-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HMF6caItC+mCDTECKnf5LUsVDn4KpSI/PoaWH/agC76iqUURYGiyBZY2sFiYopju zeJ87Oc6WB+FOcGIoCyB/Q== 0000950124-98-005085.txt : 19980922 0000950124-98-005085.hdr.sgml : 19980922 ACCESSION NUMBER: 0000950124-98-005085 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980921 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYNTEL INC CENTRAL INDEX KEY: 0001040426 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 382312018 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-22903 FILM NUMBER: 98712028 BUSINESS ADDRESS: STREET 1: 2800 LIVERNOIS STREET 2: SUITE 400 CITY: TROY STATE: MI ZIP: 48043 BUSINESS PHONE: 2486192800 MAIL ADDRESS: STREET 1: 2800 LIVERNOIS STREET 2: SUITE 400 CITY: TROY STATE: MI ZIP: 48043 10-K/A 1 FORM 10-K/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A AMEND NO. 1 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 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 13, 1998, based on the last sale price of $31.625 per share for the Common Stock on the NASDAQ National Market on such date, was approximately $107,724,400. As of March 13, 1998, the Registrant had 25,450,000 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders to be held on or about May 18, 1998 are incorporated by reference into Part III hereof. 1 2 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, and are incorporated herein by reference. The Financial Statements have been amended to add the auditors signature to the audit opinion, which was inadvertently excluded in the original filing of the Form 10-K, on March 31, 1998. 31 3 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: September 18, 1998 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.
Signature Title Date /s/Bharat Desai President and Chief Executive Officer September 18, 1998 - ------------------- (Principal Executive Officer) Bharat Desai /s/John Andary Chief Financial Officer September 18, 1998 - -------------------- (Principal Financial and John Andary and Accounting Officer) /s/Neerja Sethi Director and Vice President, September 18, 1998 - -------------------- Corporate Affairs Neerja Sethi /s/Paritosh K. Choksi Director September 18, 1998 - -------------------- Paritosh K. Choksi /s/Douglas VanHouweling Director September 18, 1998 - ---------------------- Douglas Van Houweling /s/GEORGE R. MRKONIC Director September 18, 1998 - -------------------- George R. Mrkonic
37 4 SYNTEL, INC. CONTENTS PAGES Report of Independent Accountants.......................................F-2 Consolidated Financial Statements: Consolidated Statements of Income..................................F-3 Consolidated Balance Sheets........................................F-4 Consolidated Statements of Shareholders' Equity....................F-5 Consolidated Statements of Cash Flows..............................F-6 Notes to Consolidated Financial Statements......................F-7-F-17 F-1 5 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Syntel, Inc.: We have audited the accompanying consolidated balance sheets of Syntel, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Syntel, Inc. as of December 31, 1997 and 1996, and the consolidated results of its operations and cash flows for the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Detroit, Michigan February 18, 1998 F-2 6 SYNTEL, INC. CONSOLIDATED STATEMENTS OF INCOME for the years ended December 31, 1997, 1996 and 1995 (in thousands, except per share data)
1997 1996 1995 Revenues $124,338 $ 92,330 $ 90,326 Cost of revenues 87,584 67,083 70,014 -------- -------- -------- Gross profit 36,754 25,247 20,312 Selling, general and administrative expenses 23,547 19,271 13,909 -------- -------- -------- Income from operations 13,207 5,976 6,403 Other income, net, principally investment income 730 149 188 -------- -------- -------- Income before income taxes 13,937 6,125 6,591 Provision for income taxes 3,517 350 436 -------- -------- -------- Net income $ 10,420 $ 5,775 $ 6,155 ======== ======== ======== Pro forma income data (unaudited): Income before income taxes $ 13,937 $ 6,125 $ 6,591 Pro forma income tax expense* 3,741 1,746 2,170 -------- -------- -------- Pro forma net income $ 10,196 $ 4,379 $ 4,421 ======== ======== ======== Pro forma net income per share: Basic earnings per share $ 0.41 $ 0.18 $ 0.18 ======== ======== ======== Diluted earnings per share $ 0.39 $ 0.17 $ 0.17 ======== ======== ========
