-----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, UNMU8NW6Oq0lXH+K9dPhC8MyFLPMcUNZHOsfx7Z7J8WvWhCj/Z+elTOCViVBmdJh bRtUgm6zEpJkAWYYyGBCaw== 0000950124-99-006054.txt : 19991117 0000950124-99-006054.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950124-99-006054 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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-Q SEC ACT: SEC FILE NUMBER: 000-22903 FILM NUMBER: 99751818 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-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1999 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ------------- ----------------- Commission file number 0-22903 ------------- Syntel, Inc. ----------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Michigan 38-2312018 ------------------------------ ------------------ (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 2800 Livernois Road, Suite 400, Troy, Michigan 48083 - ----------------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (248) 619-2800 -------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------------- ------------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, no par value: 38,227,611 shares issued and outstanding as of November 5, 1999. 2 SYNTEL, INC. INDEX
Page ---- Part I Financial Information Item 1 Financial Statements 3 Item 2 Management's Discussion and Analysis of 9 Financial Condition and Results of Operation Part II Other Information 15 Signatures 16 Index to Exhibits 17
2 3 SYNTEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share data)
3 MONTHS 9 MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 --------------------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Revenues $42,564 $43,607 $121,015 $128,413 Cost of revenues 26,477 27,772 74,797 81,915 ------- ------- -------- -------- Gross profit 16,087 15,835 46,218 46,498 Selling, general and administrative expenses 9,502 7,423 24,053 20,447 ------- ------- -------- -------- Income from operations 6,585 8,412 22,165 26,051 Other income, principally interest 541 680 1,648 1,503 ------- ------- -------- -------- Income before income taxes 7,126 9,092 23,813 27,554 Income taxes 2,442 2,638 7,807 8,343 ------- ------- -------- -------- Net income $ 4,684 $ 6,454 $ 16,006 $ 19,211 ======= ======= ======== ======== EARNINGS PER SHARE (1) Basic $ 0.12 $ 0.17 $ 0.42 $ 0.50 Diluted $ 0.12 $ 0.16 $ 0.41 $ 0.49 Weighted average common shares outstanding - diluted 39,016 39,311 38,855 39,366 ======= ======= ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 3 4 SYNTEL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (in thousands)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 58,970 $ 64,660 Accounts receivable, net 24,297 23,581 Advanced billings and other current assets 10,410 10,330 -------- -------- Total current assets 93,677 98,571 Property and equipment 14,744 12,635 Less accumulated depreciation 8,617 7,037 -------- -------- Property and equipment, net 6,127 5,598 Goodwill, net of amortization 19,518 - Deferred income taxes, noncurrent - 66 -------- -------- $119,322 $104,235 ======== ======== LIABILITIES Current liabilities: Accrued payroll and related costs $ 14,369 $ 14,258 Accounts payable and other current liabilities 17,301 15,009 Deferred revenue 3,918 10,442 -------- -------- Total current liabilities 35,588 39,709 Income taxes payable - 379 -------- -------- Total liabilities 35,588 40,088 SHAREHOLDERS' EQUITY Total shareholders' equity 83,734 64,147 -------- -------- Total liabilities and shareholders' equity $119,322 $104,235 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 4 5 SYNTEL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
NINE MONTHS ENDED SEPTEMBER 30 -------------------- 1999 1998 Cash flows from operating activities: Net income $ 16,006 $ 19,211 -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,911 1,337 Deferred income taxes 66 (310) Compensation expense related to stock options 75 39 Changes in assets and liabilities net of effects from purchase of Metier Inc & IMG Inc: Accounts receivable, net 4,437 (4,793) Advance billing and other assets 47 (4,230) Accrued payroll and other liabilities (3,202) 8,287 Deferred revenues (6,524) 6,222 -------- -------- Net cash provided by operating activities 12,816 25,763 Cash flows used in investing activities, Property and equipment expenditures (1,428) (2,848) Payments for purchases of Metier, Inc. and IMG, Inc. net of cash acquired (15,944) 0 -------- -------- Net cash used in investing activities (17,372) (2,848) Cash flows provided by (used in) financing activities: Net proceeds from issuance of stock 124 59 Common stock repurchases (1,097) 0 -------- -------- Net cash provided by (used in) financing activities (973) 59 Effect of foreign currency exchange rate changes on cash (161) (147) -------- -------- Net increase (decrease) in cash and cash equivalents (5,690) 22,827 Cash and cash equivalents, beginning of period $ 64,660 $ 