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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 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
------------ ------------
Commission file number 0-22903
--------------------
Syntel, Inc.
----------------------------------------------------
(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
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(Address of Principal Executive Offices) (Zip Code)
(248) 619-2800
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(Registrant's Telephone Number, Including Area Code)
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: 38,127,462 shares issued and outstanding as of
August 6, 1999.
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SYNTEL, INC.
INDEX
Page
----
Part I Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis of 8
Financial Condition and Results of Operation
Part II Other Information 14
Signatures 15
Index to Exhibits 16
<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
---------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues $39,654 $43,214 $78,451 $84,806
Cost of revenues 24,377 27,096 48,319 54,143
------- ------- ------- -------
Gross profit 15,277 16,118 30,132 30,663
Selling, general and administrative expenses 7,307 6,931 14,552 13,024
------- ------- ------- -------
Income from operations 7,970 9,187 15,580 17,639
Other income, principally interest 575 425 1,107 823
------- ------- ------- -------
Income before income taxes 8,545 9,612 16,687 18,462
Income taxes 2,657 2,891 5,365 5,705
------- ------- ------- -------
Net income $ 5,888 $ 6,721 $11,322 $12,757
======= ======= ======= =======
HISTORICAL EARNINGS PER SHARE (1)
Basic $ 0.15 $ 0.18 $ 0.30 $ 0.33
Diluted $ 0.15 $ 0.17 $ 0.29 $ 0.32
Weighted average common shares
outstanding - diluted 38,683 39,517 38,775 39,393
======= ======= ======= =======
</TABLE>
(1) Gives effect to a 3:2 stock split effective April 22, 1998.
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>
JUNE 30, DECEMBER 31,
1999 1998
----- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 70,750 $ 64,660
Accounts receivable, net 19,488 23,581
Advanced billings and other current assets 12,565 10,330
-------- --------
Total current assets 102,803 98,571
Property and equipment 13,365 12,635
Less accumulated depreciation 8,042 7,037
-------- --------
Property and equipment, net 5,323 5,598
Deferred income taxes, noncurrent -- 66
-------- --------
$108,126 $104,235
======== ========
LIABILITIES
Current liabilities:
Accrued payroll and related costs $ 13,643 $ 14,258
Accounts payable and other current liabilities 14,059 14,009
Deferred revenue 4,910 10,442
-------- --------
Total current liabilities 32,612 38,709
Income taxes payable 1,100 1,379
-------- --------
Total liabilities 33,712 40,088
SHAREHOLDERS' EQUITY
Total shareholders' equity 74,414 64,147
-------- --------
Total liabilities and shareholders' equity $108,126 $104,235
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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SYNTEL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30
---------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,322 $ 12,757
-------- --------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 1,005 812
Deferred income taxes 66 (191)
Compensation expense related to
stock options 45 24
Changes in assets and liabilities:
Accounts receivable, net 4,093 (7,131)
Advance billing and other assets (2,235) (4,802)
Accrued payroll and other liabilities (844) 4,346
Deferred revenues (5,532) 7,041
-------- --------
Net cash provided by operating activities 7,920 12,856
Cash flows used in investing activities,
property and equipment expenditures (730) (2,029)
Cash flows provided by (used in) financing activities:
Net proceeds from issuance of stock 79 30
Common stock repurchases (1,074) 0
-------- --------
Net cash provided by (used in) financing activities (995) 30
Effect of foreign currency exchange rate changes on cash (105) (168)
-------- --------
Net increase in cash and cash equivalents 6,090 10,689
Cash and cash equivalents, beginning of period $ 64,660 $ 32,945
======== ========
Cash and cash equivalents, end of period $ 70,750 $ 43,634
======== ========
</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 June 30, 1999, the results of its operations for the three
and six month periods ended June 30, 1999 and June 30, 1998, and cash flows for
the six months ended June 30, 1999 and June 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 six months ended June 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. 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.
