<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2000 or
---------------------
[ ] Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
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Commission file number 0-22903
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Syntel, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Michigan 38-2312018
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2800 Livernois Road, Suite 400, Troy, Michigan 48083
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(Address of Principal Executive Offices) (Zip Code)
(248) 619-2800
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, no par value: 38,380,644 shares issued and outstanding as of
October 25, 2000.
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SYNTEL, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I Financial Information
Item 1 Financial Statements
Consolidated Statement of Income 3
Condensed Consolidated Balance Sheet 4
Condensed Consolidated Statement of Cash Flows 5
Notes to the Financial Statements 6
Item 2 Management's Discussion and Analysis of 8
Financial Condition and Results of Operation
Part II Other Information 12
Signatures 13
Index to Exhibits 14
</TABLE>
2
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SYNTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
3 MONTHS 9 MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 41,105 $ 42,564 $ 123,690 $ 121,015
Cost of revenues 26,001 26,477 78,386 74,797
--------- --------- --------- ---------
Gross profit 15,104 16,087 45,304 46,218
Selling, general and administrative expenses 8,348 9,502 25,791 24,053
Goodwill impairment and related charges -- -- 21,650 --
--------- --------- --------- ---------
Income from operations 6,756 6,585 (2,137) 22,165
Other income, principally interest 829 541 2,409 1,648
--------- --------- --------- ---------
Income before income taxes 7,585 7,126 272 23,813
Income tax (provision) benefit (2,035) (2,442) 2,744 (7,807)
--------- --------- --------- ---------
Net income before loss from equity investment
in unconsolidated subsidiary, net of taxes 5,550 4,684 3,016 16,006
Loss from equity investment
200 -- 319 --
--------- --------- --------- ---------
Net income $ 5,350 $ 4,684 $ 2,697 $ 16,006
========= ========= ========= =========
EARNINGS (LOSS) PER SHARE
Basic $ 0.14 $ 0.12 $ 0.07 $ 0.42
Diluted $ 0.14 $ 0.12 $ 0.07 $ 0.41
Weighted average common shares
outstanding - diluted 39,255 39,016 39,666 38,855
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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SYNTEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
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<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 64,888 $ 63,611
Accounts receivable, net 36,246 23,800
Advanced billings and other current assets 8,664 9,522
-------- --------
Total current assets 109,798 96,933
Property and equipment 18,475 15,812
Less accumulated depreciation 11,315 9,390
-------- --------
Property and equipment, net 7,160 6,422
Goodwill, net of amortization 1,034 19,113
Equity and other investments 3,395 --
Deferred income taxes, noncurrent 6,808 --
-------- --------
$128,195 $122,468
======== ========
LIABILITIES
Current liabilities:
Accrued payroll and related costs $ 10,855 $ 12,748
Accounts payable and other current liabilities 19,152 14,853
Deferred revenue 5,552 4,506
-------- --------
Total current liabilities 35,559 32,107
SHAREHOLDERS' EQUITY
Total shareholders' equity 92,636 90,361
-------- --------
Total liabilities and shareholders' equity $128,195 $122,468
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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SYNTEL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,697 $ 16,006
-------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,925 1,580
Goodwill amortization 636 331
Goodwill impairment and related charges 21,650 --
Deferred income taxes (6,808) 66
Compensation expense related to
stock options 96 75
Loss on equity investment 319 --
Changes in assets and liabilities:
Accounts receivable, net (12,446) 4,437
Advance billing and other assets 858 47
Accrued payroll and other liabilities (2,401) (3,202)
Deferred revenues 1,046 (6,524)
-------- --------
Net cash provided by operating activities 7,572 12,816
Cash flows used in investing activities:
Property and equipment expenditures (3,077) (1,428)
Equity and other investments (2,700) --
Payments for purchases of Metier, Inc. and IMG, Inc. net
of cash acquired -- (15,944)
-------- --------
Net cash used in investing activities (5,777) (17,372)
Cash flows provided by (used in) financing activities:
Net proceeds from issuance of stock 1,071 124
Common stock repurchases (1,413) (1,097)
-------- --------
Net cash used in financing activities (342) (973)
Effect of foreign currency exchange rate changes on cash (176) (161)
-------- --------
Net increase in cash and cash equivalents 1,277 (5,690)
Cash and cash equivalents, beginning of period 63,611 64,660
-------- --------
Cash and cash equivalents, end of period $ 64,888 $ 58,970
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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SYNTEL, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying condensed consolidated financial statements of Syntel, Inc.
