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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to ______________
Commission file number 0-22903
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Syntel, Inc.
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(Exact name of registrant as specified in its charter)
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<S><C>
Michigan 38-2312018
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2800 Livernois Road, Suite 400, Troy, Michigan 48083
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(Address of Principal Executive Offices) (Zip Code)
(248) 619-2800
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(Registrant's Telephone Number, Including Area Code)
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Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, no par value: 38,180,981 shares issued and outstanding as of
May 11, 1998.
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SYNTEL, INC.
INDEX
Page
Part I Financial Information ----
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis of 8
Financial Condition and Results of Operation
Part II Other Information 10
Signatures 11
Index to Exhibits 12
2
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SYNTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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<CAPTION>
3 MONTHS
ENDED MARCH 31
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1998 1997
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<S> <C> <C>
Revenues $41,592 $26,294
Cost of revenues 27,047 18,892
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Gross profit 14,545 7,402
Selling, general and administrative expenses 6,093 5,395
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Income from operations 8,452 2,007
Other income, principally interest 398 121
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Income before income taxes 8,850 2,128
Income taxes 2,814 12
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Net income $ 6,036 $ 2,116
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1997 PRO FORMA INFORMATION:
Income before income taxes $ 2,128
Pro forma income taxes** 541
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Pro forma net income $ 1,587
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EARNINGS PER SHARE (1)
Basic $ 0.16 $ 0.04 *
Diluted $ 0.15 $ 0.04 *
Weighted average common shares
outstanding - diluted 39,269 38,730
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(1) Gives effect to a 3:2 stock split effective April 22, 1998.
* - Pro forma EPS as if the company had been taxed as a C corporation
for the period presented.
** - Represents the income taxes, as if the company had been a C
corporation for the period presented.
The accompanying notes are an integral part of the consolidated financial
statements.
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SYNTEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
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<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $31,714 $32,945
Accounts receivable, net 30,654 20,644
Advanced billings and other current assets 9,768 6,897
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Total current assets 72,136 60,486
Property and equipment 9,708 9,299
Less accumulated depreciation 5,495 5,060
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Property and equipment, net 4,213 4,239
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Deferred income taxes, noncurrent 668 507
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$77,017 $65,232
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LIABILITIES
Current liabilities:
Accrued payroll and related costs $10,214 $10,388
Other current liabilities 11,953 9,047
Deferred revenue 8,562 5,705
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Total current liabilities 30,729 25,140
Income taxes payable 668 507
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Total liabilities 31,397 25,647
SHAREHOLDERS' EQUITY
Total shareholders' equity 45,620 39,585
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Total liabilities and shareholders' equity $77,017 $65,232
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The accompanying notes are an integral part of the Consolidated Financial
Statements
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SYNTEL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
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<CAPTION>
THREE MONTHS
ENDED MARCH 31
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1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,036 $ 2,116
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Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 435 454
Deferred income taxes (161) 0
Compensation expense related to
stock options 11 0
Changes in assets and liabilities:
Accounts receivable, net (10,010) (673)
Advance billing and other assets (2,871) (3,554)
Accrued payroll and other liabilities 2,893 (3,077)
Deferred revenues 2,857 3,441
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Net cash used in operating activities (810) (1,293)
Cash flows used in investing activities,
property and equipment expenditures (409) (632)
Effect of foreign currency exchange rate changes on cash (12) (3)
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Net decrease in cash and cash equivalents (1,231) (1,928)
Cash and cash equivalents, beginning of period $ 32,945 $ 7,332
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Cash and cash equivalents, end of period $ 31,714 $ 5,404
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The accompanying notes are an integral part of the consolidated financial
statements.
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SYNTEL, INC. AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying condensed consolidated financial statements have been
prepared by management, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
accompanying unaudited, condensed consolidated financial statements contain
all adjustments, consisting of normal recurring adjustments, necessary to
present fairly the financial position of Syntel, Inc. and it's subsidiaries
as of March 31, 1998, the results of its operations for the three months
ended March 31, 1998 and March 31, 1997, and cash flows for the three months
ended March 31, 1998 and March 31, 1997. The year end condensed balance
sheet as of December 31, 1997 was derived from audited financial statements
but does not include all disclosures required by generally accepted
accounting principles. For further information refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on form 10K for the year ended December 31, 1997.
