<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, 1999 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
-------------- -------------
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: 38,227,611 shares issued and outstanding as of
November 5, 1999.
<PAGE> 2
SYNTEL, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis of 9
Financial Condition and Results of Operation
Part II Other Information 15
Signatures 16
Index to Exhibits 17
</TABLE>
2
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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
---------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $42,564 $43,607 $121,015 $128,413
Cost of revenues 26,477 27,772 74,797 81,915
------- ------- -------- --------
Gross profit 16,087 15,835 46,218 46,498
Selling, general and administrative expenses 9,502 7,423 24,053 20,447
------- ------- -------- --------
Income from operations 6,585 8,412 22,165 26,051
Other income, principally interest 541 680 1,648 1,503
------- ------- -------- --------
Income before income taxes 7,126 9,092 23,813 27,554
Income taxes 2,442 2,638 7,807 8,343
------- ------- -------- --------
Net income $ 4,684 $ 6,454 $ 16,006 $ 19,211
======= ======= ======== ========
EARNINGS PER SHARE (1)
Basic $ 0.12 $ 0.17 $ 0.42 $ 0.50
Diluted $ 0.12 $ 0.16 $ 0.41 $ 0.49
Weighted average common shares
outstanding - diluted 39,016 39,311 38,855 39,366
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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SYNTEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 58,970 $ 64,660
Accounts receivable, net 24,297 23,581
Advanced billings and other current assets 10,410 10,330
-------- --------
Total current assets 93,677 98,571
Property and equipment 14,744 12,635
Less accumulated depreciation 8,617 7,037
-------- --------
Property and equipment, net 6,127 5,598
Goodwill, net of amortization 19,518 -
Deferred income taxes, noncurrent - 66
-------- --------
$119,322 $104,235
======== ========
LIABILITIES
Current liabilities:
Accrued payroll and related costs $ 14,369 $ 14,258
Accounts payable and other current liabilities 17,301 15,009
Deferred revenue 3,918 10,442
-------- --------
Total current liabilities 35,588 39,709
Income taxes payable - 379
-------- --------
Total liabilities 35,588 40,088
SHAREHOLDERS' EQUITY
Total shareholders' equity 83,734 64,147
-------- --------
Total liabilities and shareholders' equity $119,322 $104,235
======== ========
</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
--------------------
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,006 $ 19,211
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,911 1,337
Deferred income taxes 66 (310)
Compensation expense related to
stock options 75 39
Changes in assets and liabilities net of effects from
purchase of Metier Inc & IMG Inc:
Accounts receivable, net 4,437 (4,793)
Advance billing and other assets 47 (4,230)
Accrued payroll and other liabilities (3,202) 8,287
Deferred revenues (6,524) 6,222
-------- --------
Net cash provided by operating activities 12,816 25,763
Cash flows used in investing activities,
Property and equipment expenditures (1,428) (2,848)
Payments for purchases of Metier, Inc. and IMG, Inc.
net of cash acquired (15,944) 0
-------- --------
Net cash used in investing activities (17,372) (2,848)
Cash flows provided by (used in) financing activities:
Net proceeds from issuance of stock 124 59
Common stock repurchases (1,097) 0
-------- --------
Net cash provided by (used in) financing activities (973) 59
Effect of foreign currency exchange rate changes on cash (161) (147)
-------- --------
Net increase (decrease) in cash and cash equivalents (5,690) 22,827
Cash and cash equivalents, beginning of period $ 64,660 $ 32,945
======== ========
Cash and cash equivalents, end of period $ 58,970 $ 55,772
======== ========
</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 its
subsidiaries as of September 30, 1999, the results of its operations for the
three and nine month periods ended September 30, 1999 and September 30, 1998,
and cash flows for the nine months ended September 30, 1999 and September 30,
1998. The year end condensed balance sheet as of December 31, 1998 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, 1998.
Operating results for the nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
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 Limited ("Syntel
India"), an Indian limited liability company, Syntel (Singapore) PTE. Ltd.