*Presentation of income tax expense as if the Company was a C-corporation during the years presented. The accompanying notes are an integral part of the consolidated financial statements. F-3 7 SYNTEL, INC. CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 (in thousands)
ASSETS 1997 1996 Current assets: Cash and cash equivalents $ 32,945 $ 7,332 Accounts receivable 20,644 20,642 Advance billings and other current assets 6,897 715 -------- -------- Total current assets 60,486 28,689 Property and equipment 9,299 7,551 Less accumulated depreciation 5,060 3,248 -------- -------- Property and equipment, net 4,239 4,303 Deferred income taxes, noncurrent 507 - -------- -------- $ 65,232 $ 32,992 ======== ======== LIABILITIES Current liabilities: Accrued payroll and related costs $ 10,388 $ 8,020 Accounts payable and other accrued liabilities 7,382 3,541 Dividends/distribution payable 300 14,000 Income taxes payable 1,365 - Deferred revenue 5,705 1,286 -------- -------- Total current liabilities 25,140 26,847 Income taxes payable 507 - -------- -------- Total liabilities 25,647 26,847 SHAREHOLDERS' EQUITY Commonstock, no par value per share, 40 million shares authorized, 25.45 million shares issued and outstanding at December 31, 1997; 22 million shares issued and outstanding at December 31, 1996 after stock split 1 1 Additional paid-in capital 34,659 - Retained earnings 5,174 6,144 Cumulative foreign currency translation adjustment (249) - -------- -------- Total shareholders' equity 39,585 6,145 -------- -------- $ 65,232 $ 32,992 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-4 8 SYNTEL, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY for the years ended December 31, 1997, 1996 and 1995 (in thousands)
CUMULATIVE -------------------- FOREIGN COMMON STOCK ADDITIONAL CURRENCY -------------------- PAID-IN RETAINED TRANSLATION SHAREHOLDERS' SHARES* AMOUNT CAPITAL EARNINGS ADJUSTMENT EQUITY -------- -------- ------------ ---------- ------------- ----------- Balance, January 1, 1995 22,000 $ 1 $ 6,214 $ 6,215 Net income 6,155 6,155 -------- -------- -------- -------- -------- -------- Balance, December 31, 1995 22,000 1 12,369 12,370 Net income 5,775 5,775 Dividends declared, paid $5,000 in 1996 and $7,000 in 1997 (12,000) (12,000) -------- -------- -------- -------- -------- -------- Balance, December 31, 1996 22,000 1 6,144 6,145 Net income 10,420 10,420 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 (Note 3) (1,531) 1,531 Translation adjustments 4 $ (249) (245) -------- -------- -------- -------- -------- -------- Balance, December 31, 1997 25,450 $ 1 $ 34,659 $ 5,174 $ (249) $ 39,585 ======== ======== ======== ======== ======== ========
*Gives effect to the 22 million-for-one stock split declared in 1997. The accompanying notes are an integral part of the consolidated financial statements. F-5 9 SYNTEL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1997, 1996 and 1995 (in thousands)
1997 1996 1995 Cash flows from operating activities: Net income $ 10,420 $ 5,775 $ 6,155 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,812 1,442 1,075 Deferred income taxes (507) Compensation expense related to stock options 38 Changes in assets and liabilities: Accounts receivable (2) (3,913) 3,429 Advance billings and other assets (6,182) (20) 710 Accounts payable and accrued liabilities 7,837 1,370 632 Deferred revenue 4,419 1,277 35 -------- -------- -------- Net cash provided by operating activities 17,835 5,931 12,036 Cash flows used in investing activities: Property and equipment expenditures (1,749) (2,138) (3,320) Acquisition of Syntel India (7,000) -------- -------- -------- Net cash used in investing activities (8,749) (2,138) (3,320) -------- -------- -------- Cash flows from financing activities: Net payments on bank line of credit (340) Net proceeds from issuance of stock 34,627 Dividend/distribution payments (18,100) (5,000) -------- -------- -------- Net cash provided by (used in) financing activities 16,527 (5,000) (340) -------- -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents 25,613 (1,207) 8,376 Cash and cash equivalents, beginning of year 7,332 8,539 163 -------- -------- -------- Cash