-----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, GZDgbbRi95b/jWQv75aX2/fYm8pwAZbSlhVoTpUCxWGxqxMOQmnv11xZNtfNENfu 6LBwfHDFq3xCIxLgsLeI7Q== 0000950124-99-002266.txt : 19990402 0000950124-99-002266.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950124-99-002266 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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 SEC ACT: SEC FILE NUMBER: 000-22903 FILM NUMBER: 99582083 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 1 FORM 10-K 1 ================================================================================ 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, 1998 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 18, 1999, based on the last sale price of $8.688 per share for the Common Stock on the NASDAQ National Market on such date, was approximately $44,133,675. As of March 18, 1999, the Registrant had 38,135,973 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Proxy Statement for the 1999 Annual Meeting of Shareholders to be held on or about June 2, 1999 are incorporated by reference into Part III hereof. 1 2 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, Singapore, Mauritius, and Australia on a consolidated basis. OVERVIEW Syntel is a worldwide provider of professional information technology ("IT") consulting and applications management services to Fortune 1000 companies, as well as to government entities. The Company's service offerings are grouped into two segments, IntelliSourcing(sm) and TeamSourcing(R). IntelliSourcing(sm) consists of outsourcing services for ongoing management, development and maintenance of business applications, including Year 2000 compliance services. TeamSourcing(R) consists of professional IT consulting services. Syntel believes that its service offerings are distinguished by its Global Service Delivery Model, 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 IntelliSourcing, 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(sm), 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 also provides Year 2000 compliance services to customers using its proprietary Method2000(R) solution. IntelliSourcing accounted for approximately 51% and 62% of revenues, for the years ended December 31, 1997 and 1998, 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 49% and 38% of revenues, for the years ended December 31, 1997 and 1998, respectively. The Company's Global Service Delivery Model 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. 2 3 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 1998, based on revenues, were American International Group, Inc., Dayton Hudson Corp., Ford Motor Co., Borders Group, Inc., and Daimler-Chrysler Corporation. 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 IntelliSourcing services. During recent years the Company has focused on increasing its resources in the development, marketing and sales of its IntelliSourcing 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, trains recent college graduates and other recruits 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, 1998, Syntel's worldwide billable headcount consisted of 1,581 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 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 3 4 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. 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, 1998, approximately 67% of Syntel's U.S. workforce (45% 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 IntelliSourcing 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 a material adverse effect on the Company's financial condition. 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 78%, 75% and 70% of revenues for the years ended December 31, 1996, 1997 and 1998, respectively. 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 34%, 31% and 26% of revenues for the years ended December 31, 1996, 1997, and 1998, respectively. 4 5 The three largest clients for the years ended December 31, 1996, 1997 and 1998 are as follows: Syntel's Largest Three Customers Percent of Total Revenues
1996 1997 1998 ----------------- ---------------- ---------------- % of %of & of Ttl Rev Rank Ttl Rev Rank Ttl Rev Rank Segment ------- ---- ------- ---- ------- ---- ------- American In't Group 34% 1 31% 1 26% 1 Intellisourcing Dayton Hudson Group * 12% 2 14% 2 Intellisourcing Ford Motor Company 12% 2 9% 3 9% 3 Intellisourcing & TeamSourcing Intellisourcing AT&T 9% 3 * * Teamsourcing --------- -------- ----- 55% 52% 49% *THE CUSTOMER RECEIVED SERVICES BUT WAS NOT ONE OF THE TOP THREE.
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 customers businesses, any failure by Syntel to meet a customers' expectations could result in 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. 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, 1998, the Company had approximately 26% 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 most of the 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. 5 6 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, enterprise solution 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 and Computer Sciences Corporation. The Company's principal competitors for Year 2000 compliance engagements include IBM Global Solutions, Cap Gemini, and Keane. 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. 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 $168.0 million in 1998, and the number of worldwide billable employees has increased from 689 as of December 31, 1993 to 1,581 as of December 31, 1998. 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, and Year 2000 compliance services. A key factor in the Company's 6 7 growth strategy is to increase outsourcing service engagements with new and existing customers. This strategy was evidenced by a shift in the revenue mix from TeamSourcing to IntelliSourcing for the years ended 1996, 1997 and 1998, as well as the improvement in the Company's direct margins. However, these services generally require a longer sales cycle (up to 12 months) and generally require approval by more senior levels of management within the customer's 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 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 certain engagements billed on a fixed-price basis, as distinguished from the Company's principal method of billing on a time-and-materials basis. In addition, the Company offers its Year 2000 compliance services on a fixed-price basis in contrast to most other compliance service providers who charge customers on a time-and-materials basis. Furthermore, the Company 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 3%, 12% and 22% of total revenues for the years ended December 31, 1996, 1997, and 1998 respectively. 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. Mr. Desai is subject to an employment agreement with the Company with a term ending December 31, 1999, which contains noncompetition, nonsolicitation and nondisclosure covenants during the term of the agreement and for two years following termination of 7 8 employment. 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 may 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 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 (SM), IntelliTransfer (SM), TeamSourcing(R), MapperQuest (SM), Syntel Y2K Consultant Online (SM), Pilot 2000 (SM), Implement 2000 (SM), and Recover 2000 (SM). The Company has submitted federal trademark applications to register certain names for its service offerings, including the IntelliSourcing and TeamSourcing names. There can be no 8 9 assurance, however, that the Company will be successful in obtaining federal trademarks for these trade names. YEAR 2000. The Year 2000 issue is the result of date-sensitive devices, systems, and computer programs that were deployed using two digits rather than four to define the applicable year. Any such technologies may recognize a year containing "00" as 1900 rather than the year 2000. This could result in system failure or a temporary inability to process transactions or engage in similar normal business operations. The Company has a Year 2000 project plan designed to identify and assess the risks of non-compliance associated with its information systems, operations, suppliers, and customers; and to develop and implement remediation and contingency plans to mitigate the risks. The Company's remediation project is well underway with a targeted completion date in the early fall of 1999. The plan includes validated assurances from suppliers that year 2000 issues will not impact service levels and validated assurances from key customers that year 2000 issues will not impact their service requirements. However, there are no assurances that validations will be adequate, and if problems are identified, that they will be addressed in a timely and satisfactory manner. The inability of a key supplier to provide adequate services, or the inability of a customer to meet their contractual obligations could result in a material adverse impact on the Company's results of operations and financial condition, as well as business interruptions. The Company believes that it's greatest potential financial and operational risks are associated with service level interruptions from key communications and utilities vendors; however, as the year 2000 project continues, additional problems may be discovered or the Company may find that the cost of remediation exceeds current expectations. In addition, even if the Company, in a timely manner, completes all of its assessments, implements and tests all remediation plans believed to be adequate, and develops all contingency plans believed to be adequate, some problems may not be identified or corrected in time to prevent material adverse consequences or business interruptions to the Company. INDUSTRY BACKGROUND Increasing globalization, technological innovation and deregulation are creating an increasingly competitive business environment that is requiring companies to change fundamentally 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, implementing and maintaining IT solutions 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 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 9 10 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. In addition, many organizations face a significant challenge because many of their existing computer systems run software programs which cannot properly process dates after 1999. Without a resolution of this Year 2000 problem, these software programs will fail due to an inability to correctly interpret dates in the year 2000 and thereafter. 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. SYNTEL SOLUTION Syntel provides IntelliSourcing services consisting of applications management services for ongoing management, development and maintenance of business applications, including Year 2000 compliance services, and TeamSourcing services consisting of professional IT consulting services. The Company believes that its IntelliSourcing 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 TeamSourcing and IntelliSourcing service offerings are distinguished by its Global Service Delivery Model, 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 SERVICE DELIVERY MODEL. Syntel performs its services on-site at 10 11 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 Service Delivery Model 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 Service Delivery Model, the Company currently has four Global Development Centers located in Cary, North Carolina; Mumbai, India; Chennai, India; and Santa Fe, New Mexico. 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, 1996, 1997, and 1998, 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. PROVEN INTELLECTUAL CAPITAL. Over its 19-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 ongoing management, development and maintenance of their IT systems by utilizing its Global Service Delivery Model, intellectual capital and customer service orientation. The Company plans to continue to pursue the following strategies to achieve this objective: LEVERAGE GLOBAL SERVICE DELIVERY MODEL. 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 11 12 services to its existing customers, expand services to existing customers and to attract new customers. Moreover, the flexibility and capacity of the Global Service Delivery Model 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. FOCUS RESOURCES ON INTELLISOURCING SERVICES. Through IntelliSourcing, the Company markets its higher value applications management services for ongoing applications management, development, maintenance and Year 2000 compliance functions. In recent years, the Company has significantly increased its investment in IntelliSourcing services and realigned its resources to focus on the development, marketing and sales of its IntelliSourcing services, including the hiring of additional salespeople and senior managers, redirecting personnel experienced in the sale of higher value contracts, developing proprietary methodologies, such as Year 2000 offerings and services, increasing marketing efforts, and redirecting organizational support in the areas of finance and administration, human resources and legal. As a result, IntelliSourcing revenues have increased from $33.3 million for the year ended December 31, 1996, to $64.0 million for the year ending December 31, 1997, representing a 92% increase; and increased to $103.9 million for the year ended December 31, 1998, representing a 62% increase. EXPAND CUSTOMER BASE AND ROLE WITH CURRENT CUSTOMERS. The Company's sales efforts includes a strategy of migrating existing TeamSourcing customers to higher value IntelliSourcing services. Traditionally, the Company has 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 IntelliSourcing 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 $20.5 million for the year ended December 31, 1998. 