32,945 ======== ======== Cash and cash equivalents, end of period $ 58,970 $ 55,772 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 5 6 SYNTEL, INC. AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: The accompanying condensed consolidated financial statements of Syntel, Inc. (the "Company") have been prepared by management, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying unaudited, condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position of Syntel, Inc. and its subsidiaries as of September 30, 1999, the results of its operations for the three and nine month periods ended September 30, 1999 and September 30, 1998, and cash flows for the nine months ended September 30, 1999 and September 30, 1998. The year end condensed balance sheet as of December 31, 1998 was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. For further information refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10K for the year ended December 31, 1998. Operating results for the nine months ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. 2. PRINCIPLES OF CONSOLIDATION AND ORGANIZATION The condensed consolidated financial statements include all the accounts of the Company and its wholly owned subsidiaries; Syntel Software Limited ("Syntel India"), an Indian limited liability company, Syntel (Singapore) PTE. Ltd. ("Syntel Singapore"), a Singapore limited liability company, and Syntel Europe, Ltd. ("Syntel Europe"), a United Kingdom limited liability company. All intercompany accounts and transactions have been eliminated. 3. ACQUISITIONS On September 22, 1999 the Company executed a purchase agreement with Metier, Inc. (Metier) to acquire substantially all of the assets and business of Metier. Consideration included 300,000 shares of Syntel Common Stock to be issued one year from the date of closing, recognized at the fair value of $4,500,000, and a cash payment of $17,389,611 at closing. The stock consideration is subject to a share price guaranty of $20.00 per share effective for a 90 day period beginning the second anniversary of the closing date. In addition, the agreement provides for earn-out payments not to exceed $16 million based on revenues and earnings for the 24 month period beginning January 1, 2000. The acquisition was treated as a purchase transaction with a total purchase price (excluding potential future earn-outs) of $23,358,144, including expenses of $1,468,533; accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their fair values of $9,638,163 and $5,199,145, respectively. This allocation resulted in goodwill of $18,919,126 which is being amortized over 15 years. On September 2, 1999 the Company acquired the fixed assets and business of IMG Incorporated (IMG). Consideration consisted of a cash payment at closing of $910,206. The acquisition was treated as a purchase transaction with a total purchase price of $978,646, including expenses of $68,440; accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their fair values of $76,145 and $26,939, respectively. This allocation resulted in goodwill of $929,440 which is being amortized over 15 years. 6 7 The operating results of both Metier and IMG have been included in the consolidated results since July 1, 1999, their respective effective dates. The consolidated results of operations on a pro forma basis are presented below as though Metier had been acquired as of January 1998 for the respective nine month periods:
Nine Months Ended September 30 ------------ 1999 1998 ---- ---- Revenue $139,018 $141,132 Net Income 16,954 19,201 Earnings per share (Diluted) $ 0.43 $ 0.48
4. CASH EQUIVALENTS For the purpose of reporting cash and cash equivalents, the Company considers all liquid investments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents are principally triple A rated municipal bonds and treasury notes held by a bank with maturity dates of less than ninety days. 5. COMPREHENSIVE INCOME Total Comprehensive Income for the three and nine month periods ended September 30, 1999 and 1998 was as follows (in thousands):
Three Months Ended Nine Months Ended September 30 September 30 1999 1998 1999 1998 ---- ---- ---- ---- Net Income $ 4,684 $6,454 $ 16,006 $ 19,211 Other Comprehensive income Foreign currency translation Adjustments (56) 18 (161) (150) Total comprehensive income $ 4,628 $6,472 $ 15,845 $ 19,061
7 8 6. EARNINGS PER SHARE Basic earnings per share is calculated by dividing net income by the average number of shares outstanding during the applicable period. The Company has stock options which are considered to be potentially dilutive to common stock. Diluted earnings per share is calculated by dividing net income by the average number of shares outstanding during the applicable period adjusted for these potentially dilutive options. The following table sets forth the computation of earnings per share. Outstanding shares have been restated to reflect the 3:2 stock split for all periods presented.
