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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number 0-22903
SYNTEL, INC.
(Exact name of Registrant as specified in its charter)
Michigan 38-2312018
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2800 Livernois Road, Suite 400, Troy, Michigan 48084
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 619-2800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
--------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the Registrant
has been required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the Common Stock held by non-affiliates
of the Registrant as of March 15, 2000, based on the last sale price of $15.50
per share for the Common Stock on the NASDAQ National Market on such date, was
approximately $80,680,615.
As of March 15, 2000, the Registrant had 38,288,669 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the 2000 Annual Meeting of
Shareholders to be held on or about May 23, 2000 are incorporated by reference
into Part III hereof.
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PART I
ITEM 1. BUSINESS.
References herein to the "Company" or "Syntel" refer to Syntel, Inc. and its
wholly owned subsidiaries in India, the UK, and Singapore on a consolidated
basis.
OVERVIEW
Syntel is a worldwide provider of advanced technology services to
Fortune 1000 companies, as well as to government entities. The Company's service
offerings are grouped into three segments, e-Business, Application Outsourcing,
and Teamsourcing(sm). E-Business consists of practice areas in Web Solutions,
Customer Relationship Management (CRM), Data Warehousing/Business Intelligence,
and Enterprise Application Outsourcing (EAI) services. Application Outsourcing
consists of outsourcing services for ongoing management, development and
maintenance of business applications. TeamSourcing(sm) consists of professional
IT consulting services. Syntel believes that its service offerings are
distinguished by its Global Delivery Service, a corporate culture focused on
customer service and responsiveness and its own internally developed
"intellectual capital" based on a proven set of methodologies, practices and
tools for managing the IT functions of its customers.
Through its e-Business practices, Syntel helps its customers harness
advanced technologies to improve their businesses. Web Solutions involves
services in the areas of web architecture, web-enabling legacy applications, as
well as the creation of web portals. CRM involves customizing and implementing
CRM software packages to enhance a customer's interaction with its customers.
Data Warehousing/Business Intelligence involves gathering and analyzing key
business data to make better real-time decisions through "data mining."
Enterprise Application Outsourcing involves consulting and Application
Outsourcing services designed to better integrate Front Office and Back Office
applications.
Through Applications Outsourcing, Syntel provides higher-value
applications management services for ongoing management, development and
maintenance of customers' business applications. Syntel assumes responsibility
for and manages selected application support functions of the customer.
Utilizing its developed methodologies, processes and tools, known as
IntelliTransfer(R), the Company is able to assimilate the business process
knowledge of its customers to develop and deliver services specifically tailored
for that customer. In 1999 and 1998, e-Business and Applications Outsourcing
services combined accounted for approximately 75% and 72% of total consolidated
revenues, respectively.
Through TeamSourcing, Syntel provides professional IT consulting
services directly to customers. TeamSourcing services include systems
specification, design, development, implementation and maintenance of complex IT
applications involving diverse computer hardware, software, data and networking
technologies and practices. TeamSourcing services are provided by individual
professionals and teams of professionals dedicated to assisting customer IT
departments with systems projects and ongoing functions. TeamSourcing accounted
for approximately 25% and 28% of revenues, for the years ended December 31, 1999
and 1998, respectively.
The Company's Global Delivery Service provides Syntel with flexibility
to deliver to each customer a unique mix of services on-site at the customer's
location, off-site at its U.S. locations and offshore at Global Development
Centers in Mumbai and Chennai, India. The benefits to the customer from this
customized service approach include responsive delivery based on an in-depth
understanding of the specific processes and needs of the customer, quick
turnaround, access to the most knowledgeable personnel and best practices,
resource depth, 24-hour support seven days a week and cost-effectiveness. By
linking each of its service locations together through a dedicated data and
voice network, Syntel provides a seamless service capability to its customers
around the world largely unconstrained by geographies, time zones and cultures.
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Syntel provides its services to a broad range of Fortune 1000 companies
principally in the financial services, manufacturing, retail, transportation and
information/communications industries, as well as to government entities. Its
five largest customers during 1999, based on revenues, were American
International Group, Inc., Dayton Hudson Corp., Ford Motor Co., Daimler-Chrysler
Corporation and Kemper Insurance. The Company has been chosen as a preferred
vendor by several of its customers and has been recognized for its quality and
responsiveness. The Company has a focused sales effort that includes a strategy
of migrating existing TeamSourcing customers to higher-value e-Business and
Applications Outsourcing services. During recent years the Company has focused
on increasing its resources in the development, marketing and sales of its
e-Business and Applications Outsourcing services.
The Company believes its human resources are its most valuable asset
and invests significantly in programs to recruit, train and retain IT
professionals. The Company recruits globally through its worldwide recruiting
network and maintains a broad package of employee support programs. Syntel
believes that its management structure and human resources organization is
designed to maximize the Company's ability to efficiently expand its IT
professional staff in response to customer needs. As of December 31, 1999,
Syntel's worldwide billable headcount consisted of 1,367 IT consultants
providing professional services to Syntel's customers. The company was
incorporated under Michigan law on April 15, 1980.
FORWARD LOOKING STATEMENTS / RISK FACTORS
Certain statements contained in this Report are forward looking
statements within the meaning of the Securities Exchange Act of 1934. In
addition, the Company from time to time may publish other forward looking
statements. Such forward looking statements are based on management's estimates,
assumptions and projections and are subject to risks and uncertainties that
could cause actual results to differ materially from those discussed in the
forward looking statements. Factors which could affect the forward looking
statements include those listed below. The Company does not intend to update
these forward looking statements.
RECRUITMENT AND RETENTION OF IT PROFESSIONALS. The Company's business
of delivering professional IT services is labor intensive, and, accordingly, its
success depends upon its ability to attract, develop, motivate, retain and
effectively utilize highly-skilled IT professionals. The Company believes that
both in the United States and in India there is a growing shortage of, and
significant competition for, IT professionals who possess the technical skills
and experience necessary to deliver the Company's services, and that such IT
professionals are likely to remain a limited resource for the foreseeable
future. The Company believes that, as a result of these factors, it operates
within an industry that experiences a significant rate of annual turnover of IT
personnel. The Company's business plans are based on hiring and training a
significant number of additional IT professionals each year to meet anticipated
turnover and increased staffing needs. The Company's ability to maintain and
renew existing engagements and to obtain new business depends, in large part, on
its ability to hire and retain qualified IT professionals. Historically, the
Company has performed a significant portion of its employee recruiting in
foreign countries, particularly in India. Any perception among the Company's
recruits or foreign IT professionals, whether or not well-founded, that the
Company's ability to assist them in obtaining permanent residency status in the
United States has been diminished could result in increased recruiting and
personnel costs or lead to significant employee attrition or both. There can be
no assurance that the Company will be able to recruit and train a sufficient
number of qualified IT professionals or that the Company will be successful in
retaining current or future employees. Failure to hire and train or retain
qualified IT professionals in sufficient numbers could have a material adverse
effect on the Company's business, results of operations and financial condition.
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GOVERNMENT REGULATION OF IMMIGRATION. The Company recruits its IT
professionals on a global basis and, therefore, must comply with the immigration
laws in the countries in which it operates, particularly the United States. As
of December 31, 1999, approximately 60% of Syntel's U.S. workforce (44% of
Syntel's worldwide workforce) worked under H-1B visas (permitting temporary
residence while employed in the U.S.). Pursuant to United States federal law,
the Department of Immigration and Naturalization Services (the "INS") limits the
number of new H-1B visas to be approved in any government fiscal year. In years
in which this limit is reached, the Company may be unable to obtain enough H-1B
visas to bring a sufficient number of foreign employees to the U.S. If the
Company were unable to obtain sufficient H-1B employees, the Company's business,
results of operations and financial condition could be materially and adversely
affected. Furthermore, Congress and administrative agencies have periodically
expressed concerns over the levels of legal immigration into the U.S. These
concerns have often resulted in proposed legislation, rules and regulations
aimed at reducing the number of work visas, including H-1B visas, that may be
issued.
VARIABILITY OF QUARTERLY OPERATING RESULTS. The Company has experienced
and expects to continue to experience fluctuations in revenues and operating
results from quarter to quarter due to a number of factors, including: the
timing, number and scope of customer engagements commenced and completed during
the quarter; progress on fixed-price engagements; timing and cost associated
with expansion of the Company's facilities; changes in IT professional wage
rates; the accuracy of estimates of resources and time frames required to
complete pending assignments; the number of working days in a quarter; employee
hiring, attrition and utilization rates; the mix of services performed on-site,
off-site and offshore; termination of engagements; start-up expenses for new
engagements; longer sales cycles for Application Outsourcing engagements;
customers' budget cycles; and investment time for training. Because a
significant percentage of the Company's selling, general and administrative
expenses are relatively fixed, variations in revenues may cause significant
variations in operating results. As fixed price engagements grow in revenue and
percent of total revenue, operating results may be adversely affected in the
future if there are cost overruns on fixed-price engagements. In addition, it is
possible that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock would likely be materially adversely
affected. No assurance can be given that quarterly results will not fluctuate
causing an adverse effect on the Company's financial condition at the time.
CUSTOMER CONCENTRATION; RISK OF TERMINATION. The Company has in the
past derived, and believes it will continue to derive, a significant portion of
its revenues from a limited number of large, corporate customers. The Company's
ten largest customers represented approximately 68%, 70% and 75% of revenues for
the years ended December 31, 1999, 1998 and 1997, respectively. For the years
ended December 31, 1998 and 1997 two customers contributed revenues in excess of
10% of total consolidated revenues. In 1999 only one customer contributed
revenues in excess of 10% of total consolidated revenues. The Company's largest
customer is American Home Assurance Company and certain other subsidiaries of
American International Group Inc. (collectively, "AIG"). AIG accounted for
approximately 21%, 26% and 31% of revenues for the years ended December 31,
1999, 1998, and 1997, respectively. For the years ended December 31, 1998 and
1997, Dayton Hudson Group was the Company's second largest customer,
contributing 14% and 12% of total consolidated revenues, respectively.
All of the revenue generated from engagements with AIG and Dayton Hudson Group
is in the Application Outsourcing segment.
The volume of work performed for specific customers is likely to vary from year
to year, and a significant customer in one year may not provide the same level
of revenues in any subsequent year. Because many of its engagements involve
functions that are critical to the operations of its customer's businesses, any
failure by Syntel to meet a customer's expectations could result in
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cancellation or nonrenewal of the engagement and could damage Syntel's
reputation and adversely affect its ability to attract new business. Most of the
Company's contracts are terminable by the customer with limited notice and
without penalty. An unanticipated termination of a significant engagement could
result in the loss of substantial anticipated revenues and could require the
Company to either maintain or terminate a significant number of unassigned IT
professionals. The loss of any significant customer or engagement could have a
material adverse effect on the Company's business, results of operations and
financial condition. The contract with AIG expires December 31, 2000.
EXPOSURE TO REGULATORY AND GENERAL ECONOMIC CONDITIONS IN INDIA. A
significant element of the Company's business strategy is to continue to develop
and expand offshore Global Development Centers in India. As of December 31,
1999, the Company had approximately 17% of its billable workforce in India, and
anticipates that this percentage will increase over time. While wage costs in
India are significantly lower than in the U.S. and other industrialized
countries for comparably skilled IT professionals, wages in India are increasing
at a faster rate than in the U.S., and could result in the Company incurring
increased costs for IT professionals. In the past, India has experienced
significant inflation and shortages of foreign exchange, and has been subject to
civil unrest. No assurance can be given that the Company will not be adversely
affected by changes in inflation, exchange rate fluctuations, interest rates,
taxation, social stability or other political, economic or diplomatic
developments in or affecting India in the future. In addition, the Indian
government is significantly involved in and exerts significant influence over
its economy. In the recent past, the Indian government has provided significant
tax incentives and relaxed certain regulatory restrictions in order to encourage
foreign investment in certain sectors of the economy, including the technology
industry. Certain of these benefits that directly benefited the Company
included, among others, tax holidays, liberalized import and export duties and
preferential rules on foreign investment. The Company treats any earnings from
its operations in India as permanently invested in India. If the Company decides
to repatriate any of such earnings, it will incur a "border" tax, currently 10%,
under Indian tax law and be required to pay U.S. corporate income taxes on such
earnings. Changes in the business or regulatory climate of India could have a
material adverse effect on the Company's business, results of operations and
financial condition.
INTENSE COMPETITION. The IT services industry is intensely competitive,
highly fragmented and subject to rapid change and evolving industry standards.
The Company competes with a variety of other companies, depending on the IT
services it offers. The Company's primary competitors for professional IT
staffing engagements include participants from a variety of market segments,
including "Big Five" accounting firms, systems consulting and implementation
firms, applications software development and maintenance firms, service groups
of computer equipment companies and temporary staffing firms. In Applications
Outsourcing services, the Company competes primarily with Keane, IBM Global
Solutions, Andersen Consulting, Infosys, and Computer Sciences Corporation. Many
of the Company's competitors have substantially greater financial, technical and
marketing resources and greater name recognition than the Company. As a result,
they may be able to compete more aggressively on pricing, respond more quickly
to new or emerging technologies and changes in customer requirements, or devote
greater resources to the development and promotion of IT services than the
Company. In addition, there are relatively few barriers to entry into the
Company's markets and the Company has faced, and expects to continue to face,
additional competition from new IT service providers. Further, there is a risk
that the Company's customers may elect to increase their internal resources to
satisfy their IT services needs as opposed to relying on a third-party vendor
such as the Company. The IT services industry is also undergoing consolidation
which may result in increased competition in the Company's target markets.
Increased competition could result in price reductions, reduced operating
margins and loss of market share, any of which could have a material adverse
effect on the Company. The Company also faces significant competition in
recruiting and retaining IT professionals which could result in higher labor
costs or shortages. There can be no assurance that the Company will compete
successfully with existing or new competitors or that competitive pressures
faced by the Company will not materially adversely affect its business, results
of operations or financial condition.
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ABILITY TO MANAGE GROWTH. The Company's business has experienced rapid
growth over the years that has placed significant demands on the Company's
managerial, administrative and operational resources. Revenues have increased
from $45.3 million in 1993 to $162.1 million in 1999, and the number of
worldwide billable employees has increased from 689 as of December 31, 1993 to
1,367 as of December 31, 1999. The Company established a sales office in London,
England in 1996, opened a sales and service office in Singapore in May 1997, has
expanded its Global Development Center in Mumbai, India and has established a
new Global Development Center in Chennai, India. The Company's future growth
depends on recruiting, hiring and training IT professionals, increasing its
international operations, expanding its U.S. and offshore capabilities, adding
effective sales and management staff and adding service offerings. Effective
management of these and other growth initiatives will require the Company to
continue to improve its operational, financial and other management processes
and systems. Failure to manage growth effectively could have a material adverse
effect on the quality of the Company's services and engagements, its ability to
attract and retain IT professionals, its business prospects, and its results of
operations and financial condition. The Company has historically derived most of
its revenues from professional IT staffing services (TeamSourcing). However, in
recent years the Company has realigned existing personnel and resources, and has
invested incrementally in the development of its IntelliSourcing business
segment, with increased focus on outsourcing services for ongoing applications
management, development, and maintenance. Additionally, the Company has invested
in the development of its emerging and rapidly growing e-business practice. In
order to increase focus and visibility to e-business, the Company realigned the
segment structure during 1999, breaking e-business out of TeamSourcing with the
creation of a third segment. Additionally, IntelliSourcing has also been
restructured to breakout e-business engagements, and has been renamed to
Application Outsourcing. A key factor in the Company's growth strategy is to
increase outsourcing service engagements and e-business with new and existing
customers. This strategy was evidenced by a shift in the revenue mix from
TeamSourcing to Application Outsourcing and e-business in recent years, as well
as the improvement in the Company's direct margins. However, Application
Outsourcing services generally require a longer sales cycle (up to 12 months)
and generally require approval by more senior levels of management within the
customers organization, as compared with traditional IT staffing services. While
the Company has strengthened its experience and strength in marketing,
developing, and performing such outsourcing services, there can be no assurance
that the Company's increased focus on outsourcing services and e-business will
continue to be successful, and any failure of such strategy could have a
material adverse effect on the Company's business, results of operations, and
financial condition.
FIXED-PRICE ENGAGEMENTS. The Company undertakes, from time to time,
certain engagements billed on a fixed-price basis, as distinguished from the
Company's principal method of billing on a time-and-materials basis and has a
strategy to increase its percentage of revenue from fixed-price outsourcing. The
Company's failure to estimate accurately the resources and time required for an
engagement or its failure to complete fixed-price engagements within budget, on
time and to the required quality levels would expose the Company to risks
associated with cost overruns and, in certain cases, penalties, any of which
could have a material adverse effect on the Company's business, operating
results and financial condition. Fixed price revenues represented approximately
22%, 22% and 12% of total revenues for the years ended December 31, 1999, 1998,
and 1997, respectively.
