanding shares of capital stock of the Company
are as set forth in the Prospectus and such shares have been duly
authorized and validly issued, are fully paid and nonassessable, and
conform in all material respects to the description thereof contained in
the Prospectus and, except as disclosed in the Prospectus, there are no
options, rights or warrants for the purchase from the Company of Common
Stock, or securities convertible into Common Stock and there are no
agreements to which the Company is a party with respect thereto. The form
of certificates for the Stock conforms to the corporate law of the
jurisdiction of the Company's incorporation.
(xvi) The financial statements of the Company and Syntel-India,
together with related notes and schedules as set forth in the Registration
Statement, present fairly the respective financial positions and the
results of operations and cash flows of the Company and Syntel-India, at
the indicated dates and for the indicated periods. Such financial
statements and related schedules have been prepared in accordance with
generally accepted accounting principles, consistently applied throughout
the periods involved, except as disclosed therein, and all adjustments
necessary for a fair presentation of results for such periods have been
made; provided, however, that the unaudited financial statements are
subject to normal year-end audit adjustments (which are not expected to be
material) and do not contain all footnotes required under generally
accepted accounting principles. The summary and selected financial and
statistical data included in the Registration Statement present fairly the
information shown thereon and such data have been compiled on a basis
consistent with the financial statements presented therein and in the books
and records of the Company, as applicable.
(xvii) The pro forma financial statements and other pro forma
information included in the Prospectus present fairly the information shown
therein, have been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements and other pro
forma information, have been properly compiled on the pro forma basis
described therein, and, in the opinion of the Company, the assumptions used
in the preparation thereof are reasonable and the adjustments used therein
are appropriate under the circumstances.
(xviii) Each of Coopers & Lybrand LLP, who has certified the financial
statements of the Company, Rajkamal Shah & Co., who has certified certain
financial statements of Syntel-India, and H.H. Sachde & Co., who has
certified certain financial statements of Syntel-India, all such financial
statements being filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Securities
Act and the rules and regulations thereunder.
(xix) Neither the Company nor Syntel-India is, nor with the giving of
notice or lapse of time or both, will be, in violation of or in default
under any agreement, lease or contract included as an exhibit to the
Registration Statement. The execution and delivery of this Agreement, and
the consummation of the transactions herein contemplated and the
fulfillment of the terms hereof, will not conflict with or result in a
breach of any of the terms or provisions of, or constitute a default under,
any material indenture, mortgage, deed of trust or other material agreement
or instrument to which the Company or Syntel-India is a party.
(xx) Each of the Company and Syntel-India maintains a system of
internal accounting controls sufficient to provide reasonable assurances
that transactions are recorded as necessary to
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permit preparation of financial statements in conformity with generally
accepted accounting principles.
(xxi) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder (herein called ERISA); and each "pension plan"
for which the Company would have any liability that is intended to be
qualified under Section 401(a) of the Code is so qualified in all material
respects and nothing has occurred, whether by action or by failure to act,
which would cause the loss of such qualification.
(xxii) No relationship, direct or indirect, exists between or among
the Company or Syntel-India, on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company or Syntel-India, on the
other hand, which is required to be described in the Prospectus that is not
so described.
(xxiii) Neither the Company nor Syntel-India, nor any director or
executive officer, nor, to the knowledge of the Company, any agent,
employee or other person associated with or acting on behalf of the Company
or Syntel-India, has used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expense relating to
political activity; made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds;
violated or is in violation of any provisions of the Foreign Corrupt
Practices Act of 1972; or made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment.
(xxiv) The business, operations and facilities of the Company and
Syntel-India have been and are being conducted in compliance in all
material respects with all applicable laws, ordinances, rules, regulations,
licenses, permits, approvals, plans, authorizations or requirements
relating to health, pollution, protection of health or the environment or
otherwise relating to remediating real property in which the Company has or
had any interest, whether owned or leased, except for such failures to so
comply as would not, individually or in the aggregate, have a material
adverse effect on the business of the Company and Syntel-India, taken as a
whole; and neither the Company nor Syntel-India has received any notice
from a governmental instrumentality or any third party alleging any
violation thereof or liability thereunder, except for such violations or
liabilities which would not, individually or in the aggregate, have a
material adverse effect on the business of the Company and Syntel-India,
taken as a whole.
(xxv) The Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the 1940 Act
and such rules and regulations.
(xxvi) The Company has validly authorized, executed and delivered the
Stock Purchase Agreement ("Stock Purchase Agreement") between the Company
and the Shareholders (as defined below), filed as Exhibit 10.4 to the
Registration Statement; no consent, approval, authorizations or order of
any court or governmental agency or body is required for the consummation
of the transactions contemplated by the Stock Purchase Agreement, other
than such consents, approvals or authorizations that have been obtained.
(xxvii) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, properties, financial condition
or results of operations of Syntel-India, other than as set forth in the
Registration Statement and the Prospectus, and since such dates, except in
the ordinary course of business, Syntel-India has not entered into any
material transaction not referred to in the Registration Statement and the
Prospectus; and Syntel-India is conducting its business in compliance with
all applicable laws, rules and regulations of the jurisdiction in which it
is conducting business, except where the failure to be so in compliance
would not materially and adversely affect the business or properties of
Syntel-India.
