<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMEND NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number 0-22903
SYNTEL, INC.
(Exact name of Registrant as specified in its charter)
Michigan 38-2312018
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2800 Livernois Road, Suite 400, Troy, Michigan 48084
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 619-2800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
--------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the Registrant
has been required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant as of March 13, 1998, based on the last sale price of $31.625 per
share for the Common Stock on the NASDAQ National Market on such date, was
approximately $107,724,400.
As of March 13, 1998, the Registrant had 25,450,000 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders to be held on or about May 18, 1998 are incorporated by reference
into Part III hereof.
1
<PAGE> 2
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and schedules filed herewith are set forth on
the Index to Financial Statements and Financial Statement Schedules on page F-1
of the separate financial section, and are incorporated herein by reference.
The Financial Statements have been amended to add the auditors signature to the
audit opinion, which was inadvertently excluded in the original filing of the
Form 10-K, on March 31, 1998.
31
<PAGE> 3
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SYNTEL, INC.
By: /s/Bharat Desai
---------------
Bharat Desai
Dated: September 18, 1998 President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/Bharat Desai President and Chief Executive Officer September 18, 1998
- ------------------- (Principal Executive Officer)
Bharat Desai
/s/John Andary Chief Financial Officer September 18, 1998
- -------------------- (Principal Financial and
John Andary and Accounting Officer)
/s/Neerja Sethi Director and Vice President, September 18, 1998
- -------------------- Corporate Affairs
Neerja Sethi
/s/Paritosh K. Choksi Director September 18, 1998
- --------------------
Paritosh K. Choksi
/s/Douglas VanHouweling Director September 18, 1998
- ----------------------
Douglas Van Houweling
/s/GEORGE R. MRKONIC Director September 18, 1998
- --------------------
George R. Mrkonic
</TABLE>
37
<PAGE> 4
SYNTEL, INC.
CONTENTS
PAGES
Report of Independent Accountants.......................................F-2
Consolidated Financial Statements:
Consolidated Statements of Income..................................F-3
Consolidated Balance Sheets........................................F-4
Consolidated Statements of Shareholders' Equity....................F-5
Consolidated Statements of Cash Flows..............................F-6
Notes to Consolidated Financial Statements......................F-7-F-17
F-1
<PAGE> 5
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Syntel, Inc.:
We have audited the accompanying consolidated balance sheets of Syntel, Inc. as
of December 31, 1997 and 1996, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Syntel, Inc. as of
December 31, 1997 and 1996, and the consolidated results of its operations and
cash flows for the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Detroit, Michigan
February 18, 1998
F-2
<PAGE> 6
SYNTEL, INC.
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1997, 1996 and 1995
(in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenues $124,338 $ 92,330 $ 90,326
Cost of revenues 87,584 67,083 70,014
-------- -------- --------
Gross profit 36,754 25,247 20,312
Selling, general and administrative expenses 23,547 19,271 13,909
-------- -------- --------
Income from operations 13,207 5,976 6,403
Other income, net, principally investment income 730 149 188
-------- -------- --------
Income before income taxes 13,937 6,125 6,591
Provision for income taxes 3,517 350 436
-------- -------- --------
Net income $ 10,420 $ 5,775 $ 6,155
======== ======== ========
Pro forma income data (unaudited):
Income before income taxes $ 13,937 $ 6,125 $ 6,591
Pro forma income tax expense* 3,741 1,746 2,170
-------- -------- --------
Pro forma net income $ 10,196 $ 4,379 $ 4,421
======== ======== ========
Pro forma net income per share:
Basic earnings per share $ 0.41 $ 0.18 $ 0.18
======== ======== ========
Diluted earnings per share $ 0.39 $ 0.17 $ 0.17
======== ======== ========
</TABLE>
*Presentation of income tax expense as if the Company was a C-corporation during
the years presented.