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POTENTIAL LIABILITY TO CUSTOMERS. Many of the Company's engagements
involve IT services that are critical to the operations of its customers'
businesses. The Company's failure or inability to meet a customer's expectations
in the performance of its services could result in a claim for substantial
damages against the Company, regardless of the Company's responsibility for such
failure. Although the Company attempts to limit contractually its liability for
damages arising from negligent acts, errors, mistakes or omissions in rendering
its IT services, there can be no assurance the limitations of liability set
forth in its service contracts will be enforceable in all instances or would
otherwise protect the Company from liability for damages. Although the Company
maintains general liability insurance coverage, including coverage for errors
and omissions, there can be no assurance that such coverage will continue to be
available on reasonable terms or will be available in sufficient amounts to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim. The successful assertion of one or more large claims
against the Company that are uninsured, exceed available insurance coverage or
result in changes to the Company's insurance policies, including premium
increases or the imposition of large deductible or co-insurance requirements,
could adversely affect the Company's business, results of operations and
financial condition.
DEPENDENCE ON PRINCIPAL. The success of the Company is highly dependent
on the efforts and abilities of Bharat Desai, the Company's founder, Chief
Executive Officer and President. The loss of the services of this key executive
for any reason could have a material adverse effect on the Company's business,
operating results and financial condition. The Company does not maintain key man
life insurance on Mr. Desai.
RISKS RELATED TO POSSIBLE ACQUISITIONS. The Company has, and may
continue to expand its operations through the acquisition of additional
businesses. Financing of any future acquisition could require the incurrence of
indebtedness, the issuance of equity (common or preferred) or a combination
thereof. There can be no assurance that the Company will be able to identify,
acquire or profitably manage additional businesses or successfully integrate any
acquired businesses into the Company without substantial expense, delays or
other operational or financial risks and problems. Furthermore, acquisitions may
involve a number of special risks, including diversion of management's
attention, failure to retain key acquired personnel, unanticipated events or
legal liabilities and amortization of acquired intangible assets, any of which
could have a material adverse effect on the Company's business, results of
operations and financial condition. Customer satisfaction or performance
problems within an acquired firm could have a material adverse impact on the
reputation of the Company as a whole. In addition, there can be no assurance
that acquired businesses, if any, will achieve anticipated revenues and
earnings. The failure of the Company to manage its acquisition strategy
successfully could have a material adverse effect on the Company's business,
results of operations and financial condition.
LIMITED INTELLECTUAL PROPERTY PROTECTION. The Company's success depends
in part upon certain methodologies, practices, tools and technical expertise it
utilizes in designing, developing, implementing and maintaining applications and
other proprietary intellectual property rights. In order to protect its
proprietary rights in these various intellectual properties, the Company relies
upon a combination of nondisclosure and other contractual arrangements and trade
secret, copyright and trademark laws which afford only limited protection. The
Company also generally enters into confidentiality agreements with its
employees, consultants, customers and potential customers and limits access to
and distribution of its proprietary information. India is a member of the Berne
Convention, an international treaty, and has agreed to recognize protections on
intellectual property rights conferred under the laws of foreign countries,
including the laws of the U.S. The Company believes that laws, rules,
regulations and treaties in effect in the U.S. and India are adequate to protect
it from misappropriation or unauthorized use of its intellectual property.
However, there can be no assurance that such laws will not change and, in
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particular, that the laws of India will not change in ways that may prevent or
restrict the transfer of software components, libraries and toolsets from India
to the U.S. There can be no assurance that the steps taken by the Company will
be adequate to deter misappropriation of its intellectual property, or that the
Company will be able to detect unauthorized use and take appropriate steps to
enforce its rights. Although the Company believes that its intellectual property
rights do not infringe on the intellectual property rights of others, there can
be no assurance that such a claim will not be asserted against the Company in
the future or what impact any such claim, would have on the Company's business,
results of operation or financial condition. The Company presently holds no
patents or registered copyrights, trademarks or servicemarks other than
Syntel(R), Consider IT Done(R), Method 2000(R), IntelliSourcing(R),
IntelliTransfer(R), TeamSourcing(R), Architects of e (SM), Digital
Blueprinting-Build-Optimize (SM), Digital Ecosystem (SM), Innovate(SM), e-sanity
(SM), and Integrating the Global Community (SM). The Company has submitted
federal trademark applications to register certain names for its service
offerings. There can be no assurance, however, that the Company will be
successful in obtaining federal trademarks for these trade names.
YEAR 2000 REMEDIATION ENGAGEMENTS.
During the years ended December 31, 1997, 1998, and 1999, the Company
provided Year 2000 remediation services as a component of the Applications
Integration segment. While all Year 2000 engagements were successfully completed
before December 31, 1999 and subsequent to December 31, 1999 the number of
reported problems encountered by the Company's customers are both few and minor,
there is no assurance that all potential Year 2000 related problems have been
exposed. Additionally, the agreements established with two of the Company's
larger Year 2000 customers includes warranty periods that extend beyond December
31, 2000. While the Company has established reserves to provide for any warranty
work that may be required, and while management is confident that the potential
for material issues is very low, there can be no assurance that the reserves
will be sufficient should either of these customers encounter significant Year
2000 related processing issues.
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INDUSTRY BACKGROUND
Increasing globalization, rapid adoption of the Internet as a business
tool, and technological innovation are creating an increasingly competitive
business environment that is requiring companies to fundamentally change their
business processes. This change is driven by increasing demand from customers
for increased quality, lower costs, faster turnaround, and highly responsive and
personalized service. To effect these changes and adequately address these
needs, companies are focusing on their core competencies and cost-effectively
utilizing IT solutions to improve productivity, lower costs and manage
operations more effectively.
Designing, developing, and implementing advanced technology solutions
is a key priority for the majority of corporations, now that the Year 2000
computer bug situation is past. In addition, the development and maintenance of
new information technology (IT) applications continues to be a high priority.
This type of work requires highly skilled individuals trained in diverse
technologies. However, there is a growing shortage of these individuals and many
companies are reluctant to expand their IT departments through additional
staffing, particularly at a time when they are attempting to minimize their
fixed costs and reduce workforces. The Company believes that many organizations
are concluding that using outside specialists to address their advanced
technology and ongoing IT requirements enables them to develop better solutions
in shorter time frames and to reduce implementation risks and ongoing
maintenance costs. Those outside specialists best positioned to benefit from
these trends have access to a pool of skilled technical professionals, have
demonstrated the ability to manage IT resources effectively, have low-cost
offshore software development facilities, and can efficiently expand operations
to meet customer demands.
Demand for IT services has grown significantly as companies seek ways
to outsource not only specific projects for the design, development and
integration of new technologies, but also ongoing management, development and
maintenance of existing IT systems.
The Company believes that outsourcing the ongoing management,
development and maintenance of IT applications is becoming increasingly critical
to business enterprises. The difficulties of IT planning, budgeting and
execution in the face of technological innovations and uncertainties, the focus
on cost cutting, and a growing shortage of skilled personnel are driving senior
corporate management to strategically pursue outsourcing of critical internal IT
functions. Organizations are seeking an experienced IT services outsourcing
provider that not only has the expertise and knowledge to address the
complexities of rapidly changing technologies, but also possesses the capability
to understand and automate the business processes and knowledge base of the
organization. In addition, the IT provider must be able to develop customized
solutions to problems unique to the organization. This involves maintaining
on-site professionals who know the customer's IT processes, providing access to
a wide range of expertise and best practices, providing responsiveness and
accountability to allow internal IT departments to meet organization goals, and
providing low cost, value-added services to stay within the organization's IT
budget constraints.
In this environment, large organizations are increasingly finding that
full facilities management outsourcing providers who own and manage an
organization's entire IT function do not permit the organization to retain
control over, or permit flexible reallocation of, its IT resources. At the same
time, IT service providers focused on project oriented professional services,
with a finite beginning and end, or "deliverables," do not typically provide
ongoing maintenance services and management of IT functions. As a result, the
Company believes there is a significant opportunity to provide outsourcing
services to customers for ongoing IT management, development and maintenance of
their business applications.
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SYNTEL SOLUTION
Syntel provides e-Business solutions in the areas of Web Solutions,
Customer Relationship Management (CRM), Data Warehousing/Business Intelligence,
and Enterprise Application Outsourcing (EAI). The Company's approach involves
taking an enterprisewide view of the customer's technology and business
environment to ensure comprehensive solution integration. This view is termed
the Digital Ecosystem (SM). Syntel's methodology for implementing its e-Business
services involves Digital Blueprinting/Build/Optimize. In the Digital
Blueprinting phase, Syntel's teams analyze the customers current technology
environment, their business objectives, and begins architecting the e-Business
solution to meet these objectives. In the Build phase, Syntel actually
constructs the technology applications and integrates the necessary package
applications for the customer. In the Optimize phase, Syntel provides ongoing,
cost effective maintenance and enhancement services for the newly created
applications.
Syntel provides comprehensive Applications Outsourcing services
consisting of applications management services for ongoing management,
development and maintenance of business applications, as well as TeamSourcing
services consisting of professional IT consulting services. The Company believes
that its Applications Outsourcing approach to IT services outsourcing, which
involves assuming responsibility for management of selected applications rather
than taking over an entire IT department or providing facilities management,
provides significant differentiation from its competitors in the IT services
market. Syntel believes that its e-Business, Applications Outsourcing, and
TeamSourcing service offerings are distinguished by its Global Delivery Service,
a corporate culture focused on customer service and responsiveness and its
internally developed "intellectual capital," comprised of a proven set of
methodologies, practices and tools for managing the IT functions of its
customers.
GLOBAL DELIVERY SERVICE. Syntel performs its services on-site at the
customer's location, off-site at Syntel's U.S. locations and offshore at its
Indian locations. By linking each of its service locations together through a
dedicated data and voice network, Syntel provides a seamless service capability
to its customers around the world, largely unconstrained by geographies, time
zones and cultures. This Global Delivery Service gives the Company the
flexibility to deliver to each customer a unique mix of on-site, off-site and
offshore services to meet varying customer needs for direct interaction with
Syntel personnel, access to technical expertise, resource availability and
cost-effective delivery. The benefits to the customer from this customized
service include responsive delivery based on an in-depth understanding of the
specific processes and needs of the customer, quick turnaround, access to the
most knowledgeable personnel and best practices, resource depth, 24-hour support
seven days a week, and cost-effectiveness. To support its Global Delivery
Service, the Company currently has three Global Development Centers located in
Cary, North Carolina; Mumbai, India; and Chennai, India.
FOCUS ON CUSTOMER SERVICE. The Syntel corporate culture reflects a
"customer for life" philosophy which emphasizes flexibility, responsiveness,
cost-consciousness and a tradition of excellence. The Company recognizes that
its best source for new business opportunities comes from existing customers and
believes its customer service is a significant factor in Syntel's high rate of
repeat business. For the years ended December 31, 1997, 1998, and 1999, over 90%
of the Company's TeamSourcing revenues were from Customers for whom the Company
provided services during the previous period. At engagement initiation, Syntel's
services are typically based on expertise in the software life-cycle and
underlying technologies. Over time, however, as Syntel develops an in-depth
knowledge of a customer's business processes, IT applications and industry,
Syntel gains a competitive advantage to perform higher-value IT services for
that customer.
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<PAGE> 11
PROVEN INTELLECTUAL CAPITAL. Over its 20-year history, Syntel has
developed a proven set of methodologies, practices, tools and technical
expertise for the development and management of its customers' information
systems. This "intellectual capital" of Syntel includes methodologies for the
selection of appropriate customer IT functions for management by Syntel, tools
for the transfer to Syntel of the systems knowledge of the customer, and
techniques for providing systems support improvements to the customer. Syntel
also offers to its customers well-trained personnel backed by a proven,
extensive employee training and continuing development program. The Company
believes its intellectual capital enhances its ability to understand customer
needs, design customized solutions and provide quality services on a timely and
cost-effective basis.
SYNTEL STRATEGY
The Company's objective is to become a strategic partner with its
customers in the development of e-Business solutions as well as the ongoing
management, development and maintenance of their IT systems by utilizing its
Global Delivery Service, intellectual capital and customer service orientation.
The Company plans to continue to pursue the following strategies to achieve this
objective:
LEVERAGE GLOBAL DELIVERY SERVICE. The ability to deliver a seamless
service capability virtually anywhere in the world from its domestic and
offshore facilities gives the Company an effective ability to meet customer
needs for technical expertise, best practice IT solutions, resource
availability, responsive turnaround and cost-effective delivery. The Company
strives to leverage this capability to provide reliable and cost-effective
services to its existing customers, expand services to existing customers and to
attract new customers. Moreover, the flexibility and capacity of the Global
Delivery Service and the Company's worldwide recruitment and training programs
enhance the ability of the Company to expand its business as the number of
customers grows and their IT demands increase. The Company intends to expand the
capacity of its Global Development Centers worldwide.
AGGRESSIVELY BUILD E-BUSINESS COMPETENCIES. Through its comprehensive
suite of e-Business services, the Company provides a key strategic role in
helping customers rapidly and cost-effectively build advanced technology
solutions. Through large-scale retraining programs, strategic acquisitions and
partnerships, the Company has quickly built a strong competency in the area of
e-Business services.
CONTINUE TO GROW APPLICATIONS OUTSOURCING SERVICES. Through
Applications Outsourcing, the Company markets its higher value applications
management services for ongoing applications management, development,
maintenance. In recent years, the Company has significantly increased its
investment in Applications Outsourcing services and realigned its resources to
focus on the development, marketing and sales of its Applications Outsourcing
services, including the hiring of additional salespeople and senior managers,
redirecting personnel experienced in the sale of higher value contracts,
developing proprietary methodologies, increasing marketing efforts, and
redirecting organizational support in the areas of finance and administration,
human resources and legal.
EXPAND CUSTOMER BASE AND ROLE WITH CURRENT CUSTOMERS. The Company's
sales efforts focus on its strategy of migrating existing TeamSourcing customers
to higher value e-business and Applications Outsourcing services. Traditionally,
the Company formed strong relationships with customers through its high quality
and responsive TeamSourcing services. The Company's emphasis on customer service
and long-term relationships has enabled the Company to generate recurring
revenues from existing customers. These long-term relationships also provide the
opportunity for the Company to cross-sell e-Business and Applications
Outsourcing services which, in some cases, represent a natural extension of work
initially performed under the TeamSourcing engagement. Cross-selling engagements
with existing clients generated incremental revenues of $14.6 million for the
year ended December 31, 1999.
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<PAGE> 12
The Company also seeks to expand its customer base by leveraging its expertise
in providing services to the financial services, manufacturing, retail,
transportation and information/communications industries, as well as to
government entities. With the expansion of the Company's Indian operations, the
Company is increasing its marketing efforts in other parts of the world,
particularly in the UK.
ENHANCE PROPRIETARY KNOWLEDGE BASE AND EXPERTISE. The Company believes
that its "intellectual capital" of methodologies, practices, tools and technical
expertise is an important part of its competitive advantage. The Company strives
to continually enhance this knowledge base by creating competencies in emerging
technical fields such as Internet/intranet applications, client/server
applications, object-oriented software, E-commerce, and data warehousing
technology. The Company continually develops new methodologies and toolsets,
building skills in e-Business, and acquiring a broad knowledge and expertise in
the IT functions of specific industries. Through these efforts, the Company
becomes more valuable to the customer, is often able to expand the scope of its
work to existing customers, and is able to offer industry-specific expertise.
ATTRACT AND RETAIN HIGHLY SKILLED IT PROFESSIONALS. The Company
believes that its human resources are its most valuable asset. Accordingly, its
success depends in large part upon its ability to attract, develop, motivate,
retain and effectively utilize highly skilled IT professionals. Over the years,
the Company has developed a worldwide recruiting network, logistical expertise
to relocate its personnel, and programs for human resource retention and
development. The Company (i) employs professional recruiters who recruit
qualified professionals throughout the U.S. and in India, Canada, Europe,
Singapore, the Philippines, and New Zealand, (ii) trains employees and new
recruits through its four training centers, two of which are located in the U.S.
and two of which are located in India, and (iii) maintains a broad range of
employee support programs, including relocation assistance, a comprehensive
benefits package, career planning, a qualified stock purchase program, and
incentive plans. The Company believes that its management structure and human
resources organization is designed to maximize the Company's ability to
efficiently expand its professional IT staff in response to customer needs.
PURSUE SELECTIVE ACQUISITION OPPORTUNITIES. Given the highly fragmented
nature of the IT services market, the Company believes that opportunities exist
to continue expansion through the selective acquisitions of IT services firms to
either augment its technical expertise or provide opportunities to cross-sell
services. The Company has increased focus on the identification and pursuit of
acquisition candidates. Syntel has the following criteria as it relates to
potential acquisitions: 1) the acquired company must enhance Syntel's technical
competencies; 2) provide enhanced geographic reach; 3) provide access to new and
strategic customers; and 4) have solid financials.