and cash equivalents, end of year $ 32,945 $ 7,332 $ 8,539 ======== ======== ======== Cash paid during the year for income taxes $ 3,411 $ 723 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-6 10 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 through two separate delivery teams, IntelliSourcing and TeamSourcing. Through IntelliSourcing, the Company provides higher-value outsourcing services for ongoing management, development and maintenance of customers' business applications. In most IntelliSourcing engagements, the Company assumes responsibility for the management of customer development and support functions. IntelliSourcing engagements are generally supported by multi year contracts. As a percentage of total revenues, IntelliSourcing revenues grew from 36 percent in 1996 to 51 percent in 1997. 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 years ended December 31, 1997, 1996 and 1995, there were sales to two customers that exceeded 10 percent of total revenues. The largest customer was the same for 1997, 1996 and 1995, while the second largest customer was different in 1997 than in 1996 and 1995. Sales to these customers approximated: 1997, $38,560,000 (31.1 percent) and $14,828,000 (11.9 percent); 1996, $30,980,000 (33.6 percent) and $10,757,000 (11.7 percent); 1995, $34,084,000 (37.7 percent) and $12,455,000 (13.8 percent). At December 31, 1997 and 1996, approximately 36 and 30 percent of accounts receivable, net were from these two customers, respectively. 2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES: a. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Syntel, Inc. ("Syntel") and its wholly owned subsidiaries Syntel Software Private Limited ("Syntel India"), an Indian limited liability company, Syntel Singapore Ptd., Ltd., ("Syntel Singapore"), a Singapore limited liability company, and Syntel ("Syntel U. K."), a United Kingdom unlimited liability company. All significant intercompany balances and transactions have been eliminated. F-7 11 2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: b. REVENUE RECOGNITION: The Company recognizes revenues from time and material contracts as services are rendered and costs are incurred. Revenue from fixed-price contracts are recognized on the percentage-of-completion method, measured by the percentage of cost incurred to date to the estimated total cost at completion. The cumulative impact of any revision in estimates of the percentage complete or losses on contracts is reflected in the period in which the changes become known. c. 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 bonds and notes with maturity dates of less than 90 days. d. WARRANTY COSTS: The Company provides limited warranties on certain of its Year 2000 compliance contracts. A provision for warranty costs is made at the time contract services are performed. At December 31, 1997, the warranty accrual aggregated $818,000. e. 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. f. PROPERTY AND EQUIPMENT: 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 of the assets ranging from three to seven years. 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. g. INCOME TAXES: Prior to August 12, 1997, the Company elected to operate as an S-corporation under the Internal Revenue Code. An S-corporation is not subject to income taxes at the corporate level (with exceptions under certain state income tax laws). 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. With the termination of the S-corporation status, the Company changed its method of accounting for tax reporting purposes from the cash method to the accrual method, resulting in an income tax obligation of $1.8 million, to be paid in four equal annual installments. The obligation includes $.7 million resulting from the tax effect of temporary differences between financial statement and tax reporting carrying amounts which was recognized as a deferred tax asset. F-8 12 NOTES TO FINANCIAL STATEMENTS, CONTINUED 2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: h. PRO FORMA NET INCOME: To reflect the Company's pro forma net income 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 periods. 