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 Asia, while also continuing its marketing efforts in other parts of the world, particularly 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 Enterprise Solutions, 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 12 13 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 recent college graduates and other 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 expand through the selective acquisitions of IT services firms to either augment its technical expertise, expand geographically, or provide opportunities to cross-sell services. The Company has increased focus on the identification and pursuit of acquisition candidates. SERVICES Syntel provides a broad range of IT services through its IntelliSourcing and TeamSourcing service offerings. Through IntelliSourcing, the Company provides applications management services for ongoing management, development and maintenance of customer applications, including Year 2000 compliance services. Through TeamSourcing, the Company provides professional IT consulting services. The Company believes that its established TeamSourcing customers represent an attractive base from which to grow its IntelliSourcing services and, as such, during the past year has increased the personnel and resources dedicated to the development, marketing and sales of its IntelliSourcing services. TeamSourcing and IntelliSourcing 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, 1997 and December 31, 1998, IntelliSourcing accounted for approximately 51% and 62%, respectively, of the Company's revenues and TeamSourcing represented approximately 49% and 38%, respectively, of the Company's revenues. INTELLISOURCING(SM) Syntel provides higher-value applications management services for ongoing management, development and maintenance of business applications, including Year 2000 compliance services. Over the last two years, the Company has made significant investments in IntelliSourcing, including the hiring of additional sales people and senior managers, redirecting personnel experienced in the sale of higher-value contracts, developing proprietary methodologies, including a package of Year 2000 offerings and services, increasing marketing efforts, and realigning organizational support in the areas of finance, administration, human resources and legal. The Global Service Delivery model is central to Syntel's delivery of IntelliSourcing 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. BUSINESS APPLICATIONS OUTSOURCING. Through IntelliSourcing, Syntel assumes responsibility for and manages selected application support functions 13 14 of the customer. Rather than being responsible for an entire IT department, including computers, other hardware, networks and all IT functions, IntelliSourcing focuses solely on providing professional services for selected IT applications. IntelliSourcing is fundamentally different than facilities management, which is cost intensive and involves the ownership of hardware. IntelliSourcing is a more flexible alternative to traditional full-scale outsourcing, as it permits the customer to maintain control of its IT resources and establish priorities. IntelliSourcing permits the customer to select the applications best suited to remain managed in-house, while still benefiting from Syntel's expertise and resource availability. The benefits of IntelliSourcing also include reliable maintenance and upkeep of systems on which the business depends, reduced operating costs, availability of IT personnel and access to best practice solutions, while allowing the customer to focus on its core competencies. Syntel has developed methodologies, processes and tools to effectively integrate and execute IntelliSourcing 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. At engagement initiation, Syntel's services are based on its expertise in the software life-cycle and underlying technologies, and are thus focused on technical solutions. For most new engagements, the Company starts by performing functions primarily revolving around production control, application systems maintenance, development of new and changed systems functionality, and 24-hour help desk support. As IntelliSourcing engagements progress, the Company typically provides an increasing proportion of software development services offshore, allowing Syntel to reduce its overall cost of service and improve responsiveness. Because providing IntelliSourcing 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 IntelliSourcing services from other outsourcing services. YEAR 2000 COMPLIANCE SERVICES. As a component of its IntelliSourcing services, the Company invested substantial resources in developing a package of Year 2000 offerings and services. The Company used its Year 2000 capabilities to expand its role with existing TeamSourcing customers, gain new 14 15 customers and market its IntelliSourcing services. All of Syntel's Year 2000 service packages are based on Method2000(R), a proprietary ITAA (International Technology Association of America)certified solution developed by Syntel. Method2000(R) is a second generation solution aimed at innovative business processes, methodologies, techniques and tools, and maximizing the use of lower-cost offshore resources. The Method2000(R) service packages are: Pilot2000(sm), Implement2000(sm) and Recover2000(sm). The Recover2000 service package enables Syntel to assume responsibility for in-progress Year 2000 compliance projects previously performed by the customer or another IT service provider. Using the Pilot2000 service package, Syntel identifies a small representative portion of the customer's application systems portfolio and executes an entire Year 2000 compliance project on the representative sample. In addition to constituting an effective "proof of concept," this provides specific customer environment knowledge to Syntel. With this specific knowledge, Syntel seeks to offer fixed-price solutions for additional applications beyond the pilot using the offering Implement2000. The Company has adapted a strategy of selectively accepting only Year 2000 engagements which provide the potential for an expanded strategic or long term relationship. While this strategy protects and enhances long term revenue potential it has limited the amount of short term Year 2000 revenues. As a result, Year 2000 revenues accounted for only 18% of total revenues for the year ended December 31, 1998. TEAMSOURCING(R) 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 Service Delivery Model, primarily through international recruiting, training and relocation, to meet customer needs for resource depth, expertise, and responsiveness. In order to continue to enhance its TeamSourcing services expertise, Syntel has enhanced its capabilities in enterprise resource planning ("ERP"), including the implementation of software packages from SAP, Oracle, and Peoplesoft. The Company also enhanced its ERP practice through the acquisition of substantially all of the business interests of Waypointe Information Technologies, Inc. in December, 1997. The Company has also developed expertise in emerging technologies such as Internet/intranet applications, Front-office applications, Data Warehousing technologies, and E-commerce technologies, client/server applications and object-oriented software. By focusing on customer satisfaction and the delivery of quality 15 16 services to TeamSourcing customers, the Company believes it is able to generate opportunities to provide its TeamSourcing customers with higher value application outsourcing services and Year 2000 compliance services. The effectiveness of its TeamSourcing services and its 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 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 1997, Ford extended Syntel's Q-1 rating for another year after successful completion of a Q-1 standards audit. 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 Execution" from the Dayton Hudson Corporation. The Company is also a Microsoft Certified Solution Provider. For the years ended December 31, 1996, 1997, and 1998, over 90% of the Company's TeamSourcing revenues were from customers for whom the Company provided services during the previous period. 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) and Method2000(R), creating reusable software components 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. 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 1998, the Company provided services to over 200 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 1998, include: 16 17
FINANCIAL SERVICES MANUFACTURING RETAIL - ------------------ ------------- ------ American Int'l Group, Inc. Boeing Dayton Hudson Co Blue Cross/Blue Shield of GA Ford Motor Co. Safeway, Inc. Colonial Management Daimler-Chrysler Corp. Mervyn's CitiBank Int'l Business Machines Corp. Kmart Corp. CIGNA Corp. Unisys Corp. Lucky Stores First Union Corp. New Venture Gear Borders Prudential Insurance Honeywell American Annuities Group Hewlett-Packard Corp. CNA Insurance Xerox Corp. Kemper Insurance Westinghouse Electric Corp. Lucent Technologies Cummins Dell Computer INFORMATION/ TRANSPORTATION COMMUNICATIONS GOVERNMENT - -------------- -------------- ---------- Norfolk Southern Corp. AT&T Corp. New Mexico Allied Van Lines Consolidated Communication New York Ryder Directories Malta Yellow Technologies Intellisoft West Virginia Northwest Airlines Corp. MCI Illinois LM Ericsson Telephone Co. Nortel Sprint
For the years ended December 31, 1996, 1997, and 1998, the Company's top ten customers accounted for approximately 78%, 75%, and 70% of the Company's revenues, respectively. American International Group, Inc. and Dayton Hudson Corporation, the Company's largest customers for the years ended December 31, 1997 and December 31, 1998, represented approximately 31% and 12% of the revenue for the year ended December 31, 1997, respectively, and approximately 26% and 14% of revenue for the year ended December 31, 1998, respectively. For the year ended December 31, 1996, American International Group was the Company's largest customer with 34% of the Company's revenues while the Ford Motor Company was the second largest customer with 12% of the Company's revenues. 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 continuously through December 31, 1998. 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 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 17 18 of policy underwriting, claims management and financial reporting and encompass both mainframe and client/server environments. During 1998, the Company successfully completed Year 2000 conversion services to AIG on a fixed-price basis. 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. During the first quarter of 1998, the Company signed a contract renewal with AIG to provide IT services through December 31, 2000. AIG may terminate the contract upon six months written notice and payment of an early termination penalty. GLOBAL SERVICE DELIVERY MODEL Syntel's Global Service Delivery Model 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 Service Delivery Model 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 Service Delivery Model 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. 18 19 The Company's four Global Development Centers located in Cary, North Carolina, Mumbai, India, Chennai, India and Santa Fe, New Mexico support the Company's Global Service Delivery Model. The Cary, North Carolina Global Development Center, which employs over 260 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 approximately 500 persons as of December 31, 1998, 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 five years, was expanded to accommodate a capacity in excess of 700 people. The expansion was completed in the third quarter of 1998. During 1998 the Company opened a new training and development center in Chennai, India which provides accommodations for an additional 600 persons. While staffing began in early 1998, the center was essentially completed in the third quarter. As it is only staffed at 23% of capacity, the facility provides Syntel the ability to respond quickly to customer and project staffing needs. The Santa Fe, New Mexico Global Development Center, which employs over 30 people, serves as a training and development center. During 1997, the Company established wholly owned subsidiaries in London, England and Singapore with a total investment 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 Oakbrook, Illinois; Dallas, Texas; Jacksonville, Florida; San Ramon, California; Minneapolis, Minnesota; New York, New York; Troy, Michigan; Woodbridge, New Jersey; Pittsburgh, Pennsylvania; London, England; and Singapore. The sales staff is integrated, with specialists for TeamSourcing and IntelliSourcing included with each sales team. During recent years the Company has focused on increasing its staffing of professional salespeople in IntelliSourcing both by dedicating internal sales professionals to this service offering and through outside hiring of professionals experienced in marketing outsourcing engagements. The sales cycle for IntelliSourcing engagements ranges from 6 to 12 months depending on the complexity of the engagement. Due to this longer sales cycle, IntelliSourcing sales executives follow an integrated sales process for the development of engagement proposals and solutions, and receive ongoing input 19 20 from the Company's technical services, delivery, finance and legal departments throughout the sales process. The IntelliSourcing 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 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. During 1996, 1997 and 1998, over 90% of TeamSourcing revenues were from customers who received services during the prior period. Syntel's marketing organization seeks to build awareness of its IntelliSourcing and TeamSourcing (including Enterprise Solutions) 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, 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, 1998 the Company had 2,076 full time employees. Of this total, the U.S. operations employed 1,404 persons, including 1,234 IT professionals; the Indian operation employed 635 persons, including 555 IT professionals; and the Company employed an additional 37 persons in various remote locations, including the U.K. and Singapore. Of the 1,404 persons employed in the U.S. operation 924 held H-1B visas (permitting temporary residency in the U.S.) 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. 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 20 21 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 approximately 40,000 resumes. 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. Recent college graduates and other recruits selected by the Company participate in Syntel's Technical and Professional Development ("TPD") program which is delivered in both the U.S. and India. The TPD program consists of 8 weeks of training including classroom lectures, hands-on exercises and program development, tests and team projects. 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 worldwide 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. 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 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, 21 22 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. The Company has a stock option plan which offered stock options to substantially all of its employees under the Stock Option Plan at consummation of its initial public offering in 1997, and initiated a qualified stock purchase program during the fourth quarter of 1998, providing all eligible employees the opportunity to purchase the Company's Common Stock at a discount to fair market value. 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, enterprise solutions 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 and Computer Sciences Corporation. The Company's principal competitors for Year 2000 compliance engagements include IBM Global Solutions, Keane, and Cap Gemini. 22 23 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Registrant, their ages, and the position or office held by each, are as follows:
NAME AGE POSITION ---- --- -------- Bharat Desai................ 46 Chairman, President, Chief Executive Officer and Director Neerja Sethi................ 44 Vice President, Corporate Affairs and Director John Andary................. 49 Chief Financial Officer and Treasurer Ken Kenjale................. 49 Chief Technology Officer Daniel M. Moore............. 44 Chief Administrative Officer and Secretary Jay Clark................... 36 Vice President, Global Applications Management Rajiv Tandon................ 40 Vice President, Global Development Services Marlin Mackey............... 48 Vice President, Global Development Services Anil Kumar.................. 38 Vice President, International Business and Recruiting
- ------------------------------------------------------------------------------ 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. Mr. Moore also served as Chairperson of the Company's Executive Committee since July, 1997. 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. Jay Clark has served the Company as Vice President, Global Applications 23 24 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 & 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. Anil Kumar has served the Company as Vice President, International Business Development and Recruiting since January 1999. From November 1996 through January 1999, Mr. Kumar served as Assistant Vice President of International Business Development. During the period of July 1995 through December 1996, Mr. Kumar served as Vice President of Operations for Waypointe Information Technologies. During the period of January 1994 through June 1995 Mr. Kumar served as Assistant Vice President of Administration for Syntel. 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 also leases regional office facilities in Dallas, Texas; San Ramon, California; Oakbrook, Illinois; Minneapolis, Minnesota; Santa Fe, New Mexico; Jacksonville, Florida; Woodbridge, New Jersey; Pittsburgh, Pennsylvania; London, England; and Singapore. Syntel leases approximately 33,856 square feet of office space in Mumbai, India, under several leases that have recently been renewed, with expiration dates ranging from April, 2002 to September, 2003. 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 33,000 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. 24 25 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, 1998. 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 for the last quarter and partial quarter of 1997, after the Company's initial public offering. All prices give effect to a 3:2 stock split effective April 22, 1998.
