<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 June 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
------------- --------------
Commission file number 0-22903
--------
Syntel, Inc.
---------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Michigan 38-2312018
----------------------------- ----------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2800 Livernois Road, Suite 400, Troy, Michigan 48083
- ------------------------------------------------- -------
(Address of Principal Executive Offices) (Zip Code)
(248) 619-2800
---------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- ---------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, no par value: 38,187,750 shares issued and outstanding as of
July 31, 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 10
Signatures 11
Index to Exhibits 12
<PAGE> 3
SYNTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
3 MONTHS 6 MONTHS
ENDED JUNE 30 ENDED JUNE 30
--------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 43,214 $ 29,031 $ 84,806 $ 55,325
Cost of revenues 27,096 20,849 54,143 39,741
----------- ------------ ------------ ------------
Gross profit 16,118 8,182 30,663 15,584
Selling, general and administrative
expenses 6,931 5,752 13,024 11,147
----------- ------------ ------------ ------------
Income from operations 9,187 2,430 17,639 4,437
Other income, principally interest 425 102 823 223
----------- ------------ ------------ ------------
Income before income taxes 9,612 2,532 18,462 4,660
Income taxes 2,891 127 5,705 139
----------- ------------ ------------ ------------
Net income $ 6,721 $ 2,405 $ 12,757 $ 4,521
=========== ============ ============ ============
1997 PRO FORMA INFORMATION:
Income before income taxes $ 2,532 $ 4,660
Pro forma income taxes** 629 1,170
----------- -----------
Pro forma net income $ 1,903 $ 3,490
=========== ===========
EARNINGS PER SHARE (1)
Basic $ 0.18 $ 0.05 * $ 0.33 $ 0.09 *
Diluted $ 0.17 $ 0.05 * $ 0.32 $ 0.09 *
Weighted average common shares
outstanding - diluted 39,517 39,368 39,393 39,049
=========== ============ ============ ============
</TABLE>
(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 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>
JUNE 30, DECEMBER 31,
1998 1997
----- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 43,634 $ 32,945
Accounts receivable, net 27,775 20,644
Advanced billings and other current assets 11,699 6,897
-------------- --------------
Total current assets 83,108 60,486
Property and equipment 11,328 9,299
Less accumulated depreciation 5,872 5,060
-------------- --------------
Property and equipment, net 5,456 4,239
Deferred income taxes, noncurrent 698 507
-------------- --------------
$ 89,262 $ 65,232
============== ==============
LIABILITIES
Current liabilities:
Accrued payroll and related costs $ 12,470 $ 10,388
Other current liabilities 11,818 9,047
Deferred revenue 12,746 5,705
-------------- --------------
Total current liabilities 37,034 25,140
Income taxes payable - 507
-------------- --------------
Total liabilities 37,034 25,647
SHAREHOLDERS' EQUITY
Total shareholders' equity 52,228 39,585
-------------- --------------
Total liabilities and shareholders' equity $ 89,262 $ 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>
SIX MONTHS
ENDED JUNE 30
--------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,757 $ 4,521
--------------- ---------------
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation 812 944
Deferred income taxes (191) 0
Compensation expense related to
stock options 24 11
Changes in assets and liabilities:
Accounts receivable, net (7,131) 136
Advanced billings and other assets (4,802) (4,276)
Accrued payroll and other liabilities 4,346 (1,041)
Deferred revenues 7,041 2,468
--------------- ---------------
Net cash generated from operating
activities 12,856 2,763
Cash flows used in investing activities:
Property and equipment expenditures (2,029) (1,002)
Cash flows from financing activities:
Net proceeds from issuance of stock 30 0
Dividend/distribution payments 0 (7,000)
--------------- ---------------
Net cash provided by (used in) financing
activities 30 (7,000)
Effect of foreign currency exchange rate changes
on cash (168) 14
--------------- ---------------
Net increase (decrease) in cash and cash
equivalents 10,689 (5,225)
Cash and cash equivalents, beginning of period $ 32,945 $ 7,332
=============== ===============
Cash and cash equivalents, end of period $ 43,634 $ 2,107
=============== ===============
</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 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 June 30, 1998, the results
of its operations for the three month and six month periods ended June 30, 1998
and June 30, 1997, and cash flows for the six months ended June 30, 1998 and
June 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 six months ended June 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 six month periods ended June 30, 1998 was as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $6,721 $2,405 $12,757 $4,521
Other comprehensive income
Foreign currency translation
adjustments $ (156) $ 17 $ (168) $ 14
----- ----- ------ -----
Total comprehensive income $6,565 $2,422 $12,589 $4,535
</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 six month periods ended June 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 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 three month and six month periods ended June 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
June 30, 1998 June 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 38,186 $ 0.18 37,500 $ 0.05
Net dilutive effect of stock options
outstanding 1,331
Shares assumed outstanding due to
excess distributions in 1997 1,868
------ ----- ------ -----
Diluted earnings per share 39,517 $ 0.17 39,368 $ 0.05
Six Months Ended
June 30, 1998 June 30, 1997
------------- -------------
Earnings Earnings
per per
Shares share Shares share
------ ----- ------ -----
(in thousands, except per share earnings)
Basic earnings per share 38,180 $0.33 37,500 $0.09
Net dilutive effect of stock options
outstanding 1,213
Shares assumed outstanding due to
excess distributions in 1997 1,549
------ ----- ------ -----