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(b) Each of Bharat Desai and Neerja Sethi, shareholders of the Company and
the sole shareholders of Syntel-India (each a "Shareholder" and together the
"Shareholders"), hereby represents and warrants as follows:
(i) The Shareholders (a) own all of the capital stock of Syntel-India,
and all such capital stock has been validly issued, subscribed and paid up
and (b) have validly authorized, executed and delivered the Stock Purchase
Agreement.
(ii) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated by the Stock Purchase Agreement, other than such
consents, approvals or authorizations that have been obtained.
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to the
terms and conditions herein set forth, the Company agrees to issue and sell
3,000,000 shares of the Underwritten Stock to the several Underwriters and each
of the Underwriters agrees to purchase from the Company the respective aggregate
number of shares of Underwritten Stock set forth opposite its name in Schedule
I. The price at which such shares of Underwritten Stock shall be sold by the
Company and purchased by the several Underwriters shall be $ per share. In
making this Agreement, each Underwriter is contracting severally and not
jointly; except as provided in paragraphs (b) and (c) of this Section 3, the
agreement of each Underwriter is to purchase only the respective number of
shares of the Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or refuse
(otherwise than for a reason sufficient to justify the termination of this
Agreement under the provisions of Section 8 or 9 hereof) to purchase and pay for
the number of shares of the Stock agreed to be purchased by such Underwriter or
Underwriters, the Company shall immediately give notice thereof to you, and the
non-defaulting Underwriters shall have the right within 24 hours after the
receipt by you of such notice to purchase, or procure one or more other
Underwriters to purchase, in such proportions as may be agreed upon between you
and such purchasing Underwriter or Underwriters and upon the terms herein set
forth, all or any part of the shares of the Stock which such defaulting
Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares
and portion, the number of shares of the Stock which each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase;
provided, however, that the non-defaulting Underwriters shall not be obligated
to purchase the shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares of the
Stock exceeds 10% of the total number of shares of the Stock which all
Underwriters agreed to purchase hereunder. If the total number of shares of the
Stock which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the 24-hour period
above referred to, to make arrangements with other underwriters or purchasers
satisfactory to you for purchase of such shares and portion on the terms herein
set forth. In any such case, either you or the Company shall have the right to
postpone the Closing Date determined as provided in Section 5 hereof for not
more than seven business days after the date originally fixed as the Closing
Date pursuant to said Section 5 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made. If neither the non-defaulting Underwriters nor the Company shall
make arrangements within the 24-hour periods stated above for the purchase of
all the shares of the Stock which the defaulting Underwriter or Underwriters
agreed to purchase hereunder, this Agreement shall be terminated without further
act or deed and without any liability on the part of the Company to any
non-defaulting Underwriter and without any liability on the part of any non-
defaulting Underwriter to the Company. Nothing in this paragraph (b), and no
action taken
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hereunder, shall relieve any defaulting Underwriter from liability in respect of
any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth, the Company
grants an option to the several Underwriters to purchase, severally and not
jointly, up to 450,000 shares in the aggregate of the Option Stock from the
Company at the same price per share as the Underwriters shall pay for the
Underwritten Stock. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Stock by the Underwriters and may be exercised
in whole or in part at any time (but not more than once) on or before the
thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of shares of the
Option Stock as to which the several Underwriters are exercising the option.
Delivery of certificates for the shares of Option Stock, and payment therefor,
shall be made as provided in Section 5 hereof. The number of shares of the
Option Stock to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front cover page
and under "Underwriting" in the Registration Statement, any Preliminary
Prospectus and the Prospectus relating to the Stock filed by the Company
(insofar as such information relates to the Underwriters) constitutes the only
information furnished by the Underwriters to the Company for inclusion in the
Registration Statement, any Preliminary Prospectus, and the Prospectus, and you
on behalf of the respective Underwriters represent and warrant to the Company
that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten Stock and
the Option Stock (if the option granted by Section 3(c) hereof shall have been
exercised not later than 7:00 A.M., San Francisco time, on the date two business
days preceding the Closing Date), and payment therefor, shall be made at the
office of Dykema Gossett PLLC , Bloomfield Hills, Michigan, at 7:00 a.m., San
Francisco time, on the fourth business day after the date of this Agreement, or
at such time on such other day, not later than seven full business days after
such fourth business day, as shall be agreed upon in writing by the Company and
you. The date and hour of such delivery and payment (which may be postponed as
provided in Section 3(b) hereof) are herein called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised after
7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Dykema Gossett PLLC ,
Bloomfield Hills, Michigan, at 7:00 a.m., San Francisco time, on the third
business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to the
Company or its order by one or more certified or official bank check or checks
in same day funds. Such payment shall be made upon delivery of certificates for
the Stock to you for the respective accounts of the several Underwriters against
receipt therefor signed by you. Certificates for the Stock to be delivered to
you shall be registered in such name or names and shall be in such denominations
as you may request at least one business day before the Closing Date, in the
case of Underwritten Stock, and at least one business day prior to the purchase
thereof, in the case of the Option Stock. Such certificates will be made
available to the Underwriters for inspection, checking and packaging at the
offices of Lewco
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Securities Corporation, 2 Broadway, New York, New York 10004 on the business day
prior to the Closing Date or, in the case of the Option Stock, by 3:00 p.m., New
York time, on the business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later date on which Option Stock is
purchased for the account of such Underwriter. Any such payment by you shall not
relieve such Underwriter from any of its obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY AND THE SHAREHOLDERS. Each of the
Company and, with respect to paragraph (k) only, the Shareholders respectively
covenants and agrees as follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at
the time of effectiveness of the Registration Statement in reliance on Rule
430A and (ii) not file any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have been
advised and furnished with a copy or to which you shall have reasonably
objected in writing or which is not in compliance with the Securities Act
or the rules and regulations of the Commission.