1998 High Low - -------------------------------------------------------------------------------- August 12, 1997 through September 30, 1997 12.167 8.000 Fourth Quarter, 1997 11.083 5.667 First Quarter, 1998 27.333 9.875 Second Quarter, 1998 37.333 21.375 Third Quarter, 1998 31.5000 11.500 Fourth Quarter, 1998 20.625 10.438
(b) There were approximately 145 shareholders of record and 6,511 beneficial holders on March 18, 1999. (c) During the year ended December 31, 1997, the Company declared a dividend of $11,400,000. The 1997 dividends included distributions to the shareholders of the Company prior to the Company's initial public offering, equal to the Company's undistributed S corporation earnings through the date of termination of the company's S corporation status on August 12, 1997. 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. 25 26 ITEM 6. SELECTED FINANCIAL DATA. SYNTEL, INC. & Subsidiaries FIVE-YEAR HIGHLIGHTS (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.
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1994 1995 1996 1997 1998 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Revenues................... $67,340 $90,326 $92,330 $124,338 $167,975 Cost of revenues........... 55,315 70,014 67,083 87,584 104,971 ------- ------- ------- ------- ------- Gross profit.... .......... 12,025 20,312 25,247 36,754 63,004 Selling, general and administrative expenses,. 8,603 13,909 19,271 23,547 28,026 ------- ------- ------- ------- ------- Income from operations .... 3,422 6,403 5,976 13,207 34,978 Other income (expense), net. (67) 188 149 730 2,077 ------- ------- ------- ------- ------- Income before income taxes. 3,355 6,591 6,125 13,937 37,055 Income taxes.(1)..... 1 436 350 3,517 12,424 ------- ------- ------- ------- ------- Net income................. $ 3,354 $ 6,155 $ 5,775 $ 10,420 $ 24,631 Net income per share (diluted) $ 0.09 $ 0.16 $ 0.15 $ 0.27 $ 0.63 ======= ======= ======= ======= ======= Pro forma net income.(2)... $ 2,203 $ 4,421 $ 4,379 $ 10,196 ======= ======= ======= ======= ======= Pro forma net income per share $ 0.06 $ 0.11 $ 0.11 $ 0.26 ======= ======= ======= ======= ======= Weighted average shares Outstanding (diluted) 39,294 Pro forma weighted average ======= shares outstanding (diluted) 38,768 39,218 39,367 39,083 ======= ======= ======= =======
(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. 27
DECEMBER 31, --------------------------------------------------- 1994 1995 1996 1997 1998 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT OTHER DATA) BALANCE SHEET DATA: Working capital ................. $11,999 $15,763 $ 1,842 $35,346 $57,196 Total assets .................... 22,928 29,140 32,992 65,232 107,808 Long-term debt .................. -- -- -- -- -- Total shareholders' equity ...... 13,201 19,209 6,145 39,585 64,147 OTHER DATA: Billable headcount in U.S. ...... 1,097 1,029 1,103 1,260 1,135 Billable headcount in India ..... 83 107 190 478 413 Billable headcount at other locations .............. -- -- -- 8 33 ------- ------- ------- ------- ------- Total billable headcount ........ 1,180 1,136 1,293 1,746 1,581 ======= ======= ======= ======= =======
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, IntelliSourcing, consisting of applications management services for ongoing management, development and maintenance of business applications, including Year 2000 compliance services, and TeamSourcing, consisting of professional IT consulting services. The Company's revenues are generated from professional services fees provided through IntelliSourcing and TeamSourcing engagements. The Company has invested significantly in developing its ability to sell and deliver IntelliSourcing services, and has shifted a larger portion of its business to IntelliSourcing engagements which the Company believes have higher gross margin potential. For the years ended December 31, 1997 and 1998, the percentage of revenues generated by IntelliSourcing engagements was 51%,and 62% respectively. On IntelliSourcing 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 IntelliSourcing engagements have been historically on a time-and-materials basis most IntelliSourcing engagements started during 1997 and 1998 have been on a fixed-price basis. For the years ended December 31, 1997 and 1998, fixed-price revenues comprised 23% and 36% of total IntelliSourcing revenues respectively. Syntel recognizes revenues from fixed-price engagements on the percentage of completion method. For the years ended December 31, 1997 and 1998, the percentage of revenues generated by TeamSourcing engagements was 49% and 38%, respectively. 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. The Company's most significant cost is personnel cost, which consists of compensation, benefits, recruiting, relocation and other related costs for its 27 28 IT professionals. The Company strives to maintain its gross margin by 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 substantially 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, 1998, approximately 67% of Syntel's U.S. workforce (45% 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 the Company's Global Development Center in Cary, North Carolina to support up to 400 IT professionals; (ii) establishing a dedicated telecommunications link between the Company's United States operations and the Mumbai, India and Chennai, India development centers; (iii) establishing a Global Development Center in Chennai, India; (iv) adding additional space to the Mumbai Global Development Center; (v) relocating the Company's headquarters to larger offices in Troy, Michigan; (vi) increasing IntelliSourcing sales and delivery capabilities through significant expansion of the IntelliSourcing sales force and the Technical Services Group, which develops and formalizes proprietary methodologies, practices and tools for the entire Syntel organization; (vii) hiring additional experienced senior management; (viii) expanding global recruiting and training capabilities, and replacement of informal systems with highly integrated, Year 2000 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. For the years ended December 31, 1996, 1997, and 1998, over 90% of the Company's TeamSourcing revenues were from customers for whom the Company provided services during the previous period. These strong relationships also have resulted in the generation of a significant percentage of revenues from key customers. The Company's top ten customers accounted for approximately 78%, 75% and 70% of revenues for the years ended December 31, 1996, 1997, and 1998. 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 1997 and December 31, 1998, represented approximately 31% and 12% of the revenue for the year ended December 31, 1997, respectively, and approximately 26% and 14% of revenue for the year ended December 31, 1998, respectively. For the year ended December 31, 1996, American International Group was the Company's largest customer with 34% of the Company's revenues while the Ford Motor Company was the second largest customer with 12% of the Company's revenues. Although the Company does not currently foresee a credit risk associated with accounts receivable from these customers, credit risk is affected by conditions or occurences 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 28 29 software development services to the Company. Prior to the offering, the Company entered into an agreement pursuant to which the Company acquired Mr. Desai 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 independent chartered accountants in India pursuant to guidelines established 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 consummation of the offering, and the portion of the purchase price 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 a period of five consecutive years in the first eight 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"). The Export Exemption remains available after expiration of the Tax Holiday. The Company presently treats most of the 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 these earnings, 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.