4. COMPREHENSIVE INCOME
The Company adopted Statement No. 130, "Reporting Comprehensive Income", as of
January 1, 1998. Total Comprehensive Income for the three and six month periods
ended June 30, 1999 and 1998 was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $5,888 $6,721 $11,322 $12,757
Other Comprehensive income
Foreign currency translation Adjustments (80) (156) (105) (168)
------ ------ ------- -------
Total comprehensive income $5,808 $6,565 $11,217 $12,589
</TABLE>
6
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5. 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.
Additionally, the Company effected a 3:2 stock split effective April 22, 1998.
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
June 30, 1999 June 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 38,129 $ 0.15 38,186 $ 0.18
Net dilutive effect of stock options
outstanding 554 1,331
-------- ------- ------ -------
Diluted earnings per share 38,683 $ 0.15 39,517 $ 0.17
<CAPTION>
Six Months Ended
June 30, 1999 June 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 38,156 $ 0.30 38,180 $ 0.33
Net dilutive effect of stock options
Outstanding 619 1,213
------- ------ ------ ------
Diluted earnings per share 38,775 $ 0.29 39,393 $ 0.32
</TABLE>
6. 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 six month periods ending
June 30, 1999 and June 30, 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- --------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Revenues:
IntelliSourcing $ 25,799 $ 26,885 $ 49,521 $ 52,068
TeamSourcing 13,855 16,329 28,930 32,738
--------- -------- -------- --------
39,654 43,214 78,451 84,806
Gross Profit:
IntelliSourcing $ 11,667 $ 11,879 $ 22,133 $ 22,529
TeamSourcing 3,610 4,239 7,999 8,134
--------- --------- -------- --------
15,277 16,118 30,132 30,663
</TABLE>
7
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PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
SYNTEL, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
Revenues. The Company's revenues consist of fees derived from its
IntelliSourcing and TeamSourcing business segments. Total revenues decreased
8.2% to $39.7 million in the second quarter of 1999 from $43.2 million in the
second quarter of 1998. Revenues for the first six months of 1999 decreased 7.5%
to $78.5 million from $84.8 million for the same period in 1998. Worldwide
billable headcount, including personnel employed by Syntel India, Syntel
Singapore, and Syntel Europe, as of June 30, 1999 decreased to 1,322 compared to
1,836 as of June 30, 1998.
IntelliSourcing Revenues. IntelliSourcing revenues decreased to $25.8 million
for the second quarter of 1999, or 65.1% of total revenues, from $26.9 million,
or 62.2% of second quarter revenues for 1998. Revenues for the first six months
of 1999 decreased to $49.5 million, or 63.1% of total revenues, from $52.1
million, or 61.4% of total revenues for the first six months of 1998. Both the
$1.1 million decrease in second quarter revenues and the $2.5 million decrease
in year-to-date revenues were attributable primarily to anticipated staffing
decreases in several outsourcing engagements as well as the completion of
several projects that contributed revenues in the first half of 1998 but were
completed during 1998, which combined, resulted in decreased revenues of
approximately $8.8 million and $17.6 million for the second quarter and the
first six months of 1999, respectively. This was largely offset by growth in
several engagements as well as new engagements, which combined, contributed
approximately $7.7 million and $15.1 million to the second quarter and the first
six 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 54.8% of total IntelliSourcing revenues for the second
quarter of 1999, from 55.8% for the second quarter of 1998. The decrease in cost
of revenues as a percent of revenues for the second quarter of 1999 from 1998
was attributable primarily to a release of warranty reserves, and reduced travel
/ relocation costs, contributing approximately 2.4% and 1.4%, respectively, to
the increased margin. These were partially offset by a 1.8% increase in
compensation levels. For the first six months of 1999, IntelliSourcing costs of
revenues decreased to 55.3% of total IntelliSourcing revenues, from 56.7% for
the same period in 1998. The decrease in cost of revenues for the first six
months of 1999 from 1998 was attributable primarily to the release of warranty
reserves and reduced travel / relocation costs, as well as a non-recurring
payroll tax charge in the first quarter of 1998, contributing approximately
1.4%, 0.7%, and 1.6% respectively, to the increased margin. These were partially
offset by an increase in average compensation levels of approximately 2.3%.