(b) The Company will promptly notify you in the event of (i) the
request by the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, (ii)
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement, (iii) the institution or
notice of intended institution of any action or proceeding for that
purpose, (iv) the receipt by the Company of any notification with respect
to the suspension of the qualification of the Stock for sale in any
jurisdiction, or (v) the receipt by it of notice of the initiation or
threatening of any proceeding for such purpose. The Company will make every
reasonable effort to prevent the issuance of such a stop order and, if such
an order shall at any time be issued, to obtain the withdrawal thereof at
the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you
a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement
becomes effective and, promptly upon the filing thereof, a signed copy of
each post-effective amendment, if any, to the Registration Statement
(together with, in each case, all exhibits thereto unless previously
furnished to you) and will also deliver to you, for distribution to the
Underwriters, a sufficient number of additional conformed copies of each of
the foregoing (but without exhibits) so that one copy of each may be
distributed to each Underwriter, (ii) as promptly as possible deliver to
you and send to the several Underwriters, at such office or offices as you
may designate, as many copies of the Prospectus as you may reasonably
request, and (iii) thereafter from time to time during the period in which
a prospectus is required by law to be delivered by an Underwriter or
dealer, likewise send to the Underwriters as many additional copies of the
Prospectus and as many copies of any supplement to the Prospectus and of
any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing
by you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement
or amend the Prospectus in order to make the Prospectus not misleading in
the light of the circumstances existing at the time it is delivered to a
purchaser of the Stock, the Company will forthwith prepare and file with
the Commission a supplement to the Prospectus or an amended prospectus so
that the Prospectus as so supplemented or amended will not contain any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances existing at the time such Prospectus is delivered to such
purchaser, not
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misleading. If, after the initial public offering of the Stock by the
Underwriters and during such period, the Underwriters shall propose to vary
the terms of offering thereof by reason of changes in general market
conditions or otherwise, you will advise the Company in writing of the
proposed variation, and, if in the opinion either of counsel for the
Company or of counsel for the Underwriters such proposed variation requires
that the Prospectus be supplemented or amended, the Company will forthwith
prepare and file with the Commission a supplement to the Prospectus or an
amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the
several Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with
the applicable provisions of the Securities Act and the applicable rules
and regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment
to the Registration Statement and any supplement to the Prospectus or any
amended prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue
sky laws of such jurisdictions as you may designate and, during the period
in which a prospectus is required by law to be delivered by an Underwriter
or dealer, in keeping such qualifications in good standing under said
securities or blue sky laws; provided, however, that the Company shall not
be obligated to file any general consent to service of process or to
qualify as a foreign corporation in any jurisdiction in which it is not so
qualified. The Company will, from time to time, prepare and file such
statements, reports, and other documents as are or may be required to
continue such qualifications in effect for so long a period as you may
reasonably request for distribution of the Stock.
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to
shareholders of the Company and of all information, documents and reports
filed with the Commission (including the Report on Form SR required by Rule
463 of the Commission under the Securities Act).
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date,
the Company will make generally available to its security holders an
earnings statement in accordance with Section 11(a) of the Securities Act
and Rule 158 thereunder.
(i) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, including all costs
and expenses incident to (i) the preparation, printing and filing with the
Commission and the National Association of Securities Dealers, Inc. of the
Registration Statement, any Preliminary Prospectus and the Prospectus, (ii)
the furnishing to the Underwriters of copies of any Preliminary Prospectus
and of the several documents required by paragraph (c) of this Section 6 to
be so furnished, (iii) the printing of this Agreement and related documents
delivered to the Underwriters, (iv) the preparation, printing and filing of
all supplements and amendments to the Prospectus referred to in paragraph
(d) of this Section 6, (v) the furnishing to you and the Underwriters of
the reports and information referred to in paragraph (g) of this Section 6
and (vi) the printing and issuance of stock certificates, including the
transfer agent's fees.