PERCENTAGE OF REVENUES YEAR ENDED DECEMBER 31, ----------------------------------------------- 1996 1997 1998 ----- ----- ----- Revenues................... 100.0% 100.0% 100.0% Cost of revenues........... 72.6 70.5 62.5 ----- ----- ----- Gross profit............... 27.4 29.5 37.5 Selling, general and administrative expenses.. 20.9 18.9 16.7 ----- ----- ----- Income from operations..... 6.5% 10.6% 20.8%
29 30 The company manages the sales and delivery of services through two Segments, IntelliSourcing and TeamSourcing. The following table Sets forth selected segment financial data for the periods indicated: (In thousands, except percentages)
1996 1997 1998 ------- -------- -------- Revenues IntelliSourcing $ 33,355 $ 64,049 $103,906 TeamSourcing 58,975 60,289 64,069 -------- -------- -------- 92,330 124,338 167,975 Gross Margin IntelliSourcing 11,604 24,038 45,732 TeamSourcing 13,643 12,716 17,272 -------- -------- -------- 25,247 36,754 63,004 Gross Margin % IntelliSourcing 34.8% 37.5% 44.0% TeamSourcing 23.1% 21.1% 27.0% -------- -------- -------- 27.3% 29.6% 37.5% SG&A IntelliSourcing 9,345 15,440 18,329 TeamSourcing 9,926 8,107 9,697 -------- -------- -------- 19,271 23,547 28,026 SG&A % IntelliSourcing 28.0% 24.1% 17.6% TeamSourcing 16.8% 13.4% 15.1% -------- -------- -------- 20.9% 18.9% 16.7% Operating Margin IntelliSourcing 2,259 8,598 27,403 TeamSourcing 3,717 4,609 7,575 -------- -------- -------- 5,976 13,207 34,978 Operating Margin % IntelliSourcing 6.8% 13.4% 26.4% TeamSourcing 6.3% 7.6% 11.8% -------- -------- -------- 6.5% 10.6% 20.8%
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 development and Y2K projects in IntelliSourcing during the second half of 1998, the ramp down in some TeamSourcing engagements, and efficiency improvements in several fixed price IntelliSourcing engagements. INTELLISOURCING REVENUES. IntelliSourcing revenues increased to $103.9 million in 1998, or 62% of total revenues, from $64.0 million, or 51% of total revenues in 1997. The $39.9 million increase was attributable primarily to new engagements, growth in the base, and bill rate increases in several major accounts, contributing approximately $21 million, $10 million, and $9 million, 30 31 respectively. 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 compensation, and warranty reserves. IntelliSourcing cost of revenues decreased to 56.0% of total 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, improved margins on existing engagements, and higher margins on new engagements, each contributing approximately 5.0%, 2.0%, and 1.5%, respectively, partially offset by pay rate increases and benefits of approximately 1.9%. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. 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. IntelliSourcing selling, general and administrative expenses for the year ended December 31, 1998 increased to $18.3 million, or 17.6% of total IntelliSourcing revenues, from $15.4 million, or 24.1% of total IntelliSourcing revenues for the year ended December 31, 1997. The $2.9 million increase is due principally to $1.1 million from the transfer of sales and account management professionals from TeamSourcing, compensation increases of $0.7 million, offshore facility expansion of $0.4 million, internal system development of $0.3 million, expanded marketing programs of $0.2 million, and $0.3 million for other programs necessary to support growing activity levels. It is anticipated that IntelliSourcing selling, general, and administrative costs will continue to increase as a percentage of revenue from 1998 levels due to additional investments in sales personnel. TEAMSOURCING REVENUES. TeamSourcing revenues increased to $64.1 million in 1998, or 38% of total revenues, from $60.2 million, or 49% of total revenues in 1997. The $3.8 million increase was attributable primarily to increased average billing rates, the acquisition of the IT consulting base from Waypointe Information Technologies in December 1997, and offshore growth in the UK and Singapore, providing $5.7 million, $4.5 million, and $1.9 million to the revenue increase, respectively; partially offset by a $5.3 million revenue decrease due to a reduction in the average number of billable consultants and a $3.1 million decrease due to the conversion of TeamSourcing customers to IntelliSouricng engagements. End of year average hourly bill rates increased to $57.59 per hour as of December 31, 1998, from $52.70 as of December 31, 1997. COST OF REVENUES. Cost of revenues consist of costs directly associated with billable consultants in the U.S., including salaries, payroll taxes, benefits, relocation costs, immigration costs, finders fees, and trainee compensation. TeamSourcing cost of revenues decreased to 73.0% of TeamSourcing revenues in 1998, down from 78.9% in 1997. The decrease in cost of revenues as a percent of revenues was attributable primarily to bill rate increases and the increased share of higher margin Enterprise Solutions revenues, contributing approximately 8.1% and 1.6%, respectively to the overall improvement while increased compensation and benefits partially offset the improvement with a 3.8% increase. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. TeamSourcing sales, general, and administrative expenses for the year ended December 31, 1998 increased to 31 32 $9.7 million, or 15.1% of total TeamSourcing revenues, from $8.1 million, or 13.4% of total TeamSourcing revenues for the year ended December 31, 1997. The $1.6 million increase was attributable principally to increased management and sales staff in Enterprise Solutions of $1.0 million, increased marketing expenses of $.5 million, growth in the UK and Singapore of $0.5 million, compensation increases of $.4 million, and other expenses of $.2 million; partially offset by the transfer of sales and account management professionals to IntelliSourcing of $1.1 million COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996 REVENUES. Total consolidated revenues increased from $92.3 million in 1996 to $124.3 million in 1997, representing a 34.7% increase. The Company's total revenues were less dependent upon its largest customers in 1997 as compared to 1996. The top two customers accounted for 43% of total revenues in 1997, down from 46% of total revenues in 1996. Additionally, the top ten customers accounted for 75% of total revenues in 1997 as compared to 78% in 1996. INTELLISOURCING INTELLISOURCING REVENUES. IntelliSourcing revenues in 1997 increased to $64.0 million, or 51% of total revenues, from $33.3 million, or 36% of total revenues in 1996. The revenue increase was attributable primarily to the conversion of TeamSourcing customers to long term IntelliSourcing engagements, new 1997 engagements, and growth in the existing base, contributing increased IntelliSourcing revenues of $14.1 million, $9.3 million, and $7.2 million respectively. COST OF REVENUES. IntelliSourcing cost of revenues decreased to 62.5% of total revenues in 1997, down from 65.2% in 1996. The decrease in cost of revenues as a percent of revenues was attributable primarily to new higher margin engagements and efficiency improvements in existing engagements, contributing approximately 3.2% and 1.7%, respectively; partially offset by increases in compensation, benefits, and other direct costs of approximately 2.2%. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. IntelliSourcing selling, general, and administrative expenses for the year ended December 31, 1997 increased to $15.4 million, or 24.1% of total IntelliSourcing revenues, from $9.3 million, or 28.0% of total IntelliSourcing revenues for the year ended December 31, 1996. The $6.1 million increase is due principally to $1.8 million from the transfer of sales and account management professionals from TeamSourcing, offshore facility expansion of $1.0 million, fixed price reserves of $0.8 million, communication expenses of $0.4 million, expanded marketing programs of $0.3 million, start-up expenses in the UK and Singapore of $0.3 million, compensation and benefits of $0.3 million, and $1.2 million for other programs necessary to support growing activity levels. 32 33 TEAMSOURCING TEAMSOURCING REVENUES. TeamSourcing revenues in 1997 increased to $60.3 million, or 49% of total revenues, from $59.0 million, or 64% of total revenues in 1996. The revenue increase was attributable primarily to bill rate increases and growing ERP revenues, which more than offset a reduction in average billable headcount. Average hourly bill rates increased to $52.70 per hour as of December 31, 1997, from $46.81 as of December 31, 1996. The reduction in average billable headcount was due largely to the conversion of TeamSourcing engagements to long term IntelliSourcing engagements. COST OF REVENUES. TeamSourcing cost of revenues increased to 78.9% of TeamSourcing revenues in 1997, up from 76.9% in 1996. The increase in cost of TeamSourcing revenues as a percent of TeamSourcing revenues was attributable primarily to the migration of several higher margin engagements to IntelliSourcing, increased compensation and benefits, and other direct costs, contributing approximately 2.6%, 2.7%, and 1.7%, respectively to the increase in the cost of revenues; which more than offset increased billing rates of approximately 5.0%. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. TeamSourcing sales, general, and administrative expenses for the year ended December 31, 1997 decreased to $8.1 million, or 13.4% of total TeamSourcing revenues, from $9.9 million, or 16.8% of total TeamSourcing revenues for the year ended December 31, 1996. The $1.8 million decrease was attributable principally to the transfer of sales and account management professionals to IntelliSourcing. QUARTERLY RESULTS OF OPERATIONS Note 14 of the audited financial statements sets forth certain quarterly income statement data for each of the eight quarters beginning January 1, 1997 and ended December 31, 1998. 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 the amounts stated below 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; 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 IntelliSourcing engagements; customers' budget cycles and investment time for training. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its working capital needs through operations. Both the Mumbai and Chennai expansion programs, completed in mid 1998, were financed from internally generated funds. 33 34 Net cash provided by operating activities was $5.9 million, $17.8 million and $35.3 million for the years ended December 31, 1996, 1997, and 1998, respectively. The increase in cash provided by operating activities in 1997 over 1996 was primarily attributable to a $4.6 million increase in net income, an improvement of $3.8 million from a reduction in the days sales outstanding in accounts receivable, and a $6.7 million increase in accrued payroll, operating costs, and taxes, partially offset by a $3.1 million increase in advanced billings. The increase in cash provided by operating activities in 1998 over 1997 was primarily attributable to an increase in net income of $14.2 million, a decreased in advanced billings of $6.9 million and a $2.0 million increase in accounts payable and other accrued liabilities; partially offset by a $2.9 million increase in accounts receivable and a $2.8 million increase in deferred tax assets. The $2.9 million increase in accounts receivable is attributable to a 7 day reduction in days sales outstanding, resulting in a $3.0 million reduction in accounts receivable, offset by an increase of $5.9 million resulting from increased 1998 fourth quarter billings over the 1997 fourth quarter billings. Net cash used in investing activities was $2.1 million, $8.7 million and $3.3 million for the years ended December 31, 1996, 1997 and 1998, respectively. Cash used in investing activities in 1996 included $0.9 million for the relocation of the Company's worldwide headquarters, $0.5 million invested in recruiting and training software, and $0.5 million for facility upgrades and equipment for the Mumbai, India Global Development Center. Cash used in investing activities in 1997 of $8.7 million included $7.0 million for the Syntel, India acquisition, and $1.7 million for the purchase of computer equipment, software, and facility improvements at the Company's Global Development Centers. Cash used in investment 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 financing activities was $5.0 million in 1996, and $.2 million in 1998. Net cash provided by financing activities in 1997 was $16.5 million. Net cash used in financing activities in 1996 reflects a dividend paid to the Company's shareholders. 