Operating results for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
2. PRINCIPLES OF CONSOLIDATION AND ORGANIZATION
The condensed consolidated financial statements include all the accounts of
the company and its wholly owned subsidiaries; Syntel Software Private
Limited ("Syntel India"), an Indian limited liability company, Syntel
(Singapore) Pte. Ltd. ("Syntel Singapore"), a Singapore limited liability
company, and Syntel Europe Ltd. ("Syntel U.K."), a United Kingdom limited
liability company. All intercompany accounts and transactions have been
eliminated.
3. CASH EQUIVALENTS
For the purpose of reporting cash and cash equivalents, the Company
considers all liquid investments purchased with a maturity of three months
or less to be cash equivalents. Cash equivalents are principally bonds and
notes with maturity dates of less than ninety days.
4. COMPREHENSIVE INCOME
The Company adopted Statement No. 130 ("SFAS 130"), "Reporting Comprehensive
Income", as of January 1, 1998. SFAS 130 established standards for reporting
and display of comprehensive income and its components. Total Comprehensive
Income for the three months ended March 31, 1998 and March 31, 1997 was as
follows (in thousands):
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<CAPTION>
Three Months Ended March 31
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1998 1997
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<S> <C> <C>
Net Income $6,036 $2,116
Other comprehensive income
Foreign currency translation adjustments (10) $ (0)
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Total comprehensive income $6,026 $2,116
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5. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting standards No. 128
"Earnings per Share", effective December 31, 1997. The pro forma earnings per
share for the quarter ended March 31, 1997 have been restated to comply with
these standards.
Basic earnings per share is calculated by dividing net income by the average
number of shares outstanding during the applicable period.
The company had stock options which are considered to be potentially dilutive to
common stock. Diluted earnings per share is calculated by dividing net income by
the average number of shares outstanding during the applicable period adjusted
for these potentially dilutive options.
Additionally, the Company effected a 3:2 stock split effective April 22, 1998.
The following table sets forth the computation of earnings per share. Per share
earnings for the first quarter of 1997 reflect pro forma net income. Outstanding
shares have been restated to reflect the 3:2 stock split for all periods
presented.
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<CAPTION>
1st Quarter 1998 1st Quarter 1997
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Earnings Earnings
per per
Shares share Shares share
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(in thousands, except per share earnings)
<S> <C> <C> <C> <C>
Basic earnings per share 38,175 $ 0.16 37,500 $ 0.04
Net dilutive effect of stock options
outstanding 1,094
Shares assumed outstanding due to
excess distributions in 1997 1,230
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Diluted earnings per share 39,269 $ 0.15 38,730 $ 0.04
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PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SYNTEL INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
Revenues. The Company's revenues consist of fees derived from its
IntelliSourcing and TeamSourcing business units. Total revenues increased to
$41.6 million for the three month period ended March 31, 1998; representing an
increase of 58% over revenues of $26.3 million for the three months ended March
31, 1997. The revenue growth was primarily attributable to growth in existing
engagements, 25 new IntelliSourcing engagements, the acquisition of the
consulting base from Waypointe Information Technologies Inc., and increased
average bill rates. Worldwide billable headcount, including personnel employed
by Syntel India, as of March 31, 1998 increased to 1,782 compared to 1,346 as of
March 31, 1997.
Cost of Revenues. Cost of revenues consist of salaries, payroll taxes, benefits,
relocation costs, immigration costs, finders fees, and trainee compensation for
consultants in both the United States and offshore. Costs of revenues were $27.0
million for the three months ended March 31, 1998, representing 65.0% of
revenues, compared to $18.9 million or 71.8% of revenues for the period ended
March 31, 1997. The decrease in cost of revenues as a percentage of revenues was
attributable primarily to increased billing rates in both IntelliSourcing and
TeamSourcing, as well as a continued migration of the business mix to higher
margin IntelliSourcing engagements, contributing approximately 7% and 4%,
respectively, to the decrease in costs as a percentage of revenues. This was
partially offset by increased compensation and benefits of approximately 4% as
well as increased rates for outside consulting, trainee and other direct costs.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses consist primarily of salaries, payroll taxes and
benefits for sales, finance, administrative, and corporate staff, travel,
telecommunications, business promotions, marketing and various facility costs
for the company's Global Development Centers. Selling, general, and
administrative costs for the three months ended March 31, 1998 were $6.1
million, or 14.6% of total revenues, compared to $5.4 million, or 20.5% of total
revenues for the three months ended March 31, 1997. The $0.7 million increase in
selling, general, and administrative expenses was primarily the result of
increased professional, facility, communication, and office expenses necessary
to support the revenue growth. It is anticipated that Selling, General and
Administrative costs will increase from first quarter levels due to additional
investments in facilities and personnel.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its working capital needs through operations. Both the
Mumbai and Chennai expansion programs, which are expected to be completed in the
next three months, are being financed from internally generated funds from
Syntel India's operations.