(j) The Company agrees to reimburse you, for the account of the
several Underwriters, for blue sky fees and related disbursements
(including counsel fees and disbursements and cost of printing memoranda
for the Underwriters) paid by or for the account of the Underwriters or
their counsel in qualifying the Stock under state securities or blue sky
laws and in the review of the offering by the NASD.
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(k) The Company and each of the Shareholders hereby agrees that,
without the prior written consent of Hambrecht & Quist LLC on behalf of the
Underwriters, the Company or such Shareholder, as the case may be, will
not, for a period of 180 days following the commencement of the public
offering of the Stock by the Underwriters, directly or indirectly, (i)
sell, offer, contract to sell, make any short sale, pledge, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of
any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire Common
Stock or (ii) enter into any swap or other agreement that transfers, in
whole or in part, any of the economic consequences or ownership of Common
Stock, whether any such transaction described in clause (i) or (ii) above
is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to (A) the Stock
to be sold to the Underwriters pursuant to this Agreement, (B) options to
purchase Common Stock granted under the stock option plan of the Company
described in the Prospectus and (C) shares of Common Stock issued by the
Company under the employee stock purchase plan of the Company described in
the Prospectus.
(l) The Company agrees to use its best efforts to cause all directors
and executive officers to agree that, without the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters, such person or entity
will not, for a period of 180 days following the commencement of the public
offering of the Stock by the Underwriters, directly or indirectly, (i)
sell, offer, contract to sell, make any short sale, pledge, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of
any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire Common
Stock or (ii) enter into any swap or other agreement that transfers, in
whole or in part, any of the economic consequences or ownership of Common
Stock, whether any such transaction described in clause (i) or (ii) above
is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise.
(m) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after
written notice from you advising the Company to the effect set forth above,
forthwith prepare, consult with you concerning the substance of, and
disseminate a press release or other public statement, reasonably
satisfactory to you, responding to or commenting on such rumor, publication
or event unless the Company shall in good faith believe any such press
release or other public statement would be detrimental to its business or
operations.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company and the Shareholders jointly and severally agree to
indemnify and hold harmless each Underwriter and each person (including each
partner or officer thereof) who controls any Underwriter within the meaning of
Section 15 of the Securities Act from and against any and all losses, claims,
damages or liabilities, joint or several, to which such indemnified parties or
any of them may become subject under the Securities Act, the Securities Exchange
Act of 1934, as amended (herein called the Exchange Act), or the common law or
otherwise, and the Company agrees to reimburse each such Underwriter and
controlling person for any legal or other expenses (including, except as
otherwise hereinafter provided, reasonable fees and disbursements of counsel)
incurred by the respective indemnified parties in connection with defending
against any such losses, claims, damages or liabilities or in connection with
any investigation or inquiry of, or other proceeding which may be brought
against, the respective indemnified parties, in each case arising out of or
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (including the Prospectus as part
thereof and any Rule 462(b) registration statement) or any post-effective
amendment thereto (including any Rule 462(b) registration statement), or the
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omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(ii) any untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus or the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
thereof or supplement thereto) or the omission or alleged omission to state
therein a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that (1) the indemnity agreements of the Company contained in
this paragraph (a) shall not apply to any such losses, claims, damages,
liabilities or expenses if such statement or omission was made in reliance upon
and in conformity with information furnished in writing to the Company by any
Underwriter for use in any Preliminary Prospectus or the Registration Statement
or the Prospectus or any such amendment thereof or supplement thereto and (2)
the indemnity agreement contained in this paragraph (a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Stock which is the subject thereof (or to the benefit of
any person controlling such Underwriter) if at or prior to the written
confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 6 hereof. The indemnity agreements of
the Company contained in this paragraph (a) and the representations and
warranties of the Company contained in Section 2 hereof shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any indemnified party and shall survive the delivery of and payment
for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his own
behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, and the Shareholders from and against any and all
losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement) or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, if such statement or omission was made in reliance upon
and in conformity with information furnished in writing to the Company by such
indemnifying Underwriter for use in the Registration Statement or the Prospectus
or any such amendment thereof or supplement thereto. The indemnity agreement of
each Underwriter contained in this paragraph (b) shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of and payment for the
Stock.
(c) Each party indemnified under the provision of paragraphs (a) and (b) of
this Section 7 agrees that, upon the service of a summons or other initial legal
process upon it in any action or suit instituted against it or upon its receipt
of written notification of the commencement of any investigation or
11
<PAGE> 12
inquiry of, or proceeding against, it in respect of which indemnity may be
sought on account of any indemnity agreement contained in such paragraphs, it
will promptly give written notice (herein called the Notice) of such service or
notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such paragraphs shall be available
to any party who shall fail so to give the Notice if the party to whom such
Notice was not given was unaware of the action, suit, investigation, inquiry or
proceeding to which the Notice would have related and was prejudiced by the
failure to give the Notice, but the omission so to notify such indemnifying
party or parties of any such service or notification shall not relieve such
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of such
indemnity agreement. Any indemnifying party shall be entitled at its own expense
to participate in the defense of any action, suit or proceeding against, or
investigation or inquiry of, an indemnified party. Any indemnifying party shall
be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (herein called the Notice of Defense) to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have authorized to
be incurred by the indemnified party or parties. If, within a reasonable time
after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be responsible for any legal or other
expenses incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is unavailable or
insufficient to hold harmless an indemnified party under paragraph (a) or (b) of
this Section 7, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as
is appropriate to reflect the relative benefits received by each indemnifying
party from the offering of the Stock or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each indemnifying party in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, or actions in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Shareholders on the one hand and the Underwriters on the other hand shall be
deemed to be in the same respective proportions as the total net proceeds from
the offering of the Stock received by the Company and the total underwriting
discount received by the Underwriters, as set forth in the table on the cover
page of the Prospectus,
12
<PAGE> 13
bear to the aggregate public offering price of the Stock. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by each indemnifying party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigation,
preparing to defend or defending against any action or claim which is the
subject of this paragraph (d). Notwithstanding the provisions of this paragraph
(d), no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Stock purchased by such Underwriter. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this paragraph (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).