During 1999 the Company made the following acquisitions: (i) the
Company purchased substantially all of the assets of Metier, Inc., a privately
held Los Angeles based consulting firm, specializing in the design and
implementation of data warehousing, e-commerce, and ERM solutions for middle
market clients, particularly in the area of healthcare, manufacturing, and
financial services; (ii) the Company acquired substantially all of the assets of
IMG, Inc, a privately held company located in Beaverton Oregon, specializing in
data warehousing / decision support systems, web enabled applications,
e-commerce, and customer relationship management.
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<PAGE> 13
SERVICES
Syntel provides a broad range of IT services through its e-Business,
Applications Outsourcing and TeamSourcing service offerings. Through its
e-Business practices, the Company provides advanced technology services in the
areas of Web Solutions, Customer Relationship Management, Data
Warehousing/Business Intelligence, and Enterprise Application Outsourcing.
Through Applications Outsourcing, the Company provides applications management
services for ongoing management, development and maintenance of customer
applications. Through TeamSourcing, the Company provides professional IT
consulting services. During the past year the Company has increased the
personnel and resources dedicated to the development, marketing and sales of its
Applications Outsourcing and e-business services. TeamSourcing, e-Business, and
Applications Outsourcing services are based on Syntel's methodologies and
technical expertise, which the Company continues to develop on an ongoing basis
in order to further enhance the value of its services to customers. For the
years ended December 31, 1999 and December 31, 1998, e-Business and Applications
Outsourcing accounted for approximately 75% and 72%, respectively, of the
Company's revenues and TeamSourcing represented approximately 25% and 28%,
respectively, of the Company's revenues.
Syntel's focus on customer service is evidenced by the high level of
repeat business from existing customers and the quality awards its customers
have bestowed on Syntel. During 1996, Syntel received the Q-1 rating from Ford
Motor Company and became a Preferred Supplier to Daimler-Chrysler Corporation
receiving the highest rating in each customer service category. The Q-1 rating
from Ford Motor Company and the Preferred Supplier designation from Chrysler
Corporation are the highest facility supplier quality ratings awarded by each of
these principal customers. During 1998, the Company received ISO 9001
Certification in its Chennai and Mumbai Global Development Centers, and received
the "Best Business Partner Award for Excellence in Education" from the Dayton
Hudson Corporation. The Company is also a Microsoft Certified Solution Provider.
e-Business Services
Syntel provides strategic advanced technology services for the design,
development, implementation and maintenance of solutions to enable customers to
be more competitive. Many of today's advanced technology solutions are built
around utilization of the web, which has transformed many businesses. The
Company provides customized technology services in the areas of web solutions,
including web architecture, web-enablement of legacy applications, and portal
development. The Company also provides Customer Relationship Management
services, which involve software solutions to put customers in closer touch with
their own customers. Syntel helps customers select appropriate package software
options, then customize and implement the solutions. In the area of Data
Warehousing/Business Intelligence, Syntel helps customers make more strategic
use of information within their businesses through the development and
implementation of data warehouses and data mining tools. In the area of
Enterprise Application Outsourcing, Syntel takes an enterprise wide view of its
customers' environment to implement package software solutions to create better
integration, and therefore better information utilization, between front office
and back office applications.
Applications Outsourcing
Syntel provides higher-value applications management services for
ongoing management, development and maintenance of business applications,
including Year 2000 compliance services. Through Application Outsourcing, the
Company assumes responsibility for, and manages selected application support
functions of the customers. The Global Delivery Service is central to Syntel's
delivery of Applications Outsourcing services. It enables the Company to respond
to customers' needs for ongoing service and flexibility and has provided the
capability to become productive quickly on a cost-effective basis to meet timing
and resource demands for mission critical applications.
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<PAGE> 14
Syntel has developed methodologies, processes and tools to effectively
integrate and execute Applications Outsourcing engagements. Referred to as
"IntelliTransfer," this methodology is implemented in three stages of planning,
transition and launch. Syntel first focuses on the customer's personnel,
processes, technology and culture to develop a plan to effectively assimilate
the business process knowledge of the customer. Syntel then begins to learn the
business processes of the customer, and, finally, seeks to assume responsibility
for performance of a particular customer application system or systems. As the
Company develops an in-depth knowledge of the customer's personnel, processes,
technology and culture, Syntel acquires a competitive advantage to pursue more
value-added services. The Company believes its approach to providing these
services results in a long-term customer relationship involving a key Syntel
role in the business processes and applications of the customer.
Because providing both e-Business and Applications Outsourcing services
typically involves close participation in the IT strategy of a customer's
organization, Syntel adjusts the manner in which it delivers these services to
meet the specific needs of each customer. For example, if the customer's
business requires fast delivery of a mission-critical application update, Syntel
will combine its on-site professionals, who have knowledge of the customer's
business processes and applications, together with its global infrastructure to
deliver around-the-clock resources. If the customer's need is for cost
reduction, Syntel may increase the portion of work performed at its offshore
Global Development Center, which has significantly lower costs. The Company
believes that its ability to provide flexible service delivery and access to
resources permits responsiveness to customer needs and are important factors
that distinguish its e-Business and Applications Outsourcing services from other
IT service firms.
TeamSourcing(sm)
Syntel offers professional IT consulting services directly to its
customers and, to a lesser degree, in partnership with other service providers.
The professional IT consulting services include individual professionals and
teams of professionals dedicated to assisting customer systems projects and
ongoing IT functions. This service responds to the demand from internal IT
departments for additional expertise, technical skills and personnel. The
Company's wide range of TeamSourcing services include IT applications systems
specification, design, development, implementation and maintenance, which
involve diverse computer hardware, software, data and networking technologies
and practices. Syntel also provides professional IT staffing services to state
governments, principally in the area of state welfare automation services.
Services to state governments are provided directly by Syntel and in partnership
with Deloitte & Touche and with Unisys. In providing its TeamSourcing services,
Syntel utilizes its Global Delivery Service, primarily through international
recruiting, training and relocation, to meet customer needs for resource depth,
expertise, and responsiveness.
Technical Services Group
The Company seeks to gain a competitive advantage through its
methodologies, tools and technical expertise. The Company employs a team of
professionals in its Technical Services Group whose mission is to develop and
formalize Syntel's "intellectual capital" for use by the entire Syntel
organization. The Technical Services Group focuses on monitoring industry
trends, creating competencies in emerging technical fields, developing new
methodologies, techniques and tools such as IntelliTransfer(sm), creating
reusable software components through its Innovate (sm) methodology to enhance
quality and value on customer assignments, and educating Syntel's personnel to
improve marketing, sales and delivery effectiveness. The Technical Services
Group consists of senior technical personnel located in both the U.S. and India.
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<PAGE> 15
CUSTOMERS
Syntel provides its services to a broad range of Fortune 1000 companies
principally in the financial services, manufacturing, retail, transportation and
information/communications industries, as well as to government entities. During
1999, the Company provided services to over 250 customers, principally in the
U.S. The Company also provides services to customers in Europe and Southeast
Asia, many of whom are subsidiaries or affiliates of its U.S. customers.
Representative customers of the Company, each of which provided revenue of at
least $100,000 during 1999, include:
<TABLE>
<CAPTION>
FINANCIAL SERVICES MANUFACTURING RETAIL
- ------------------ ------------- ------
<S> <C> <C>
American Annuities Group Cummins Borders
American Express Daimler-Chrysler Corp Dayton Hudson Co.
American Int'l Group, Inc. Dell Computer Kmart Co.
Blue Cross/Blue Shield Eaton Corp Meldisco
CIGNA Corp. Ford Motor Co. Mervyn's
CNA Insurance General Motors Corp Safeway, Inc.
Fireman's Fund Hewlett-Packard Corp.
Humana Honeywell
Kemper Insurance Int'l Business Machines Corp.
Kent Bank Lucent Technologies
Prudential Insurance New Venture Gear
US Life Nissan
VISA Power One
Wells Fargo Special Metals Corp
World Bank TekTronix
Union Carbide
Unisys Corp.
Xerox Corp.
<CAPTION>
INFORMATION/
TRANSPORTATION COMMUNICATIONS GOVERNMENT
- -------------- -------------- ----------
<S> <C> <C>
Allied Van Lines Intellisoft City of
Norfolk Southern Co. LM Ericsson Telephone Co. Albuquerque
Northwest Airlines Corp. MCI Illinois
Ryder Nielsen Media New Mexico
Yellow Technologies Sprint New York
Time Customer Services West Virginia
</TABLE>
For the years ended December 31, 1999, 1998, and 1997, the Company's
top ten customers accounted for approximately 68%, 70%, and 75% of the Company's
revenues, respectively. For the years ended December 31, 1998 and 1997 two
customers contributed revenues in excess of 10% of total consolidated revenues.
In 1999 only one customer contributed revenues in excess of 10% of total
consolidated revenues. The Company's largest customer is American Home Assurance
Company and certain other subsidiaries of American International Group Inc.
(collectively, "AIG"). AIG accounted for approximately 21%, 26% and 31% of
revenues for the years ended December 31, 1999, 1998, and 1997, respectively.
For the years ended December 31, 1998 and 1997, Dayton Hudson Group was the
Company's second largest customer, contributing 14% and 12% of total
consolidated revenues, respectively.
AMERICAN INTERNATIONAL GROUP. The Company's largest customer is
American Home Assurance Company, and certain other subsidiaries of American
International Group, Inc. (collectively, "AIG"). This customer relationship
began with the placement of a single IT professional in 1989 and has grown
significantly since then. The Company supports AIG systems throughout the U.S.
and in selected countries around the world. Both the Company's Cary, North
Carolina and Mumbai, India Global Development Centers were initially established
to support AIG. As the Company has become more knowledgeable about AIG's
personnel, processes, technology and culture, it has had the opportunity
15
<PAGE> 16
to expand the range of its services beyond contract minimums and to play an
increasingly valuable role in project management and systems design.
Currently, the Company provides applications development and
maintenance services in support of various AIG subsidiaries through integrated
service teams located onsite, offsite, and offshore. Its applications
development services focus on providing customized solutions and applications in
support of policy underwriting, claims management and financial reporting and
encompass both mainframe and client/server environments. The Company's
applications maintenance services focus on enhancing existing business systems,
including 24-hour management of data processing functions and a 24 hour customer
assistance center. The Company is responsible for complete production support,
maintenance and related activities for over 250 applications. Through its
long-term relationship with AIG, Syntel has enabled AIG to better control,
manage, and plan its IT resource allocation and to simplify management of IT
functions while benefiting from Syntel's expertise, practices and resource
availability for the cost-efficient execution of their plans and priorities.
Syntel has also delivered to AIG 24-hour support, fast turnaround and the
capacity to address AIG enterprise needs in other parts of the world. The
Company's current contract with AIG terminates on December 31, 2000. AIG may
terminate the contract upon six months written notice and payment of an early
termination penalty.
GLOBAL DELIVERY SERVICE
Syntel's Global Delivery Service gives the Company the flexibility and
resources to perform services on-site at the customer's location, off-site at
the Company's U.S. locations and offshore at the Company's Indian locations. By
linking each of its service locations together through a dedicated data and
voice network, Syntel provides a seamless service capability to its customers.
The Global Delivery Service gives the Company the flexibility to deliver to each
customer a customized mix of integrated on-site, off-site and offshore services
to meet varying customer needs for direct interaction with Syntel personnel,
access to technical expertise and best practices, resource availability and
cost-effective delivery.
Through on-site service delivery at the customer's location, the
Company is able to gain comprehensive knowledge concerning the customer's
personnel, processes, technology and culture, and maintain direct customer
contact to facilitate project management, problem solving and integration of
Syntel services. Off-site service delivery at the Company's U.S. locations
provides the customer with access to the diverse skill base and technical
expertise resident at different regional centers, availability of resources, and
cost-effective delivery due to the savings in transportation, facilities and
relocation costs associated with on-site work. Offshore service delivery at the
Company's Indian locations provides the customer with the capacity to receive
around the clock attention to applications maintenance and project development
for faster turnaround, greater availability of resources, expertise resident in
India and more cost-effective delivery than the Company's off-site services.
The Company has developed global recruiting and training programs which
have efficiently provided skilled IT professionals to meet customer needs. In
addition, the Company's sales, solutions and delivery functions are closely
integrated in the Global Delivery Service so that appropriate resources can be
provided to the customer at the right time and at the most advantageous
location. Each customer is tracked and serviced through a multi-stage customer
care process. Weekly meetings are held with key project management, sales,
technical, legal and finance personnel to monitor progress, identify issues and
discuss solutions. As engagements evolve and customer needs change, the Company
can reallocate resources responsively from among these locations as necessary.
The Company's three Global Development Centers located in Cary, North
Carolina; Mumbai, India; and Chennai, India; support the Company's Global
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<PAGE> 17
Delivery Service.
The Cary, North Carolina Global Development Center, which employs over
300 persons, serves as the hub for the Company's telecommunications, project
management, technical training and professional development programs. Its
support functions include administration of a dedicated data and voice network,
a 24-hour customer assistance center which coordinates problem resolution
worldwide, and a development center for the sharing of knowledge and expertise
among IT professionals. Moreover, due to its proximity to a large number of
major universities, the Cary, North Carolina Global Development Center has
access to a relatively large talent pool.
The Mumbai, India Global Development Center, which employed over 370
persons as of December 31, 1999, serves as the hub of the Company's Indian
operations. This Global Development Center provides substantial resource depth
to meet customer needs around the world, low-cost service delivery, a 24-hour
customer assistance center and development of technical solutions and expertise.
Mumbai also serves as a principal recruiting and training center for the Company
due to the large resource pool of skilled IT professionals and college
graduates. The Mumbai Center, which has been in operation for over six years,
was expanded in 1998 to a capacity in excess of 700 people.
During 1998 the Company opened a new training and development center in
Chennai, India which provides accommodations for an additional 600 persons. As
it is only staffed at 18% of capacity, the facility provides Syntel the ability
to respond quickly to customer and project staffing needs.
During 1997, the Company established wholly owned subsidiaries in
London England and Singapore with a total investments of $0.1 million.
SALES AND MARKETING
The Company markets and sells its services directly through its
professional salespeople and senior management operating principally from the
Company's offices in Los Angeles, California; Costa Mesa, California, Phoenix,
Arizona; Beaverton, Oregon; Oakbrook, Illinois; Dallas, Texas; Jacksonville,
Florida; San Francisco, California; Minneapolis, Minnesota; New York, New York;
Troy, Michigan; Woodbridge, New Jersey; London, England; and Singapore. The
sales staff is aligned into two separate sales teams, one for TeamSourcing
services and one for e-Business and Applications Outsourcing services.
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<PAGE> 18
During recent years the Company has focused on increasing its staffing
of professional salespeople in e-Business and Applications Outsourcing both by
dedicating internal sales professionals to these service offerings and through
outside hiring of professionals experienced in selling e-business and
outsourcing engagements.
The sales cycle for Applications Outsourcing engagements ranges from 6
to 12 months depending on the complexity of the engagement. Due to this longer
sales cycle, Applications Outsourcing sales executives follow an integrated
sales process for the development of engagement proposals and solutions, and
receive ongoing input from the Company's technical services, delivery, finance
and legal departments throughout the sales process. The Applications Outsourcing
sales process also typically involves a greater number of customer personnel at
more senior levels of management than the TeamSourcing sales process.
The sales cycle for e-Business engagements, from initial contact to
execution of an agreement, varies by type of service and account size, but
typically ranges from 4 to 8 months, depending on the complexity of the
engagement.
The sales cycle for TeamSourcing engagements, from initial contact to
execution of an agreement, varies by type of service and account size, but is
typically completed within 30 days. A significant amount of TeamSourcing
engagements are developed from existing customers.
Syntel's marketing organization seeks to build awareness of its
e-business, Applications Outsourcing, and TeamSourcing brands to help generate
sales leads. The Company's current marketing efforts include trade
shows/conferences, direct mail, publications, public relations, and print/web
advertising targeted to CEOs, CIOs, and CFOs of Fortune 500 companies and CIOs
of government agencies. In addition, Syntel maintains relationships with key
industry analyst groups such as Giga Information Group, Gartner Group, Meta
Group, and Yankee Group, among others.
HUMAN RESOURCES
The Company believes that its human resources are its most valuable
asset. Accordingly, the Company's success depends in large part upon its ability
to attract, develop, motivate, retain and effectively utilize highly skilled IT
professionals. The Company has developed a number of processes, methodologies,
technologies and tools for the recruitment, training, development and retention
of its employees. As of December 31, 1999 the Company had 1,917 full time
employees. Of this total, the U.S. operations employed 1,403 persons, including
1,158 IT professionals; the Indian operation employed 480 persons, including 414
IT professionals; and the Company employed an additional 34 persons in various
remote locations, including the U.K. and Singapore.
A majority of the Company's professional employees have a Bachelor of
Science degree or its equivalent, or higher degrees in computer science,
engineering disciplines, management, finance and other areas. Their experience
level ranges from entry-level programmers to engagement managers and senior
consultants with over 20 years of IT experience. The Company has personnel who
are experienced in mainframe, client/server and open systems technologies, and
proficient in a variety of computer programming languages, software tools,
database management systems, networks, processes, methodologies, techniques and
standards.