("Syntel Singapore"), a Singapore limited liability company, and Syntel Europe,
Ltd. ("Syntel Europe"), a United Kingdom limited liability company. All
intercompany accounts and transactions have been eliminated.
3. ACQUISITIONS
On September 22, 1999 the Company executed a purchase agreement with Metier,
Inc. (Metier) to acquire substantially all of the assets and business of Metier.
Consideration included 300,000 shares of Syntel Common Stock to be issued one
year from the date of closing, recognized at the fair value of $4,500,000, and a
cash payment of $17,389,611 at closing. The stock consideration is subject to a
share price guaranty of $20.00 per share effective for a 90 day period beginning
the second anniversary of the closing date. In addition, the agreement provides
for earn-out payments not to exceed $16 million based on revenues and earnings
for the 24 month period beginning January 1, 2000. The acquisition was treated
as a purchase transaction with a total purchase price (excluding potential
future earn-outs) of $23,358,144, including expenses of $1,468,533; accordingly,
the purchase price was allocated to the assets acquired and liabilities assumed
based on their fair values of $9,638,163 and $5,199,145, respectively. This
allocation resulted in goodwill of $18,919,126 which is being amortized over 15
years.
On September 2, 1999 the Company acquired the fixed assets and business of IMG
Incorporated (IMG). Consideration consisted of a cash payment at closing of
$910,206. The acquisition was treated as a purchase transaction with a total
purchase price of $978,646, including expenses of $68,440; accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on their fair values of $76,145 and $26,939, respectively. This allocation
resulted in goodwill of $929,440 which is being amortized over 15 years.
6
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The operating results of both Metier and IMG have been included in the
consolidated results since July 1, 1999, their respective effective dates.
The consolidated results of operations on a pro forma basis are presented below
as though Metier had been acquired as of January 1998 for the respective nine
month periods:
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------
1999 1998
---- ----
<S> <C> <C>
Revenue $139,018 $141,132
Net Income 16,954 19,201
Earnings per share (Diluted) $ 0.43 $ 0.48
</TABLE>
4. 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 triple A rated municipal
bonds and treasury notes held by a bank with maturity dates of less than ninety
days.
5. COMPREHENSIVE INCOME
Total Comprehensive Income for the three and nine month periods ended September
30, 1999 and 1998 was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 4,684 $6,454 $ 16,006 $ 19,211
Other Comprehensive income
Foreign currency translation Adjustments (56) 18 (161) (150)
Total comprehensive income $ 4,628 $6,472 $ 15,845 $ 19,061
</TABLE>
7
<PAGE> 8
6. EARNINGS PER SHARE
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.
The following table sets forth the computation of earnings per share.
Outstanding shares have been restated to reflect the 3:2 stock split for all
periods presented.
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
Weighted Earnings Weighted Earnings
Average per Average per
Shares Share Shares Share
------ ----- ------ -----
(in thousands, except per share earnings)
<S> <C> <C> <C> <C>
Basic earnings per share 38,426 $ 0.12 38,193 $ 0.17
Net dilutive effect of stock options
outstanding 590 1,118
------ ------- ------ --------
Diluted earnings per share 39,016 $ 0.12 39,311 $ 0.16
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1999 September 30, 1998
------------------- -------------------
Weighted Earnings Weighted Earnings
Average per Average per
Shares Share Shares Share
------ ----- ------ -----
(in thousands, except per share earnings)
<S> <C> <C> <C> <C>
Basic earnings per share 38,221 $ 0.42 38,185 $ 0.50
Net dilutive effect of stock options
Outstanding 634 1,181
------ --------- ------ ---------
Diluted earnings per share 38,855 $ 0.41 39,366 $ 0.49
</TABLE>
7. SEGMENT REPORTING
The Company manages its operations through two segments, IntelliSourcing
and TeamSourcing. Management allocates all corporate expenses to the segments.