(e) Neither the Company nor the Shareholders will, without the prior
written consent of each Underwriter settle or compromise or consent to the entry
of any judgment in any pending or threatened claim, action, suit or proceeding
in respect of which indemnification may be sought hereunder (whether or not such
Underwriter or any person who controls such Underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act is a party to
such claim, action, suit or proceeding) unless such settlement, compromise or
consent includes an unconditional release of such Underwriter and each such
controlling person from all liability arising out of such claim, action, suit or
proceeding.
(f) The liability of the Shareholders under the Shareholders'
representations and warranties contained in paragraph (b) of Section 2 hereof
and under the indemnity, contribution and reimbursement agreements contained in
the provisions of this Section 7 and Section 11 hereof shall be limited to
[ ].
8. Termination. This Agreement may be terminated by you at any time prior
to the Closing Date by giving written notice to the Company if after the date of
this Agreement trading in the Common Stock shall have been suspended, or if
there shall have occurred (i) the engagement in major hostilities or an
escalation of major hostilities by the United States or the declaration of war
or a national emergency by the United States on or after the date hereof, (ii)
any outbreak of hostilities or other national or international calamity or
crisis or drastic change in economic or political conditions if the effect of
such outbreak, calamity, crisis or change in economic or political conditions in
the financial markets of the United States would, in the Underwriters'
reasonable judgment, make the offering or delivery of the Stock impracticable,
(iii) suspension of trading in securities generally or a material adverse
decline in value of securities generally on the New York Stock Exchange, the
American Stock Exchange, The Nasdaq Stock Market, or limitations on prices
(other than limitations on hours or numbers of days of trading) for securities
on either such exchange or system, (iv) the enactment, publication, decree or
other promulgation of any federal or state statute, regulation, rule or
13
<PAGE> 14
order of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company and
Syntel-India, taken as a whole, (v) declaration of a banking moratorium by
either federal or New York State authorities or (vi) the taking of any action by
any federal, state or local government or agency in respect of its monetary or
fiscal affairs which in the Underwriters' reasonable opinion has a material
adverse effect on the securities markets in the United States. If this Agreement
shall be terminated pursuant to this Section 8, there shall be no liability of
the Company to the Underwriters and no liability of the Underwriters to the
Company; provided, however, that in the event of any such termination the
Company agrees to indemnify and hold harmless the Underwriters from all costs or
expenses incident to the performance of the obligations of the Company under
this Agreement, including all costs and expenses referred to in paragraphs (i)
and (j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several
Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company of all its obligations to be performed hereunder at
or prior to the Closing Date or any later date on which Option Stock is to be
purchased, as the case may be, and to the following further conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and
no proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder
and the validity and form of the certificates representing the Stock, all
corporate proceedings and other legal matters incident to the foregoing,
and the form of the Registration Statement and of the Prospectus (except as
to the financial statements contained therein), shall have been approved at
or prior to the Closing Date by Sidley & Austin, counsel for the
Underwriters, exercising reasonable judgment.
(c) You shall have received from Dykema Gossett PLLC, counsel for the
Company, an opinion, addressed to the Underwriters and dated the Closing
Date, covering the matters set forth in Annex A hereto, and an opinion from
Shah, Desai Doijode and Phatarpheka, counsel for Syntel-India, addressed to
the Underwriters and dated the Closing Date, covering the matters set forth
in Annex B hereto, and if Option Stock is purchased at any date after the
Closing Date, an additional opinion from each such counsel, addressed to
the Underwriters and dated such later date, confirming that the statements
expressed as of the Closing Date in such opinions remain valid as of such
later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true
and correct in all material respects and neither the Registration Statement
nor the Prospectus omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, respectively,
not misleading, (ii) since the Effective Date, no event has occurred which
should have been set forth in a supplement or amendment to the Prospectus
which has not been set forth in such a supplement or amendment, (iii) since
the respective dates as of which information is given in the Registration
Statement in the form in which it originally became effective and the
Prospectus contained therein, there has not been any material adverse
change or any development involving a prospective material adverse change
in or affecting the business, properties, financial condition or results of
operations of the Company, whether or not arising from transactions in the
ordinary course of business, and, since such dates, except in the ordinary
course of business, the Company has not entered into any material
transaction not referred to in the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein,
(iv) the Company does not have any material contingent obligations which
are not disclosed in the Registration Statement and the Prospectus, (v)
there are not any pending or known threatened legal proceedings to which
the Company is a party or of which property of the Company is the
14
<PAGE> 15
subject which are material and which are not disclosed in the Registration
Statement and the Prospectus, (vi) there are not any franchises, contracts,
leases or other documents which are required to be filed as exhibits to the
Registration Statement which have not been filed as required, and (vii) the
representations and warranties of the Company herein (other than the
representations and warranties contained in Section 2(a)(xxvii)) are true
and correct in all material respects as of the Closing Date or any later
date on which Option Stock is to be purchased, as the case may be.