TeamSourcing Revenues. TeamSourcing revenues decreased to $13.9 million for the
first quarter of 1999, or 34.9% of total revenues, down from $16.3 million, or
37.8% of total revenues for the first quarter of 1998. Revenues for the first
six months of 1999 decreased to $28.9 million, or 36.9% of total revenues, down
from $32.7 million, or 38.6% of total revenues for the first six months of 1998.
The revenue decrease for both the second quarter and year-to-date was
attributable primarily to a reduction in the number of U.S. based billable
consultants, contributing approximately $3.9 million and $6.5 million,
respectively, to the reduced revenue. This was partially offset by billing rate
increases of approximately $0.7 million and $1.1 million, respectively, for the
second quarter and the first six months of 1999; as well as growth in the U.K.
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and Singapore of $0.7 million and $1.6 million, respectively, for the second
quarter and the first six months of 1999.
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
slightly to 73.9% of TeamSourcing revenues for the second quarter of 1999, down
from 74.0% for the second quarter of 1998. The decrease in cost of revenues as a
percent of TeamSourcing revenues was attributable primarily to increased average
bill rates of 2.7%, partially offset by compensation increases 2.2% and
decreased resource utilization of 0.4%. TeamSourcing cost of revenues decreased
to 72.4% of TeamSourcing revenues for the first six months of 1999, down from
75.2% for the first six months of 1998. The decrease in cost of revenues as a
percent of TeamSourcing revenues for the first six months of 1999 was
attributable primarily to a non-recurring payroll tax charge in the first
quarter of 1998 and increased average bill rates, contributing approximately
2.4% and 2.2%, respectively to the increased margins; partially offset by a 1.8%
decrease due to compensation increases.
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 June 30,
1999 were $7.3 million, or 18.4% of total revenues, compared to $6.9 million, or
16.0% of total revenues, for the three months ended June 30, 1998. Selling,
general, and administrative costs for the six month period ending June 30, 1999
were $14.6 million, or 18.5% of total revenues, compared to $13.0 million, or
15.4% of total revenues, for the six months ending June 30, 1998. The increase
in selling, general, and administrative costs for both the three and six month
periods ending June 30, 1999 was primarily attributable to increased
professional staffing in sales, marketing, recruiting, and support.
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 $7.9 million for the first six
months of 1999, compared to $12.9 million for the first six months of 1998. The
$5.0 million decrease was attributable primarily to a decrease in deferred
revenues, accrued payroll and other liabilities, and lower net income of $12.6
million, $5.2 million, and $1.4 million, respectively; partially offset by
decreased accounts receivables and advance billings and other assets of $11.2
million and $2.5 million, respectively. The decrease in accounts receivable was
due primarily to a 12 day improvement in days sales outstanding and reduced
second quarter revenues. The decrease in deferred revenues is attributable
primarily to the completion of Year 2000 remediation engagements which were
generally billed at an accelerated rate.
Net cash used in investing activities was $0.7 million for the first six months
of 1999 as compared to $2.0 million for the first six months of 1998. Cash used
for investing activities for the six months ended June 30, 1999 consisted
primarily of capitalized development costs of $0.4 million and computer
equipment of $0.3 million. Cash used for investing activities for the six months
ended June 30, 1998 consisted primarily of $1.1 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 $0.5 million for computer hardware.
Net cash used in financing activities for the six months ended June 30, 1999
consisted principally of the purchase of 122,500 shares of treasury stock for
$1.0 million.
The Company has a line of credit with NBD Bank, which provides for borrowings of
up to $30.0 million.
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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 June 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 $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 intends to renew both the $30
million and the $15 million line of credit before the expiration date.
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
- - 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 have been made Year
2000 compliant by means of a Bios upgrade and have been tested for compliance.
Remediation of personal computers at the Company's various sales offices is in
process and will be completed by the
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end of the third quarter. Software testing and remediation has been completed on
all personal computers in the Cary, Chennai, and Santa Fe Development Centers.
Software remediation of personal computers in the Mumbai Development Center is
expected to be completed during the third quarter of 1999.