Key financial data for each segment for the three and nine month periods ending
September 30, 1999 and September 30, 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept 30, 1999 Sept 30, 1998 Sept 30, 1999 Sept 30, 1998
------------- ------------- ------------- -------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Revenues:
IntelliSourcing $21,208 $ 27,553 $ 70,729 $ 79,621
TeamSourcing 21,356 16,054 50,286 48,792
------- -------- -------- --------
42,564 43,607 121,015 128,413
Gross Profit:
IntelliSourcing $ 9,505 $ 11,694 $ 31,638 $ 34,223
TeamSourcing 6,582 4,141 14,581 12,275
------- -------- -------- --------
16,087 15,835 46,218 46,498
</TABLE>
8
<PAGE> 9
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 segments. Total revenues decreased
2.4% to $42.6 million in the third quarter of 1999 from $43.6 million in the
third quarter of 1998. Revenues for the first nine months of 1999 decreased 5.8%
to $121.0 million from $128.4 million for the same period in 1998. Worldwide
billable headcount, including personnel employed by Syntel India, Syntel
Singapore, and Syntel Europe, as of September 30, 1999 decreased to 1,366
compared to 1,768 as of September 30, 1998.
IntelliSourcing Revenues. IntelliSourcing revenues decreased to $21.2 million
for the third quarter of 1999, or 49.8% of total revenues, from $27.6 million,
or 63.2% of third quarter revenues for 1998. Revenues for the first nine months
of 1999 decreased to $70.7 million, or 58.4% of total revenues, from $79.6
million, or 62.0% of total revenues for the first nine months of 1998. Both the
$6.4 million decrease in third quarter revenues and the $8.9 million decrease in
year-to-date revenues were attributable primarily to the successful completion
of Year 2000 remediation engagagements as well as anticipated staffing decreases
in several application management engagements, which combined, resulted in
decreased revenues of approximately $11.2 million and $28.8 million for the
third quarter and the first nine months of 1999, respectively. This was
partially offset by net growth in several engagements as well as new
engagements, which combined, contributed approximately $4.8 million and $19.9
million to the third quarter and the first nine months of 1999, respectively.
IntelliSourcing Cost of Revenues. Cost of revenues consist of costs directly
associated with billable consultants in the US and offshore, including salaries,
payroll taxes, benefits, relocation costs, immigration costs, finders fees,
trainee compensation, travel, and warranty reserves. IntelliSourcing costs of
revenues decreased to 55.2% of total IntelliSourcing revenues for the third
quarter of 1999, from 57.6% for the third quarter of 1998. The decrease in cost
of revenues as a percent of revenues for the third quarter of 1999 from 1998 was
attributable primarily to a release of expiring warranty reserves and reduced
travel / recruiting / relocation costs, which were partially offset by a 3.6%
increase in compensation levels. For the first nine months of 1999,
IntelliSourcing costs of revenues decreased to 55.3% of total IntelliSourcing
revenues, from 57.0% for the same period in 1998. The decrease in cost of
revenues for the first nine months of 1999 from 1998 was attributable primarily
to the release of expiring warranty reserves and reduced travel / relocation
costs; partially offset by an increase in average compensation levels of
approximately 3.5%.
TeamSourcing Revenues. TeamSourcing revenues increased to $21.4 million for the
third quarter of 1999, or 50.2% of total revenues, from $16.1 million, or 36.8%
of total revenues for the third quarter of 1998. Revenues for the first nine
months of 1999 increased to $50.3 million, or 41.6% of total revenues, from
$48.8 million, or 38.0% of total revenues for the first nine months of 1998. The
revenue increase for both the third quarter and year-to-date was attributable
primarily to the acquisitions of Metier and IMG in the third quarter of 1999,
increased average bill rates, and growth in the U.K. and Singapore; partially
offset by a decrease in the pre-acquisition U.S. based billable consultants. The
acquisitions of Metier and IMG contributed $7.7 million to both the third
quarter and year-to-date increase, increases in average bill rates contributed
$0.3 million and $1.4 million to the third quarter and year-to-date results,
respectively, and growth in the U.K. and Singapore contributed $0.4 million and
$2.0 million to the third quarter and year-to-date results, respectively. The
decrease in the average number of U.S. based billable consultants impacted
revenue by approximately $3.1 million and $9.6 million, in the third quarter and
year-to-date,
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respectively.