(the "Company") have been prepared by management, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the accompanying unaudited, condensed consolidated financial
statements contain all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the financial position of Syntel, Inc. and it's
subsidiaries as of September 30, 2000, the results of its operations for the
three and nine month periods ended September 30, 2000 and September 30, 1999,
and cash flows for the nine months ended September 30, 2000 and September 30,
1999. The year end condensed balance sheet as of December 31, 1999 was derived
from audited financial statements but does not include all disclosures required
by generally accepted accounting principles. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10K for the year ended December 31, 1999.
Operating results for the nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
2. PRINCIPLES OF CONSOLIDATION AND ORGANIZATION
The condensed consolidated financial statements include all the accounts of the
Company and its wholly owned subsidiaries; Syntel Software Private Limited
("Syntel India"), an Indian limited liability company, Syntel (Singapore) PTE,
Ltd. ("Syntel Singapore"), a Singapore limited liability company, and Syntel
Europe Ltd. ("Syntel Europe"), a United Kingdom limited liability company. All
intercompany accounts and transactions have been eliminated.
3. RECLASSIFICATION
Certain prior quarter amounts have been reclassified to conform with the current
quarter presentation.
4. CASH EQUIVALENTS
For the purpose of reporting cash and cash equivalents, the Company considers
all liquid investments purchased with a maturity of three months or less to be
cash equivalents. Cash equivalents are principally triple A rated corporate
bonds and treasury notes held by a bank with maturity dates of less than ninety
days.
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5. COMPREHENSIVE INCOME
Total Comprehensive Income for the three and nine month periods ended September
30, 2000 and 1999 was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30 September 30
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 5,350 $ 4,684 $ 2,697 $ 16,006
Other Comprehensive income
Foreign currency translation Adjustments (112) (56) (176) (161)
-------- -------- -------- --------
Total comprehensive income $ 5,238 $ 4,628 $ 2,521 $ 15,845
</TABLE>
6. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the average
number of shares outstanding during the applicable period. The Company has stock
options which are considered to be potentially dilutive to common stock. Diluted
earnings per share is calculated considering these potentially dilutive options.
The following table sets forth the computation of earnings per share.
<TABLE>
<CAPTION>
Three Months Ended
September 30, 2000 September 30, 1999
------------------ ------------------
Weighted Earnings Weighted Earnings
Average per Average per
Shares share Shares share
------ ----- ------ -----
(in thousands, except per share earnings)
<S> <C> <C> <C> <C>
Basic earnings per share 38,583 $ 0.14 38,426 $ 0.12
Net dilutive effect of stock options
outstanding 672 590
------ -------- ------- --------
Diluted earnings per share 39,255 $ 0.14 39,016 $ 0.12
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 2000 September 30, 1999
------------------ ------------------
Weighted Earnings Weighted Earnings
Average per Average per
Shares share Shares share
------ ----- ------ -----
(in thousands, except per share earnings)
<S> <C> <C> <C> <C>
Basic earnings per share 38,576 $ 0.07 38,221 $ 0.42
Net dilutive effect of stock options
outstanding 1,090 634
------ -------- ------- --------
Diluted earnings per share 39,666 $ 0.07 38,855 $ 0.41
</TABLE>
7. SEGMENT REPORTING
The Company manages its operations through three segments, Applications
Outsourcing, e-Business, and TeamSourcing. Management allocates all direct
expenses to the segments. Financial data for each segment for the three month
periods ended September 30, 2000 and September 30, 1999 is as follows:
7
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sep 30, 2000 Sep 30, 1999 Sep 30, 2000 Sep 30, 1999
------------ ------------ ------------ ------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Revenues:
Applications Outsourcing $ 23,479 $ 18,824 $ 64,942 $ 66,851
e-Business 10,643 13,492 33,040 22,602
TeamSourcing 6,983 10,248 25,708 31,562
-------- -------- -------- --------
41,105 42,564 123,690 121,015
Gross Profit:
Applications Outsourcing 10,144 7,898 28,414 28,807
e-business 3,697 5,087 10,848 8,147
TeamSourcing 1,263 3,102 6,042 9,265
-------- -------- -------- --------
15,104 16,087 45,304 46,219
</TABLE>
The Applications Outsourcing segment included Year 2000 remediation engagements
for the first nine months of 1999, all of which were completed before December
31, 1999. Excluding the impact of Year 2000 remediation engagements,
Applications Outsourcing revenues for the third quarter of 1999 and the first
nine months of 1999 would have been $17.7 million and $55.3 million,
respectively; and gross profit would have been $7.3 and $22.3 million.