All proprietary delivery software as well as internal applications are Year
2000 compliant. The Company is currently implementing 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 is being implemeted by module. General ledger and
accounts payable were implemented in June and July, respectively, with the
remaining modules to be 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
replacement of the telephone system for the Troy Headquarters and replacement of
the voice mail systems in both the Cary Global Development Center and the Troy
Headquarters, as well as replacement of various communication hubs. Purchase
orders for new communication hubs have been issued and replacement will commence
as soon as the hardware is received. Evaluation of replacement phone and voice
mail systems has been completed and purchase negotiations are near completion.
The following chart summarizes the project status as of August 1, 1999:
<TABLE>
<CAPTION>
% completed Expected Completion
Task At 8/01/99 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 80% On-going
Customer validations & follow-up 20% Sep-99
Remediate non-compliant hardware systems 60% Sep-99
Remediate non-compliant software systems 80% Sep-99
Develop contingency plans 50% Aug-99
Project closure & review Sep-99
</TABLE>
COSTS TO ADDRESS YEAR 2000 ISSUES. The Company anticipates total remediation
costs to be approximately $700,000. These costs include amounts necessary to
replace or upgrade hardware, replace phone systems, replace data communications
equipment, replace non-compliant software, and compensation costs of individuals
assigned full time to the project. The replacement of hardware costs will total
approximately $500,000, software will total approximately $80,000, 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
$700,000 has been fully reflected in the Company's 1999 operating plan and
forecasts. As of June 30, 1999, year-to-date Year 2000 expenditures totaled
approximately $100,000, as the most costly activities, replacement of
communications switches and hubs, are scheduled to be completed during the third
quarter of 1999.
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.
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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; is following 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 200 responses, including positive
confirmation from Sprint, its largest communications vendor, ADP the Company's
payroll processor, and Videsh Sanchar Nigam, Limited, the national telephone
company in India. A vast majority of the vendors have reported significant
progress in Year 2000 remediation efforts and expect to be fully compliant
before the close of the third quarter. 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.
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
preliminary 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, 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 are being developed 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
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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.
13
<PAGE> 14
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.
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 on Wednesday June 2, 1999. At the
meeting, Neerja Sethi and Douglas E. Van Houweling were elected as directors of
the Corporation to serve for a three year term until the annual meeting of
shareholders in 2002. The vote of the shareholders with regard to the election
of Ms. Sethi as a director was 34,231,629 shares FOR and 19,075 shares WITHHELD.
The vote of the shareholders with regard to the election of Mr. Van Houweling as
a director was 34,231,629 shares FOR and 19,075 shares WITHHELD. The following
persons continued to serve their terms of office as directors of the Corporation
after the meeting: Paritosh K. Choksi, Bharat Desai, and George R.
Mrkonic.
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, 1999.
14
<PAGE> 15
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 10, 1999 By /s/ Bharat Desai
--------------- ------------------
Bharat Desai, President and
Chief Executive Officer
Date August 10, 1999 By /s/ John Andary
--------------- -----------------
John Andary, Chief Financial Officer
(principal financial and chief accounting officer)
15
<PAGE> 16
EXHIBIT INDEX
Sequentially
Numbered
Exhibit No. Description Page
- -----------------------------------------------------------------------------
27 Financial Data Schedule 13
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Financial
Statements for the period ended June 30, 1999 and is qualified in its entirety
by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 70,750
<SECURITIES> 0
<RECEIVABLES> 19,488
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 102,803
<PP&E> 13,365
<DEPRECIATION> 8,042
<TOTAL-ASSETS> 108,126
<CURRENT-LIABILITIES> 32,612
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 74,961
<TOTAL-LIABILITY-AND-EQUITY> 108,126
<SALES> 0
<TOTAL-REVENUES> 78,451
<CGS> 0
<TOTAL-COSTS> 48,319
<OTHER-EXPENSES> 14,552
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,107)
<INCOME-PRETAX> 16,687
<INCOME-TAX> 5,365
<INCOME-CONTINUING> 11,322
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,322
<EPS-BASIC> .30
<EPS-DILUTED> .29
</TABLE>