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 7
SYNTEL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 32,945 $ 7,332
Accounts receivable 20,644 20,642
Advance billings and other current assets 6,897 715
-------- --------
Total current assets 60,486 28,689
Property and equipment 9,299 7,551
Less accumulated depreciation 5,060 3,248
-------- --------
Property and equipment, net 4,239 4,303
Deferred income taxes, noncurrent 507 -
-------- --------
$ 65,232 $ 32,992
======== ========
LIABILITIES
Current liabilities:
Accrued payroll and related costs $ 10,388 $ 8,020
Accounts payable and other accrued liabilities 7,382 3,541
Dividends/distribution payable 300 14,000
Income taxes payable 1,365 -
Deferred revenue 5,705 1,286
-------- --------
Total current liabilities 25,140 26,847
Income taxes payable 507 -
-------- --------
Total liabilities 25,647 26,847
SHAREHOLDERS' EQUITY
Commonstock, no par value per share, 40 million shares authorized, 25.45 million
shares issued and outstanding at December 31, 1997; 22 million shares
issued and outstanding at December 31, 1996 after stock split 1 1
Additional paid-in capital 34,659 -
Retained earnings 5,174 6,144
Cumulative foreign currency translation adjustment (249) -
-------- --------
Total shareholders' equity 39,585 6,145
-------- --------
$ 65,232 $ 32,992
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 8
SYNTEL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION> CUMULATIVE
-------------------- FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
-------------------- PAID-IN RETAINED TRANSLATION SHAREHOLDERS'
SHARES* AMOUNT CAPITAL EARNINGS ADJUSTMENT EQUITY
-------- -------- ------------ ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 22,000 $ 1 $ 6,214 $ 6,215
Net income 6,155 6,155
-------- -------- -------- -------- -------- --------
Balance, December 31, 1995 22,000 1 12,369 12,370
Net income 5,775 5,775
Dividends declared, paid $5,000 in
1996 and $7,000 in 1997 (12,000) (12,000)
-------- -------- -------- -------- -------- --------
Balance, December 31, 1996 22,000 1 6,144 6,145
Net income 10,420 10,420
Dividends declared (previously
undistributed S-Corporation earnings) (11,400) (11,400)
Termination of S-Corporation tax status $ 1,525 (1,525)
Shares issued in initial public
offering 3,450 34,627 34,627
Compensation expense related to
stock options 38 38
Acquisition of Syntel India (Note 3) (1,531) 1,531
Translation adjustments 4 $ (249) (245)
-------- -------- -------- -------- -------- --------
Balance, December 31, 1997 25,450 $ 1 $ 34,659 $ 5,174 $ (249) $ 39,585
======== ======== ======== ======== ======== ========
</TABLE>
*Gives effect to the 22 million-for-one stock split declared in 1997.
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 9
SYNTEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,420 $ 5,775 $ 6,155
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 1,812 1,442 1,075
Deferred income taxes (507)
Compensation expense related to stock options 38
Changes in assets and liabilities:
Accounts receivable (2) (3,913) 3,429
Advance billings and other assets (6,182) (20) 710
Accounts payable and accrued liabilities 7,837 1,370 632
Deferred revenue 4,419 1,277 35
-------- -------- --------
Net cash provided by operating activities 17,835 5,931 12,036
Cash flows used in investing activities:
Property and equipment expenditures (1,749) (2,138) (3,320)
Acquisition of Syntel India (7,000)
-------- -------- --------
Net cash used in investing activities (8,749) (2,138) (3,320)
-------- -------- --------
Cash flows from financing activities:
Net payments on bank line of credit (340)
Net proceeds from issuance of stock 34,627
Dividend/distribution payments (18,100) (5,000)
-------- -------- --------
Net cash provided by (used in) financing activities 16,527 (5,000) (340)
-------- -------- --------
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 25,613 (1,207) 8,376
Cash and cash equivalents, beginning of year 7,332 8,539 163
-------- -------- --------
Cash and cash equivalents, end of year $ 32,945 $ 7,332 $ 8,539
======== ======== ========
Cash paid during the year for income taxes $ 3,411 $ 723
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 10
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS:
Syntel, Inc. and Subsidiaries (the "Company") provides information technology
services such as programming, systems integration, outsourcing and overall
project management. The Company provides services to customers primarily in the
financial, manufacturing, transportation, retail and information/communication
industries, as well as to government entities through two separate delivery
teams, IntelliSourcing and TeamSourcing.
Through IntelliSourcing, the Company provides higher-value outsourcing services
for ongoing management, development and maintenance of customers' business
applications. In most IntelliSourcing engagements, the Company assumes
responsibility for the management of customer development and support functions.
IntelliSourcing engagements are generally supported by multi year contracts. As
a percentage of total revenues, IntelliSourcing revenues grew from 36 percent in
1996 to 51 percent in 1997.