TeamSourcing Cost of Revenues. TeamSourcing cost of revenues consist of costs
directly associated with billable consultants primarily in the US, including
salaries, payroll taxes, benefits, relocation costs, immigration costs, finders
fees, trainee compensation, and travel. TeamSourcing cost of revenues decreased
to 69.1% of TeamSourcing revenues for the third quarter of 1999, down from 74.2%
for the third quarter of 1998. The decrease in cost of revenues as a percent of
TeamSourcing revenues was attributable primarily to increased average bill
rates, the impact of the Metier and IMG acquisitions, and reduced recruiting and
relocation costs, contributing 2.0%, 1.3%, and 2.5% respectively, to the
decrease in costs of revenues. These were partially offset by compensation
increases of 1.6%.
TeamSourcing cost of revenues decreased to 71.0% of TeamSourcing revenues for
the first nine months of 1999, down from 74.8% for the first nine months of
1998. The decrease in cost of revenues as a percent of TeamSourcing revenues for
the first nine months of 1999 was attributable primarily to increased average
bill rates, the impact of the Metier and IMG acquisitions, and reduced
recruiting and relocation costs, contributing 2.1%, 0.7%, and 1.2% respectively,
to the decrease in costs of revenues. These were partially offset by
compensation increases of 1.7%.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses consist primarily of salaries, payroll taxes and
benefits for sales, solutions, delivery, finance, administrative, and corporate
staff, travel, telecommunications, business promotions, marketing and various
facility costs for the Company's Global Development Centers and various offices.
Selling, general, and administrative costs for the three months ended September
30, 1999 were $9.5 million, or 22.3% of total revenues, compared to $7.4
million, or 17.0% of total revenues, for the three months ended September 30,
1998. The increase in selling, general, and administrative costs in the third
quarter of 1999 over the third quarter of 1998 is attributable primarily to the
acquisition of Metier and IMG, goodwill amortization, one-time acquisition
costs, and increased professional staffing in sales, marketing, recruiting, and
support, contributing $1.4 million, $0.3 million, $0.4 million, and $0.2
million, respectively, partially offset by a reduction in recruiting,
relocation, and other administrative costs of $0.2 million Selling, general, and
administrative costs for the nine month period ending September 30, 1999 were
$24.1 million, or 19.9% of total revenues, compared to $20.4 million, or 15.9%
of total revenues, for the nine months ending September 30, 1998. The increase
in selling, general, and administrative costs for nine month period ending
September 30, 1999 as compared to the same period in 1998 was primarily
attributable to the acquisition of Metier and IMG, as well as increased
professional staffing in sales, marketing, recruiting, and support, contribuitng
$2.1 million and $1.5 million, respectively to the increase.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its working capital needs through operations. Both the
Mumbai and Chennai expansion programs, completed in mid-1998, were financed from
internally generated funds.
Net cash generated by operating activities was $12.8 million for the first nine
months of 1999. Cash flows from operating activities included a $6.5 million
decrease in deferred revenues attributable principally to the completion of
fixed price year 2000 engagements as well as a $4.4 million increase in accounts
receivable and a $3.2 million decrease in accrued payroll and other liabilities.