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. i. ESTIMATES: Use of estimates, as determined by management, are required in the preparation of financial statements in conformity with generally accepted accounting principles. Actual results could differ from estimates. j. 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 shareholders' equity. k. PER SHARE DATA: The Company adopted Statement of Financial Accounting Standards No. 128 "Earnings per Share", for the year ended December 31, 1997. The pro forma earnings per share for the years 1996 and 1995 have been restated to comply with these standards. Basic earnings per share is calculated by dividing pro forma net income by the average number of shares outstanding during the applicable period. The Company had stock options which are considered to be potentially dilutive to common stock. Diluted earnings per share is calculated by dividing pro forma net income by the average number of shares outstanding during the applicable period adjusted for these potentially dilutive options. The following table sets forth the computation of pro forma earnings per share:
1997 1996 1995 ---------------------- ----------------------- ------------------- EARNINGS EARNINGS EARNINGS PER PER PER SHARES SHARE SHARES SHARE SHARES SHARE -------- --------- -------- ---------- -------- --------- (in thousands, except per share earnings) Basic earnings per share 25,175 $ 0.41 25,000 $ 0.18 25,000 $0.18 Net dilutive effect of stock options outstanding 117 Shares assumed outstanding due to excess distributions in 1997 763 1,245 1,145 ------ ------- ------ ------ ------ ----- Diluted earnings per share 26,055 $ 0.39 26,245 $ 0.17 26,145 $0.17 ====== ======= ====== ====== ====== =====
F-9 13 NOTES TO FINANCIAL STATEMENTS, CONTINUED 2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: l. 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. After underwriting discounts and other issuance costs, net proceeds to the Company were approximately $34.6 million. Prior to the initial public offering, the Company agreed to acquire 100 percent ownership of Syntel India for $7 million in cash. The purchase price was paid from available cash after the initial public offering. The acquisition, which was a merger of interests under common control, is being 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. A reconciliation of the period between January 1, 1997 and August 12, 1997 and the previously reported years ended December 31, 1996 and 1995, revenue and net income is as follows:
JAN 1, 1997 - AUG 12, 1997 1996 1995 ------------- ---------- ---------- (in thousands) Revenue $ 70,929 $ 92,237 $ 90,326 Syntel India revenue 4,668 4,159 2,520 Intercompany revenue elimination (4,602) (4,066) (2,520) -------- -------- -------- Total revenue $ 70,995 $ 92,330 $ 90,326 ======== ======== ======== Net income $ 4,561 $ 4,171 $ 5,237 Syntel India net income 2,240 1,604 918 -------- -------- -------- Total net income $ 6,801 $ 5,775 $ 6,155 ======== ======== ========
F-10 14 NOTES TO FINANCIAL STATEMENTS, CONTINUED 4. PROPERTY AND EQUIPMENT: Cost of property and equipment at December 31, 1997 and 1996 is summarized as follows (in thousands):
1997 1996 Computer equipment and software $ 5,432 $ 4,084 Furniture and equipment 3,482 3,167 Leasehold improvements 385 300 --------- --------- 9,299 7,551 Accumulated depreciation 5,060 3,248 --------- --------- $ 4,239 $ 4,303 ========= =========
5. LINE OF CREDIT: The Company has a line-of-credit arrangement with a bank which will expire August 31, 1998, which provides for borrowings up to $25,000,000. 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 will expire August 31, 1998 which provides for borrowings up to $10,000,000 to finance acquisitions. 6. 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 payments under noncancelable leases as of December 31, 1997 are as follows (in thousands):
1,998 $ 1,825 1,999 1,112 2,000 789 2,001 490 2,002 18 -------- $ 4,234 ========
Total rent expense charged to operations amounted to approximately $1,678, $1,352 and $1,219 for the years ended December 31, 1997, 1996 and 1995, respectively. F-11 15 NOTES TO FINANCIAL STATEMENTS, CONTINUED 7. INCOME TAXES: Income before income taxes for U. S. and foreign operations was as follows (in thousands):
1997 1996 1995 U. S. $ 9,663 $ 4,492 $ 5,665 Foreign 4,274 1,633 926 --------- -------- -------- $ 13,937 $ 6,125 $ 6,591 ========= ======== ========