Through TeamSourcing, the Company provides professional information technology
services directly to the customer. TeamSourcing contracts are generally
terminable by the customer without penalty.
During the years ended December 31, 1997, 1996 and 1995, there were sales to two
customers that exceeded 10 percent of total revenues. The largest customer was
the same for 1997, 1996 and 1995, while the second largest customer was
different in 1997 than in 1996 and 1995. Sales to these customers approximated:
1997, $38,560,000 (31.1 percent) and $14,828,000 (11.9 percent); 1996,
$30,980,000 (33.6 percent) and $10,757,000 (11.7 percent); 1995, $34,084,000
(37.7 percent) and $12,455,000 (13.8 percent). At December 31, 1997 and 1996,
approximately 36 and 30 percent of accounts receivable, net were from these two
customers, respectively.
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES:
a. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Syntel, Inc. ("Syntel") and its wholly owned subsidiaries
Syntel Software Private Limited ("Syntel India"), an Indian limited
liability company, Syntel Singapore Ptd., Ltd., ("Syntel Singapore"), a
Singapore limited liability company, and Syntel ("Syntel U. K."), a United
Kingdom unlimited liability company. All significant intercompany balances
and transactions have been eliminated.
F-7
<PAGE> 11
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
b. REVENUE RECOGNITION: The Company recognizes revenues from time and material
contracts as services are rendered and costs are incurred.
Revenue from fixed-price contracts are recognized on the
percentage-of-completion method, measured by the percentage of cost
incurred to date to the estimated total cost at completion. The cumulative
impact of any revision in estimates of the percentage complete or losses on
contracts is reflected in the period in which the changes become known.
c. CASH AND CASH EQUIVALENTS: For the purpose of reporting cash and cash
equivalents, the Company considers all liquid investments purchased with a
maturity of three months or less to be cash equivalents. Cash equivalents are
principally bonds and notes with maturity dates of less than 90 days.
d. WARRANTY COSTS: The Company provides limited warranties on certain of its
Year 2000 compliance contracts. A provision for warranty costs is made at the
time contract services are performed. At December 31, 1997, the warranty
accrual aggregated $818,000.
e. FINANCIAL INSTRUMENTS: The carrying amount of cash equivalents, trade
receivables and trade payables approximate fair value because of the
short-term nature of these instruments.
f. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Maintenance and repairs are charged to expense when incurred. Depreciation is
computed primarily using the straight-line method over the estimated useful
lives of the assets ranging from three to seven years.
Upon sale or retirement, the cost of assets and related accumulated
depreciation is eliminated from the respective accounts, and the resulting
gain or loss is included in operations.
g. INCOME TAXES: Prior to August 12, 1997, the Company elected to operate as an
S-corporation under the Internal Revenue Code. An S-corporation is not
subject to income taxes at the corporate level (with exceptions under certain
state income tax laws). As part of the initial public offering, the Company
terminated its S-corporation status, and effective August 12, 1997, became
subject to federal and state income taxes on its earnings.
With the termination of the S-corporation status, the Company changed its
method of accounting for tax reporting purposes from the cash method to the
accrual method, resulting in an income tax obligation of $1.8 million, to
be paid in four equal annual installments. The obligation includes $.7
million resulting from the tax effect of temporary differences between
financial statement and tax reporting carrying amounts which was recognized
as a deferred tax asset.
F-8
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
h. PRO FORMA NET INCOME: To reflect the Company's pro forma net income
the provision for income taxes has been adjusted as if the Company had been
a taxable entity subject to federal and state income taxes at the marginal
rates applicable to such periods. The resulting apparent tax rate is less
than the federal statutory tax rate due principally to the tax exempt status
of the income generated by Syntel India.
i. ESTIMATES: Use of estimates, as determined by management, are required in
the preparation of financial statements in conformity with generally
accepted accounting principles. Actual results could differ from estimates.
j. FOREIGN CURRENCY TRANSLATION: The financial statements of the Company's
foreign operations utilize the functional currency of the country in which
business is conducted. Revenues, costs and expenses of the foreign
subsidiaries are translated to U. S. dollars at average - period exchange
rates. Assets and liabilities are translated to U. S. dollars at year-end
exchange rates with the effects of these translation adjustments being
reported as a separate component of shareholders' equity.
k. PER SHARE DATA: The Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings per Share", for the year ended December 31,
1997. The pro forma earnings per share for the years 1996 and 1995 have been
restated to comply with these standards.