Net cash used in operating activities was $0.8 million for the first three
months of 1998 and $1.3 million for the first three months of 1997. The $0.8
million used by operating activities in 1998 was attributable to a $10.0 million
increase in accounts receivable due to a $6.2 million increase in 1998 first
quarter revenues over 1997 fourth quarter revenues and a seven day increase in
days-sales-outstanding due to a short delay in receipt of payment from a large
customer. The increase in accounts receivable was offset by net income of $6.0
million and an increase in accrued liabilities of $2.9 million.
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Net cash used in investing activities was $0.4 million for the three months
ended March 31, 1998 and $.06 million for the three months ended March 31, 1997.
Cash used for investing activities for the three months ended March 31, 1998
consisted primarily of license fees for a new integrated accounting and Human
Resources software system. Cash used for investing activities for the three
months ended March 31, 1997 included $0.6 million for computers, software, and
facility upgrades.
The company has a line of credit with NBD Bank, which provides for borrowings of
up to $25 million. The line of credit matures on August 31, 1998. The line of
credit contains covenants restricting the Company from, among other things,
incurring additional debt, issuing guarantees and creating liens on the
Company's property, without prior consent of the bank. The line of credit also
requires the Company to maintain certain tangible net worth levels and leverage
ratios. At March 31, 1998, there was no indebtedness outstanding under the line
of credit. Borrowings under the line of credit bear interest at the lower of the
Eurodollar rate plus the applicable Eurodollar margin, the bank's prime rate or
a negotiated rate established with the bank at the time of borrowing.
In addition to the bank line of credit, the Company has a $10.0 million facility
with NBD Bank to finance acquisitions which expires on August 31, 1998. The
Company has not borrowed any amounts under this facility.
The Company believes that the combination of present cash balances and future
operating cash flows will be sufficient to meet the Company's currently
anticipated cash requirements for at least the next 12 months.
YEAR 2000 DATE CONVERSION
The Company has developed a plan and implemented initiatives to replace existing
network systems, computers, and financial systems with year 2000 compliant
computers and software. Management anticipates these initiatives will be
completed before December 31, 1998 with no effect on customers or disruption to
business operations.
The cost of addressing year 2000 issues are reflected in the current year
financial forecasts and are not anticipated to have a material adverse impact on
the Company's financial position.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Syntel, Inc. (the "Corporation") is currently not a party to any material
pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description
27 Financial Data Schedule
(b) Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the three month
period ended March 31, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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Syntel, Inc.
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(Registrant)
Date May 11, 1998 By /s/ Bharat Desai
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Bharat Desai, President and
Chief Executive Officer
Date May 11, 1998 By /s/ John Andary
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John Andary, Chief Financial Officer
(principal financial and chief accounting officer)
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11
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EXHIBIT INDEX
Sequentially
Numbered
Exhibit No. Description Page
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27 Financial Data Schedule 13
12
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 31,714
<SECURITIES> 0
<RECEIVABLES> 30,654
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 72,136
<PP&E> 9,708
<DEPRECIATION> 5,495
<TOTAL-ASSETS> 77,017
<CURRENT-LIABILITIES> 30,729
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 46,234
<TOTAL-LIABILITY-AND-EQUITY> 77,017
<SALES> 0
<TOTAL-REVENUES> 41,592
<CGS> 0
<TOTAL-COSTS> 27,047
<OTHER-EXPENSES> 6,093
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (398)
<INCOME-PRETAX> 8,850
<INCOME-TAX> 2,814
<INCOME-CONTINUING> 6,036
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,036
<EPS-PRIMARY> .16
<EPS-DILUTED> .15
</TABLE>