The provision for income taxes is as follows:
1997 1996 1995 Currently payable Federal $ 3,839 321 408 State and local 474 29 8 Foreign 2 $ - - -------- ------- ------- Total currently payable provision for income taxes 4,313 350 436 Deferred: Federal (708) - - State and local (88) - - Foreign - - - -------- ------- ------- Total deferred (796) - - -------- ------- ------- Total provision $ 3,517 $ 350 436 ======== ======= =======
Upon termination of the S-Corporation election, as described in Note 2, current and deferred income taxes of $1.8 million and ($.7) million, respectively, were recognized. Accordingly, the above provision for income taxes includes a $1.1 million nonrecurring expense resulting from the termination of the S-Corporation election. In accordance with the Internal Revenue Code, the Company will defer the payment of 75 percent of the total tax obligation of $1.8 million over the next three years. The components of the net deferred tax asset are as follows (in thousands):
1997 1996 Deferred tax assets, accrued expenses $ 1,574 - Deferred tax liabilities, property and equipment (26) - ---------- -------- Net deferred tax asset $ 1,548 - ========== ========
F-12 16 NOTES TO FINANCIAL STATEMENTS, CONTINUED 7. INCOME TAXES, CONTINUED: Balance sheet classification of net deferred tax asset is summarized as follows (in thousands):
1997 1996 Deferred tax asset, current $ 1,041 - Deferred tax asset, noncurrent 507 - -------- -------- $ 1,548 - ========= ========
Under the Indian Income Tax Act of 1961 (the "Act"), virtually all of Syntel India's income is exempt from Indian Income Tax as profits attributable to export operations. Under the Act, there are certain alternative minimum tax provisions which impose tax on net profits at a rate of approximately 35 percent. These provisions are not currently applicable due to the tax holiday expiring in March 2000 for the Mumbai operation and in March 2002 for the Chennai operation. The Company has not recorded deferred income taxes applicable to undistributed earnings of Syntel India. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for U. S. federal and state income tax or India "border tax" of 10 percent has been provided thereon. The unrecognized taxes on the undistributed earnings is approximately $3.8 million. 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 34 percent to income before income taxes:
1997 1996 1995 (in thousands) Statutory tax provision $ 4,739 $ 2,083 $ 2,241 State taxes, net of federal benefit 655 321 428 S-Corporation income not subject to federal income taxes (1,556) (1,527) (1,926) Foreign income not subject to tax (1,411) (527) (307) Termination of S-corporation status 1,090 - - ---------- ---------- ---------- Total provision for income taxes $ 3,517 $ 350 $ 436 ========== ========== ==========
F-13 17 NOTES TO FINANCIAL STATEMENTS, CONTINUED 8. STOCK OPTION PLAN: The Company established a stock option plan in 1997 under which 2 million shares of common stock were reserved for issuance. The dates on which granted options are first exercisable is 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 10 years from the date of grant. Options available to grant under the plan at December 31, 1997 aggregate 919,420 shares. 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 certain other options granted in 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 in 1997 been determined consistent with the methodology of SFAS 123, the pro forma impact on the Company's net income and earnings per share would have been immaterial The following table sets forth changes in options outstanding:
WEIGHTED NUMBER AVERAGE OF SHARES AMOUNT PRICE ------------ ------------- ------------ Shares under option: Outstanding at beginning of year - - - Granted Price equals fair value 503,000 $ 4,536,000 $ 9.02 Price less than fair value 650,500 4,021,500 6.18 ----------- ----------- Granted 1,153,500 8,557,500 7.42 Forfeited 72,920 501,120 6.87 ----------- ------------ ----------- Outstanding at end of year 1,080,580 $ 8,056,380 7.46 =========== ============ Exercisable at end of year none ===========
F-14 18 NOTES TO FINANCIAL STATEMENTS, CONTINUED 8. STOCK OPTION PLAN, CONTINUED: The following table sets forth details of options outstanding at December 31, 1997:
