<PAGE> 1
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 September 30, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 0-22903
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Syntel, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
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
- ----------------------------------------------------- -------------------
(Address of Principal Executive Offices) (Zip Code)
(248) 619-2800
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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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: 38,193,750 shares issued and outstanding as of
November 4, 1998.
<PAGE> 2
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 11
Signatures 12
Index to Exhibits 13
<PAGE> 3
SYNTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
3 MONTHS 9 MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
-------------------- ---------------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues $43,607 $33,596 $128,413 $88,921
Cost of revenues 27,772 23,681 81,915 63,422
------- ------- -------- -------
Gross profit 15,835 9,915 46,498 25,499
Selling, general and administrative expenses 7,423 6,276 20,447 17,423
------- ------- -------- -------
Income from operations 8,412 3,639 26,051 8,076
Other income, principally interest 680 299 1,503 522
------- ------- -------- -------
Income before income taxes 9,092 3,938 27,554 8,598
Income taxes 2,638 1,836* 8,343 1,976*
------- ------- -------- -------
Net income $ 6,454 $ 2,102 $ 19,211 $ 6,622
======= ======= ======== =======
HISTORICAL EARNINGS PER SHARE (1)
Basic $ 0.17 $ 0.06 $ 0.50 $ 0.18
Diluted $ 0.16 $ 0.05 $ 0.49 $ 0.17
1997 PRO FORMA NET INCOME:
Income before income taxes $ 3,938 $ 8,598
Pro forma income taxes*** 1,030 2,200
------- -------
Pro forma net income $ 2,908 $ 6,398
======= =======
1997 PRO FORMA EARNINGS PER SHARE (1)
Basic $ 0.08 ** $ 0.17 **
Diluted $ 0.07 ** $ 0.16 **
Weighted average common shares
outstanding - diluted 39,311 38,988 39,366 39,240
======= ======= ======== =======
</TABLE>
(1) Gives effect to a 3:2 stock split effective April 22, 1998.
* - In connection with the termination of its S corporation status, the
Company changed its method of accounting for tax reporting purposes
from the cash method to the accrual method, resulting in a one time
charge of $1,090 to income taxes.
** - 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 periods presented.
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
SYNTEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 55,772 $ 32,945
Accounts receivable, net 25,437 20,644
Advanced billings and other current assets 11,127 6,897
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Total current assets 92,336 60,486
Property and equipment 12,147 9,299
Less accumulated depreciation 6,397 5,060
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Property and equipment, net 5,750 4,239
Deferred income taxes, noncurrent 817 507
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$ 98,903 $ 65,232
============= ============
LIABILITIES
Current liabilities:
Accrued payroll and related costs $ 15,531 $ 10,388
Other current liabilities 12,698 9,047
Deferred revenue 11,927 5,705
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Total current liabilities 40,156 25,140
Income taxes payable - 507
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Total liabilities 40,156 25,647
SHAREHOLDERS' EQUITY
Total shareholders' equity 58,747 39,585
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Total liabilities and shareholders' equity $ 98,903 $ 65,232
============= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
SYNTEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 19,211 $ 6,622
-------- --------
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 1,337 1,426
Deferred income taxes (310) 0
Compensation expense related to
stock options 39 22
Changes in assets and liabilities:
Accounts receivable, net (4,793) (3,164)
Advance billing and other assets (4,230) (4,612)
Accrued payroll and other liabilities 8,287 3,634
Deferred revenues 6,222 2,713
-------- --------
Net cash generated from operating activities 25,763 6,641
Cash flows used in investing activities:
Property and equipment expenditures (2,848) (1,283)
Cash flows from financing activities:
Net proceeds from issuance of stock 59 34,627
Dividend/distribution payments 0 (25,000)
-------- --------
Net cash provided by financing activities 59 9,627
Effect of foreign currency exchange rate changes on cash (147) (8)
-------- --------
Net increase in cash and cash equivalents 22,827 14,977
Cash and cash equivalents, beginning of period $ 32,945 $ 7,332
======== ========
Cash and cash equivalents, end of period $ 55,772 $ 22,309
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
SYNTEL, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying condensed consolidated financial statements of Syntel, Inc.
(the "Company") 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 September 30, 1998, the results of its operations for the
three month and nine month periods ended September 30, 1998 and September 30,
1997, and cash flows for the nine months ended September 30, 1998 and September
30, 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 nine months ended September 30, 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 and nine month periods ended September 30, 1998 and 1997 was as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------- ----------------------
1998 1997 1998 1997
------ ------- -------- -------
<S> <C> <C> <C> <C>
Net Income $6,454 $ 2,102 $ 19,211 $ 6,622
Other comprehensive income
Foreign currency translation adjustments 18 (25) (150) (11)
------ ------- -------- -------
Total comprehensive income $6,472 $ 2,077 $ 19,061 $ 6,611
</TABLE>
6
<PAGE> 7
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 three and nine month periods ended September 30, 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 has 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 three month and nine month periods ended September 30, 1997
reflect pro forma net income. Outstanding shares have been restated to reflect
the 3:2 stock split for all periods presented.