Basic earnings per share is calculated by dividing pro forma net income by
the average number of shares outstanding during the applicable period.
The Company had stock options which are considered to be potentially
dilutive to common stock. Diluted earnings per share is calculated by
dividing pro forma net income by the average number of shares outstanding
during the applicable period adjusted for these potentially dilutive options.
The following table sets forth the computation of pro forma earnings per
share:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ----------------------- -------------------
EARNINGS EARNINGS EARNINGS
PER PER PER
SHARES SHARE SHARES SHARE SHARES SHARE
-------- --------- -------- ---------- -------- ---------
(in thousands, except per share earnings)
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share 25,175 $ 0.41 25,000 $ 0.18 25,000 $0.18
Net dilutive effect of stock options
outstanding 117
Shares assumed outstanding due to
excess distributions in 1997 763 1,245 1,145
------ ------- ------ ------ ------ -----
Diluted earnings per share 26,055 $ 0.39 26,245 $ 0.17 26,145 $0.17
====== ======= ====== ====== ====== =====
</TABLE>
F-9
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
l. RECLASSIFICATIONS: Certain amounts in previously issued financial statements
have been reclassified to conform with the current year presentation.
3. INITIAL PUBLIC OFFERING BUSINESS COMBINATION:
In August 1997, the Company completed an initial public offering of 3,450,000
shares of common stock at a price of $11.00 per share. After underwriting
discounts and other issuance costs, net proceeds to the Company were
approximately $34.6 million.
Prior to the initial public offering, the Company agreed to acquire 100
percent ownership of Syntel India for $7 million in cash. The purchase
price was paid from available cash after the initial public offering. The
acquisition, which was a merger of interests under common control, is being
accounted for on the carryover basis of accounting similar to pooling of
interests with the historical financial statements of the Company restated
to include Syntel India. The portion of the purchase price in excess of the
carrying value of the net assets acquired at August 12, 1997, or $1.5
million was accounted for as a reduction of additional paid in capital.
A reconciliation of the period between January 1, 1997 and August 12, 1997
and the previously reported years ended December 31, 1996 and 1995, revenue
and net income is as follows:
<TABLE>
<CAPTION>
JAN 1, 1997 -
AUG 12, 1997 1996 1995
------------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Revenue $ 70,929 $ 92,237 $ 90,326
Syntel India revenue 4,668 4,159 2,520
Intercompany revenue elimination (4,602) (4,066) (2,520)
-------- -------- --------
Total revenue $ 70,995 $ 92,330 $ 90,326
======== ======== ========
Net income $ 4,561 $ 4,171 $ 5,237
Syntel India net income 2,240 1,604 918
-------- -------- --------
Total net income $ 6,801 $ 5,775 $ 6,155
======== ======== ========
</TABLE>
F-10
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. PROPERTY AND EQUIPMENT:
Cost of property and equipment at December 31, 1997 and 1996 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Computer equipment and software $ 5,432 $ 4,084
Furniture and equipment 3,482 3,167
Leasehold improvements 385 300
--------- ---------
9,299 7,551
Accumulated depreciation 5,060 3,248
--------- ---------
$ 4,239 $ 4,303
========= =========
</TABLE>
5. LINE OF CREDIT:
The Company has a line-of-credit arrangement with a bank which will expire
August 31, 1998, which provides for borrowings up to $25,000,000. Interest is
computed on the basis of the Company's option at (i) the Eurodollar rate plus
the applicable Eurodollar margin, (ii) the bank's prime rate or (iii) a
negotiated rate, as defined. The Company also has an additional line of
credit with the same bank which will expire August 31, 1998 which provides
for borrowings up to $10,000,000 to finance acquisitions.
6. LEASES:
The Company leases certain facilities and equipment under operating leases.
Current operating lease obligations are expected to be renewed or replaced
upon expiration. Future minimum payments under noncancelable leases as of
December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1,998 $ 1,825
1,999 1,112
2,000 789
2,001 490
2,002 18
--------
$ 4,234
========
</TABLE>
Total rent expense charged to operations amounted to approximately $1,678,
$1,352 and $1,219 for the years ended December 31, 1997, 1996 and 1995,
respectively.