Diluted earnings per share 39,393 $0.32 39,049 $0.09
</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 48.9% to
$43.2 million in the second quarter of 1998 from $29.0 million in the second
quarter of 1997. Revenues for the first six months of 1998 increased 53.3% to
$84.8 million from $55.3 million for the first six months of 1997. The revenue
growth for both the three and six month periods ended June 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 June 30, 1998 increased to 1,836 compared to 1,484 as of June 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 $27.1
million for the three months ended June 30, 1998, representing 62.7% of
revenues, compared to $20.8 million or 71.8% of revenues for the three month
period ended June 30, 1997. Costs of revenues for the first six months of 1998
were $54.1 million , representing 63.8% of revenues, compared to $39.7 million
or 71.8% of revenues for the six month period ended June 30, 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 for both the three month period and the six month period ending June
30, 1998. During the second quarter of 1998 the increased billing rates and the
business migration to IntelliSourcing engagements contributed approximately 7%
and 6%, respectively, to the decrease in costs as a percentage of revenues, and
contributed approximately 7% and 5% for the six month period ending June 30,
1998, respectively. This was partially offset by increased compensation,
benefits, and other direct costs of approximately 4% for both the three month
and six month periods ending June 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 June 30, 1998 were $6.9 million,
or 16.0% of total revenues, compared to $5.8 million, or 19.8% of revenues for
the three months ended June 30, 1997. Selling, general , and administrative
costs for the six month period ended June 30, 1998 were $13.0 million, or 15.4%
of revenues, compared to $11.1 million, or 20.1% of revenues for the period
ended June 30, 1997. The $1.1 million increase in selling, general, and
administrative expenses in the second quarter of 1998 as well as the $1.8
million increase for the six month period ended June 30, 1998, were both
primarily the result of additional staffing in sales, business development,
recruiting, and administration, as well as other costs necessary to support the
revenue growth. It is anticipated that selling, general, and administrative
costs will continue to increase from second quarter levels due to additional
investments in facilities and 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 $12.8 million for the first six
months of 1998. The $12.8 million increase was attributable primarily to net
income for the period of $12.8 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 increase in accounts
receivable at June 30, 1998 as compared to December 31, 1997 was due primarily
to a $7.8 million increase in second quarter revenues over 1997 fourth quarter
revenues. The increase in advanced billings and other assets is primarily
attributable to advanced billings to several new IntelliSourcing clients. The
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 for fixed price, fixed deliverable
projects for which revenue is recognized on a percentage of completion basis.
Net cash used in investing activities was $2.0 million for the six months ended
June 30, 1998, consisting of $1.1 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 $.5 million for hardware.
The company has a line of credit with NBD Bank, which provides for borrowings of
up to $25 million. The line of credit expires 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 June 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 $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 expects to
renew both lines of credit before the expiration date with no material changes
in terms or conditions.
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.
9
<PAGE> 10
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.
The Corporation held an annual meeting of shareholders on Monday, May 18, 1998.
At the meeting, George R. Mrkonic was elected as a director of the Corporation
to serve for a three year term through 2001. The vote of the shareholders with
regard to the election of Mr. Mrkonic as a director was 25,063,666 shares FOR
and 5,783 shares WITHHELD. The following persons continued to serve their terms
of office as directors of the Corporation after the meeting: Paritosh K. Choski,
Bharat Desai, Neerja Sethi, and Douglas E. Van Houweling.
The shareholders of the Corporation also approved a proposed amendment to the
Corporation's Articles of Incorporation to increase the Corporation's number of
authorized shares of common stock from 40,000,000 shares to 100,000,000 shares.
With regard to this amendment to the Corporation's Articles of Incorporation the
shareholder vote was as follows: 24,870,436 shares FOR, 187,998 shares AGAINST,
10,995 shares ABSTAINED, and -0- shares as BROKER NON-VOTES.
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 June 30, 1998.
10
<PAGE> 11
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 August 11, 1998 By /s/ Bharat Desai
--------------- -------------------
Bharat Desai, President and
Chief Executive Officer
Date August 11, 1998 By /s/ John Andary
---------------- -------------------
John Andary, Chief Financial Officer
(principal financial and chief accounting
officer)
11
<PAGE> 12
EXHIBIT INDEX
Sequentially
Numbered
Exhibit No. Description Page
- --------------------------------------------------------------
27 Financial Data schedule 13
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 43,634
<SECURITIES> 0
<RECEIVABLES> 27,775
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 83,108
<PP&E> 11,328
<DEPRECIATION> 5,872
<TOTAL-ASSETS> 89,262
<CURRENT-LIABILITIES> 37,034
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 52,645
<TOTAL-LIABILITY-AND-EQUITY> 89,262
<SALES> 0
<TOTAL-REVENUES> 84,806
<CGS> 0
<TOTAL-COSTS> 54,143
<OTHER-EXPENSES> 13,024
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (823)
<INCOME-PRETAX> 18,462
<INCOME-TAX> 5,705
<INCOME-CONTINUING> 12,757
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,757
<EPS-PRIMARY> .33
<EPS-DILUTED> .32
</TABLE>