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1998 September 30, 1997
------------------- ------------------
Earnings Earnings
per per
Shares share Shares share
------ ----- ------ -----
(in thousands, except per share earnings)
<S> <C> <C> <C> <C>
Basic earnings per share 38,193 $ 0.17 37,866 $ 0.08
Net dilutive effect of stock options
outstanding 1,118 270
Shares assumed outstanding due to
excess distributions in 1997 - 852
------ -------- ------ --------
Diluted earnings per share 39,311 $ 0.16 38,988 $ 0.07
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998 September 30, 1997
------------------- -------------------
Earnings Earnings
per per
Shares share Shares share
------ ----- ------ -----
(in thousands, except per share earnings)
<S> <C> <C> <C> <C>
Basic earnings per share 38,185 $0.50 37,622 $ 0.17
Net dilutive effect of stock options
outstanding 1,181 90
Shares assumed outstanding due to
excess distributions in 1997 1,528
------ ----- ------ --------
Diluted earnings per share 39,366 $0.49 39,240 $ 0.16
</TABLE>
7
<PAGE> 8
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. Revenues increased 29.8% to
$43.6 million in the third quarter of 1998 from $33.6 million in the third
quarter of 1997. Revenues for the first nine months of 1998 increased 44.4% to
$128.4 million from $88.9 million for the first nine months of 1997. The revenue
growth for both the three and nine month periods ended September 30, 1998 was
primarily attributable to growth in existing engagements, the addition of 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 September 30, 1998 increased to 1,768 compared to 1,593 as of September 30,
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 $27.8
million for the three months ended September 30, 1998, representing 63.7% of
revenues, compared to $23.7 million or 70.5% of revenues for the three month
period ended September 30, 1997. Costs of revenues for the first nine months of
1998 were $81.9 million , representing 63.8% of revenues, compared to $63.4
million or 71.3% of revenues for the nine month period ended September 30, 1997.
The decrease in cost of revenues as a percentage of revenues for both the three
and nine month periods ending September 30, 1998 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. The
impact of the billing rate increases and business mix migration was
approximately 6% and 3%, respectively, to the improvement in the direct margin
percentage for the three month period ending September 30, 1998, and was
approximately 6% and 5%, respectively, for the nine month period ending
September 30, 1998. This was partially offset by increased compensation,
benefits, and other direct costs of approximately 2% and 3%, respectively, for
the three month and nine month periods ending September 30, 1998.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses consist primarily of salaries, payroll taxes and
benefits for sales, finance, administrative, and corporate staff, travel,
telecommunications, business promotions, marketing and various facility costs
for the Company's Global Development Centers. Selling, general, and
administrative costs for the three months ended September 30, 1998 were $7.4
million, or 17.0% of total revenues, compared to $6.3 million, or 18.7% of
revenues for the three months ended September 30, 1997. Selling, general , and
administrative costs for the nine month period ended September 30, 1998 were
$20.4 million, or 15.9% of revenues, compared to $17.4 million, or 19.6% of
revenues for the period ended September 30, 1997. The $1.1 million increase in
selling, general, and administrative expenses in the third quarter of 1998 as
well as the $3.0 million increase for the nine month period ended September 30,
1998, were both primarily the result of additional staffing in sales, business
development, marketing, and administration. It is anticipated that selling,
general, and administrative costs will continue to increase as a percentage of
revenue from third quarter levels due to investments in personnel.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its working capital needs through operations. The
initial investment in the Chennai Global Development Center as well as expansion
of the Mumbai Global Development Center, both of which have been essentially
completed, have been financed from internally generated funds from Syntel
India's operations.
Net cash generated by operating activities was $25.8 million for the first nine
months of 1998. The $25.8 million increase was attributable primarily to net
income for the period of $19.2 million and increases in deferred revenues,
accrued payroll and other liabilities, partially offset by increases in accounts
receivables, advance billings and other current assets. The $4.8 million
increase in accounts receivable at September 30, 1998 as compared to December
31, 1997 was due primarily to a $8.2 million increase in third quarter revenues
over 1997 fourth quarter revenues and a slight improvement in days sales
outstanding. The $4.2 million increase in advanced billings and other assets is
primarily attributable to advanced billings to several new IntelliSourcing
clients and an increase in deferred tax assets. The $8.3 million increase in
accrued payroll and other liabilities is primarily attributable to increased
compensation obligations and warranty reserves associated with fixed price
projects. The $6.2 million increase in deferred revenues is primarily
attributable to the increase in advanced billings as well as an increase in the
timing difference between current billings and the revenue recognized on fixed
price projects for which revenue is recognized on a percentage of completion
basis.
Net cash used in investing activities was $2.8 million for the nine months ended
September 30, 1998, consisting of $1.7 million for facility expansion and
improvements at the Chennai and Mumbai Global Development Centers, $.4 million
in license fees for a new integrated accounting and Human Resources software
system, and $.7 million for computer hardware.