The Company has implemented a management structure and human resources
organization intended to maximize the Company's ability to efficiently expand
its professional staff. Although the Company believes that it has the capability
to meet its anticipated future needs for IT professionals through its
established recruiting and training programs, there can be no assurance that the
Company will be able to hire, train or retain qualified IT professionals in
sufficient numbers to meet anticipated staffing needs.
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<PAGE> 19
RECRUITING. The Company has developed a recruiting methodology and
organization which is a core competency. The Company has a recruiting team based
in the U.S. which recruits primarily across the U.S., India, Canada, Europe,
Singapore, the Philippines and New Zealand. The Company also has an
international-based recruiting team, with recruiters in Mumbai, Chennai,
Hyderabad, Delhi and Banglore, India, to recruit for the Company's needs in
India, as well as for the Company's U.S. operations. The Company uses a
standardized global selection process that includes interviews and reference
checks.
Among the Company's other recruiting techniques are the placement of
advertisements on its web site, in newspapers and trade magazines, providing
bonuses to its employees who refer qualified applicants, participating in job
fairs and recruiting on university campuses. In addition, the Company has
developed a proprietary database of talent utilizing the Resumix database
system, which is an automated tool for managing all phases of recruiting. This
system directly downloads resumes from the Internet, directly loads faxed
resumes and currently stores over 2000 qualified resumes for potential
candidates. This system enhances the ability of the Company's recruiters to
select appropriate candidates and can distribute resumes directly to the
recruiters.
TRAINING. The Company uses a number of established training delivery
mechanisms in its efforts to provide a consistent and reliable source for
qualified IT professionals.
Syntel also maintains an Internet-based global Computer-Based Training
(CBT) program with over 200 training courses from which Syntel employees can
select to enhance and develop their skills. The CBT topics cover the latest
Client/Server topics including Object Oriented Programming, local-area and
wide-area networking, E-Commerce, various Microsoft products, and Web-based
solutions in addition to management and related developmental areas.
The Company reskilled a significant percentage of the consulting base
during 1999 in the latest advanced software platforms, including JAVA, HTML,
Object Oriented, C++, RMI Cobra, JDBC, Cold Fusion, and Oracle.
During 1998 the Company implemented a Project Manager Training program.
The objective of the program is to develop certified project managers to ensure
consistent and quality delivery of the Company's engagements on a world wide
basis. The 12 to 18 month program consists of lecture style classroom work,
computer based training, and on the job apprenticeships. The program trains
students on industry "best practices" as well as Syntel specific methods and
processes. Program participants must receive certification from the Project
Management Institute ("PMI") before receiving Syntel branded certification.
The Company has been accepted as a Microsoft Certified Solution Partner
and sponsors the Microsoft Certification Program in its Cary, North Carolina,
Global Development Center and provides opportunities for cross-training of its
professionals in emerging technologies.
SUPPORT AND RETENTION. The Company seeks to provide meaningful support
to its employees which the Company believes leads to improved employee retention
and better quality services to its customers. Traditionally, a significant
percentage of the Company's employees have been recruited from outside the U.S.
and relocated to the U.S. This has resulted in the need to provide a higher
level of initial support to its employees than is common for U.S.-based
employees. As a result of these activities, Syntel has developed a significant
knowledge base in making foreign professionals comfortable and quickly
productive in the U.S. and Europe. The Company also conducts regular career
planning sessions with its employees, and seeks to meet their career goals over
a long-term planning horizon. As part of its retention strategy, the Company
strives to provide a competitive compensation and benefits package, including
relocation reimbursement and support, health insurance, 24-hour on-call nurse
consulting, a 401(K) plan, life insurance, dental options, a vision eye-care
program, long-term disability coverage, short-term disability options, tuition
subsidy plan, PC purchase plan and an employee referral plan. Upon consummation
of its initial public offering in 1997 the Company offered a stock option
program, and in 1998, a qualified stock purchase program, providing all eligible
employees the opportunity to purchase the Company's Common Stock at a discount
to fair market value.
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COMPETITION
The IT services industry is intensely competitive, highly fragmented
and subject to rapid change and evolving industry standards. The Company
competes with a variety of other companies, depending on the IT services it
offers. The Company's primary competitors for professional IT staffing
engagements include participants from a variety of market segments, including
"Big Five" accounting firms, systems consulting and implementation firms,
applications software development and maintenance firms, service groups of
computer equipment companies and temporary staffing firms. In applications
outsourcing services, the Company competes primarily with IBM Global Solutions,
Keane, Andersen Consulting, Infosys, and Computer Sciences Corporation.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Registrant, their ages, and the position
or office held by each, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Bharat Desai................ 47 Chairman, President, Chief Executive Officer
and Director
Neerja Sethi................ 45 Vice President, Corporate Affairs
and Director
John Andary................. 50 Chief Financial Officer and
Treasurer
Ken Kenjale................. 50 Chief Technology Officer
Daniel M. Moore............. 45 Chief Administrative Officer and
Secretary
Jay Clark................... 37 Vice President, Global
Applications Management
Rajiv Tandon................ 41 Vice President, Global Delivery
East & Enterprise Solutions
Marlin Mackey............... 49 Vice President, Global Delivery
West & Information Services
- ------------------------------------------------------------------------------
</TABLE>
Bharat Desai is a co-founder of the Company and has served as its
President, Chief Executive Officer and Director since its formation in 1980. Mr.
Desai became Chairman of the Board in February 1999.
Neerja Sethi is a co-founder of the Company and has served as a Vice
President, Corporate Affairs and Director since its formation in 1980 and as
Secretary and Treasurer from 1980 to March 1996. Ms. Sethi is the spouse of Mr.
Desai.
John Andary has served the Company as Chief Financial Officer since
August 1994 and as Treasurer since March 1996. From October 1992 to April 1994,
Mr. Andary was a General Manager of Automatic Data Processing and from May 1987
to October 1992 he was one of its Division Controllers.
Ken Kenjale has served the Company as Chief Technology Officer since
July 1995. From April 1988 to July 1995, Mr. Kenjale served in various positions
with the Company.
Daniel M. Moore has served the Company as Chief Administrative Officer
and Secretary since August 1998. From March 1996 through August 1998, Mr. Moore
served as General Counsel and Secretary and also served as Vice President,
Benefits and Policy Administration from July 1997 through August 1998. From June
1996 to June 1997, Mr. Moore served as the Company's acting Vice President,
Human Resources. From June 1992 to March 1996, Mr. Moore served as Vice
president and Senior Corporate Counsel with Comerica Incorporated, and he was
Vice President and Managing Commercial Counsel with Manufacturers National
Corporation prior to its merger with Comerica Incorporated.
20
<PAGE> 21
Jay Clark has served the Company as Vice President, Global Applications
Management since August 1998. From July 1997 through August 1998, Mr. Clark
served as Vice President, Global Infrastructure and Career Administration. From
August 1994 to July 1997, Mr. Clark served as Assistant Vice President,
Outsourcing Solutions of the Company. From January 1985 to August 1994, Mr.
Clark served in various positions at EDS.
Rajiv Tandon joined Syntel in January 1992, and has served the Company
as Vice President, Global Delivery East & Enterprise Solutions since January
1999. From April 1998 through January 1999, Mr. Tandon was Assistant Vice
President, Global Delivery Services and, from November 1996 through April
1998, Mr. Tandon was Director of Operations for the AIG account. From January
1992 until November 1996 Mr. Tandon served in various other project management
positions within the Company.
Marlin Mackey has served the Company as Vice President, Global Delivery
West and Information Services since January 1999. From April 1998 through
January 1999, Mr. Mackey was Assistant Vice President, Global Delivery
Services and, from November 1995 through April 1998, Mr. Mackey was a Deputy
Engagement Manager; both with the Company. From 1991 to November 1995, Mr.
Mackey was Project Director for the State of New Mexico's ONGARD project, a
multi-million dollar software development project.
21
<PAGE> 22
ITEM 2. PROPERTIES.
The Company's headquarters and principal administrative, sales and
marketing, and system development operations are located in approximately
24,900 square feet of leased space in Troy, Michigan. The Company occupies these
premises under a lease expiring on November 30, 2001. The Company's primary
training and development center is located in approximately 50,240 square feet
of leased space in Cary, North Carolina, under a lease which expires March 31,
2004. The Company's Metier division is headquartered in Los Angeles and occupies
approximately 10,765 square feet. The Company also leases regional office
facilities in Dallas, Texas; San Ramon, California; Oakbrook, Illinois;
Minneapolis, Minnesota; Santa Fe, New Mexico; Jacksonville, Florida; Woodbridge,
New Jersey; Beaverton, Oregon; Fort Lauderdale, Florida; Costa Mesa,
California; Phoenix, Arizona; London, England; and Singapore.
Syntel leases approximately 40,744 square feet of office space in Mumbai,
India, under six leases expiring on various dates from October 13, 2002 to March
2, 2004. This facility houses IT professionals, as well as its senior
management, administrative personnel, human resources and sales and marketing
functions. Additionally, Syntel has leased substantially all of an office
building in Chennai, India consisting of approximately 32,812 square feet. The
lease terms expire May 2003, subject to the Company's option to renew for an
additional period of three years.
The Company believes that these facilities are adequate for its currently
anticipated future needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently a party to any material legal proceedings or
governmental investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the year ended December 31, 1999.
22
<PAGE> 23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
(a) The Registrant's common stock is traded on the NASDAQ National
Market under the symbol "SYNT." The following table sets forth, for the periods
indicated, the range of high and low bid information per share of the Company's
common stock as reported on NASDAQ for each full quarterly period in 1998 and
1999. All prices give effect to a 3:2 stock split effective April 22, 1998.
<TABLE>
<CAPTION>
Period High Low
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
First Quarter, 1998 $ 27.333 $ 9.875
Second Quarter, 1998 37.333 21.375
Third Quarter, 1998 31.500 11.500
Fourth Quarter, 1998 20.625 10.438
First Quarter, 1999 13.500 8.000
Second Quarter, 1999 12.063 7.125
Third Quarter, 1999 12.500 8.500
Fourth Quarter, 1999 18.547 8.063
</TABLE>
(b) There were approximately 175 shareholders of record and 5,000
beneficial holders on March 15, 2000.
(c) The Company did not pay any cash dividends during the years ended
December 31, 1998 or December 31, 1999. The Company does not intend to declare
or pay cash dividends in the foreseeable future. Management anticipates that all
earnings and other cash resources of the Company, if any, will be retained by
the Company for investment in its business.
23
<PAGE> 24
ITEM 6. SELECTED FINANCIAL DATA.
SYNTEL, INC. & Subsidiaries
FIVE-YEAR HIGHLIGHTS (UNAUDITED)
(In thousands, except per share amounts)
The following tables set fourth selected consolidated financial data and other
data concerning Syntel, Inc. for each of the last five years. The pro forma
weighted average shares outstanding for all periods shown give effect to a 3:2
stock split effective April 22, 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues................... $162,117 $167,975 $124,338 $92,330 $90,326
Cost of revenues........... 99,300 104,971 87,584 67,083 70,014
------- ------- ------- ------- -------
Gross profit.... .......... 62,817 63,004 36,754 25,247 20,312
Selling, general and
administrative expenses,. 32,814 28,026 23,547 19,271 13,909
------- ------- ------- ------- -------
Income from operations .... 30,003 34,978 13,207 5,976 6,403
Other income, net. 2,024 2,077 730 149 188
------- ------- ------- ------- -------
Income before income taxes. 32,027 37,055 13,937 6,125 6,591
Income taxes (1)........ 10,573 12,424 3,517 350 436
------- ------- ------- ------- -------
Net income................. $21,454 $24,631 $10,420 $ 5,775 $ 6,155
Net income per share (diluted)$ 0.55 $ 0.63 $ 0.27 $ 0.15 $ 0.16
======= ======= ======= ======= =======
Pro forma net income (2)... $10,196 $ 4,379 $ 4,421
======= ======= =======
Pro forma net income
per share $ 0.26 $ 0.11 $ 0.11
======= ======= =======
Weighted average shares
Outstanding (diluted) 39,049 39,294
====== ======
Pro forma weighted average
shares outstanding (diluted) 39,083 39,367 39,218
======= ======= =======
</TABLE>
(1) For all periods shown through August 12, 1997, the Company
elected to be treated as an S corporation and, as a result,
the income of the Company has been taxed for federal and state
purposes (with exceptions under certain state income tax laws)
directly to the Company's shareholders rather than to the
Company.
(2) Pro forma data reflect income tax provisions for the periods
presented for federal and additional state income taxes as if
the Company had been taxed as a C corporation.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- ---------
(IN THOUSANDS, EXCEPT OTHER DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........... $64,893 $58,862 $35,346 $ 1,842 $ 15,763
Total assets... ......... 122,468 104,235 65,232 32,992 29,140
Long-term debt............ -- -- -- -- --
Total shareholders' equity 90,361 64,147 39,585 6,145 19,209
OTHER DATA:
Billable headcount in U.S. 1,114 1,135 1,260 1,103 1,029
Billable headcount in India 225 413 478 190 107
Billable headcount at
other locations......... 28 33 8 -- --
------- ------- ------- ------- --------
Total billable headcount.. 1,367 1,581 1,746 1,293 1,136
======= ======= ======= ======= ========
</TABLE>
24
<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Syntel is a worldwide provider of professional IT consulting and
applications management services to Fortune 1000 companies, as well as to
government entities. The Company's service offerings include Application
Outsourcing, consisting of applications management services for ongoing
management, development and maintenance of business applications; e-business,
consisting of the integration and development of advanced technology
applications including E-commerce, Web development, Data Warehousing, CRM,
Oracle, and SAP; and TeamSourcing, consisting of professional IT consulting
services. For the years ended December 31, 1997, 1998, and 1999, the Company
provided Year 2000 remediation services as a component of the Application
Outsourcing segment. All Year 2000 remediation engagements were completed before
December 31, 1999.
The Company's revenues are generated from professional services fees
provided through three segments, Application Outsourcing, E-business, and
TeamSourcing. The Company has invested significantly in developing its ability
to sell and deliver Application Outsourcing and e-business services, and has
shifted a larger portion of its business to engagements within these two
segments, which the Company believes have higher growth and gross margin
potential. The following table outlines the revenue mix for the years ended
December 31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
Percent of Total Revenues
-------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Application Outsourcing 54% 63% 51%
E-business 21 9 4
TeamSourcing 25 28 45
-- -- --
100% 100% 100%
</TABLE>
On Application Outsourcing engagements, the Company typically assumes
responsibility for engagement management and generally is able to allocate
certain portions of the engagement to on-site, off-site and offshore personnel.
Syntel may bill the customer on either a time-and-materials or fixed-price
basis. While a significant portion of Application Outsourcing engagements have
been historically on a time-and-materials basis, a significant share of the
Application Outsourcing engagements started during 1999, 1998, and 1997 have
been on a fixed-price basis. For the years ended December 31, 1999, 1998 and
1997, fixed-price revenues comprised approximately 37%, 36%, and 23% of total
Application Outsourcing revenues respectively. Syntel recognizes revenues from
fixed-price engagements on the percentage of completion method.
In order to properly reflect the growing demand for e-business
services, the Company separated e-business out for management and reporting
purposes during 1999. While e-business engagements have been historically on a
time-and-materials basis, the Company began providing services on a fixed price
basis during 1999. Fixed price revenues comprised approximately 14% of
e-business revenues for the year ended December 31, 1999.
The Company made significant investments in the e-business segment
during 1999, consisting of two acquisitions, training, and increased
professional staffing in sales and delivery. The acquisitions included the
purchase of substantially all of the assets of Metier, Inc., a privately held
Los Angeles based consulting firm, specializing in the design and implementation
of data warehousing, e-commerce, and ERM solutions for middle market clients,
particularly in the area of healthcare, manufacturing, and financial services.
Consideration included a cash payment of $17.4 million and 300,000 shares of
Syntel Common Stock. In addition, the agreement provided
25
<PAGE> 26
for earnout payments not to exceed $16 million based on revenues and earnings
for a 24 month period beginning January 1, 2000. In addition, the Company
acquired substantially all of the assets of IMG, Inc., a privately held company
located in Beaverton, Oregon. Consideration consisted of a cash payment of $.9
million.
The Company reskilled a very significant percentage of the consulting
base during 1999 in the latest advanced software platforms, including JAVA,
HTML, Object Oriented, C++, RMI Cobra, JDBC, Cold Fusion, and Oracle.
Historically, most e-business engagements were billed on a time and
materials basis under the direct supervision of the customer (similar to
TeamSourcing engagements); however, as the Company expanded its expertise in
delivering e-commerce engagements, Syntel has assumed the project management
role for a significant number of new engagements starting in 1999.