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. Net cash used in financing activities in 1998 are attributable to a final distribution of S corporation undistributed taxable profits. The Company has a line of credit with NBD Bank which provides for borrowings up to $30.0 million. The line of credit expires on August 31, 1999. The line of credit contains covenants restricting the Company from, among other things, incurring additional debt, issuing guarantees and creating liens on the Company's property, without 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, 1998, 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 $15.0 million 34 35 facility with NBD Bank to finance acquisitions which expires on August 31, 1999. The Company has not borrowed any amounts under this facility. The Company intends to extend both the $30 million and $15 million line of credit before the expiration date. The Company believes that the combination of present cash balances and future operating cash flows will be sufficient to meet the Company's currently anticipated cash requirements for at least the next 12 months. YEAR 2000 STATE OF READINESS. The Company has a Year 2000 project plan designed to identify and assess the risks of non-compliance associated with its information systems, operations, suppliers, and customers; and to develop and implement remediation and contingency plans to mitigate the risks. The year 2000 project plan consists of the following activities: - - IT and non-IT systems. - Complete inventory of all hardware, software, and firmware components. - Impact assessment - identify and prioritize components that are not Year 2000 compliant. - Develop solution plan - determine and prioritize remediation procedures for each non-compliant component, including decision to replace or repair. - Complete remediation and test systems - Develop contingency plans - - Third party confirmations - Obtain written verification from key suppliers that services will not be impacted by Year 2000 issues. - Obtain representations from major customers that their ongoing service requirements as well as accounts payable processes will not be impacted by Year 2000 issues. - - Develop contingency plans The Year 2000 remediation project is being directed by the Manager of Information Systems. Reporting to the manager is a Project Manager dedicated full time to the project. The Project Manager is supported by an assistant assigned full time to the project, as well as coordinators and subject matter experts at each of the Company's Global Development Centers. The Manager of Information Systems provides weekly status reports to the Company's senior management team. The Company's Internal IT and non-IT issues are minimized by the nature of its service offerings. As an Information Technology company, Syntel's revenues are driven by the extensive knowledge base of its professional IT consultants. IT and non-IT Year 2000 issues are principally associated with the compliance of personal computers, servers, communication equipment, and software residing on both individual personal computers and on the servers. Over 57% of the Company's IT professionals work on-site at the client location. These consultants utilize client provided work stations and software. Of approximately 1100 personal computers in operation at the Company's Global Development Centers and various branch offices, less than 75 will require replacement. All other non-compliant PCs have been or will be made Year 2000 compliant by means of a Bios upgrade. All PCs in the Cary 35 36 Development Center and the Troy headquarters have been upgraded and tested for compliance. All proprietary delivery software as well as internal "Syntranet" and E-mail (Lotus Notes) applications are Year 2000 compliant. The Company is currently implementing Year 2000 compliant, PeopleSoft financial and human resources information systems. The human resource system will be placed into live production in the early part of the second quarter of 1999 while the financial information system is on track to be placed into production during the third quarter of 1999. The financial information systems in Mumbai and Chennai, India are fully Year 2000 compliant. The following chart summarizes the project status as of March 1, 1999:
% completed Planned Completion Task At 3/16/99 Date ---- ---------- ---- Create Y2K awareness 100% -- Equipment & software inventory 100% -- Critical Systems impact assessment 100% -- Develop plan (budget, priorities, Resources) 100% -- Non-critical systems impact assessment 100% -- Supplier mailings & follow-up 50% May-99 Customer mailings & follow-up 5% May-99 Remediate non-compliant systems 30% Aug-99 Develop contingency plans 5% Aug-99 Project closure & review Sep-99
COSTS TO ADDRESS YEAR 2000 ISSUES. The Company anticipates total remediation costs to be approximately $700,000. These costs include amounts necessary to replace or upgrade hardware, replace phone systems, replace data communications equipment, replace non-compliant software, and compensation costs of individuals assigned full time to the project. The replacement of hardware costs will total approximately $500,000, software will total approximately $80,000, and compensation costs will total approximately $120,000. Costs to implement new Human Resource and Financial Information Systems are not considered as Year 2000 costs as these projects were based on growing business needs independent of Year 2000 issues, and were not accelerated by Year 2000 remediation requirements. The $700,000 has been fully reflected in the Company's 1999 operating plan and forecasts. The refocusing of resources to the Year 2000 has not caused any major internal projects to be deferred; however, the completion of projects to automate several internal processes have been slightly delayed. These delays will not have any material impact on the financial condition or results of operations. MAJOR RISKS OF THE COMPANY'S YEAR 2000 ISSUES. The Company believes that its greatest potential financial and operational risks are associated with service interruptions from key communication and utility service providers. To fully assess the extent of this risk, the Company has sent questionnaires to all key service providers via certified mail; is following up with secondary mailings, and is reviewing vendor web sites on the Internet for confirmation of Year 2000 compliance. To date, the Company has mailed approximately 290 confirmations to key suppliers and has received approximately 25 responses, including positive confirmation from its largest communications vendor, Sprint, as well as ADP, the Company's payroll processor. The loss of communication capabilities would have an immediate impact on the Company's ability to maintain operations as would the loss of power at any of the Company's Global Development Centers. The occurrence of either situation 36 37 could cause a material adverse effect on the Company's financial condition. The Mumbai, India Global Development Center, the Company's largest development center, is supported by a back-up power generator which could provide full power to the center indefinitely, in the event of a power failure. The next greatest potential risk is the potential for lost revenue should the Company's customers encounter Year 2000 issues, forcing a reallocation of resources from existing applications and projects. To fully assess the extent of this risk, the Company is sending questionnaires to the major customers, will explore customer readiness via direct communication by engagement and account executives, and will monitor customer web sites for confirmation of Year 2000 compliance. This risk is partially mitigated by several factors, including: (1) The Company has completed, tested, and delivered Year 2000 compliance services to five of the projected top 10 customers based on projected revenue for 1999 and 2000. (2) The Company's revenue base is comprised primarily of revenues from Fortune 1000 companies. Significant Year 2000 issues by these companies would suggest widespread problems, which in turn would open opportunities to selectively provide additional Year 2000 remediation services, potentially offsetting revenues lost from the suspension of non-year 2000 application support and development projects. The next greatest potential risk is the inability to process payroll, reduced or lost banking capabilities, and lost air travel capabilities. While loss of these capabilities would not have an immediate impact on the Company's ability to maintain normal operations, an extended loss of any of these functions could have a material adverse effect on the Company's business, results of operations, and financial condition. The Company receives payroll services from ADP (Automatic Data Processing) and banking services from NBD Bank. As indicated with other key service providers, the Company has requested written confirmation of Year 2000 Compliance from these vendors, and will follow-up with their account representatives to ensure receipt of confirmation. YEAR 2000 CONTINGENCY PLANS. The Company is in the process of developing contingency plans. Because the major risks (communications and utilities) are associated with large, external service providers for which the Company has no influence or control, and for which the implementation of substitute processes are not practical, contingency plans are anticipated to consist of migrating activity from vendors for which Year 2000 compliance has not been confirmed and in shifting work to Global Development Centers for which Year 2000 compliance for utilities and communications have been confirmed. In regard to air travel, the Company will attempt to reduce the impact from a temporary termination of services by assessing new customer placement requirements for early January 2000, and will suggest an earlier start date to ensure that key placements are not delayed. The Company has implemented a significant program to identify, evaluate, and remediate Year 2000 issues; however, as the Year 2000 project continues, additional Year 2000 issues may be discovered or the Company may find that the costs of these activities exceed current expectations. In many cases the Company must rely on assurances from suppliers that key services will be Year 2000 compliant. While the Company plans to validate representations wherever possible, it cannot be sure that validations will be adequate, or that if problems are identified, they will be addressed in a timely and satisfactory manner. Even if the Company, in a timely manner, completes all of its assessments, implements and tests all remediation plans believed to be adequate, and develops contingency plans believed to be adequate, some problems may not be identified or corrected in time to prevent material adverse consequences or business interruptions to the Company. 37 38 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. This risk is partially mitigated as the Company has sufficient capital 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 45 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 Two Directors" in the Registrant's Proxy Statement for the Annual Shareholders' Meeting to be held June 2, 1999 (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 Registrant's 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. 38 39 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 by reference 3.2 Amendment to Articles of Incorporation of the Registrant dated September 21, 1998. 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 Form of Stock Purchase Agreement between the Registrant and the stockholders of Syntel Software Private Limited, filed as an Exhibit to the Registrant's Registration Statement on Form S-1 dated June 6, 1997, and incorporated herein by reference. 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 39 40 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. 10.8 Lease Agreement, dated June 7, 1995, between the Registrant and Office Court Development Ltd. Co., a New Mexico General Partnership, 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 Indentures of Lease entered into between the President of India and Syntel Software Pvt. Ltd. on various dates in 1992 and 1993 for the Mumbia 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. 10.10 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. 10.11 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, 1997 and incorporated herein by reference. 10.12 PeopleNet Supplier Contract, effective as of April 1, 1996, between the Registrant and Geometric Results, Incorporated (d/b/a "PeopleNet"), 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 * 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. 10.14 * 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. 10.15 * 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. 10.16 * Employment Agreement, dated June 5, 1997, between the 40 41 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. 10.17 Form of S Corporation Revocation, Tax Allocation and Indemnification Agreement (the "Agreement") between the Registrant and the shareholders of the Registrant on the date of the Agreement, filed as an Exhibit to the Registrant's Registration Statement on Form S-1 dated June 6, 1997, and incorporated herein by reference. 21 Subsidiaries of the Registrant. 23 Consent of Pricewaterhouse Coopers LLP 27 Financial Data Schedule. 99.1 Proxy Statement for the Registrant's 1999 Annual Meeting of Shareholders, filed by the Registrant pursuant to Regulation 14A and incorporated herein by reference. (b) No report on Form 8-K was filed during the fourth quarter of the year ended December 31, 1998. 41 42 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 23, 1998 Chairman, 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 Chairman, President and Chief March 23, 1998 - ------------------- Executive Officer Bharat Desai (Principal Executive Officer) /s/John Andary Chief Financial Officer March 23, 1998 - -------------------- (Principal Financial and John Andary and Accounting Officer) /s/Neerja Sethi Director and Vice President, March 23, 1998 - -------------------- Corporate Affairs Neerja Sethi /s/Paritosh K. Choksi Director March 23, 1998 - --------------------- Paritosh K. Choksi /s/Douglas VanHouweling Director March 23, 1998 - ----------------------- Douglas Van Houweling /s/George R. Mrkonic Director March 23, 1998 - ------------------------ George R. Mrkonic 42 43 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-7-22 F-1 44 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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 LLP Detroit, Michigan February 19, 1999 F-2 45 SYNTEL, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share and per share data)