F-11
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES:
Income before income taxes for U. S. and foreign operations was as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
U. S. $ 9,663 $ 4,492 $ 5,665
Foreign 4,274 1,633 926
--------- -------- --------
$ 13,937 $ 6,125 $ 6,591
========= ======== ========
</TABLE>
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Currently payable
Federal $ 3,839 321 408
State and local 474 29 8
Foreign 2 $ - -
-------- ------- -------
Total currently payable provision for income taxes 4,313 350 436
Deferred:
Federal (708) - -
State and local (88) - -
Foreign - - -
-------- ------- -------
Total deferred (796) - -
-------- ------- -------
Total provision $ 3,517 $ 350 436
======== ======= =======
</TABLE>
Upon termination of the S-Corporation election, as described in Note 2, current
and deferred income taxes of $1.8 million and ($.7) million, respectively, were
recognized. Accordingly, the above provision for income taxes includes a $1.1
million nonrecurring expense resulting from the termination of the S-Corporation
election. In accordance with the Internal Revenue Code, the Company will defer
the payment of 75 percent of the total tax obligation of $1.8 million over the
next three years.
The components of the net deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets, accrued expenses $ 1,574 -
Deferred tax liabilities, property and equipment (26) -
---------- --------
Net deferred tax asset $ 1,548 -
========== ========
</TABLE>
F-12
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES, CONTINUED:
Balance sheet classification of net deferred tax asset is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax asset, current $ 1,041 -
Deferred tax asset, noncurrent 507 -
-------- --------
$ 1,548 -
========= ========
</TABLE>
Under the Indian Income Tax Act of 1961 (the "Act"), virtually all of Syntel
India's income is exempt from Indian Income Tax as profits attributable to
export operations. Under the Act, there are certain alternative minimum tax
provisions which impose tax on net profits at a rate of approximately 35
percent. These provisions are not currently applicable due to the tax holiday
expiring in March 2000 for the Mumbai operation and in March 2002 for the
Chennai operation.
The Company has not recorded deferred income taxes applicable to undistributed
earnings of Syntel India. Those earnings are considered to be indefinitely
reinvested and, accordingly, no provision for U. S. federal and state income tax
or India "border tax" of 10 percent has been provided thereon. The unrecognized
taxes on the undistributed earnings is approximately $3.8 million.
The following table accounts for the differences between the actual tax
provision and the amounts obtained by applying the statutory U. S. federal
income tax rate of 34 percent to income before income taxes:
<TABLE>
<CAPTION>
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Statutory tax provision $ 4,739 $ 2,083 $ 2,241
State taxes, net of federal benefit 655 321 428
S-Corporation income not subject to federal income taxes (1,556) (1,527) (1,926)
Foreign income not subject to tax (1,411) (527) (307)
Termination of S-corporation status 1,090 - -
---------- ---------- ----------
Total provision for income taxes $ 3,517 $ 350 $ 436
========== ========== ==========
</TABLE>
F-13
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. STOCK OPTION PLAN:
The Company established a stock option plan in 1997 under which 2 million shares
of common stock were reserved for issuance. The dates on which granted options
are first exercisable is determined by the Compensation Committee of the Board
of Directors, but generally vest over a four-year period from the date of grant.
The term of any option may not exceed 10 years from the date of grant. Options
available to grant under the plan at December 31, 1997 aggregate 919,420 shares.
For certain options granted during 1997, the exercise price was less than the
fair value of the Company's stock on the date of grant and, accordingly,
compensation expense is being recognized over the vesting period for such
difference. For certain other options granted in 1997, the exercise price
equaled the market price on the date of grant, and therefore, no compensation
expense was recognized.