The Company has a line of credit with NBD Bank, which provides for borrowings of
up to $30 million. The line of credit expires on August 31, 1999. The line of
credit contains covenants restricting the Company from, among other things,
incurring additional debt, issuing guarantees and creating liens on the
Company's property, without prior consent of the bank. The line of credit also
requires the Company to maintain certain tangible net worth levels and leverage
ratios. At September 30, 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 $15.0 million facility
with NBD Bank to finance acquisitions which also expires on August 31, 1999. 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.
9
<PAGE> 10
YEAR 2000 READINESS
The Year 2000 issue is the result of date-sensitive devices, systems, and
computer programs that were deployed using two digits rather than four to define
the applicable year. Any such technologies may recognize a year containing "00"
as 1900 rather than the year 2000. This could result in system failure or
miscalculations causing disruptions of operations including, among other things,
a temporary inability to process transactions or engage in similar normal
business activities.
The company has a Year 2000 project plan designed to identify and assess the
risks of non-compliance associated with its information systems, operations,
suppliers, and customers; and to develop and implement remediation and
contingency plans to mitigate the risks. The Company's Year 2000 project is
currently in the identification and assessment phase, with the exception of
certain information systems, including financial and human resource systems,
which are in the remediation phase. Conversion of these systems is expected to
be completed in mid 1999. Assessment of non-IT systems, including PCs,
communication equipment, and other computer equipment is expected to be
completed by early 1999. While the company is in the early stages of assessing
potential third party risks, it is dedicating resources to expedite assessment
and remediation of non-IT and third party issues, and does not anticipate delays
in any other IT and non-IT projects.
The Company has not yet determined the extent of contingency planning that may
be required as this is dependent on completion of ongoing assessments of non-IT
systems and third party risks. Costs incurred to date have not been material as
replacement of the financial and HR systems were planned based on business needs
irrespective of Year 2000 requirements. Based on the status of the assessments
made and remediation work completed to date, total remediation costs, consisting
primarily of capital costs to remediate and replace non-IT systems, is not
expected to materially impact the Company's financial operations. All
remediation costs will be funded through operating cash flows.
The Company believes that its greatest potential financial and operational risks
are associated with service interruptions from key communications and utilities
service providers; however, as the Year 2000 project continues, additional Year
2000 problems may be discovered or the Company may find that the costs of these
activities exceed current expectations. In many cases, the Company must rely on
assurances from suppliers that new and upgraded information systems as well as
key services will be Year 2000 compliant. While the Company plans to validate
supplier representations, it cannot be sure that its tests will be adequate, or
that, if problems are identified, they will be addressed in a timely and
satisfactory manner. Even if the Company, in a timely manner, completes all of
its assessments, implements and tests all remediation plans believed to be
adequate, and develops contingency plans believed to be adequate, some problems
may not be identified or corrected in time to prevent material adverse
consequences or business interruptions to the Company.
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements, including those with respect to
future levels of business for Syntel, Inc. These statements are necessarily
subject to risk and uncertainty. Actual results could differ materially from
those projected in these forward-looking statements as a result of certain risk
factors set forth in the Company's annual Form 10-K document dated March 30,
1998. Factors that could cause results to differ materially from those set forth
above include general trends and developments in the information technology
industry, which is subject to rapid technological changes, and the Company's
concentration of sales in a relatively small number of large customers, as well
as intense competition in the information technology industry, which the Company
believes will increase.
10
<PAGE> 11
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Syntel, Inc. (the "Corporation") is currently not a party to any material
pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
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 September 30, 1998.
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Syntel, Inc.
-----------------
(Registrant)
Date November 11, 1998 By /s/ Bharat Desai
----------------- ----------------------------------
Bharat Desai, President and
Chief Executive Officer
Date November 11, 1998 By /s/ John Andary
------------------ -----------------------------------
John Andary, Chief Financial
Officer
(principal financial and chief
accounting officer)
12
<PAGE> 13
EXHIBIT INDEX
Sequentially
Numbered
Exhibit No. Description Page
- --------------------------------------------------------------------------------
27 Financial Data Schedule 13
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 55,772
<SECURITIES> 0
<RECEIVABLES> 25,437
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 92,336
<PP&E> 12,147
<DEPRECIATION> 6,397
<TOTAL-ASSETS> 98,903
<CURRENT-LIABILITIES> 40,156
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 59,145
<TOTAL-LIABILITY-AND-EQUITY> 98,903
<SALES> 0
<TOTAL-REVENUES> 128,413
<CGS> 0
<TOTAL-COSTS> 81,915
<OTHER-EXPENSES> 20,447
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,503)
<INCOME-PRETAX> 27,554
<INCOME-TAX> 8,343
<INCOME-CONTINUING> 19,211
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,211
<EPS-PRIMARY> .50
<EPS-DILUTED> .49
</TABLE>