FOR THE YEARS ENDED DECEMBER 31 --------------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- Revenues $ 167,975 $ 124,338 $ 92,330 Cost of revenues 104,971 87,584 67,083 ------------- -------------- ------------- Gross profit 63,004 36,754 25,247 Selling, general and administrative expenses 28,026 23,547 19,271 ------------- ------------- ------------- Income from operations 34,978 13,207 5,976 Other income, principally investment income 2,077 730 149 ------------- ------------- ------------- Income before income taxes 37,055 13,937 6,125 Provision for income taxes 12,424 3,517 350 ------------- ------------- ------------- Net income $ 24,631 $ 10,420 $ 5,775 ============= ============= ============= Historical earnings per share:* Basic $ 0.65 $ 0.28 $ 0.15 Diluted $ 0.63 $ 0.27 $ 0.15 1996 and 1997 pro forma net income: Income before income taxes $ 13,937 $ 6,125 Pro forma income taxes ** 3,741 1,746 ------------- ------------- Pro forma net income $ 10,196 $ 4,379 ============= ============= 1996 and 1997 pro forma earnings per share:* Basic*** $ 0.27 $ 0.12 Diluted*** $ 0.26 $ 0.11 Weighted average common shares outstanding - diluted 39,294 39,083 39,368 ============= ============= =============
*Gives effect to 3:2 stock split effective April 22, 1998. **Presentation of income tax expense as if the Company was a C-corporation during the years presented. ***Presentation of EPS 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 46 SYNTEL, INC. CONSOLIDATED BALANCE SHEETS (in thousands)
DECEMBER 31 -------------------------------------- ASSETS 1998 1997 --------------- ---------------- Current assets: Cash and cash equivalents $ 64,660 $ 32,945 Accounts receivable 23,581 20,644 Advance billings and other current assets 10,330 6,897 --------------- ---------------- Total current assets 98,571 60,486 Property and equipment 12,635 9,299 Less accumulated depreciation 7,037 5,060 --------------- ---------------- Property and equipment, net 5,598 4,239 Deferred income taxes, noncurrent 66 507 --------------- ---------------- $ 104,235 $ 65,232 =============== ================ LIABILITIES Current liabilities: Accounts payable $ 4,004 $% 2,355 Accrued payroll and related costs 15,258 10,388 Dividends payable 300 Income taxes payable 1,244 1,365 Accrued warranty costs 3,636 852 Accrued liabilities 5,125 4,175 Deferred revenue 10,442 5,705 --------------- ---------------- Total current liabilities 39,709 25,140 Income taxes payable 379 507 --------------- ---------------- Total liabilities 40,088 25,647 SHAREHOLDERS' EQUITY Common stock, no par value per share,100 million shares authorized, 38.195 million shares and 25.45 million shares issued and outstanding at December 31, 1998 and 1997, respectively 1 1 Additional paid-in capital 34,784 34,659 Accumulated other comprehensive income (443) (249) Retained earnings 29,805 5,174 --------------- ---------------- Total shareholders' equity 64,147 39,585 --------------- ---------------- $ 104,235 $ 65,232 =============== ================
The accompanying notes are an integral part of the consolidated financial statements. F-4 47 SYNTEL, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
ACCUMULATED OTHER COMPREHENSIVE INCOME ADDITIONAL CURRENCY COMMON STOCK PAID-IN RETAINED TRANSLATION SHAREHOLDERS' ------------------ SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT EQUITY ----- --------- --------- -------- -------- --------- BALANCE, JANUARY 1, 1996 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 Comprehensive income: Net income 10,420 10,420 Translation adjustments 4 (249) (245) --------- -------- --------- Total comprehensive income, 10,424 (249) 10,175 net of tax 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 38 38 options Acquisition of Syntel India (Note 3) (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 adjustment (194) (194) --------- -------- --------- Total comprehensive income, 24,631 (194) 24,437 net of tax Stock split, 3-for-2, April 22, 1998 12,725 Exercised Stock Options 20 66 66 Compensation expense related to stock 59 59 options ------ --------- ----------- --------- -------- --------- Balance, December 31, 1998 38,195 $ 1 $ 34,784 $ 29,805 $ (443) $ 64,147 ====== ========= =========== ========= ======== =========
The accompanying notes are an integral part of the consolidated financial statements. F-5 48 SYNTEL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
FOR THE YEARS ENDED DECEMBER 31 --------------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- Cash flows from operating activities: Net income $ 24,631 $ 10,420 $ 5,775 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,977 1,812 1,442 Deferred income taxes (3,368) (507) Compensation expense related to stock 59 38 options Changes in assets and liabilities: Accounts receivable (2,937) (2) (3,913) Advance billings and other assets 376 (6,182) (20) Accounts payable and accrued 9,810 7,837 1,370 liabilities Deferred revenue 4,737 4,419 1,277 ------------- ------------- ------------- Net cash provided by operating activities 35,285 17,835 5,931 Cash flows used in investing activities: Property and equipment expenditures (3,336) (1,749) (2,138) Acquisition of Syntel India (7,000) ------------- ------------- ------------- Net cash used in investing activities (3,336) (8,749) (2,138) ------------- ------------- ------------- Cash flows from financing activities: Net proceeds from issuance of stock 66 34,627 Dividend/distribution payments (300) (18,100) (5,000) ------------- ------------- ------------- Net cash provided by (used in) financing (234) 16,527 (5,000) activities ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents 31,715 25,613 (1,207) Cash and cash equivalents, beginning of year 32,945 7,332 8,539 ------------- ------------- ------------- Cash and cash equivalents, end of year $ 64,660 $ 32,945 $ 7,332 ============= ============= ============= Cash paid during the year for income taxes $ 15,186 $ 3,411 $ 723 ============= ============= ============
The accompanying notes are an integral part of the consolidated financial statements. F-6 49 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 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 multiyear contracts. As a percentage of total revenues, IntelliSourcing revenues grew from 51 percent in 1997 to 62 percent 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 years ended December 31, 1998, 1997 and 1996, there were sales to two customers that exceeded 10 percent of total revenues. The largest customer was the same for 1998, 1997 and 1996, while the second largest customer was different in 1998 and 1997 than in 1996. Sales to these customers approximated: 1998, $43,100,000 (25.7 percent) and $23,635,000 (14.1 percent); 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). At December 31, 1998 and 1997, approximately 22 and 36 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" PTE., Ltd., ("Syntel Singapore"), a Singapore limited liability company, and Syntel Europe, Ltd., ("Syntel U. K."), a United Kingdom limited liability company. All significant intercompany balances and transactions have been eliminated. F-7 50 NOTES TO FINANCIAL STATEMENTS, CONTINUED 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-priced Year 2000 remediation projects is 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. 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 triple A rated corporate bonds and treasury notes held by a bank 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. 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 as follows:
YEARS ----------- Computer equipment and software 3 Furniture and fixtures 7 Telephone equipment 5 Leasehold improvements Life of lease
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. F-8 51 2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: 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 included $.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. h. PRO FORMA NET INCOME: To reflect the Company's pro forma net income for the years ended December 31, 1997 and 1996 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 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. k. PER SHARE DATA: In 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share," for all years presented. 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. F-9 52 2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: k. PER SHARE DATA, CONTINUED: The Company had 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. 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. F-10 53 4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND DEFERRED REVENUE: The following summarizes activity for uncompleted, fixed price, fixed deliverable projects:
1998 1997 (in thousands) Direct costs incurred on uncompleted, fixed price, fixed deliverable projects $ 8,660 $ 3,631 Direct margin estimated on uncompleted, fixed price, fixed 4,645 2,730 deliverable projects --------------- ---------------- Revenues recognized on uncompleted projects 13,305 6,361 Less billings to date 18,857 7,009 --------------- ---------------- Deferred revenues on fixed price, fixed deliverable projects 5,552 648 Advanced billings on application management projects 4,438 4,818 Other deferred revenues 452 239 --------------- ---------------- Total deferred revenue as reported $ 10,442 $ 5,705 =============== ================ Projects with billings in excess of costs and estimated earnings on uncompleted fixed price, fixed deliverable $ 6,762 $ 689 projects Projects with costs and estimated earnings in excess of billings on uncompleted fixed price, fixed deliverable 1,210 41 projects --------------- ---------------- Total deferred revenues $ 5,552 $ 648 =============== ================
5. PROPERTY AND EQUIPMENT: Cost of property and equipment at December 31, 1998 and 1997 is summarized as follows (in thousands):
1998 1997 Computer equipment and software $ 7,170 $ 5,432 Furniture and equipment 4,811 3,482 Leasehold improvements 654 385 --------------- ---------------- 12,635 9,299 Accumulated depreciation 7,037 5,060 --------------- ---------------- $ 5,598 $ 4,239 =============== ================
F-11 54 6. LINE OF CREDIT: The Company has a line-of-credit arrangement with a bank which expires August 31, 1999, which provides for borrowings up to $30,000,000. 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 $15,000,000 to finance acquisitions. 7. 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, 1998 are as follows (in thousands):
1999 $ 1,752 2000 1,515 2001 1,331 2002 847 2003 819 --------- $ 6,264 =========
Total rent expense charged to operations amounted to approximately $1,869, $1,678 and $1,352 for the years ended December 31, 1998, 1997 and 1996, respectively. 8. INCOME TAXES: Income before income taxes for U. S. and foreign operations was as follows (in thousands):
1998 1997 1996 U.S. $ 28,928 $ 9,663 $ 4,492 Foreign 8,127 4,274 1,633 ---------- ----------- --------- $ 37,055 $ 13,937 $ 6,125 ========== =========== =========
F-12 55 8. INCOME TAXES, CONTINUED: The provision for income taxes is as follows:
1998 1997 1996 Currently payable: Federal $ 14,271 $ 3,839 State and local 1,350 474 $ 321 Foreign 171 2 29 ------------- ------------- ------------- Total currently payable 15,792 4,315 350 Deferred: Federal (3,002) (708) State and local (366) (88) ------------- ------------- ------------- Total deferred (3,368) (796) ------------- ------------- ------------- Total provision for income taxes $ 12,424 $ 3,519 $ 350 ============= ============= =============
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 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):
1998 1997 Deferred tax assets: Advance billing receipts $ 1,701 $ 331 Accrued warranty and other expenses 3,149 1,243 Property and equipment 66 (26) --------------- ---------------- Net deferred tax asset $ 4,916 $ 1,548 =============== ================
Balance sheet classification of the net deferred tax asset is summarized as follows (in thousands):
1998 1997 Deferred tax asset, current $ 4,850 $ 1,041 Deferred tax asset, noncurrent 66 507 ---------- ---------- $ 4,916 $ 1,548 ========== ==========
F-13 56 8. INCOME TAXES, CONTINUED: Under the Indian Income Tax Act of 1961 (the "Act"), virtually all of Syntel India's income is exempt from Indian Income Tax for 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 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 is approximately $5 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 35 percent for 1998 and 34 percent for 1997 and 1996 to income before income taxes:
1998 1997 1996 (in thousands) Statutory tax provision $ 12,969 $ 4,739 $ 2,083 State taxes, net of federal benefit 1,350 655 321 S-Corporation income not subject to federal (1,556) (1,527) income taxes Foreign income not subject to tax (2,470) (1,411) (527) Termination of S-corporation status 1,090 Other 575 ------------- ------------- ------------- Total provision for income taxes $ 12,424 $ 3,517 $ 350 ============= ============= =============
F-14 57 9. EARNINGS PER SHARE: The reconciliations of earnings per share computations for the fiscal years 1998, 1997 and 1996 were as follows:
1998 1997 1996 ----------------------- ----------------------- ----------------------- PRO PRO FORMA FORMA PER PER PER SHARE SHARES SHARE SHARES SHARE SHARES ----- ------------ ------ ----------- ------ ------------ (in thousands, except per share earnings) Basic earnings per 38,195 $ 0.65 37,763 $ 0.27 37,500 $ 0.12 share Net dilutive effect 1,099 175 of stock options outstanding Shares assumed outstanding due to excess distributions 1,145 1,868 in 1997 ------ ------------ ------ ----------- ------ ------------ Diluted 39,294 $ 0.63 39,083 $ 0.26 39,368 $ 0.11 earnings per share ====== ============ ====== =========== ====== ============