The increase in accounts receivable and the decrease in accrued payroll and
other liabilities were attributable primarily to the net effect of the third
quarter acquisitions, contributing $4.1 million and $3.1 million, respectively,
to the net change in accounts receivable and accrued payroll and other
liabilities for the nine month period ending September 30, 1999. Net cash
generated by operating activities for the first nine months of 1998 were $25.8
million. The $25.8 million increase was attributable primarily to increase in
deferred revenues, accrued payroll and other liabilities; partially offset by
increased accounts receivables and advance billings and other assets. The
increase in deferred revenue was attributable primarily to the ramp-up of fixed
price year 2000 engagements, the increase in accrued payroll and other assets
was attributable primarily to increase in payroll accruals and warranty
reserves, the increase in accounts receivable was attributable
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principally to increased revenues in the third quarter of 1998 over fourth
quarter of 1997 levels, and the increase in advanced billings and other assets
was attributable principally to increases in advanced tax payments and deferred
tax assets.
Net cash used in investing activities was $17.4 million for the first nine
months of 1999 as compared to $2.8 million for the first nine months of 1998.
Cash used for investing activities for the nine months ended September 30, 1999
consisted primarily of $15.9 million in cash payments related to the
acquisitions of Metier and IMG, capitalized development costs of $0.9 million
and computer equipment of $0.5 million. Cash used for investing activities for
the nine months ended September 30, 1998 consisted primarily of $1.8 million for
facility expansion and improvements at the Chennai and Mumbai Global Development
Centers, $0.4 million in license fees for a new integrated accounting and human
resources information system, and $0.6 million for computer hardware.
Net cash used in financing activities for the nine months ended September 30,
1999 consisted principally of the purchase of 129,000 shares of treasury stock
for $1.1 million, partially offset by $0.1 million in proceeds received from the
exercising of stock options.
The Company has extended and increased its line of credit with Bank One. The
amended agreement increased the line from $30 million to $40 million and was
extended to August 31, 2000. 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, 1999, 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 line of credit with Bank One to finance acquisitions. This
facility was increased from $15 million to $20 million and was also extended to
August 31, 2000. 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 operating cash requirements for at least the next 12 months.
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.
STATE OF READINESS. 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 year 2000 project
plan consists of the following activities:
- - IT and non-IT systems.
- Complete inventory of all hardware, software, and firmware components.
- Impact assessment - identify and prioritize components that are not
Year 2000 compliant.
- Develop solution plan - determine and prioritize remediation
procedures for each non-compliant component, including decision to
replace or repair.
- Complete remediation and test systems
- Develop contingency plans
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- - Third party confirmations
- Obtain written verification from key suppliers that services will not
be impacted by Year 2000 issues.
- Obtain representations from major customers that their ongoing service
requirements as well as accounts payable processes will not be
impacted by Year 2000 issues.
- Develop contingency plans
The Company's internal IT and non-IT issues are minimized by the nature of
its service offerings. As an Information Technology company, Syntel's revenues
are driven by the extensive knowledge base of its professional IT consultants.
IT and non-IT Year 2000 issues are principally associated with the compliance of
personal computers, servers, communication equipment, and software residing on
both individual personal computers and on the servers.
Over 60% of the Company's IT professionals work on-site at the client
location. These consultants utilize client provided work stations and software.
Virtually all of the approximately 1100 personal computers in operation at the
Company's Global Development Centers and Troy headquarters as well as the
personal computers at the Company's various sales offices have been made Year
2000 compliant by means of a Bios upgrade and have been tested for compliance.
Software testing and remediation has been completed on all personal computers in
the Cary, Chennai, Mumbai, and Santa Fe Development Centers. All computer
equipment, software, and communication systems used by the Companys recent
acquisitions, Metier and IMG, is fully Year 2000 compliant.
All proprietary delivery software as well as internal applications are Year
2000 compliant. The Company has implemented Year 2000 compliant, PeopleSoft
financial and human resources information systems. The human resource system was
placed into live production during the second quarter of 1999. The financial
information system, including general ledger, accounts payable, billing, and
accounts receivable were placed into production during the third quarter of
1999. The financial information systems in Mumbai and Chennai, India are fully
Year 2000 compliant.