On TeamSourcing engagements, Syntel's professional services typically
are provided at the customer's site and under the direct supervision of the
customer. TeamSourcing revenues generally are recognized on a time-and-materials
basis as services are performed. As indicated in the above table, the Company's
dependence on TeamSourcing engagements has decreased significantly and is
expected to continue to decrease as a percent of the total revenue base.
The Company's most significant cost is personnel cost, which consists
of compensation, benefits, recruiting, relocation and other related costs for
its IT professionals. The Company strives to maintain its gross margin by
migrating more revenue toward Application Outsourcing and e-business,
controlling engagement costs, and offsetting increases in salaries and benefits
with increases in billing rates. The Company has established a human resource
allocation team whose purpose is to staff IT professionals on engagements that
efficiently utilize their technical skills and allow for optimal billing rates.
Syntel India derives essentially all of its revenues from software development
services provided to the Company from Mumbai and Chennai, India, where salaries
of IT professionals are comparatively lower than in the U.S.
The Company has performed a significant portion of its employee
recruiting in other countries. As of December 31, 1999, approximately 60% of
Syntel's U.S. workforce (44% of Syntel's worldwide workforce) worked under H-1B
temporary work visas in the U.S.
The Company has made substantial investments in infrastructure in
recent years, including: (i) establishing a Global Development Center in
Chennai, India; (ii) increasing Application Outsourcing sales and delivery
capabilities through significant expansion of the sales force and the Technical
Services Group, which develops and formalizes proprietary methodologies,
practices and tools for the entire Syntel organization; (iii) hiring additional
experienced senior management; and (iv) expanding global recruiting and
training capabilities, and replacement of informal systems with highly
integrated, Y2K compliant, Human Resource and Financial Information Systems.
Through its strong relationships with customers, the Company has been
able to generate recurring revenues from repeat business. Excluding
acquisitions, for the years ended December 31, 1999 and 1998 and 1997, over 90%
of Syntel's TeamSourcing revenues were derived from customers served in the
prior period. These strong relationships also have resulted in the Company
generating a significant percentage of revenues from key customers. The
Company's top ten customers accounted for approximately 68%, 70% and 75% of
revenues for the years ended December 31, 1999, 1998, and 1997. The Company does
not believe there is any material collectibility exposure among its top ten
customers. American International Group, Inc. and Dayton Hudson Corporation, the
Company's largest customers for the years ended December 31, 1998 and December
31, 1997, represented approximately 26% and 14% of the revenue for the year
ended December 31, 1998, respectively, and approximately 31% and 12% of revenue
26
<PAGE> 27
for the year ended December 31, 1997, respectively. AIG was the Company's only
significant customer in 1999, accounting for approximately 21% of revenues for
the year ended December 31, 1999. Although the Company does not currently
foresee a credit risk associated with accounts receivable from these customers,
credit risk is affected by conditions or occurrences within the economy and the
specific industries in which these customers operate.
SYNTEL INDIA ACQUISITION
Before the Company's initial public offering in 1997, Bharat Desai and
Neerja Sethi, the Company's Chairman, President, and Chief Executive Officer,
and the Company's Vice President, Corporate Affairs, respectively, were the sole
beneficial shareholders of the Company's Indian subsidiary, Syntel Software
Private Limited ("Syntel India"). Syntel India provides offshore software
development services to the Company. Prior to the offering, the Company entered
into an agreement pursuant to which the Company acquired Mr. Desai's and Ms.
Sethi's combined 100% ownership interest in Syntel India for $7.0 million in
cash. The $7.0 million purchase price was based on a valuation performed by the
Reserve Bank of India for acquisitions of Indian corporations. The purchase
price was paid from a portion of the net proceeds of the initial public
offering. This acquisition was closed upon consumation of the offering, and the
portion of the purchase price paid in excess of the carrying value of the net
assets acquired ($1.5 million) was accounted for as a reduction in shareholders'
equity.
INCOME TAX MATTERS
Syntel India is eligible for certain favorable tax provisions provided
under Indian tax law including: (i) an exemption from payment of corporate
income taxes for the first ten years of operation (the "Tax Holiday"); or (ii)
an exemption from income taxes on the profits derived from exporting computer
software services from India (the "Export Exemption"). During 1999, the Indian
government amended the Tax Holiday regulations, extending the effective period
to ten years, from the previous regulation which permitted a tax Holiday of five
consecutive years within the first eight years of operation. The Export
Exemption remains available after expiration of the Tax Holiday. Under the new
regulations, the Company's Tax Holidays will expire no earlier than March 31,
2003. The Company treats most of Syntel India earnings as permanently invested
in India and does not anticipate repatriating any of these earnings to the U.S.
If the Company decides to repatriate any earnings of Syntel India, it will incur
a "border" tax, currently 10%, under Indian tax law and will be required to pay
U.S. corporate income taxes on such earnings.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected
income statement data as a percentage of the Company's total revenues.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
-----------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Revenues................... 100.0% 100.0% 100.0%
Cost of revenues........... 61.3 62.5 70.5
----- ----- -----
Gross profit............... 38.7 37.5 29.5
Selling, general and
administrative expenses.. 20.2 16.7 18.9
----- ----- -----
Income from operations..... 18.5% 20.8% 10.6%
</TABLE>
27
<PAGE> 28
In prior years the Company managed the sales and delivery activities through two
segments, IntelliSourcing and TeamSourcing; However, to facilitate a more
focused management and greater visibility to its rapidly growing e-business,
previously managed and reported elsewhere, the Company established a third
segment. In the selected financial and operational data set forth below the
results for 1997 and 1998 have been restated to reflect the break-out of
e-business:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Revenues
Application Outsourcing $ 87,311 $105,835 $ 64,409
e-business 33,402 14,614 5,089
TeamSourcing 41,404 47,526 55,200
-------- -------- --------
$162,117 $167,975 $124,338
Gross Margin
Application Outsourcing $ 40,324 $ 45,516 $ 24,038
e-business 10,789 4,409 1,172
TeamSourcing 11,704 13,079 11,544
-------- -------- --------
$ 62,817 $ 63,004 $ 36,754
Gross Margin %
Applications Integration 46.2% 43.0% 37.5%
e-business 32.3% 30.2% 23.0%
TeamSourcing 28.3% 27.5% 20.9%
-------- -------- --------
38.7% 37.5% 29.6%
Sales, general, and administrative $ 32,814 $ 28,026 $ 23,547
Operating Margin $ 30,003 $ 34,978 $ 13,207
</TABLE>
The Application Outsourcing segment included Year 2000 remediation engagements
for all the years presented above. All Year 2000 engagements were completed
before December 31, 1999. Excluding the impact of Year 2000 remediation
engagements, Application Outsourcing revenues for the years ended December 31,
1999, 1998, and 1997 would have been $74.2 million, $77.0 million, and $55.3
million, respectively; and gross margins would have been $31.5 million, $30.7
million, and $20.5 million, respectively.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues. Total consolidated revenues decreased from $168.0 million in
1998 to $162.1 million in 1999, representing a 3% decrease. The Company's total
revenues were less dependent upon its largest customers in 1999 as compared to
1998. The top two customers accounted for 30% of the total revenues in 1999,
down from 40% of total revenues in 1998. Additionally, the top 10 customers
accounted for 68% of the revenues in 1999 as compared to 70% in 1998. The
worldwide billable headcount decreased to 1,367 as of December 31, 1999 compared
to 1,581 as of December 31, 1998. The decreased headcount was due principally to
the completion of the Y2K engagements, the ramp down in some TeamSourcing
engagements, partially offset by increased staffing in e-business engagements.
APPLICATION OUTSOURCING
REVENUES. Application Outsourcing revenues decreased from $105.8 million, or 63%
of total revenues in 1998, to $87.3 million, or 54% of total revenues in 1999.
The $18.5 million decrease is due principally to the completion of Year 2000
remediation engagements and the completion of major development projects of
approximately $15.8 million and $8.6 million, respectively; partially offset by
new business development and net growth in other engagements of approximately
$5.9 million.
COST OF REVENUES. Cost of revenues consist of costs directly associated with
billable consultants in both the US and offshore, including salaries, payroll
taxes, benefits, relocation costs, immigration costs, finders fees, trainee
28
<PAGE> 29
compensation, and warranty reserves. Application Outsourcing cost of revenues
decreased to 53.8% of Application Outsourcing revenues in 1999, down from 57.0%
in 1998. The decrease in cost of revenues as a percent of revenues was
attributable principally to productivity improvements on several large
engagements, billing rate increases, the release of warranty reserves on
completed Year 2000 remediation engagements, and higher margins on new
engagements, contributing approximately 3.9%, 1.0%, 1.0 %, and 1.0%,
respectively; partially offset by pay rate increases and increased bench of 2.4%
and 1.3%, respectively.
E-BUSINESS.
REVENUES. E-Business revenues increased to $33.4 million in 1999, or 21% of
total consolidated revenues, from $14.6 million in 1998, or 8.7% of total
consolidated revenues. The $18.8 million increase was attributable principally
to the acquisitions of Metier and IMG, as well as new engagements, contributing
approximately $12.1 million, $1.7 million, and $5.0 million, respectively.
COST OF REVENUES. E-business Cost of revenues consist of costs directly
associated with billable consultants, including salaries, payroll taxes,
benefits, relocation costs, immigration costs, finders fees, and trainee
compensation. E-business cost of revenues decreased to 67.7% of e-business
revenues in 1999, from 69.8% in 1998. The decrease in cost of revenues as a
percent of revenues was attributable primarily to improved margins on new fixed
price e-business engagements of approximately 3.5%; partially offset by slightly
reduced margins on acquired businesses of 0.8% and increased travel expense of
0.6%.
TEAMSOURCING
REVENUES. TeamSourcing revenues decreased from $47.5 million, or 28% of total
consolidated revenues in 1998, to $41.4 million, or 25% of total consolidated
revenues in 1999. The $6.1 million decrease in TeamSourcing revenues was
attributable principally to a decrease in average billable consultants of $8.6
million, partially offset by bill rate increases of $2.5 million. End of year
average bill rates increased to $54.73 per hour as of December 31, 1999, from
$51.80 as of December 31, 1998.
COST OF REVENUES. TeamSourcing Cost of revenues consist of costs directly
associated with billable consultants, including salaries, payroll taxes,
benefits, relocation costs, immigration costs, finders fees, and trainee
compensation. TeamSourcing cost of revenues decreased to 71.7% of TeamSourcing
revenues in 1999, from 72.5% in 1998. The decrease in cost of revenues as a
percent of revenues was attributable principally to bill rate changes of 4.0%,
partially offset by pay rate increases of 3.2%.
SALES, GENERAL, AND ADMINISTRATIVE COSTS.
Selling, general, and administrative expenses consist primarily of salaries,
payroll taxes and benefits for sales, finance, human resources, administrative,
and corporate staff, travel, communications, business promotions, marketing, and
various facility costs for the Company's Global Development Centers. For the
year ended December 31, 1999, sales, general, and administrative expenses
increased to $32.8 million, or 20.2% of revenue, from $28.0 million, or 16.7% of
revenues for the year ended December 31, 1998. The $4.8 million increase in
sales, general, and administrative costs was attributable principally to $3.5
million associated with the acquisition of Metier and IMG, $1.2 million from
continued investments in sales personnel, $0.9 million in compensation
increases, $0.7 million in goodwill amortization, and approximately $0.6 million
in increased costs in the U.K. and Singapore. These costs were partially offset
by a decrease in management bonuses of approximately $1.7 million and decreased
costs in India of approximately $0.4 million.
29
<PAGE> 30
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues. Total consolidated revenues increased from $124.3 million in
1997 to $168.0 million in 1998, representing a 35% increase. The Company's total
revenues were less dependent upon its largest customers in 1998 as compared to
1997. The top two customers accounted for 40% of the total revenues in 1998,
down from 43% of total revenues in 1997. Additionally, the top 10 customers
accounted for 70% of the revenues in 1998 as compared to 75% in 1997. The
worldwide billable headcount decreased to 1,581 as of December 31, 1998 compared
to 1,746 as of December 31, 1997. The decreased headcount was due principally to
the completion of several Y2K projects and several development projects in
Application Outsourcing, the ramp down in some TeamSourcing engagements, and
efficiency improvements in several fixed price Application Outsourcing
engagements.
APPLICATION OUTSOURCING
REVENUES. Application Outsourcing revenues increased to $105.8 million in 1998,
or 63% of total revenues, from $64.4 million, or 52% of total revenues in 1997.
The $41.4 million increase was attributable primarily to growth in Year 2000
remediation engagements, growth in the Outsourcing Application base, bill rate
increases in several major accounts, and new engagements; each contributing
approximately $20.1 million, $11.9 million, $9.0 million, and $2.7 million,
respectively; partially offset by a revenue decrease of $1.9 million due to
engagement completions.
COST OF REVENUES. Application Outsourcing cost of revenues decreased to 57.0% of
total Application Outsourcing revenues in 1998, down from 62.5% in 1997. The
decrease in cost of revenues as a percent of revenues was attributable primarily
to billing rate increases, increased margins on the growing Year 2000
remediation engagements, and higher margins on new engagements, contributing
approximately 6.7%, 1.2%, and 0.5%, respectively, partially offset by pay rate
increases and benefits of approximately 2.9%.
E-BUSINESS.
REVENUES. E-Business revenues increased to $14.6 million in 1998, or 9% of total
consolidated revenues, from $5.1 million in 1997, or 4% of total consolidated
revenues. The $9.5 million increase was attributable principally to the
acquisition of the IT consulting base from Waypointe Information Technologies in
December 1997 and other new business growth, contributing $5.7 million and $4.8
million, respectively to the increased revenues, partially offset be a decrease
in average billing rates of $1.0 million.
COST OF REVENUES. E-business cost of revenues decreased to 69.8% of e-business
revenues in 1998, from 77.0% in 1997. The decrease in cost of revenues as a
percent of revenues was attributable primarily to improved pay rate/ bill rate
margins on the Waypointe acquisition (which took effect December 1, 1997) and on
new business engagements.
30
<PAGE> 31
TEAMSOURCING
REVENUES. TeamSourcing revenues decreased to $47.5 million in 1998, or 28% of
total revenues, from $55.2 million, or 44% of total revenues in 1997. The $7.7
million decrease was attributable primarily to decrease in the average number
billable consultants, and the conversion of TeamSourcing engagements to long
term Applications Integration engagements, contributing $7.2 million and $3.1
million, respectively, to the revenue decrease. These decreases were partially
offset by an increase in average billing rates, contributing approximately $2.6
million in increased revenues. End of year average bill rates increased to
$51.80 per hour as of December 31, 1998, from $49.35 as of December 31, 1997.
COST OF REVENUES. TeamSourcing cost of revenues decreased to 72.5% of
TeamSourcing revenues in 1998, from 79.1% in 1997. The decrease in cost of
revenues as a percent of revenues was attributable primarily to bill rate
increases of 8.5% while increased compensation and benefits partially offset the
improvement with a 1.9% increase.
SELLING, GENERAL, AND ADMINISTRATIVE COSTS.
For the year ended December 31, 1998, selling, general, and administrative costs
increased to $28.0 million, or 16.7% of total consolidated revenues, from $23.5
million, or 18.9% of consolidated revenues for the year ended December 31, 1997.
The $4.5 million increase in sales, general, and administrative costs was
attributable principally to compensation increases, expansion of e-business
management and sales resources, increased marketing, U.K. and Singapore growth,
investments in offshore development facilities, internal systems development,
and other costs necessary to support the revenue growth, of $1.1 million, $1.0
million, $0.7 million, $0.5 million, $0.4 million, $0.3 million, and $0.5
million, respectively.
31
<PAGE> 32
QUARTERLY RESULTS OF OPERATIONS
Note 15 of the consolidated financial statements appearing elsewhere in
this document sets forth certain quarterly income statement data for each of the
eight quarters beginning January 1, 1998 and ended December 31, 1999. In the
opinion of management, this information has been presented on the same basis as
the Company's Financial Statements appearing elsewhere in this document and all
necessary adjustments (consisting only of normal recurring adjustments) have
been included in order to present fairly the unaudited quarterly results. The
results of operations for any quarter are not necessarily indicative of the
results for any future period.
The Company's quarterly revenues and results of operations have
fluctuated from quarter to quarter in the past and will likely fluctuate in the
future. Various factors causing such fluctuations include: the timing, number
and scope of customer engagements commenced and completed during the quarter;
progress on fixed-price engagements; acquisitions; timing and cost associated
with expansion of the Company's facilities; changes in IT professional wage
rates; the accuracy of estimates of resources and time frames required to
complete pending assignments; the number of working days in a quarter; employee
hiring and training, attrition and utilization rates; the mix of services
performed on-site, off-site and offshore; termination of engagements; start-up
expenses for new engagements; longer sales cycles for Application Outsourcing
engagements; customers' budget cycles and investment time for training.
LIQUIDITY AND CAPITAL RESOURCES
The Company generally has financed its working capital needs through
operations, occasionally supplemented by borrowings under a line of credit with
a commercial bank. Both the Mumbai and Chennai expansion programs, completed in
mid 1998, as well as the 1999 acquisitions of Metier, Inc. and IMG, Inc. were
financed from internally generated funds.