Stock options to purchase 44,500 shares of common stock at a weighted average price per share of $18.21, were outstanding during 1998, but were not included in the computation of diluted earnings per share. The options' exercise price was greater than the average market price of the common shares and were antidilutive. No such options were available in 1997 and 1996. 10. STOCK COMPENSATION PLANS: 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, 1998 aggregate 1,427,651 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 the other options granted in 1998 and 1997, the exercise price equaled the market price on the date of grant, and therefore, no compensation expense was recognized. F-15 58 10. STOCK COMPENSATION PLANS, CONTINUED: 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, 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:
YEAR ENDED DEC 31, -------------------------------------- 1998 1997 --------------- ---------------- Net earnings: As reported $ 24,631 $ 10,420 Impact of SFAS No. 123 (976) (385) --------------- ---------------- Pro forma 23,655 10,035 Earnings per share, as reported: Basic earnings per share 0.65 0.28 Diluted earnings per share 0.63 0.27 Earnings per share, pro forma: Basic earnings per share 0.62 0.27 Diluted earnings per share 0.60 0.26
F-16 59 10. STOCK COMPENSATION PLANS, CONTINUED: The following table sets forth changes in options outstanding:
NUMBER OF WEIGHTED SHARES AMOUNT AVERAGE PRICe ------ ------------- -------------- 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 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 ========== ========== ========= Exercisable, December 31, 1998 112,843 ==========
The following table sets forth details of options outstanding at December 31, 1998:
OPTIONS OUTSTANDING ---------------------------------------------------------------------------------------------------------- WEIGHTED WEIGHTED RANGE OF AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE PRICES OUTSTANDING LIFE PRICE ---------------------------------------- -------- -------- ----------------- $1.33 157,500 8.2 $ 1.33 $ 4.67 - $ 8.00 1,143,651 8.7 5.44 $ 9.83 - $ 16.75 116,500 9.6 12.16 $ 26.38 - $ 33.19 10,000 9.6 29.10 -------- $ 1.33 - $ 33.19 1,427,651 8.7 5.69 ========
F-17 60 10. STOCK COMPENSATION PLANS, CONTINUED: 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 the following weighted average assumptions for grants in 1998 and 1997:
1998 1997 ------------ ----------- Estimated fair value per $ 8.86 $ 2.82 option granted Assumptions: Risk-free interest rate 5.33% 6.18% Expected life (years) 5 5 Expected volatility 51.26% 51.26% Expected dividends 0.00% 0.00%
The Company has implemented an employee stock purchase plan. The plan 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 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 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 percent of their regular base earnings withheld to purchase company stock, with a maximum contribution value which may not exceed $21,250 for each calendar year in which a purchase period occurs. The Company's first offering period, beginning October 1, 1998, will extend 12 months to October 31, 1999. As of December 31, 1998, amounts withheld towards the first offering totaled $383,382. F-18 61 11. SEGMENT REPORTING: The Company manages its operations through two segments, TeamSourcing and IntelliSourcing. 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. Through IntelliSourcing, 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 also provides Year 2000 compliance services to customers using its Method 2000(R) solution. 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. IntelliSourcing 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 minimum billing commitment for fixed-price engagements. The accounting policies of the segments are the same as those presented in Note 1. 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-19 62 11. SEGMENT REPORTING, CONTINUED: Key financial data for each segment for the years ended December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996 Revenues: IntelliSourcing $ 103,906 $ 64,049 $ 33,355 TeamSourcing 64,069 60,289 58,975 ------------ ----------- ----------- 167,975 124,338 92,330 Gross profit IntelliSourcing 45,732 24,038 11,604 TeamSourcing 17,272 12,716 13,643 ------------ ----------- ----------- 63,004 36,754 25,247 Selling, general and administrative expenses: IntelliSourcing 18,329 15,440 9,345 TeamSourcing 9,697 8,107 9,926 ------------ ----------- ----------- 28,026 23,547 19,271 Income from operations: IntelliSourcing 27,403 8,598 2,259 TeamSourcing 7,575 4,609 3,717 ------------ ----------- ----------- $ 34,978 $ 13,207 $ 5,976 =========== ========== ==========
F-20 63 12. GEOGRAPHIC INFORMATION: Total revenues, income before income taxes and identifiable assets by geographic location were as follows:
1998 1997 1996 Revenues: United States operations $ 166,046 $ 124,157 $ 92,237 India operations 14,400 9,264 4,159 Europe operations 1,632 61 Singapore operations 456 54 Intercompany revenue elimination (14,559) (9,198) (4,066) ------------- ------------- ------------- Total revenue $ 167,975 $ 124,338 $ 92,330 ============= ============= ============= Income before income taxes: United States operations $ 28,928 $ 9,663 $ 4,492 India operations 7,839 4,542 1,633 Europe operations 296 (211) Singapore operations (8) (57) ------------- ------------- ------------- Total income before income taxes $ 37,055 $ 13,937 $ 6,125 ============= ============= ============= Assets, December 31: United States operations $ 90,884 $ 58,574 $ 29,649 India operations 12,084 6,401 3,343 Europe operations 985 93 Singapore operations 282 164 ------------- ------------- ------------- Total assets $ 104,235 $ 65,232 $ 32,992 ============= ============= =============
13. 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, 1998 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. F-21 64 NOTES TO FINANCIAL STATEMENTS, CONTINUED 14. 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) 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 6,093 6,931 7,423 7,579 28,026 administrative expenses -------- -------- -------- -------- -------- 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 $ 0.15 $ 0.17 $ 0.16 $ 0.14 $ 0.63 ======== ======== ======== ======== ======== Weighted average shares 39,269 39,517 39,311 39,078 39,294 outstanding, diluted ======== ======== ======== ======== ======== 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 5,395 5,752 6,276 6,124 23,547 administrative expenses -------- -------- -------- -------- -------- 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 Income taxes 13 127 1,836 1,541 3,517 -------- -------- -------- -------- -------- Net income $ 2,115 $ 2,405 $ 2,102 $ 3,798 $ 10,420 ======== ======== ======== ======== ======== Earnings per share, diluted $ 0.05 $ 0.06 $ 0.05 $ 0.10 $ 0.26 ======== ======== ======== ======== ======== 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 $ 0.04 $ 0.05 $ 0.07 $ 0.10 $ 0.26 ======== ======== ======== ======== ======== Weighted average shares 38,730 39,368 38,988 38,606 39,083 outstanding, diluted ======== ======== ======== ======== ========
Earnings per share for the quarter are computed independently and may not equal the earnings per share computed for the total year. F-22 65 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 by reference 3.2 Amendment to Articles of Incorporation of the Registrant dated September 21, 1998. 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 Form of Stock Purchase Agreement between the Registrant and the stockholders of Syntel Software Private Limited, filed as an Exhibit to the Registrant's Registration Statement on Form S-1 dated June 6, 1997, and incorporated herein by reference. 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. 43 66 10.8 Lease Agreement, dated June 7, 1995, between the Registrant and Office Court Development Ltd. Co., a New Mexico General Partnership, 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 Indentures of Lease entered into between the President of India and Syntel Software Pvt. Ltd. on various dates in 1992 and 1993 for the Mumbia 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. 10.10 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. 10.11 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, 1997 and incorporated herein by reference. 10.12 PeopleNet Supplier Contract, effective as of April 1, 1996, between the Registrant and Geometric Results, Incorporated (d/b/a "PeopleNet"), 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 * 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. 10.14 * 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. 10.15 * 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. 10.16 * 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. 10.17 Form of S Corporation Revocation, Tax Allocation and Indemnification Agreement (the "Agreement") between the Registrant and the shareholders of the Registrant on the date of the Agreement, filed as an Exhibit to the Registrant's Registration Statement on Form S-1 dated June 6, 1997, and incorporated herein by reference. 21 Subsidiaries of the Registrant. 44 67 23 Consent of Pricewaterhouse Coopers LLP 27 Financial Data Schedule. 99.1 Proxy Statement for the Registrant's 1999 Annual Meeting of Shareholders, filed by the Registrant pursuant to Regulation 14A and incorporated herein by reference. (b) No report on Form 8-K was filed during the fourth quarter of the year ended December 31, 1998. 45 EX-3.2 2 AMEND TO ARTICLES OF INCORPORATION 1 EXHIBIT 3.2 MICHIGAN DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES CORPORATION, SECURITIES AND LAND DEVELOPMENT BUREAU CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION FOR USE BY DOMESTIC PROFIT AND NONPROFIT CORPORATIONS Pursuant to the provisions of Act 284, Public Acts of 1972 (profit corporations), or Act 162, Public Acts of 1982 (nonprofit corporations), the undersigned corporation executes the following Certificate: 1. The present name of the corporation is: Syntel, Inc. 2. The identification number assigned by the Bureau is: 202-412 3. Article III of the Articles of Incorporation is hereby amended to read as follows: See the attached Exhibit A 4. [Not Applicable] 5. The foregoing amendment to the Articles of Incorporation was duly adopted on the 18th day of May, 1998 by the shareholders if a profit corporation, or by the shareholders or members if a nonprofit corporation, at a meeting the necessary votes were cast in favor of the amendment. Signed this 20th day of July, 1998 By /s/ Byron S. Collier -------------------- Byron S. Collier, Assistant Secretary 1 2 EXHIBIT A ARTICLE III The total authorized capital stock of the corporation is as follows: (i) 100,000,000 shares of Common Stock; and (ii) 5,000,000 shares of Preferred Stock. A statement of the designations, relative rights, preferences and limitations of the shares of each class is as follows: Preferred Stock Subject to the limitations and restrictions set forth in this Article III, and without action or approval by the shareholders, the Board of Directors is authorized and empowered at any time, and from time to time, to designate and issue any authorized and unissued shares of Preferred Stock (whether or not previously designated as shares of a particular series, and including Preferred Stock of any series issued and thereafter acquired by the corporation) as shares of one or more series, hereby or hereafter to be designated. Each different series of Preferred Stock may vary as to dividend rate, redemption price, liquidation price, voting rights and conversion rights, if any, all of which shall be fixed as hereinafter provided. Each series of Preferred Stock issued hereunder shall be so designated as to distinguish the shares thereof from the shares of the other series and classes. All shares of Preferred Stock of any one series shall be alike in every particular. The rights, qualifications, limitations or restrictions of each series of Preferred Stock shall be as stated and expressed in the resolution or resolutions adopted by the Board of Directors which provides for the issuance of such series, which resolutions shall determine, fix or alter the following: (1) The distinctive designation and number of shares comprising such series, which number may (except where otherwise provided by the Board of Directors in creating such series) be increased or decreased (but not below the number of shares then outstanding) from time to time by action of the Board of Directors; (2) The rate of the annual dividends thereon and the relation which such dividends shall bear to the dividends payable on any other class of capital stock or on any other series of Preferred Stock, the terms and conditions upon which and the periods in respect of which dividends shall be payable, whether and upon what conditions such dividends shall be cumulative and if cumulative, the date or dates from which dividends shall accumulate; 2 3 (3) The amount per share, if any, which the holders of Preferred Stock of such series shall be entitled to receive, in addition to any dividends accrued and unpaid thereon, (a) upon the redemption thereof, plus the premium payable upon redemption, if any; or (b) upon the voluntary liquidation, dissolution or winding up of the corporation; or (c) upon the involuntary liquidation, dissolution