(e) You shall have received on the Closing Date and on any later date
on which Option Stock is purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and the
Chief Financial Officer of the Company, stating that the respective signers
of said certificate have carefully examined the Registration Statement in
the form in which it originally became effective and the Prospectus
contained therein and any supplements or amendments thereto, and that the
statements included in clauses (i) through (vii) of paragraph (d) of this
Section 9 are true and correct.
(f) You shall have received from each of Coopers & Lybrand LLP and
Rajkamal Shah & Company, a letter or letters, addressed to the Underwriters
and dated the Closing Date and any later date on which Option Stock is
purchased, confirming that they are independent public accountants with
respect to the Company within the meaning of the Securities Act and the
applicable published rules and regulations thereunder and based upon the
procedures described in their respective letters delivered to you
concurrently with the execution of this Agreement (each herein called the
Original Letter), but carried out to a date not more than three business
days prior to the Closing Date or such later date on which Option Stock is
purchased (i) confirming, to the extent true, that the statements and
conclusions set forth in the Original Letter are accurate as of the Closing
Date or such later date, as the case may be, and (ii) setting forth any
revisions and additions to the statements and conclusions set forth in the
Original Letter which are necessary to reflect any changes in the facts
described in the Original Letter since the date of the Original Letter or
to reflect the availability of more recent financial statements, data or
information. The letters shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties
of the Company which, in your sole judgment, makes it impractical or
inadvisable to proceed with the public offering of the Stock or the
purchase of the Option Stock as contemplated by the Prospectus.
(g) You shall have received from Coopers & Lybrand LLP a letter
stating that their review of the Company's system of internal accounting
controls, to the extent they deemed necessary in establishing the scope of
their examination of the Company's financial statements as at December 31,
1996, did not disclose any weakness in internal controls that they
considered to be material weaknesses.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several
jurisdictions, or other evidence satisfactory to you, of the qualification
referred to in paragraph (f) of Section 6 hereof.
(i) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by The Nasdaq National
Market upon official notice of issuance.
(j) On or prior to the Closing Date, you shall have received from all
holders (prior to the execution of this Agreement) of shares of Common
Stock, or any securities convertible into or exchangeable or exercisable
for or any rights to purchase or acquire Common Stock, agreements, in form
reasonably satisfactory to Hambrecht & Quist LLC, stating that without the
prior written consent of Hambrecht & Quist LLC on behalf of the
Underwriters, such person or entity will not, for a period of 180 days
following the commencement of the public offering of the Stock by the
Underwriters, directly or indirectly, (i) sell, offer, contract to sell,
make any short sale, pledge, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant
to purchase or otherwise transfer or dispose of any shares of Common Stock
or any
15
<PAGE> 16
securities convertible into or exchangeable or exercisable for or any
rights to purchase or acquire Common Stock or (ii) enter into any swap or
other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of
Common Stock or such other securities, in cash or otherwise.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Sidley & Austin, counsel for the Underwriters,
exercising reasonable judgment, shall be satisfied that they comply in form and
scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that (i) in the event of such termination, the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof, and (ii) if this Agreement is terminated by you because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein, to fulfill any of the conditions herein, or to comply with any
provision hereof other than by reason of a default by any of the Underwriters,
the Company will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including reasonable fees and disbursements of counsel)
that shall have been incurred by them in connection with the transactions
contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligation of the
Company to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company by giving notice to
you. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that in the event of any such termination the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other obligations
under Section 7 of this Agreement, the Company and the Shareholders hereby
jointly and severally agree to reimburse on a quarterly basis the Underwriters
for all reasonable legal and other expenses incurred in connection with
investigating or defending any claim, action, investigation, inquiry or other
proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in paragraph (a) of Section 7 of this
Agreement, notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the obligations under this Section 11 and the
possibility that such payments might later be held to be improper; provided,
however, that (i) to the extent any such payment is ultimately held to be
improper, the persons receiving such payments shall promptly refund them and
(ii) such persons shall provide to the Company and the Shareholders, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to
the benefit of the Company, the Shareholders and the several Underwriters and,
with respect to the provisions of Section 7 hereof, the several parties (in
addition to the Company, the Shareholders and the several Underwriters)
indemnified under the provisions of said Section 7, and their respective
personal representatives, successors and assigns. Nothing in this Agreement is
intended or shall be construed to give to any other person, firm or corporation
any legal or equitable remedy or claim under or in respect of this Agreement or
any provision herein contained. The term "successors and assigns" as
16
<PAGE> 17
herein used shall not include any purchaser, as such purchaser, of any of the
Stock from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104; and if to the Company, shall be mailed,
facsimiled or delivered to it at its office, 2800 Livernois Road, Suite 400,
Troy, Michigan 48083, Attention: General Counsel and Secretary. All notices
given by telegraph shall be promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or their respective directors or officers, and (c) delivery and
payment for the Stock under this Agreement; provided, however, that if this
Agreement is terminated prior to the Closing Date, the provisions of paragraphs
(k) and (l) of Section 6 hereof shall be of no further force or effect.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
SYNTEL, INC.