Net cash provided by operating activities was $17.2 million, $35.3
million and $17.8 million for the years ended December 31, 1999, 1998, and 1997,
respectively. The number of days sales outstanding in accounts receivable was
approximately 52 days, 50 days, and 57 days as of December 31,
1999, 1998, and 1997, respectively.
32
<PAGE> 33
Net cash used in investing activities was $18.2 million, $3.3 million,
and $8.7 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
Net cash used in investing activities in 1999 of $18.2 million included
$15.7 million for the acquisitions of Metier, Inc. and IMG, Inc., $1.7 million
for capitalized development costs, and $0.8 million for computer equipment. The
$1.7 million for capitalized development costs consists of $0.9 million for
implementation of internal PeopleSoft financial systems and $0.8 million for new
product development.
Net cash used in investing activities in 1998 of $3.3 million included
$2.1 million for completion of the facility expansion and improvement programs
at the Company's Global Development Centers in Mumbai and Chennai, India, $0.7
million for computer equipment, and $0.5 million for new human resource and
financial information systems.
Net cash used in investing activities in 1997 of $8.7 million included
$7.0 million for the India acquisition, and $1.7 million for computer equipment,
software, and facility improvements at the Company's Global Development Centers.
Net cash used in financing activities was $0.1 million in 1999, due
principally to the repurchase of 129,000 shares of common stock, offset by
shares issued from the Company's first stock purchase plan of $1.0 million. Net
cash used in financing activities was $0.2 million in 1998, due principally to a
final distribution of S corporation undistributed taxable profits. Net cash
provided by financing activities in 1997 was $16.5 million. In 1997 the Company
received $34.6 million in net proceeds from the initial public offering. The net
proceeds were offset by pre-IPO shareholder distributions of $18.1 million
related to undistributed S corporation taxable income through August 12, 1997.
The Company has a line of credit with Bank One which provides for
borrowings up to $40.0 million. The line of credit expires on 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 the prior consent of the bank. The line of credit
also requires the Company to maintain certain tangible net worth levels and
leverage ratios. At December 31, 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 by the bank at the time of
borrowing.
In addition to the bank line of credit, the Company has a $20.0 million
facility with Bank One to finance acquisitions which terminates on August 31,
2000. The Company has not borrowed any amounts under this facility. The Company
intends to extend both the $40 million and $20 million lines 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 cash requirements for at least the next 12 months.
NEW ACCOUNTING STANDARDS
Effective January 1, 1999 the Company adopted Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use", which requires capitalization of certain costs for the
development of internal use software, including the costs of coding, software
configuration, upgrades, and enhancements. The adoption of the pronouncement did
not have a material effect on the Company's financial results.
33
<PAGE> 34
ITEM 7A. MARKET RISKS
The Company is primarily exposed to the effects of changes in foreign
currency. Foreign currency exchange risk exists as costs are paid in local
currency and receipts are provided in U.S. dollars. The risk is partially
mitigated as the Company has sufficient resources in the local currency to meet
immediate requirements. The Company's holdings and positions in market sensitive
instruments do not subject the Company to material risk. These exposures are
monitored and managed by the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and schedules filed herewith are set forth on
the Index to Financial Statements and Financial Statement Schedules on page F-1
of the separate financial section which follows page 37 of this Report and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the first part of the section entitled
"Election of Directors" in the Registrant's Proxy Statement for the Annual
Shareholders' Meeting to be held on or about May 23, 2000 (the "Proxy Statement)
is incorporated herein by reference.
The information set forth under the caption "Compliance with Section
16(a) of The Exchange Act" in the section entitled "Additional Information" in
the Registrants Proxy Statement is incorporated herein by reference. The
information set forth in the section entitled "Executive Officers of the
Registrant" in Item 1 of this report is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
The information set forth under the section entitled "Executive
Compensation" in the Registrant's Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the captions "Principal Shareholders"
and "Security Ownership of Management" in the section entitled "Additional
Information" in the Registrant's Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
34
<PAGE> 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The financial statements, supplementary financial information, and
financial statement schedules filed herewith are set forth on the Index to
Financial Statements and Financial Statement Schedules on page F-1 of the
separate financial section which follows page 45 of this Report, which is
incorporated herein by reference.
The following exhibits are filed as part of this Report. Those exhibits
with an asterisk(*) designate the Registrant's management contracts or
compensation plans or arrangements for its executive officers.
Exhibit No. Description
3.1 Restated Articles of Incorporation of the registrant
filed as an exhibit to the Registrant's Statement on
Form S-1 dated June 6, 1997, and incorporated herein
be reference.
3.2 Amendment to Articles of Incorporation of the
Registrant dated September 21, 1998 filed as an
Exhibit to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1998 and
incorporated herein by reference.
3.3 Bylaws of the Registrant filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 dated
June 6, 1997, and incorporated herein by reference.
10.1 Credit Authorization Agreement, dated September 13,
1996, between the Registrant and NBD Bank filed as an
Exhibit to the Registrant's Registration Statement on
Form S-1 dated June 6, 1997, and incorporated herein
by reference.
10.2 Letter Agreement between the Registrant and NBD Bank
dated March 11, 1997 amending Credit Authorization
Agreement, filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 dated June 6,
1997, and incorporated herein by reference.
10.3 Letter Agreement between the Registrant and NBD Bank
dated March 25, 1997 amending Credit Authorization
Agreement, filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 dated June 6,
1997, and incorporated herein by reference.
10.4 Letter Agreement between the Registrant and Bank One
dated September 13, 1999 amending the prior Credit
Authorization Agreement.
10.5 Lease, dated August 22, 1996, between WRC Properties,
Inc. and the Registrant, filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 dated
June 6, 1997, and incorporated herein by reference.
10.6 Lease Agreement, dated November 30, 1994, between the
Registrant and NationsBank of North Carolina, NA., as
Trustee for the Public Employees Retirement System of
Ohio, filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 dated June 6,
1997, and incorporated herein by reference.
10.7 First Amendment, dated October 19, 1998, between the
Registrant and Corning Road, L.L.C. (successor to
First Union National Bank of North Carolina as
Trustee, successor to NationsBank), to the Lease
Agreement, dated November 30, 1994, between the
Registrant and NationsBank, filed as an Exhibit to
the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein
by reference.
10.8 Indentures of Lease entered into between the
President of
35
<PAGE> 36
India and Syntel Software Pvt. Ltd. on various dates
in 1992 and 1993 for the Mumbai Global Development
Center and filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 dated June 6,
1997, and incorporated herein by reference.
10.9 Rental Agreement, dated February 24, 1997, between
Syntel Software Pvt. Ltd. and the Landlords for the
Chennai Global Development Center, filed as an
Exhibit to the Registrant's Registration Statement on
Form S-1 dated June 6, 1997, and incorporated herein
by reference.
10.10 Agreement for Software Programming Services, dated as
of December 31, 1997, between the Registrant and
American Home Assurance Company, filed as an Exhibit
to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998 and incorporated
herein by reference.
10.11 * 1997 Stock Option and Incentive Plan, filed as an
Exhibit to the Registrant's Registration Statement on
Form S-1 dated June 6, 1997, and incorporated herein
by reference.
10.12 * Employee Stock Purchase Plan, filed as an Exhibit
to the Registrant's Registration Statement on Form
S-1 dated June 6, 1997, and incorporated herein by
reference.
10.13 * Employment Agreement, dated June 5, 1997, between
the Registrant and Bharat Desai, filed as an Exhibit
to the Registrant's Registration Statement on Form
S-1 dated June 6, 1997, and incorporated herein by
reference.
10.14 * Employment Agreement, dated June 5, 1997, between
the Registrant and Neerja Sethi, filed as an Exhibit
to the Registrant's Registration Statement on Form
S-1 dated June 6, 1997, and incorporated herein by
reference.
10.15 Asset Purchase Agreement dated as of September 22,
1999 by Syntel, Inc. and Metier, Inc. filed as an
Exhibit to the Registrant's Current Report on Form
8-K dated October 5, 1999 and incorporated herein by
reference.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
99.1 Proxy Statement for the Registrant's 2000 Annual
Meeting of Shareholders, filed by the Registrant
pursuant to Regulation 14A and incorporated herein by
reference.
(b) A Current Report on Form 8-K was filed on October 7,
1999 and amended on December 6, 1999. An acquisition
of assets was reported under Item 2 of Form 8-K and
financial statements and pro forma financial
information thereto were reported under Item 7 of
Form 8-K.
36
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SYNTEL, INC.
By: /s/Bharat Desai
-----------------
Bharat Desai
Dated: March 25, 2000 President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Bharat Desai President and Chief Executive Officer March 25, 2000
- ------------------- (Principal Executive Officer)
Bharat Desai
/s/John Andary Chief Financial Officer March 25, 2000
- -------------------- (Principal Financial and
John Andary and Accounting Officer)
/s/Neerja Sethi Director and Vice President, March 25, 2000
- -------------------- Corporate Affairs
Neerja Sethi
/s/Paritosh K. Choksi Director March 25, 2000
- ----------------------
Paritosh K. Choksi
/s/Douglas VanHouweling Director March 25, 2000
- ------------------------
Douglas Van Houweling
/s/GEORGE R. MRKONIC Director March 25, 2000
- ---------------------
George R. Mrkonic
</TABLE>
37
<PAGE> 38
SYNTEL, INC.
CONTENTS
- --------------------------------------------------------------------------------
PAGE(S)
REPORT OF INDEPENDENT ACCOUNTANTS.........................................F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets...............................................F-2
Consolidated Statements of Income.........................................F-3
Consolidated Statements of Shareholders' Equity...........................F-4
Consolidated Statements of Cash Flows.....................................F-5
Notes to Consolidated Financial Statements...........................F-6-F-20
<PAGE> 39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Syntel, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Syntel,
Inc., and its subsidiaries at December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers
Detroit, Michigan
February 15, 2000
F-1
<PAGE> 40
SYNTEL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1999 1998
<S> <C> <C>
Current assets
Cash and cash equivalents $ 63,611 $ 64,660
Accounts receivable 23,800 23,581
Advance billings and other current assets 9,522 10,330
--------- ---------
Total current assets 96,933 98,571
Property and equipment 15,812 12,635
Less - accumulated depreciation 9,390 7,037
--------- ---------
Property and equipment, net 6,422 5,598
Goodwill, net of amortization 19,113 --
Deferred income taxes, noncurrent -- 66
--------- ---------
$ 122,468 $ 104,235
========= =========
LIABILITIES
Current liabilities
Accounts payable $ 4,381 $ 4,004
Accrued payroll and related costs 12,748 14,258
Income taxes payable 3,464 2,244
Accrued warranty costs 1,641 3,636
Accrued liabilities 5,367 5,125
Deferred revenue 4,506 10,442
--------- ---------
Total current liabilities 32,107 39,709
Income taxes payable -- 379
--------- ---------
Total liabilities 32,107 40,088
SHAREHOLDERS' EQUITY
Common stock, no par value per share, 100 million shares
authorized; 38.556 million shares and 38.195 million shares issued
and outstanding at December 31, 1999 and 1998, respectively 1 1
Additional paid-in capital 39,677 34,784
Accumulated other comprehensive income (576) (443)
Retained earnings 51,259 29,805
--------- ---------
Total shareholders' equity 90,361 64,147
--------- ---------
TOTAL CURRENT LIABILITIES AND SHAREHOLDERS' EQUITY $ 122,468 $ 104,235
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE> 41
SYNTEL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Revenues $162,117 $167,975 $124,338
Cost of revenues 99,300 104,971 87,584
-------- -------- --------
Gross profit 62,817 63,004 36,754
Selling, general and administrative expenses 32,814 28,026 23,547
-------- -------- --------
Income from operations 30,003 34,978 13,207
Other income, principally interest income 2,024 2,077 730
-------- -------- --------
Income before income taxes 32,027 37,055 13,937
Provision for income taxes 10,573 12,424 3,517
-------- -------- --------
Net income $ 21,454 $ 24,631 $ 10,420
======== ======== ========
Historical earnings per share*
Basic $ .56 $ .65 $ .28
Diluted $ .55 $ .63 $ .27
1997 pro forma net income
Income before income taxes $ 13,937
Pro forma income taxes** 3,741
--------
Pro forma net income $ 10,196
--------
1997 pro forma earnings per share*
Basic*** $ .27
Diluted*** $ .26
Weighted average common shares
outstanding - diluted 39,049 39,294 39,083
======== ======== ========
</TABLE>
* Gives effect to 3:2 stock split effective April 22, 1998
** Presentation of income tax expense as if Company were a C-corporation for
the entire year
*** Presentation of EPS as if the Company were a C-corporation for the entire
year
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 42
SYNTEL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMPREHENSIVE
COMMON STOCK ADDITIONAL INCOME CURRENCY
----------------- PAID-IN RETAINED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT EQUITY
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 22,000 $ 1 $ - $ 6,144 $ - $ 6,145
Comprehensive income
Net income 10,420 10,420
Translation adjustments 4 (249) (245)
---------- -------- ------------
Total comprehensive income,
net of tax - - - 10,424 (249) 10,175
Dividends declared (previously
undistributed S-corporation earnings) (11,400) (11,400)
Termination of S-corporation tax
status 1,525 (1,525) -
Shares issued in initial public
offering 3,450 34,627 34,627
Compensation expense related to
stock options 38 38
Acquisition of Syntel India (1,531) 1,531 -
-------- ------ ----------- ---------- -------- ------------
BALANCE, DECEMBER 31, 1997 25,450 1 34,659 5,174 (249) 39,585
Comprehensive income
Net income 24,631 24,631
Translation adjustments (194) (194)
---------- -------- ------------
Total comprehensive income,
net of tax 24,631 (194) 24,437
Stock split, 3-for-2, April 22, 1998 12,725
Exercised stock options 20 66 66
Compensation expense related to
stock options 59 59
-------- ------ ----------- ---------- -------- ------------
BALANCE, DECEMBER 31, 1998 38,195 1 34,784 29,805 (443) 64,147
Comprehensive income
Net income 21,454 21,454
Translation adjustments (133) (133)
---------- -------- ------------
Total comprehensive income,
net of tax 21,454 (133) 21,321
Share awards to directors 18 111 111
Repurchase of common stock (129) (1,097) (1,097)
Metier acquisition 300 4,738 4,738
Common stock issued in connection
with employee stock purchase plan 101 762 762
Exercised stock options 71 274 274
Compensation expense related to
stock options 105 105
-------- ------ ----------- ---------- -------- ------------
BALANCE, DECEMBER 31, 1999 38,556 $ 1 $ 39,677 $ 51,259 $ (576) $ 90,361
======= ===== ========== ========== ======== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 43
SYNTEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 21,454 $ 24,631 $ 10,420
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 2,353 1,977 1,812
Goodwill amortization 662 -- --
Deferred income taxes 1,078 (3,368) (507)
Compensation expense related to stock options 105 59 38
Expense related to common stock issued to directors 111 -- --
Changes in assets and liabilities, net of effects
from purchase of Metier, Inc. & IMG, Inc.
Accounts receivable 4,934 (2,937) (2)
Advance billings and other assets (77) 376 (6,182)
Accounts payable and accrued liabilities (7,438) 9,810 7,837
Deferred revenue (5,936) 4,737 4,419
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,246 35,285 17,835
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures (2,496) (3,336) (1,749)
Payments for purchase of Metier, Inc. and IMG, Inc.
net of cash acquired (15,738) -- --
Acquisition of Syntel India -- -- (7,000)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (18,234) (3,336) (8,749)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of stock 1,036 66 34,627
Common stock repurchases (1,097) -- --
Dividend/distribution payments -- (300) (18,100)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (61) (234) 16,527
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (1,049) 31,715 25,613
Cash and cash equivalents, beginning of year 64,660 32,945 7,332
-------- -------- --------
Cash and cash equivalents, end of year $ 63,611 $ 64,660 $ 32,945
-------- -------- --------
Cash paid during the year for income taxes $ 9,993 15,186 $ 3,411
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 44
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BUSINESS
Syntel, Inc. and Subsidiaries (the "Company") provides information
technology services such as programming, systems integration, outsourcing
and overall project management. The Company provides services to
customers primarily in the financial, manufacturing, transportation,
retail, and information/communication industries, as well as to
government entities. The Company's reportable operating segments consist
of Applications Outsourcing, e-business, and TeamSourcing. Additionally,
during 1999, 1998, and 1997, the Company provided Year 2000 remediation
services. All Year 2000 remediation engagements have been completed.
Through Applications Outsourcing, the Company provides higher-value
outsourcing services for ongoing management and development and
maintenance of customers' business applications. In most Application
Outsourcing engagements, the Company assumes responsibility for the
management of customer development and support functions. Application
Outsourcing engagements are generally supported by multiyear contracts.