or winding up of the corporation; (4) The conversion or exchange rights, if any, of such series, including without limitation, the price or prices, rate or rates, provisions for the adjustment thereof (including provisions for protection against the dilution or impairment of such rights), and all other terms and conditions upon which Preferred Stock constituting such series may be convertible into, or exchangeable for shares of any other class or classes or series; (5) Whether the shares of such series shall be redeemable, and, if redeemable, whether redeemable for cash, property or rights, including securities of any other corporation, at the option of either the holder or the corporation or upon the happening of a specified event, the limitations and restrictions with respect to such redemption, the time or times when, the price or prices or rate or rates at which, the adjustments with which and the manner in which such shares shall be redeemable, including the manner of selecting shares of such series for redemption if less than all shares are to be redeemed; (6) Whether the shares of such series shall be subject to the operation of a purchase, retirement, or sinking fund, and, if so, whether and upon what conditions such purchase, retirement or sinking fund shall be cumulative or noncumulative, the extent to which and the manner in which such fund shall be applied to the purchase or redemption of the shares of such series for retirement or to other corporate purposes and the terms and provisions relative to the operation thereof; (7) The voting rights per share, if any, of each such series, and whether and under what conditions the shares of such series (alone or together with the shares of one or more other series) shall be entitled to vote separately as a single class; (8) Whether the issuance of any additional shares of such series, or of any shares of any other series shall be subject to restrictions as to issuance or as to the power, preferences or rights of any such other series; and (9) Any other preferences, privileges and powers and relative, participating, optional or other special rights and qualifications, limitations or restrictions of such series, as the Board of Directors may deem advisable and as shall not be inconsistent with the provisions of these Articles of Incorporation. Any resolution of the Board of Directors establishing and designating a series of Preferred Stock and fixing and determining the relevant rights and preferences thereof shall be appropriately filed with the State of Michigan as an amendment to the Articles of Incorporation. 3 4 Common Stock None of the Common Stock shall be entitled to any preferences, and each share of Common Stock shall be equal to every other share of such class of stock in every respect. After payment or declaration of full cumulative dividends on all shares having priority over the Common Stock as to dividends, and after making all sinking or retirement fund payments on all series of Preferred Stock and on any other stock of the corporation ranking as to dividends or assets prior to the Common Stock providing for the same, dividends on the Common Stock may be declared and paid, but only when and as determined by the Board of Directors. On any dissolution, liquidation or winding up of the corporation, after there shall have been paid to or set aside for the holders of all shares having priority over the Common Stock the full preferential amounts to which they are respectively entitled, the holders of the Common Stock shall be entitled to receive pro rata all the remaining assets of the corporation available for distribution to its shareholders. At all meetings of shareholders of the corporation, the holders of the Common Stock shall be entitled to one vote for each share of Common Stock held by them of record. 4 EX-10.7 3 FIRST AMENDMENT TO LEASE AGREEMENT 1 EXHIBIT 10.7 STATE OF NORTH CAROLINA FIRST AMENDMENT TO LEASE AGREEMENT COUNTY OF WAKE This First Amendment to the Lease Agreement (the "First Amendment") made and entered into as of the 19th day of October, 1998, by and between CORNING ROAD, L.L.C., a Delaware limited liability company [successor to First Union National Bank of North Carolina as Trustee, successor to NationsBank of North Carolina, N.A., as Trustee for the Public Employees' Retirement System of Ohio] hereinafter called "Landlord"; and SYNTEL, INC, a Michigan corporation, hereinafter called "Tenant": W I T N E S S E T H : WHEREAS, Landlord, as landlord, and Tenant, as tenant, entered into that certain Lease Agreement dated November 30, 1994 (the "Lease"), regarding certain space (the "Premises") as more particularly described in the Lease; and WHEREAS, the parties have agreed to extend and amend its terms pursuant to this First Amendment. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties hereto agree for themselves, their successors and assigns as follows: 1. Paragraph 2(a) of the Lease shall be amended to extend the "Expiration Date" of the Lease from Midnight on March 31, 1999 to Midnight on March 31, 2004. However, the Tenant shall have the right to terminate the Lease at Midnight on March 31, 2001, provided: (a) Tenant shall provide Landlord with (i) Ninety (90) days prior written notice of its desire to terminate this Lease and (ii) An amount equal to six (6) months of the Payment described in paragraph 2 below on or prior to April 1, 2001, with the remaining nine (9) months of the Minimum Rental Payment to be due and payable in monthly installments on or prior to the 1 2 first day of the following nine (9) months during the term thereof; 2. Tenant shall pay additional rent equal to the current Minimum Rental, Monthly Estimate and the Annual Payment for fifteen (15) months following the termination date (the "Payment"). If Landlord relets the Premises prior to August 31, 2002, Landlord shall refund to Tenant that portion of the Payment recouped from the new tenant. Tenant's obligations to pay additional installments of the Payment ends upon Landlord's re-renting of the Premises and upon Landlord receiving rental payments for the space or any new tenant taking possession of the Premises. 3. Minimum Rental. (a) Lease Year Commencing April 1, 1999 Through March 31, 2000. Commencing with April 1, 1999 and continuing through March 31, 2000, Tenant shall pay a Minimum Annual Rental of Seven Hundred Fifty-Three Thousand Six Hundred Fifteen and no/100 Dollars ($753,615.00) payable in equal monthly installments of Sixty-Two Thousand Eight Hundred One and 25/100 Dollars ($62,801.25) each in advance on or before the first day of each month. (b) Lease Year Commencing April 1, 2000 Through March 31, 2001. Commencing with April 1, 2000 and continuing through March 31, 2001, Tenant shall pay a Minimum Annual Rental of Seven Hundred Sixty-Eight Thousand Three Hundred Eighty-Five and 85/100 Dollars ($768,385.85) payable in equal monthly installments of Sixty-Four Thousand Thirty-Two and 15/100 Dollars ($64,032.15) each in advance on or before the first day of each month. (c) Lease Year Commencing April 1, 2001 Through March 31, 2002. Commencing with April 1, 2001 and continuing through March 31, 2002, Tenant shall pay a Minimum Annual Rental of Seven Hundred Eighty-Three Thousand Five Hundred Ninety-Nine and 83/100 Dollars ($783,599.83) payable in equal monthly installments of Sixty-Five Thousand Two Hundred Ninety-Nine and 99/100 Dollars ($65,299.99) each in advance on or before the first day of each month. (d) Lease Year Commencing April 1, 2002 Through March 31, 2003. Commencing with April 1, 2002 and continuing through March 31, 2003, Tenant shall pay a Minimum Annual Rental of Seven Hundred 2 3 Ninety-Nine Thousand Two Hundred Twenty-Seven and 79/100 Dollars ($799,227.79) payable in equal monthly installments of Sixty-Six Thousand Six Hundred Two and 32/100 Dollars ($66,602.32) each in advance on or before the first day of each month. (e) Lease Year Commencing April 1, 2003 Through March 31, 2004. Commencing with April 1, 2003 and continuing through March 31, 2004, Tenant shall pay a Minimum Annual Rental of Eight Hundred Fifteen Thousand Three Hundred Sixty-Two and 89/100 Dollars ($815,362.89) payable in equal monthly installments of Sixty-Seven Thousand Nine Hundred Forty-Six and 91/100 Dollars ($67,946.91) each in advance on or before the first day of each month. 4. Annual Payment. Paragraph 3(b)(i)(A) of the Lease shall be amended to increase the Operating Expenses respecting the Building from Five Dollars ($5.00) per rentable square foot to Five and 20/100 Dollars ($5.20) per rentable square foot (the "Operating Expense Base Amount"), reduced by the amount, if any, paid by Tenant as the Monthly Estimate during the applicable calendar year of 1999 (such calculations to be annualized respecting any partial calendar year). Landlord represents that to the best of Landlord's belief, the Operating Expenses regarding the Building regarding calendar year 1999 [adjusted, as applicable, in accordance with the provisions of said Paragraphs 3(b)(i)(C) and 3(b)(i)(B) of the Lease] will not exceed Five and 20/100 Dollars ($5.20) per rentable square foot. 5. Option Period. Provided the Lease is still in full force and effect and Tenant is not in default under any of the terms, provisions or conditions of this Lease on its part to observe, comply with or fulfill, Tenant shall have the option to renew the term of the Lease for two (2) periods of three (3) years next succeeding the additional five (5) year period which ends at midnight on March 31, 2004. Such option to renew shall be exercised by written notice to Landlord not less than six (6) months prior to April 1, 2004. The option period, if exercised by Tenant, shall be on the same terms and conditions as provided in Paragraph 2(b) of the Lease. 6. Back-up Power. Landlord at its sole expense shall provide a 50,000 kw or comparable source back-up power generator to be installed, connected and operational. 7. HVAC System. Landlord will provide at its sole expense up to ten (10) additional VAV boxes if needed and associated controls creating additional zones within the space as determined by Landlord and Tenant. The Landlord will also work with an HVAC engineer for the space to maximize HVAC efficiency within the space. 3 4 8. Right of First Refusal. Tenant shall have a right of first refusal on all space that comes available within the Building subject to any pre-existing options or rights of first refusal of other tenants. 9. Right to Assign and Sublease. Tenant will receive fifty percent (50%) of any excess payments received by Tenant from subtenants renting and occupying the Premises. 10. Leasing Commission. "Highwood Properties, Inc." in paragraph 31 shall be replaced with "Corporate Realty Advisors." 11. Ratification. As amended hereby, the parties hereto agree that the Lease is in full force and effect. IN WITNESS WHEREOF, the parties have caused this First Amendment to be duly executed and sealed pursuant to the authority duly given as of the day and year first above written. LANDLORD CORNING ROAD, L.L.C. By: Richard G. Sesler (SEAL) ------------------------------------ Richard G. Sesler Manager WITNESSED BY: TENANT SYNTEL, INC. [CORPORATE SEAL] By: Daniel M. Moore ------------------------------------ Daniel M. Moore Chief Administrative Officer WITNESSED BY: Byron S. Collin 4 5 STATE OF NORTH CAROLINA COUNTY OF MECKLENBERG Before me, the undersigned Notary Public in and for the County and State aforesaid, personally came Richard G. Sesler, Manager of Corning Road, L.L.C. and acknowledged the due execution of the foregoing instrument in writing for the purposes therein expressed. WITNESS my hand and notarial seal, this 19th day of October, 1998. Patricia F. Waite -------------------------------- Notary Public My Commission Expires: 6-22-2000 Patricia F. Waite [Notarial Seal] STATE OF MICHIGAN COUNTY OF OAKLAND This 12 day of October, 1998, before me, the undersigned Notary Public in and for the County and State aforesaid, personally came Daniel M. Moore, who, being duly sworn, says that he is Chief Administrative Officer of SYNTEL, INC., and that the seal affixed to the foregoing instrument in writing is the corporate seal of said corporation, and that he signed and sealed said instrument on behalf of said corporation by its authority duly given and acknowledged said instrument to be the act and deed of said corporation. WITNESS my hand and seal this 12 day of October, 1998. Mary E. Boldt -------------------------------- Notary Public My Commission Expires: 8/20/2001 MARY E. BOLDT NOTARY PUBLIC - MACOMB COUNTY, MI [Notarial Seal] MY COMMISSION EXP. 08/20/2001 acting in Oakland County 5 EX-21 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
State of Other Jurisdiction Name of incorporation or Organization - ---- -------------------------------- Syntel Software Limited India Syntel Europe, LTD. England Syntel (Singapore) PTE. LTD. Singapore Syntel Mauritius Mauritius Syntel (Australia) Pty Limited Australia Syntel Canada, Inc. Canada
1 EX-23 5 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Syntel, Inc. on Form S-8 (No.333-49435) of our report dated February 19, 1999 on our audits of the consolidated financial statements of Syntel, Inc. as of December 31 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996, which report is included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP Detroit, Michigan March 25, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 64,660 0 23,581 0 0 98,571 12,635 7,037 104,235 39,709 0 0 0 1 64,589 104,235 0 167,975 0 104,971 28,026 0 (2,077) 37,055 12,424 24,631 0 0 0 24,631 .65 .63
-----END PRIVACY-ENHANCED MESSAGE-----