The most significant internal remediation activities yet to be completed include
upgrade of the telephone system for the Troy Headquarters, replacement of the
phone system in the Mumbai Global Development Center and replacement of various
communication hubs. The Company has completed the final determination of the
necessary equipment upgrades / replacements to the phones and hubs, and will
complete all remediation activities and testing before the end of 1999.
The following chart summarizes the project status as of November 1, 1999:
<TABLE>
<CAPTION>
% completed Expected Completion
Task At 11/01/99 Date
---- ----------- ----
<S> <C> <C>
Create Y2K awareness 100% -
Equipment & software inventory 100% -
Critical Systems impact assessment 100% -
Develop plan (budget, priorities,
Resources) 100% -
Non-critical systems impact assessment 100% -
Supplier mailings & follow-up 90% On-going
Customer validations & follow-up 80% On-going
Remediate non-compliant hardware systems 60% Dec-99
Remediate non-compliant software systems 100%
Develop contingency plans 80% Nov-30
</TABLE>
COSTS TO ADDRESS YEAR 2000 ISSUES. The Company anticipates total remediation
costs to be approximately $456,000. These costs include amounts necessary to
replace or upgrade hardware, replace phone systems,
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replace data communications equipment, replace non-compliant software, and
compensation costs of individuals assigned full time to the project. The
replacement and upgrade of hardware will total approximately $315,000, software
will total approximately $21,000, and compensation costs will total
approximately $120,000. Costs to implement new Human Resource and Financial
Information Systems are not considered as Year 2000 costs as these projects were
based on growing business needs independent of Year 2000 issues, and were not
accelerated by Year 2000 remediation requirements. The $456,000 has been fully
reflected in the Company's 1999 operating plan and forecasts. As of September
30, 1999, year-to-date Year 2000 expenditures totaled approximately $240,000, as
the most costly activities, replacement of communications switches and hubs, are
not yet completed.
The refocusing of resources to the Year 2000 has not caused any major
internal projects to be deferred; however, the completion of projects to
automate several internal processes have been slightly delayed. These delays
will not have any material impact on the financial condition or results of
operations.
MAJOR RISKS OF THE COMPANY'S YEAR 2000 ISSUES. The Company believes that its
greatest potential financial and operational risks are associated with service
interruptions from key communication and utility service providers. To fully
assess the extent of this risk, the Company has sent questionnaires to all key
service providers via certified mail; followed up with secondary mailings, and
is reviewing vendor web sites on the Internet for confirmation of Year 2000
compliance. To date, the Company has mailed approximately 290 confirmations to
key suppliers and has received over 230 responses, including positive
confirmation from Sprint, its largest communications vendor, ADP the Company's
payroll processor, Videsh Sanchar Nigam, Limited, the national telephone company
in India, and Bank One, the Company's U.S. bank, as well as all other from whom
a disruption in service would impact the Company's operations. A vast majority
of the vendors have reported either full Year 2000 compliance or significant
progress in Year 2000 remediation efforts with no significant outstanding issues
and expect to be fully compliant before the end of the year. The loss of
communication capabilities would have an immediate impact on the Company's
ability to maintain operations as would the loss of power at any of the
Company's Global Development Centers. The occurrence of either situation could
cause a material adverse effect on the Company's financial condition. The
Mumbai, India Global Development Center, the Company's largest development
center, is supported by a back-up power generator which could provide full power
to the center indefinitely, in the event of a power failure.
The next greatest potential risk is the potential for lost revenue should
the Company's customers encounter Year 2000 issues, forcing a reallocation of
resources from existing applications and projects. To fully assess the extent of
this risk, the Company is exploring customer readiness via direct communication
by engagement managers and account executives and by monitoring customer web
sites for confirmation of Year 2000 compliance. This risk is partially mitigated
by several factors, including: (1) The Company has completed, tested, and
delivered Year 2000 compliance services to five of the projected top 10
customers based on projected revenue for 1999 and 2000. (2) The Company's
revenue base is comprised primarily of revenues from Fortune 1000 companies.