As a percentage of total consolidated revenues, Application Outsourcing
revenues represented 54%, 63% and 52% of total revenues during 1999,
1998, and 1997, respectively.
Through e-business, the Company provides development and implementation
services for a number of emerging and rapidly growing high technology
applications, including Web development, Data Warehousing, e-commerce,
CRM, Oracle, and SAP. These services may be provided on either a
time-and-material or a fixed-price basis. As a percent of total revenues,
e-business revenues grew to 21% of total consolidated revenues in 1999,
from 9% of total revenues in 1998.
Through TeamSourcing, the Company provides professional information
technology services directly to the customer. TeamSourcing contracts are
generally terminable by the customer without penalty.
During the year ended December 31, 1999, the Company's largest customer
contributed revenues in excess of 10% of total consolidated revenues.
Revenues from this customer totaled $33,900,000, contributing 20.9% of
total consolidated revenues. At December 31, 1999, approximately 16% of
accounts receivable, net, were from this customer.
During the years ended December 31, 1998 and 1997, the Company's two
largest customers each contributed revenues in excess of 10% of the total
consolidated revenues. Revenues from the largest customer were
approximately $43,100,000 and $38,561,000 for the years ended 1998 and
1997, respectively; contributing approximately 25.7% and 31.0% of total
consolidated revenues, respectively. Revenues from the second largest
customer were approximately $23,625,000 and $14,828,000 for the years
ended 1998 and 1997, respectively; contributing approximately 14.1% and
11.9% of total consolidated revenues, respectively. At December 31, 1998,
approximately 22% of accounts receivable, net, were from these two
customers, respectively.
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Syntel,
Inc. ("Syntel") and its 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 of which are wholly owned. All intercompany
balances and transactions have been eliminated.
F-6
<PAGE> 45
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenues from time and material contracts as
services are rendered and costs are incurred
Revenue from fixed-priced Year 2000 remediation projects were recognized
on the percentage-of-completion method, measured by the percentage of
"lines" completed to the total contracted number. Revenue on other
fixed-price, fixed deliverable projects is measured by the percentage of
cost incurred to date to the estimated total cost at completion. Revenue
from fixed-price application management engagements is recognized as
earned. The cumulative impact of any change in estimates of the
percentage complete or losses on contracts is reflected in the period in
which the changes become known.
CASH AND CASH EQUIVALENTS
For the purpose of reporting cash and cash equivalents, the Company
considers all liquid investments purchased with a maturity of three
months or less to be cash equivalents. Cash equivalents are principally
triple A rated corporate bonds and treasury notes, held by a bank, with
maturity dates of less than 90 days.
WARRANTY COSTS
The Company provided limited warranties on certain of its Year 2000
compliance contracts. A provision for warranty costs was made at the time
contract services were performed. With the exception of estimated reserve
requirements on two large Year 2000 remediation engagements with
associated warranty periods that extend through the end of Year 2000, all
warranty reserves have been eliminated or utilized.
FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, trade receivables and trade
payables approximate fair value because of the short-term nature of these
instruments.
PROPERTY, EQUIPMENT, AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Property and equipment are stated at cost. Maintenance and repairs are
charged to expense when incurred. Depreciation is computed primarily
using the straight-line method over the estimated useful lives as
follows:
<TABLE>
<CAPTION>
YEARS
<S> <C>
Computer equipment and internal software 3
Furniture and fixtures 7
Telephone equipment 5
Leasehold improvements Life of lease
Capitalized software development costs See below
</TABLE>
F-7
<PAGE> 46
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 86 "Accounting for the Costs of Computer Software to
be Sold, Leased, or Otherwise Marketed," capitalization of internally
developed software products begins when technological feasibility of the
product is established. The establishment of technological feasibility
and the ongoing assessment of the recoverability of these costs requires
considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenue, estimated economic product lives and changes in software and
hardware technology. These assumptions are reevaluated and adjusted as
necessary at the end of each quarter. The Company considers the future
undiscounted cash flows attributable to the capitalized development costs
in evaluating potential impairment of the asset. For the years ended
December 31, 1999, 1998, and 1997 the Company has not recorded any
amortization expense related to capitalized software development costs.
Amortization will be provided on a product-by-product basis, using the
greater of the straight-line method or the current year revenue as a
percentage of total revenue estimates for the related product, not to
exceed five years, commencing the month after the date of product
release.
Effective January 1, 1999, the Company adopted Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer software Developed or
Obtained for Internal Use", which requires that certain costs for the
development of internal use software should be capitalized, including the
costs of coding, software configuration, upgrades and enhancements. The
adoption of this pronouncement did not have a material effect on the
Company's financial results.
Upon sale or retirement, the cost of assets and related accumulated
depreciation is eliminated from the respective accounts, and the
resulting gain or loss is included in operations.
INCOME TAXES
Prior to August 12, 1997, the Company elected to be taxed as an
S-corporation under the Internal Revenue Code. As part of the initial
public offering, the Company terminated its S-corporation status, and
effective August 12, 1997, became subject to federal and state income
taxes on its earnings. The Company accounts for income taxes using the
asset and liability method in accordance with SFAS 109 "Accounting for
Income Taxes."
PRO FORMA NET INCOME
To reflect the Company's pro forma net income for the year ended December
31, 1997 the provision for income taxes has been adjusted as if the
Company had been a taxable entity subject to federal and state income
taxes at the marginal rates applicable to such period. The resulting
apparent tax rate is less than the federal statutory tax rate due
principally to the tax exempt status of the income generated by Syntel
India.
GOODWILL
Goodwill originated from the acquisition, in 1999, of two entities, IMG
and Metier, and is being amortized on a straight-line basis over a
15-year period. The Company periodically reviews the recoverability of
its goodwill to determine if impairment has occurred. The Company
measures the recoverability of recorded goodwill by the undiscounted
expected future cash flow from the operations to which the goodwill
applies.
F-8
<PAGE> 47
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts including, but not limited
to, warranty costs, valuation of trade accounts receivable, amortization
and impairment of goodwill, and potential tax liabilities. Actual results
could differ those estimates and assumptions.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign operations utilize the
functional currency of the country in which business is conducted.
Revenues, costs and expenses of the foreign subsidiaries are translated
to U. S. dollars at average period exchange rates. Assets and liabilities
are translated to U. S. dollars at year-end exchange rates with the
effects of these translation adjustments being reported as a separate
component of accumulated other comprehensive income in shareholders'
equity. The change in the accumulated other comprehensive income account
results from translation adjustments recognized for the respective
period.
PER SHARE DATA
Basic earnings per share is calculated by dividing net income or pro
forma 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 or pro forma net income by the average number of
shares outstanding during the applicable period adjusted for these
potentially dilutive options.
RECLASSIFICATIONS
Certain amounts in previously issued financial statements have been
reclassified to conform with the current year presentation.
3. INITIAL PUBLIC OFFERING BUSINESS COMBINATION
In August 1997, the Company completed an initial public offering of
3,450,000 shares of common stock at a price of $11.00 per share ($7.33
per share considering the stock split in 1998 of 3 for 2 shares). After
underwriting discounts and other issuance costs, net proceeds to the
Company were approximately $34.6 million.
In connection with the initial public offering, the Company agreed to
acquire 100% ownership of Syntel India for $7 million in cash. The
acquisition, which was a merger of interests under common control, was
accounted for on the carryover basis of accounting similar to pooling of
interests with the historical financial statements of the Company
restated to include Syntel India. The portion of the purchase price in
excess of the carrying value of the net assets acquired at August 12,
1997, or $1.5 million was accounted for as a reduction of additional
paid-in capital.
F-9
<PAGE> 48
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. ACQUISITIONS
On September 22, 1999, the Company executed a purchase agreement with
Metier, Inc. 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. The cash payment of $17.4 million was funded from available
cash. In addition, the agreement provides for earnout 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 the total purchase price (excluding future potential
earnouts) of $23,250,107, including expenses of $1,360,496, 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 $18,811,089, which is being amortized over 15 years.
Metier was a privately held, Los Angeles based technology consulting
firm, specializing in the design and implementation of data warehousing,
e-commerce, and ERM solutions for middle market clients, particularly in
the areas of healthcare, manufacturing, and financial services.
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 the total purchase price of $1,012,802, including
expenses of $102,596, allocated to the assets acquired and liabilities
assumed based on their values of $76,145 and $26,939, respectively. This
acquisition resulted in goodwill of $963,596, which is being amortized
over 15 years.
The operating results of both Metier and IMG have been included in the
consolidated results of the Company since July 1, 1999, the effective
acquisition dates.
The unaudited consolidated results of operations on a pro forma basis are
presented below, for the respective 12-month period, as though Metier had
been acquired as of January 1, 1998:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31
(UNAUDITED) 1999 1998
<S> <C> <C>
Revenue $ 180,120 $ 186,146
Net income 22,402 24,705
Earnings per share (diluted) 0.57 0.62
</TABLE>
F-10
<PAGE> 49
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND DEFERRED
REVENUE
The following summarizes activity for uncompleted, fixed price, fixed
deliverable projects:
<TABLE>
<CAPTION>
1999 1998
(IN THOUSANDS)
<S> <C> <C>
Direct costs incurred on uncompleted, fixed price, fixed
deliverable projects $ 2,324 $ 8,660
Direct margin estimated on uncompleted, fixed price, fixed
deliverable projects 1,246 4,645
-------- ---------
Revenues recognized on uncompleted projects 3,570 13,305
Less - billings to date 4,518 18,857
-------- ---------
Deferred revenues on fixed price, fixed deliverable projects 948 5,552
Advanced billings on application management projects 3,558 4,438
Other deferred revenues - 452
-------- ---------
Total deferred revenue as reported $ 4,506 $ 10,442
======== =========
Projects with billings in excess of costs and estimated earnings on uncompleted
fixed price, fixed deliverable projects $ 948 $ 6,762
Projects with costs and estimated earnings in excess of
billings on uncompleted fixed price, fixed deliverable projects - 1,210
-------- ---------
Deferred revenues on fixed price, fixed deliverable projects $ 948 $ 5,552
======== =========
</TABLE>
6. PROPERTY, EQUIPMENT, AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Cost of property and equipment at December 31, 1999 and 1998 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Computer equipment and internal software $ 9,018 $ 7,170
Furniture and equipment 4,899 4,811
Leasehold improvements 878 654
Capitalized software development costs 1,017 -
-------- ---------
15,812 12,635
Accumulated depreciation 9,390 7,037
-------- ---------
$ 6,422 $ 5,598
======== =========
</TABLE>
F-11
<PAGE> 50
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. LINE OF CREDIT
The Company has a line-of-credit arrangement with a bank which expires
August 31, 2000, which provides for borrowings up to $40,000,000.
Interest is computed on the basis of the Company's option at (i) the
Eurodollar rate plus the applicable Eurodollar margin, (ii) the bank's
prime rate or (iii) a negotiated rate, as defined. The Company also has
an additional line of credit with the same bank which expires August 31,
1999, which provides for borrowings up to $20,000,000 to finance
acquisitions.
8. LEASES
The Company leases certain facilities and equipment under operating
leases. Current operating lease obligations are expected to be renewed or
replaced upon expiration. Future minimum lease payments under all
noncancelable leases expiring beyond one year as of December 31, 1999 are
as follows (in thousands):
<TABLE>
<C> <C>
2000 $ 2,033
2001 1,789
2002 1,325
2003 1,099
2004 254
--------
$ 6,500
========
</TABLE>
Total rent expense charged to operations amounted to approximately
$2,221, $1,869 and $1,678 for the years ended December 31, 1999,
1998 and 1997, respectively.
9. INCOME TAXES
Income before income taxes for U. S. and foreign operations was as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
U.S. $ 27,052 $ 28,928 $ 9,663
Foreign 4,975 8,127 4,274
-------- -------- -------
$ 32,027 $ 37,055 $ 13,937
======== ======== ========
</TABLE>
F-12
<PAGE> 51
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. INCOME TAXES (CONTINUED)
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Currently payable
Federal $ 7,965 $ 14,271 $ 3,839
State and local 1,190 1,350 474
Foreign 340 171 2
-------- -------- -------
Total currently payable 9,495 15,792 4,315
Deferred
Federal 976 (3,002) (708)
State and local 102 (366) (88)
-------- -------- -------
Total deferred 1,078 (3,368) (796)
-------- -------- -------
Total provision for income taxes $ 10,573 $ 12,424 $ 3,519
======== ======== =======
</TABLE>
Upon termination of the S-corporation election, as described in Note 2,
current and deferred income taxes of $1.8 million and ($0.7) million,
respectively, were recognized. Accordingly, the above 1997 provision for
income taxes includes a $1.1 million nonrecurring expense resulting from
the termination of the S-corporation election.
The components of the net deferred tax asset are as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets
Advance billing receipts $ 266 $ 1,701
Accrued warranty and other expenses 3,437 3,149
Property and equipment - 66
------- -------
Net deferred tax asset $ 3,703 $ 4,916
======= =======
</TABLE>
Balance sheet classification of the net deferred tax asset is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax asset, current $ 3,703 $ 4,850
Deferred tax asset, noncurrent - 66
------- -------
$ 3,703 $ 4,916
======= =======
</TABLE>
F-13
<PAGE> 52
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. INCOME TAXES (CONTINUED)
Under the Indian Income Tax Act of 1961 (the "Act"), Syntel India is
eligible for certain favorable tax provisions including: (i) an exemption
from payment of corporate income taxes for the first ten years of
operation (the "Tax Holiday"); or (ii) an exemption from income taxes on
the profits derived from exporting computer software services from India
(the "Export Exemption"). During 1999, the Indian government amended the
Tax Holiday regulations, extending the effective period to ten years,
from the previous regulation which permitted a tax holiday of five
consecutive years within the first eight years of operation. The Export
Exemption remains available after expiration of the Tax Holiday. Under
the new regulations, the Company's Tax Holidays will expire no earlier
than March 31, 2003.
The Company has not recorded deferred income taxes applicable to all of
the undistributed earnings of its foreign subsidiaries. For those
earnings considered to be indefinitely reinvested no provision for U. S.
federal and state income tax or applicable withholding tax has been
provided thereon. The unrecognized taxes on the undistributed earnings
are approximately $6.8 million at December 31, 1999.
The following table accounts for the differences between the actual tax
provision and the amounts obtained by applying the statutory U. S.
federal income tax rate of 35% for 1999 and 1998 and 34% for 1997 to
income before income taxes:
<TABLE>
<CAPTION>
1999 1998 1997
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory provision $ 11,209 $ 12,969 $ 4,739
State taxes, net of federal benefit 1,190 1,350 655
S-corporation income not subject to federal
income taxes - - (1,556)
Tax-free investment income (531) (344) -
Foreign income not subject to tax (1,595) (2,470) (1,411)
Termination of S-corporation status - - 1,090
Other 300 919 -
-------- -------- -------
Total provision for income taxes $ 10,573 $ 12,424 $ 3,517
======== ======== =======
</TABLE>
F-14
<PAGE> 53
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. EARNINGS PER SHARE
The reconciliations of earnings per share computations for the
fiscal years 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ --------------------- ----------------------
PRO FORMA
PER PER PER
SHARES SHARE SHARES SHARE SHARES SHARE
(IN THOUSANDS, EXCEPT PER SHARE EARNINGS)
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share 38,556 $ .56 38,195 $ .65 37,763 $ .27
Net dilutive effect of stock options
outstanding 493 - 1,099 - 175 -
Shares assumed outstanding due to
excess distributions in 1997 - - - - 1,145 -
-------- ------ ------- ------ ------- ------
Diluted earnings per share 39,049 $ .55 39,294 $ .63 39,083 $ .26
======== ====== ======= ====== ======= ======
</TABLE>
As of December 31, 1999 and 1998, stock options to purchase 36,000 and
44,500 shares of common stock, respectively, at a weighted average price
per share of $18.70 and $18.21, respectively, were outstanding but were
not included in the computation of diluted earnings per share. The
options' exercise prices were greater than the average market price of
the common shares and were antidilutive. No such options were available
in 1997.
11. STOCK COMPENSATION PLANS
The Company established a stock option plan in 1997 under which 3 million
shares of common stock were reserved for issuance. The dates on which
granted options are first exercisable are determined by the Compensation
Committee of the Board of Directors, but generally vest over a four-year
period from the date of grant. The term of any option may not exceed ten
years from the date of grant.
For certain options granted during 1997, the exercise price was less than
the fair value of the Company's stock on the date of grant and,
accordingly, compensation expense is being recognized over the vesting
period for such difference. For the other options granted in 1999, 1998
and 1997, the exercise price equaled the market price on the date of
grant, and therefore, no compensation expense was recognized.