OPTIONS OUTSTANDING ------------------------------------------------------------------------------------------------------------- WEIGHTED WEIGHTED RANGE OF AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE PRICES OUTSTANDING LIFE PRICE --------------------- --------------- -------------- ------------ $2.00 130,000 9.2 $ 2.00 $ 7.00 - $ 9.00 915,750 9.7 8.09 $ 11.00 - $ 12.00 34,830 9.6 11.09 -------------- $ 2.00 - $ 12.00 1,080,580 9.7 7.46 ==============
The Company has also reserved one million shares of common stock for issuance under the Company's employee stock purchase plan. The plan, which has not yet been implemented, provides for employees to purchase pre-established amounts as determined by the Compensation Committee. The price at which employees may purchase common stock will be set by the Compensation Committee at not less than the lesser of 85 percent of the fair market value of the common stock on the NASDAQ National Market on the first day of the purchase period or 85 percent of the fair market value of the common stock on the last day of the purchase period. The purchase period will generally be one year or less. F-15 19 NOTES TO FINANCIAL STATEMENTS, CONTINUED 9. SEGMENT INFORMATION: Total revenues, income before income taxes and identifiable assets by geographic location were as follows:
1997 1996 1995 (in thousands) Revenues: United States operations $ 124,157 $ 92,237 $ 90,326 Foreign operations 9,379 4,159 2,520 Intercompany revenue elimination (9,198) (4,066) (2,520) ----------- --------- --------- Total revenue 124,338 92,330 90,326 Income before income taxes: United States operations $ 9,663 $ 4,492 $ 5,665 Foreign operations 4,274 1,633 926 ----------- --------- --------- Total income before income taxes 13,937 6,125 6,591 Assets at December 31: United States operations $ 58,574 $ 29,649 $ 27,878 Foreign operations 6,658 3,343 1,692 ----------- --------- --------- Total assets $ 65,232 $ 32,992 $ 29,570 =========== ========= =========
F-16 20 NOTES TO FINANCIAL STATEMENTS, CONTINUED 10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED): Selected financial data by calendar quarter were as follows:
FIRST SECOND THIRD FOURTH FULL QUARTER QUARTER QUARTER QUARTER YEAR ---------- --------- --------- ---------- ---------- (in thousands) 1997: Revenues $ 26,294 $ 29,031 $ 33,596 $ 35,417 $ 124,338 Cost of revenues 18,892 20,849 23,681 24,162 87,584 --------- -------- -------- --------- --------- Gross profit 7,402 8,182 9,915 11,255 36,754 Selling, general and administrative expenses 5,395 5,752 6,276 6,124 23,547 --------- -------- -------- --------- --------- Income from operations 2,007 2,430 3,639 5,131 13,207 Other income, net 121 102 299 208 730 --------- -------- -------- --------- --------- Income before income taxes 2,128 2,532 3,938 5,339 13,937 Pro forma income taxes 541 629 1,030 1,541 3,741 --------- -------- -------- --------- --------- Pro forma Net income $ 1,587 $ 1,903 $ 2,908 $ 3,798 $ 10,196 ========= ======== ======== ========= ========= Pro forma earnings per share, diluted $ 0.06 $ 0.07 $ 0.11 $ 0.15 $ 0.39 ========= ======== ======== ========= ========= Weighted average shares outstanding, diluted 25,820 26,245 25,992 25,737 26,055 ========= ======== ======== ========= ========= 1996: Revenues $ 21,862 $ 22,697 $ 23,482 $ 24,289 $ 92,330 Cost of revenues 16,200 16,396 17,048 17,439 67,083 --------- -------- -------- --------- --------- Gross profit 5,662 6,301 6,434 6,850 25,247 Selling, general and administrative expenses 4,266 4,840 5,019 5,146 19,271 --------- -------- -------- --------- --------- Income from operations 1,396 1,461 1,415 1,704 5,976 Other income (expense), net 138 86 39 (114) 149 --------- -------- -------- --------- --------- Income before income taxes 1,534 1,547 1,454 1,590 6,125 Pro forma income taxes 452 446 353 495 1,746 --------- -------- -------- --------- --------- Pro forma Net income $ 1,082 $ 1,101 $ 1,101 $ 1,095 $ 4,379 ========== ========= ========= ========== ========== Pro forma earnings per share, diluted $ 0.04 $ 0.04 $ 0.04 $ 0.04 $ 0.17 ========= ======== ======== ========= ========= Weighted average shares outstanding, diluted 26,245 26,245 26,245 26,245 26,245 ========= ======== ======== ========= =========
F-17 -----END PRIVACY-ENHANCED MESSAGE-----