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
SYNTEL INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
Revenues. The Company's revenues consist of fees derived from its Applications
Outsourcing, e-Business, and TeamSourcing business segments. Revenues decreased
3.4% to $41.1 million in the third quarter of 2000 from $42.6 million in the
third quarter of 1999. Worldwide billable headcount, including personnel
employed by Syntel India, Singapore, and Syntel Europe, as of September 30, 2000
increased to 1,579 compared to 1,366 as of September 30, 1999.
Applications Outsourcing Revenues. Applications Outsourcing revenues increased
to $23.5 million for the third quarter of 2000, or 57.1% of total revenues, from
$18.8 million, or 44.2% of third quarter revenues for 1999. Revenues for the
first nine months of 2000 decreased to $64.9 million, or 52.5% of total
revenues, from $66.9 million, or 55.2% of total revenues for the first nine
months of 1999. The increase in third quarter 2000 revenues over the third
quarter 1999 was attributable principally the new business engagements of
approximately $6.6 million, partially offset by the completion of Y2K
remediation engagements that contributed approximately $1.1 million in the third
quarter of 1999, as well as the completion of development projects that
contributed approximately $0.8 million in the third quarter of 1999. The $2.0
million decrease for the first nine months of 2000 were attributable principally
to the completion of Year 2000 remediation projects that contributed $11.5
million for the first nine months of 1999. The loss of Y2K revenues was largely
offset by net growth in several engagements as well as new engagements, which
combined, contributed approximately $9.5 million for the first nine months of
2000.
Applications Outsourcing Cost of Revenues. Cost of revenues consist of costs
directly associated with billable consultants in the US and offshore, including
salaries, payroll taxes, benefits, relocation costs, immigration costs, finders
fees, trainee compensation, travel, and warranty reserves. Applications
Outsourcing costs of revenues decreased to 56.8% of total Applications
Outsourcing revenues for the third quarter of 2000, from 58.0% for the third
quarter of 1999. Costs of revenues for the first nine months of 2000 decreased
to 56.2% of total Applications Outsourcing revenues, from 56.9% for the first
nine months
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of 1999. The 1.2% decrease in cost of revenues as a percent of revenues for the
third quarter was attributable primarily to an increase in the higher margin
offshore component of the overall services, contributing approximately 6.1% to
the increased margin. This was partially offset by decreased margins on existing
engagements due principally to increasing compensation levels and high margin
Y2K remediation engagements completed in 1999, contributing approximately 2.8%
and 1.8%, respectively. The 0.7% decrease in cost of revenues for the first nine
months of 2000 was attributable primarily to a release of warranty reserves that
were no longer deemed necessary in the first quarter of 2000, contributing
approximately 4.3% to the reduction in cost of revenues as a percent of
revenues; partially offset by a 1.8% increase in the cost of revenues due to the
completion of high margin Year 2000 remediation engagements during the first
nine months of 1999 and compensation rates of approximately 1.8%.
e-Business Revenues. e-Business revenues decreased to $10.6 million for the
third quarter of 2000, or 25.9% of total consolidated revenues, from $13.5
million, or 31.7% of total consolidated revenues for the third quarter of 1999.