The Company has elected to measure compensation cost using the intrinsic value
method, in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Had the fair value of each stock option granted in 1997 been
determined consistent with the methodology of SFAS 123, the pro forma impact on
the Company's net income and earnings per share would have been immaterial
The following table sets forth changes in options outstanding:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES AMOUNT PRICE
------------ ------------- ------------
<S> <C> <C> <C>
Shares under option:
Outstanding at beginning of year - - -
Granted
Price equals fair value 503,000 $ 4,536,000 $ 9.02
Price less than fair value 650,500 4,021,500 6.18
----------- -----------
Granted 1,153,500 8,557,500 7.42
Forfeited 72,920 501,120 6.87
----------- ------------ -----------
Outstanding at end of year 1,080,580 $ 8,056,380 7.46
=========== ============
Exercisable at end of year none
===========
</TABLE>
F-14
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. STOCK OPTION PLAN, CONTINUED:
The following table sets forth details of options outstanding at December 31,
1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE
PRICES OUTSTANDING LIFE PRICE
--------------------- --------------- -------------- ------------
<S> <C> <C> <C>
$2.00 130,000 9.2 $ 2.00
$ 7.00 - $ 9.00 915,750 9.7 8.09
$ 11.00 - $ 12.00 34,830 9.6 11.09
--------------
$ 2.00 - $ 12.00 1,080,580 9.7 7.46
==============
</TABLE>
The Company has also reserved one million shares of common stock for issuance
under the Company's employee stock purchase plan. The plan, which has not yet
been implemented, provides for employees to purchase pre-established amounts as
determined by the Compensation Committee. The price at which employees may
purchase common stock will be set by the Compensation Committee at not less than
the lesser of 85 percent of the fair market value of the common stock on the
NASDAQ National Market on the first day of the purchase period or 85 percent of
the fair market value of the common stock on the last day of the purchase
period. The purchase period will generally be one year or less.
F-15
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. SEGMENT INFORMATION:
Total revenues, income before income taxes and identifiable assets by geographic
location were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Revenues:
United States operations $ 124,157 $ 92,237 $ 90,326
Foreign operations 9,379 4,159 2,520
Intercompany revenue elimination (9,198) (4,066) (2,520)
----------- --------- ---------
Total revenue 124,338 92,330 90,326
Income before income taxes:
United States operations $ 9,663 $ 4,492 $ 5,665
Foreign operations 4,274 1,633 926
----------- --------- ---------
Total income before income taxes 13,937 6,125 6,591
Assets at December 31:
United States operations $ 58,574 $ 29,649 $ 27,878
Foreign operations 6,658 3,343 1,692
----------- --------- ---------
Total assets $ 65,232 $ 32,992 $ 29,570
=========== ========= =========
</TABLE>
F-16
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Selected financial data by calendar quarter were as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
---------- --------- --------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
1997:
Revenues $ 26,294 $ 29,031 $ 33,596 $ 35,417 $ 124,338
Cost of revenues 18,892 20,849 23,681 24,162 87,584
--------- -------- -------- --------- ---------
Gross profit 7,402 8,182 9,915 11,255 36,754
Selling, general and administrative
expenses 5,395 5,752 6,276 6,124 23,547
--------- -------- -------- --------- ---------
Income from operations 2,007 2,430 3,639 5,131 13,207
Other income, net 121 102 299 208 730
--------- -------- -------- --------- ---------
Income before income taxes 2,128 2,532 3,938 5,339 13,937
Pro forma income taxes 541 629 1,030 1,541 3,741
--------- -------- -------- --------- ---------
Pro forma Net income $ 1,587 $ 1,903 $ 2,908 $ 3,798 $ 10,196
========= ======== ======== ========= =========
Pro forma earnings per share, diluted $ 0.06 $ 0.07 $ 0.11 $ 0.15 $ 0.39
========= ======== ======== ========= =========
Weighted average shares outstanding, diluted 25,820 26,245 25,992 25,737 26,055
========= ======== ======== ========= =========
1996:
Revenues $ 21,862 $ 22,697 $ 23,482 $ 24,289 $ 92,330
Cost of revenues 16,200 16,396 17,048 17,439 67,083
--------- -------- -------- --------- ---------
Gross profit 5,662 6,301 6,434 6,850 25,247
Selling, general and administrative
expenses 4,266 4,840 5,019 5,146 19,271
--------- -------- -------- --------- ---------
Income from operations 1,396 1,461 1,415 1,704 5,976
Other income (expense), net 138 86 39 (114) 149
--------- -------- -------- --------- ---------
Income before income taxes 1,534 1,547 1,454 1,590 6,125
Pro forma income taxes 452 446 353 495 1,746
--------- -------- -------- --------- ---------
Pro forma Net income $ 1,082 $ 1,101 $ 1,101 $ 1,095 $ 4,379
========== ========= ========= ========== ==========
Pro forma earnings per share, diluted $ 0.04 $ 0.04 $ 0.04 $ 0.04 $ 0.17
========= ======== ======== ========= =========
Weighted average shares outstanding, diluted 26,245 26,245 26,245 26,245 26,245
========= ======== ======== ========= =========
</TABLE>
F-17