By
------------------------------------
John Andary
Chief Financial Officer
--------------------------------------
Bharat Desai
--------------------------------------
Neerja Sethi
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
PRUDENTIAL SECURITIES INCORPORATED
ROBERTSON, STEPHENS & COMPANY LLC
By Hambrecht & Quist LLC
By
----------------------------------
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
17
<PAGE> 18
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS TO BE PURCHASED
------------ ----------------
<S> <C>
Hambrecht & Quist LLC.......................................
Prudential Securities Incorporated..........................
Robertson, Stephens & Company LLC...........................
-------
Total..................................................
=======
</TABLE>
<PAGE> 19
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF DYKEMA GOSSETT PLLC
COUNSEL FOR THE COMPANY
(i) The Company (a) has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the jurisdiction of its
incorporation, (b) is duly qualified as a foreign corporation and in good
standing in each state of the United States of America in which its
ownership or leasing of property requires such qualification except where
the failure to so qualify would not have a material adverse effect upon the
condition (financial or otherwise) or results of operations of the Company,
and (c) has full corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement; provided, that, in making the statement set forth in (b) such
counsel may rely upon a certificate of the Company as to the jurisdictions
in which it owns or leases property or conducts its business.
(ii) The Stock Purchase Agreement between the Company and Bharat Desai
and Neerja Sethi, filed as Exhibit 10.4 to the Registration Statement, has
been duly authorized, executed and delivered by the Company;
(iii) Upon the closing of the sale of the Underwritten Stock, the
authorized capital stock of the Company consists of 5,000,000 shares of
Preferred Stock, no par value and 40,000,000 shares of Common Stock, no par
value, and proper corporate proceedings have been validly taken to
authorize such authorized capital stock; the amount of outstanding capital
stock of the Company as set forth in the Prospectus conforms with the stock
ledger of the Company; all of the outstanding shares of such capital stock
have been duly and validly issued and, based upon a certificate of the
President and the Chief Financial Officer of the Company, are fully paid
and nonassessable; the Underwritten Stock and any Option Stock purchased
after the Closing Date, when issued and delivered to and paid for by the
Underwriters as provided in the Underwriting Agreement, will have been duly
and validly issued and be fully paid and nonassessable; the certificates
for the Stock are in due and proper form; and no preemptive rights of, or
rights of refusal in favor of, shareholders exist with respect to the
Stock, or the issue and sale thereof, pursuant to the Articles of
Incorporation or Bylaws of the Company and, to the knowledge of such
counsel, there are no contractual preemptive rights that have not been
waived, rights of first refusal or rights of co-sale which exist with
respect to the issue and sale of the Stock;
(iv) the Registration Statement has become effective under the
Securities Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or suspending or
preventing the use of the Prospectus is in effect and no proceedings for
that purpose have been instituted or are pending or contemplated by the
Commission;
(v) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial or statistical data
contained therein, as to which such counsel need express no opinion) comply
as to form in all material respects with the requirements of the Securities
Act and with the rules and regulations of the Commission thereunder (the
"Rules");
(vi) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such counsel)
and 11(c) of Form S-1 is to the best of such counsel's knowledge set forth
therein in all material respects to the extent required by the Securities
Act and the Rules or no response is required with respect to such Items,
and the description of the Company's stock option plan and the options
granted and which may be granted thereunder set forth in the Prospectus
presents the information required to be shown with respect to said plan and
options to the extent required by the Securities Act and the Rules;
(vii) to such counsel's knowledge, there are no franchises, contracts,
leases or documents which are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement, which are not described and filed as required;
<PAGE> 20
(viii) the Underwriting Agreement has been duly authorized, executed
and delivered by the Company;
(ix) the issue and sale by the Company of the shares of Stock sold by
the Company as contemplated by the Underwriting Agreement do not conflict
with, or result in a breach of, the Articles of Incorporation or Bylaws of
the Company or, to such counsel's knowledge, any agreement or instrument to
which the Company is a party, any applicable law or regulation, or any
order, writ, injunction or decree, of any jurisdiction, court or
governmental instrumentality;
(x) to such counsel's knowledge, no consent, approval, authorization
or order of any court or governmental agency or body is required for the
consummation of the transactions contemplated in the Underwriting
Agreement, except such as have been obtained under the Securities Act and
such as may be required by the NASD or under state securities or blue sky
laws in connection with the purchase and distribution of the Stock by the
Underwriters as to which such counsel need not express any opinion; and
(xi) the Stock issued and sold by the Company has been duly authorized
for listing by The Nasdaq National Market upon official notice of issuance.