The Company has elected to measure compensation cost using the intrinsic
value method, in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Had the fair value of each stock option
granted been determined consistent with the methodology of SFAS 123
"Accounting for Stock-Based Compensation," the pro forma impact on the
Company's net income and earnings per share would have been adjusted to
the pro forma amounts listed below:
F-15
<PAGE> 54
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. STOCK COMPENSATION PLAN (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Net earnings
As reported $ 21,454 $ 24,631 $ 10,420
Impact of SFAS No. 123 (1,534) (976) (385)
---------- ---------- ----------
Pro forma 19,920 23,655 10,035
Earnings per share, pro forma
Basic earnings per share $ .52 $ .62 $ .27
Diluted earnings per share .51 .60 .26
Earnings per share, as reported
Basic earnings per share $ .56 $ .65 $ .28
Diluted earnings per share .55 .63 .27
</TABLE>
Under SFAS No. 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with following weighted
average assumptions for grants in 1999, 1998, and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Estimated fair value per option granted $ 6.26 $ 8.86 $ 2.82
Assumptions
Risk-free interest rate 6.00% 5.33% 6.18%
Expected life (years) 5.00 5.00 5.00
Expected volatility 68.38% 51.26% 51.26%
Expected dividends 0.00% 0.00% 0.00%
</TABLE>
F-16
<PAGE> 55
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. STOCK COMPENSATION PLUS (CONTINUED)
The following table sets forth changes in options outstanding:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES AMOUNT PRICE
<S> <C> <C> <C>
Shares under option
Granted during 1997
Grant price less than fair value 826,125 $ 3,205,250 $ 3.88
Grant price equals fair value 794,745 4,851,130 6.10
---------- ----------- ---------
Outstanding, December 31, 1997 1,620,870 8,056,380 4.97
Activity during 1998
Granted, price equals fair value 513,500 8,843,933 17.22
Exercised 19,191 64,558 3.36
Forfeited 684,456 8,697,203 12.71
Expired 3,072 15,168 4.94
---------- ----------- ---------
Outstanding, December 31, 1998 1,427,651 8,123,384 5.69
Activity during 1999
Granted, price equals fair value 2,052,259 19,061,738 9.29
Exercised 71,896 272,805 3.79
Forfeited 256,807 1,966,161 7.66
Expired 13,970 73,644 5.27
---------- ----------- ---------
Outstanding, December 31, 1999 3,137,237 $24,872,512 $ 7.93
========== =========== =========
Exercisable, December 31, 1999 326,779
==========
</TABLE>
The following table sets forth of option outstanding at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE
<S> <C> <C> <C>
$1.33 122,500 7.3 $ 1.33
$ 4.67 - $ 8.00 961,598 7.7 5.52
$8.125 - $11.00 1,457,544 9.8 8.46
$11.25 - $16.75 585,595 9.0 11.60
$26.38 - $33.19 10,000 8.9 29.10
-------------- ------ --------
$ 1.33 - $33.19 3,137,237 8.9 $ 7.93
--------------
</TABLE>
F-17
<PAGE> 56
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. STOCK COMPENSATION PLANS (CONTINUED)
The Company has an employee stock purchase plan which provides for
employees to purchase pre-established amounts as determined by the
compensation committee. The price at which employees may purchase common
stock is set by the compensation committee as not less than the lessor of
85% of the fair market value of the common stock on the NASDAQ National
Market on the first day of the purchase period or 85% of the fair market
value of the common stock on the last day of the purchase period. The
Company has reserved 1.5 million shares of common stock for issuance
under the Company's employee stock purchase plan. Under the terms of the
plan, eligible employees may elect to have up to 5% of their regular base
earnings withheld to purchase company stock, with a maximum not to exceed
$21,250 for each calendar year. As of December 31, 1999, the Company has,
recorded in accrued payroll and related costs, $630,478 of employee
withholdings to be used to purchase company stock.
12. SEGMENT REPORTING
The Company manages its operations through three segments, Application
Outsourcing, e-business, and TeamSourcing. During 1999 the Company
realigned the segment structure, separating e-business out of
TeamSourcing with the creation of a third segment. Additionally,
IntelliSourcing has also been restructured to separate out e-business
engagements, and has been renamed to Application Outsourcing.
Through Application Outsourcing, the Company provides higher-value
applications management services for ongoing management, development and
maintenance of customers' business applications. The Company assumes
responsibility for, and manages selected application support functions
for the customer. Utilizing its developed methodologies, processes and
tools, the Company is able to assimilate the business process knowledge
of its customers to develop and deliver services specifically tailored
for that customer. The Company's Global Service Delivery Model provides
the flexibility to deliver to each client a unique mix of services
on-site to the customer's location, off-site at its U.S. development
centers and offshore at development centers in Mumbai and Chennai, India.
The Company also provided Year 2000 compliance services to customers
during 1999, 1998, and 1997, all of which were completed before December
31, 1999.
Application Outsourcing engagements are frequently supported by long-term
contractual agreements which generally provide for minimum resource
commitments, if billed on a time-and-materials basis, or a specific set
of deliverables for fixed-price engagements.
Through e-business, the Company provides development and implementation
services for a number of emerging and rapidly growing high technology
applications, including Web development, Data Warehousing, e-commerce,
CRM, Oracle, and SAP. These services may be provided on either a
time-and-material or on a fixed-price basis.
Through TeamSourcing, the Company provides professional information
technology consulting services directly to customers on a staff
augmentation basis. TeamSourcing services include systems specification,
design, development, implementation and maintenance of complex
information technology applications involving diverse computer hardware,
software, data and networking technologies and practices. TeamSourcing
consultants, whether working individually or as a team of professionals,
generally receive direct supervision from the customer's management
staff. TeamSourcing services are generally invoiced on a time and
material basis.
The accounting policies of the segments are the same as those presented
in Note 2. Management allocates all corporate expenses to the segments.
No balance sheet/identifiable assets data is presented since the company
does not segregate its assets by segment.
F-18
<PAGE> 57
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Revenues
Application Outsourcing $ 87,311 $105,835 $ 64,049
e-business 33,402 14,614 5,089
TeamSourcing 41,404 47,526 55,200
-------- -------- --------
162,117 167,975 124,338
Gross profit
Application Outsourcing 40,324 45,516 24,038
e-business 10,789 4,409 1,172
TeamSourcing 11,704 13,079 11,544
-------- -------- --------
62,817 63,004 36,754
Sales, general, and administrative expenses 32,814 28,026 23,547
-------- -------- --------
Income from operations $ 30,003 $ 34,978 $ 13,207
-------- -------- --------
</TABLE>
13. GEOGRAPHIC INFORMATION
Total revenues before income taxes and identifiable assets by geographic
location were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Revenues
United States operations $ 158,452 $ 166,046 $ 124,157
India operations 10,188 14,400 9,264
Europe operations 3,211 1,632 61
Singapore operations 548 456 54
Intercompany revenue elimination (10,282) (14,559) (9,198)
--------- --------- ---------
Total revenue $ 162,117 $ 167,975 $ 124,338
--------- --------- ---------
Income before income taxes
United States operations $ 27,052 $ 28,928 $ 9,663
India operations 4,486 7,839 4,542
Europe operations 645 296 (211)
Singapore operations (156) (8) (57)
--------- --------- ---------
Total income before income taxes $ 32,027 $ 37,055 $ 13,937
--------- --------- ---------
Assets, December 31
United States operations $ 100,495 $ 90,884 $ 58,574
India operations 19,933 12,084 6,401
Europe operations 1,842 985 93
Singapore operations 198 282 164
--------- --------- ---------
Total assets $ 122,468 $ 104,235 $ 65,232
--------- --------- ---------
</TABLE>
F-19
<PAGE> 58
SYNTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. LITIGATION AND CLAIMS
Legal actions and other claims are pending or may be instituted or
asserted in the future against the Company. Although the amount of
liability at December 31, 1999 with respect to these matters cannot be
ascertained, the Company believes that any resulting liability should not
materially affect future consolidated financial position or results of
operations of the Company.
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected financial data by calendar quarter were as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1999
Revenues $ 38,797 $ 39,654 $ 42,564 $ 41,102 $162,117
Cost of revenues 23,942 24,377 26,477 24,504 99,300
-------- -------- -------- -------- --------
Gross profit 14,855 15,277 16,087 16,598 62,817
Selling, general and administrative expenses 7,245 7,307 9,502 8,760 32,814
-------- -------- -------- -------- --------
Income from operations 7,610 7,970 6,585 7,838 30,003
Other income, net 532 575 541 376 2,024
-------- -------- -------- -------- --------
Income before income taxes 8,142 8,545 7,126 8,214 32,027
Income taxes 2,708 2,657 2,442 2,766 10,573
-------- -------- -------- -------- --------
Net income $ 5,434 $ 5,888 $ 4,684 $ 5,448 $ 21,454
======== ======== ======== ======== ========
Earnings per share, diluted $ .14 $ .15 $ .12 $ .14 $ .55
======== ======== ======== ======== ========
Weighted average share outstanding, diluted 38,886 38,683 39,016 39,631 39,049
======== ======== ======== ======== ========
1998
Revenues $ 41,592 $ 43,214 $ 43,607 $ 39,562 $167,975
Cost of revenues 27,047 27,096 27,772 23,056 104,971
-------- -------- -------- -------- --------
Gross profit 14,545 16,118 15,835 16,506 63,004
Selling, general and administrative expenses 6,093 6,931 7,423 7,579 28,026
-------- -------- -------- -------- --------
Income from operations 8,452 9,187 8,412 8,927 34,978
Other income, net 398 425 680 574 2,077
-------- -------- -------- -------- --------
Income before income taxes 8,850 9,612 9,092 9,501 37,055
Income taxes 2,814 2,891 2,638 4,081 12,424
-------- -------- -------- -------- --------
Net income $ 6,036 $ 6,721 $ 6,454 $ 5,420 $ 24,631
======== ======== ======== ======== ========
Earnings per share, diluted $ .15 $ .17 $ .16 $ .14 $ .62
======== ======== ======== ======== ========
Weighted average share outstanding, diluted 39,269 39,417 39,311 39,078 39,294
======== ======== ======== ======== ========
</TABLE>
Earnings per share for the quarter are computed independently and may not
equal the earnings per share computed for the total year.
F-20
<PAGE> 59
Exhibit No. Description
3.1 Restated Articles of Incorporation of the registrant
filed as an exhibit to the Registrant's Statement on
Form S-1 dated June 6, 1997, and incorporated herein
be reference.
3.2 Amendment to Articles of Incorporation of the
Registrant dated September 21, 1998 filed as an
Exhibit to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1998 and
incorporated herein by reference.
3.3 Bylaws of the Registrant filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 dated
June 6, 1997, and incorporated herein by reference.
10.1 Credit Authorization Agreement, dated September 13,
1996, between the Registrant and NBD Bank filed as an
Exhibit to the Registrant's Registration Statement on
Form S-1 dated June 6, 1997, and incorporated herein
by reference.
10.2 Letter Agreement between the Registrant and NBD Bank
dated March 11, 1997 amending Credit Authorization
Agreement, filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 dated June 6,
1997, and incorporated herein by reference.
10.3 Letter Agreement between the Registrant and NBD Bank
dated March 25, 1997 amending Credit Authorization
Agreement, filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 dated June 6,
1997, and incorporated herein by reference.
10.4 Letter Agreement between the Registrant and Bank One
dated September 13, 1999 amending the prior Credit
Authorization Agreement.
10.5 Lease, dated August 22, 1996, between WRC Properties,
Inc. and the Registrant, filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 dated
June 6, 1997, and incorporated herein by reference.
10.6 Lease Agreement, dated November 30, 1994, between the
Registrant and NationsBank of North Carolina, NA., as
Trustee for the Public Employees Retirement System of
Ohio, filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 dated June 6,
1997, and incorporated herein by reference.
10.7 First Amendment, dated October 19, 1998, between the
Registrant and Corning Road, L.L.C. (successor to
First Union National Bank of North Carolina as
Trustee, successor to NationsBank), to the Lease
Agreement, dated November 30, 1994, between the
Registrant and NationsBank, filed as an Exhibit to
the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein
by reference.
10.8 Indentures of Lease entered into between the
President of India and Syntel Software Pvt. Ltd. on
various dates in 1992 and 1993 for the Mumbai Global
Development Center and filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 dated
June 6, 1997, and incorporated herein by reference.
<PAGE> 60
10.9 Rental Agreement, dated February 24, 1997, between
Syntel Software Pvt. Ltd. and the Landlords for the
Chennai Global Development Center, filed as an
Exhibit to the Registrant's Registration Statement on
Form S-1 dated June 6, 1997, and incorporated herein
by reference.
10.10 Agreement for Software Programming Services, dated as
of December 31, 1997, between the Registrant and
American Home Assurance Company, filed as an Exhibit
to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998 and incorporated
herein by reference.
10.11 * 1997 Stock Option and Incentive Plan, filed as an
Exhibit to the Registrant's Registration Statement on
Form S-1 dated June 6, 1997, and incorporated herein
by reference.
10.12 * Employee Stock Purchase Plan, filed as an Exhibit
to the Registrant's Registration Statement on Form
S-1 dated June 6, 1997, and incorporated herein by
reference.
10.13 * Employment Agreement, dated June 5, 1997, between
the Registrant and Bharat Desai, filed as an Exhibit
to the Registrant's Registration Statement on Form
S-1 dated June 6, 1997, and incorporated herein by
reference.
10.14 * Employment Agreement, dated June 5, 1997, between
the Registrant and Neerja Sethi, filed as an Exhibit
to the Registrant's Registration Statement on Form
S-1 dated June 6, 1997, and incorporated herein by
reference.
10.15 Asset Purchase Agreement dated as of September 22,
1999 by Syntel, Inc. and Metier, Inc. filed as an
Exhibit to the Registrant's Current Report on Form
8-K dated October 5, 1999 and incorporated herein by
reference.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
99.1 Proxy Statement for the Registrant's 2000 Annual
Meeting of Shareholders, filed by the Registrant
pursuant to Regulation 14A and incorporated herein by
reference.
(b) A Current Report on Form 8-K was filed on October 7,
1999 and amended on December 6, 1999. An acquisition
of assets was reported under Item 2 of Form 8-K and
financial statements and pro forma financial
information thereto were reported under Item 7 of
Form 8-K.
<PAGE> 1
EXHIBIT 10.4
BANK ONE, MICHIGAN TEL 248 816 0233
MI1 8923 FAX 248 816 0254
2155 W. BIG BEAVER
TROY, MICHIGAN 48084-3422
[BANK ONE LOGO]
September 13, 1999
Mr. R.S. Ramdas
Sr. Director Internal Audit, Tax & Treasury
Syntel, Inc.
2800 Livernois
Suite 400
Troy, MI 48083
Dear Ramdas:
I am pleased to inform you that Bank One, Michigan has extended and increased
the Uncommitted Credit Authorizations described in Section 1.1 of the Credit
Authorization Agreement, executed by you and the Bank on September 18, 1998.
As referenced in Section 1.1, Facility A has been increased to $40,000,000 and
Facility B has been increased to $20,000,000. The expiration date set forth in
Section 1.1 of the Credit Authorization Agreement for Facilities A and B is
changed to August 31, 2000. As referenced in Section 6.3 F of the Credit
Authorization Agreement, the Tangible Net Worth covenant shall not be permitted
to be less than $45,000,000 (formerly $35,000,000).
Except as modified by this letter, all of the terms and conditions of the
Credit Authorization Agreement remain in effect. Please have Bharat Desai sign
below to confirm this change.
Sincerely,
Bank One, Michigan
By: /s/ Sarah C. McCoy
--------------------
Sarah C. McCoy
Its: Loan Officer
-------------------
<PAGE> 2
[BANK ONE LOGO]
Accepted and Agreed to on this 25th day of OCTOBER, 1999.
SYNTEL, INC.
By: /s/ Bharat Desai
---------------------
Bharat Desai
Its: President
--------------------
<PAGE> 1
EXHIBIT 21
----------
<TABLE>
<CAPTION>
SUBSIDIARIES OF THE REGISTRANT
------------------------------
Name State of Other Jurisdiction
- ---- ---------------------------
of incorporation or Organization
--------------------------------
<S> <C>
Syntel Software Private Limited India
- ------------------------------- ------
Syntel, LTD. England
- ------------ -------
Syntel (Singapore) PTE. LTD. Singapore
- ---------------------------- ---------
Syntel Mauritius Mauritius
- ---------------- ---------
Syntel (Australia) Pty Limited Australia
- ------------------------------ ---------
Syntel Canada, Inc. Canada
- ------------------- ------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 63,611
<SECURITIES> 0
<RECEIVABLES> 23,800
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 96,933
<PP&E> 15,812
<DEPRECIATION> 9,390
<TOTAL-ASSETS> 122,468
<CURRENT-LIABILITIES> 32,040
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 90,937
<TOTAL-LIABILITY-AND-EQUITY> 122,468
<SALES> 0
<TOTAL-REVENUES> 162,117
<CGS> 0
<TOTAL-COSTS> 99,300
<OTHER-EXPENSES> 32,814
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,024
<INCOME-PRETAX> 32,027
<INCOME-TAX> 10,573
<INCOME-CONTINUING> 21,454
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,454
<EPS-BASIC> .56
<EPS-DILUTED> .55
</TABLE>