Revenues for the first nine months of 2000 increased to $33.0 million, or 26.7%
of total revenues, from $22.6 million, or 18.7% of total revenues for the first
nine months of 1999. The $2.9 million decrease for the third quarter was
attributable principally to a $6.0 million decrease in Metier revenues,
partially offset by new business growth in IMG revenues and other e-business
engagements of $1.0 million and $2.1 million, respectively. The $10.4 million
increase for the first nine months were attributable primarily to growth in
other e-business revenues of $7.6 million and the acquisitions of Metier, Inc.
and IMG, Inc., which combined contributed $2.8 million to the increased
revenues.
e-Business Cost of Revenues. e-Business cost of revenues consist of costs
directly associated with billable consultants in the US and offshore, including
salaries, payroll taxes, benefits, relocation costs, immigration costs, finders
fees, trainee compensation, and travel. e-Business cost of revenues increased to
65.3% of total e-Business revenues for the third quarter of 2000, from 62.3% for
the third quarter of 1999. The 3.0% increase in cost of revenues as a percent of
revenues was attributable principally to decreased utilization levels and the
wind-down of a large fixed price engagement, contributing approximately 5.8% and
0.9% respectively, to the decreased margins. These were partially offset by
decreased compensation costs in relation to respective bill rates of
approximately 3.7%. The decrease in utilization levels was due principally to a
significant increase in training activities. For the first nine months of 2000,
e-business costs of revenues increased to 67.2% of total e-business revenues,
from 64.0% for the first nine months of 1999. The 3.2% increase was attributable
principally to reduced consultant utilization levels due to softness in the
Oracle marketplace as well as increased training activities, contributing
approximately 7.1% to the decrease in gross margins, largely offset by improved
margins from existing engagements, contributing approximately 3.9% to the gross
margins.
TeamSourcing Revenues. TeamSourcing revenues decreased to $7.0 million for the
third quarter of 2000, or 17.0% of total revenues, down from $10.2 million, or
24.1% of total revenues for the third quarter of 1999. For the first nine months
of 2000, Teamsourcing revenues decreased to $25.7 million, or 20.8% of total
revenues, down from $31.6 million, or 26.1% of total revenues for the first nine
months of 1999. Both the $3.2 million decrease for the third quarter as well as
the $5.9 million decrease for the first nine months of 2000 were due principally
to decreases in U.S. based billable consultants on various engagements, the
result of an organizational focus away from this segment.
TeamSourcing Cost of Revenues. TeamSourcing cost of revenues consist of costs
directly associated with billable consultants in the US, including salaries,
payroll taxes, benefits, relocation costs, immigration costs, finders fees,
trainee compensation, and travel. TeamSourcing cost of revenues increased to
81.9% of TeamSourcing revenues for the third quarter of 2000, from 69.7% for the
third quarter of 1999. The 12.2% increase in cost of revenues as a percent of
total TeamSourcing revenues was attributable primarily to decreased utilization,
increased compensation and benefit costs in relation to respective bill rates,
and one less business day, contributing approximately 4.5%, 5.2%, and 1.5% to
the decreased margins. The cost of revenues as a percent of revenues increased
to 76.5% of total TeamSourcing revenues for the nine month period ended
September 30, 2000, from 70.6% for the nine month period ending September 30,
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1999. The 5.9% increase was attributable principally to increased compensation
costs in relation to respective bill rates, decreased utilization, and increased
travel and relocation costs, contributing approximately 2.9%, 2.6%, and 0.2%,
respectively, to the decreased margins.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses consist primarily of salaries, payroll taxes and
benefits for sales, solutions, delivery, finance, administrative, and corporate
staff, travel, telecommunications, business promotions, marketing and various
facility costs for the Company's Global Development Centers and various offices.