Such counsel shall state that, in the course of the preparation of the
Registration Statement and the Prospectus, they have considered the information
set forth therein in light of the matters required to be set forth therein, and
they have participated in conferences with representatives and officers of the
Company, including its internal counsel and independent public accountants,
during the course of which the contents of the Registration Statement and the
Prospectus and related matters were discussed. Such counsel may state that they
have not independently checked the accuracy or completeness of, or otherwise
verified, and accordingly are not passing upon, and do not assume responsibility
for, the accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus; and such counsel may state that they
have relied as to materiality, to a large extent, upon the judgment of officers
and representatives of the Company. Such counsel shall state, however, that as a
result of such consideration and participation, nothing has come to their
attention which causes them to believe that the Registration Statement (other
than the financial statements, financial data, statistical data and supporting
schedules included therein or in the exhibits thereto, as to which such counsel
need not express any belief), at the time each such Registration Statement
became effective (but after giving effect to Rule 430A under the Securities
Act), contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus (other than the financial
statements, financial data, statistical data and supporting schedules included
therein or in the exhibits thereto, as to which such counsel need not express
any belief), as of its date (but after giving effect to Rule 430A under the
Securities Act), included any untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
2
<PAGE> 21
ANNEX B
MATTERS TO BE COVERED IN THE OPINION OF
SHAH DESAI DOIJODE AND PHATARPHEKA
COUNSEL FOR SYNTEL INDIA
(1) Syntel India is a corporation duly organized, validly existing and in
good standing under the laws of the country of India and has corporate power and
authority to own, lease and operate its business as now being conducted.
(2) The Stock Purchase Agreement has been duly authorized, executed and
delivered by the Stockholders and constitutes a legal, valid and binding
obligation of the Stockholders.
(3) Neither the execution and delivery of the Stock Purchase Agreement by
the Stockholders and Syntel nor the consummation of the transactions
contemplated thereby (i) will violate the organizational documents of Syntel
India or any law, statute, rule or regulation under the laws of the country of
India, and (ii) will require the consent of any governmental body or agency,
other than the Reserve Bank Permission, which has been duly obtained.
(4) Upon the closing of the transactions contemplated under the Stock
Purchase Agreement, Syntel will own all of the capital stock of Syntel India,
free and clear of all liens, encumbrances and security interests, other than
those referenced in the Reserve Bank Permission.
<PAGE> 1
EXHIBIT 10.17
July 22, 1997
Mr. R.S. Ramdas
Sr. Director Internal Audit, Tax & Treasury
Syntel, Inc.
2800 Livernois
Troy, MI 48083
Dear Ramdas:
Under the terms and conditions of the Credit Authorization Agreement dated
July 9, 1997 between NBD Bank and Syntel, Inc., NBD Bank hereby removes items
9.3A Dividends and 9.3B Sale of Shares. In addition, NBD Bank hereby amends
Section 9.3 I Tangible Net Worth to be a minimum of $10,000,000 increasing to
$16,000,000 by December 31, 1997 and Section 9.3K Leverage Ratio not to exceed
2.20:1.00 reducing to 1.00:1.00 by December 31, 1997. All other terms and
conditions remain the same. Please sign below to acknowledge your acceptance and
confirmation.
Sincerely,
By: /s/ MARY ANN LIEVOIS
------------------------------------
Mary Ann Lievois
Its: Vice President
------------------------------------
Accepted and Agreed to this 22nd day
of July 1997.
Syntel, Inc.
By: /s/ R.S. RAMDAS
------------------------------------
R.S. Ramdas
Its:
Sr. Director Internal Audit, Tax &
Treasury
------------------------------------
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Syntel, Inc.:
We consent to the inclusion in this registration statement on Form S-1
(File No. 333-28655) of our report dated February 28, 1997, on our audits of the
financial statements and financial statement schedule of Syntel, Inc. We also
consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND, L.L.P.
Detroit, Michigan
July 24, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Syntel Software Private Limited:
We consent to the inclusion in this registration statement on Form S-1 of
Syntel Inc. of our report dated March 20, 1997, on our audit of the financial
statements of Syntel Software Private Limited. We also consent to the reference
to our firm under the caption "Experts."
RAJKAMAL SHAH & CO.
Mumbai, India
July 24, 1997
<PAGE> 1
EXHIBIT 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Syntel Software Private Limited:
We consent to the inclusion in this registration statement on Form S-1 of
Syntel Inc. of our report dated July 14, 1997, on our audit of the financial
statements of Syntel Software Private Limited. We also consent to the reference
to our firm under the caption "Experts."
H. H. SACHDE & CO.
Gondal, India
July 24, 1997
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