Significant Year 2000 issues by these companies would suggest widespread
problems, which in turn would open opportunities to selectively provide
additional Year 2000 remediation services, potentially offsetting revenues lost
from the suspension of non-year 2000 application support and development
projects. The Company has received direct confirmations and/or has noted positve
representations on customer web sites from a large number of the customers
including all of the largest ten customers.
YEAR 2000 CONTINGENCY PLANS. The Company is in the process of developing
contingency plans. Because the major risks (communications and utilities) are
associated with large, external service providers for which the Company has no
influence or control, and for which the implementation of substitute processes
are not practical, contingency plans will include migrating activity from
vendors for which Year 2000 compliance has not been confirmed and in shifting
work to Global Development Centers for which Year 2000 compliance for utilities
and communications have been confirmed. The Company has also developed plans for
addressing potential facility, travel, payroll, and banking disruptions. The
facility contingency plan includes provisions for backup generator support at
each of the development centers,
13
<PAGE> 14
advance purchases of key supplies, increased security, and emergency procedures.
In regard to air travel, the Company will attempt to reduce the impact from a
temporary termination of services by assessing new customer placement
requirements for early January 2000, and will suggest an earlier start date to
ensure that key placements are not delayed. The probability of encountering
payroll problems is considered low as both ADP and Bank One have confirmed full
compliance and the Company's first pay date of year 2000 is not until January
10; however, contingency plans include employee mailings to increase direct
deposit participation and to confirm direct deposits to all accounts with the
bank immediately following the transfers.
The Company has implemented a significant program to identify, evaluate,
and remediate Year 2000 issues; however, as the Year 2000 project continues,
additional Year 2000 issues 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 key services will be Year 2000
compliant. While the Company plans to validate representations wherever
possible, it cannot be sure that validations 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 Report Form 10-K document dated March
30, 1999. 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.
14
<PAGE> 15
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is currently not a party to any material pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The remainder of the proceeds from the Corporations's issuance of common stock
pursuant to a Registration Statement on Form S-1 (Commission file number
333-28655, effective date August 12, 1997) were applied towards the acquisition
of certain of the assets of Metier, Inc. as reported by the Company on a Form
8-K filed with the Commission and dated September 22, 1999.
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
<TABLE>
<CAPTION>
Exhibit No. Description
- ---------------------------------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
On October 7, 1999 the Company filed a Report on Form 8-K, dated September 22,
1999 reporting its acquisition of certain of the net assets of Metier, Inc.
(Metier) pursuant to an Asset Purchase Agreement dated as of July 1, 1999
entered into by and among the Company, Metier and ther shareholders of Metier.
15
<PAGE> 16
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, 1999 By /s/ Bharat Desai
----------------- ------------------------------------
Bharat Desai, President and
Chief Executive Officer
Date November 11, 1999 By /s/ John Andary
----------------- ------------------------------------
John Andary, Chief Financial Officer
(principal financial and chief accounting officer)
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Description Page
- -------------------------------------------------------------------
<S> <C> <C>
27 Financial Data Schedule 18
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
FINANCIAL STATEMENTS FOR THE PERIOD ENDED JUNE 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 58,970
<SECURITIES> 0
<RECEIVABLES> 24,297
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 93,677
<PP&E> 14,744
<DEPRECIATION> 8,617
<TOTAL-ASSETS> 119,322
<CURRENT-LIABILITIES> 35,588
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 84,337
<TOTAL-LIABILITY-AND-EQUITY> 119,322
<SALES> 0
<TOTAL-REVENUES> 121,015
<CGS> 0
<TOTAL-COSTS> 74,797
<OTHER-EXPENSES> 24,053
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,648)
<INCOME-PRETAX> 23,813
<INCOME-TAX> 7,807
<INCOME-CONTINUING> 16,006
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,006
<EPS-BASIC> .42
<EPS-DILUTED> .41
</TABLE>