Selling, general, and administrative costs for the three months ended September
30, 2000 were $8.3 million, or 20.3% of total revenues, compared to $9.5 million
or 22.3% of total revenues for the three months ended September 30, 1999. The
$1.2 million decrease was attributable principally to savings in administrative
costs at Metier and IMG, Metier goodwill amortization, and savings in recruiting
and TeamSourcing sales, contributing approximately $0.5 million, $0.3 million,
and $0.3 million, respectively. Selling, general, and administrative costs
increased to $25.8 million, or 20.9% of total revenues for the nine month period
ending September 30, 2000, from $24.1 million, or $19.9% of total revenues for
the same period in 1999. The $1.7 million increase was attributable principally
to acquisition related operating costs and associated goodwill, contributing
$1.4 million and $0.3, respectively to the increase in sales, general, and
administrative costs.
LIQUIDITY AND CAPITAL RESOURCES
In recent history, the Company has financed its working capital needs through
operations. Net cash generated by operating activities was $7.6 million for the
first nine months of 2000, compared to $12.8 million for the first nine months
of 1999. The number of days sales outstanding in accounts receivable was
approximately 79 days and 51 days as of September 30, 2000 and September 30,
1999, respectively. The increase in days was due principally to delayed payments
from several large customers, most of which has since been received, as well as
some non-recurring billing delays which occurred in the third quarter of 2000.
Net cash used in investing activities was $5.8 million and $17.4 million for the
first nine months of 2000 and 1999, respectively. Cash used for investing
activities for the first nine months of 2000 consisted principally of equity
investments of approximately $2.7 million, capitalized software development
costs of approximately $1.6, and computer and communications equipment of $1.5
million. Cash used for investing activities for the first nine months of 1999
consisted primarily of $15.9 million in cash payments related to the
acquisitions of Metier and IMG, capitalized development costs of $0.9 million
and computer equipment of $0.5 million.
Net cash used in financing activities for the first nine months of 2000
consisted primarily of common stock repurchases of $1.4 million, partially
offset by $1.1 million from the issuance of stock from the employee stock option
and stock purchase programs. Net cash used in financing activities for the nine
months ended September 30, 1999 consisted primarily of common stock repurchases
of $1.1 million, partially offset by $0.1 million in proceeds received from the
exercising of stock options.
The Company has a line of credit with Bank One which provides for borrowings of
up to $40.0 million. The line of credit expires on August 31, 2001. The line of
credit contains covenants restricting the Company from, among other things,
incurring additional debt, issuing guarantees and creating liens on the
Company's property, without prior consent of the bank. The line of credit also
requires the Company to maintain certain tangible net worth levels and leverage
ratios. At September 30, 2000, there was no indebtedness outstanding under the
line of credit. Borrowings under the line of credit bear interest at the lower
of the Eurodollar rate plus the applicable Eurodollar margin, the bank's prime
rate or a negotiated rate established with the bank at the time of borrowing. In
addition to the bank line of credit, the Company has a $20.0 million facility
with Bank One to finance acquisitions which also expires on August 31, 2001. The
Company has not borrowed any amounts under this facility. The Company believes
that the
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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.
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements, including those with respect to
future levels of business for Syntel, Inc. These statements are necessarily
subject to risk and uncertainty. Actual results could differ materially from
those projected in these forward-looking statements as a result of certain risk
factors set forth in the Company's Annual Report Form 10-K document dated March
30, 2000. Factors that could cause results to differ materially from those set
forth above include general trends and developments in the information
technology industry, which is subject to rapid technological changes, and the
Company's concentration of sales in a relatively small number of large
customers, as well as intense competition in the information technology
industry, which the Company believes will increase.
11
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is currently not a party to any material pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description
---------------------------------
27 Financial Data Schedule
(b) Reports on Form 8-K
The Corporation did not file any reports on Form 8-K during the three month
period ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Syntel, Inc.
------------------------------
(Registrant)
Date November 6, 2000 By /s/ Bharat Desai
---------------- -----------------------------------------
Bharat Desai, President and
Chief Executive Officer
Date November 6, 2000 By /s/ John Andary
----------------- -----------------------------------------
John Andary, Chief Financial Officer
(principal financial and chief
accounting officer)
13
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Description Page
--------------------------------------------------------------------------------
<S> <C> <C>
27 Financial Data Schedule 13
</TABLE>
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