Three Months Ended September 30, 1999 September 30, 1998 ------------------ ------------------ Weighted Earnings Weighted Earnings Average per Average per Shares Share Shares Share ------ ----- ------ ----- (in thousands, except per share earnings) Basic earnings per share 38,426 $ 0.12 38,193 $ 0.17 Net dilutive effect of stock options outstanding 590 1,118 ------ ------- ------ -------- Diluted earnings per share 39,016 $ 0.12 39,311 $ 0.16
Nine Months Ended September 30, 1999 September 30, 1998 ------------------- ------------------- Weighted Earnings Weighted Earnings Average per Average per Shares Share Shares Share ------ ----- ------ ----- (in thousands, except per share earnings) Basic earnings per share 38,221 $ 0.42 38,185 $ 0.50 Net dilutive effect of stock options Outstanding 634 1,181 ------ --------- ------ --------- Diluted earnings per share 38,855 $ 0.41 39,366 $ 0.49
7. SEGMENT REPORTING The Company manages its operations through two segments, IntelliSourcing and TeamSourcing. Management allocates all corporate expenses to the segments. Key financial data for each segment for the three and nine month periods ending September 30, 1999 and September 30, 1998 is as follows:
Three Months Ended Nine Months Ended Sept 30, 1999 Sept 30, 1998 Sept 30, 1999 Sept 30, 1998 ------------- ------------- ------------- ------------- (in thousands) (in thousands) Revenues: IntelliSourcing $21,208 $ 27,553 $ 70,729 $ 79,621 TeamSourcing 21,356 16,054 50,286 48,792 ------- -------- -------- -------- 42,564 43,607 121,015 128,413 Gross Profit: IntelliSourcing $ 9,505 $ 11,694 $ 31,638 $ 34,223 TeamSourcing 6,582 4,141 14,581 12,275 ------- -------- -------- -------- 16,087 15,835 46,218 46,498
8 9 PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. SYNTEL, INC. AND SUBSIDIARIES RESULTS OF OPERATIONS Revenues. The Company's revenues consist of fees derived from its IntelliSourcing and TeamSourcing business segments. Total revenues decreased 2.4% to $42.6 million in the third quarter of 1999 from $43.6 million in the third quarter of 1998. Revenues for the first nine months of 1999 decreased 5.8% to $121.0 million from $128.4 million for the same period in 1998. Worldwide billable headcount, including personnel employed by Syntel India, Syntel Singapore, and Syntel Europe, as of September 30, 1999 decreased to 1,366 compared to 1,768 as of September 30, 1998. IntelliSourcing Revenues. IntelliSourcing revenues decreased to $21.2 million for the third quarter of 1999, or 49.8% of total revenues, from $27.6 million, or 63.2% of third quarter revenues for 1998. Revenues for the first nine months of 1999 decreased to $70.7 million, or 58.4% of total revenues, from $79.6 million, or 62.0% of total revenues for the first nine months of 1998. Both the $6.4 million decrease in third quarter revenues and the $8.9 million decrease in year-to-date revenues were attributable primarily to the successful completion of Year 2000 remediation engagagements as well as anticipated staffing decreases in several application management engagements, which combined, resulted in decreased revenues of approximately $11.2 million and $28.8 million for the third quarter and the first nine months of 1999, respectively. This was partially offset by net growth in several engagements as well as new engagements, which combined, contributed approximately $4.8 million and $19.9 million to the third quarter and the first nine months of 1999, respectively. IntelliSourcing Cost of Revenues. Cost of revenues consist of costs directly associated with billable consultants in the US and offshore, including salaries, payroll taxes, benefits, relocation costs, immigration costs, finders fees, trainee compensation, travel, and warranty reserves. IntelliSourcing costs of revenues decreased to 55.2% of total IntelliSourcing revenues for the third quarter of 1999, from 57.6% for the third quarter of 1998. The decrease in cost of revenues as a percent of revenues for the third quarter of 1999 from 1998 was attributable primarily to a release of expiring warranty reserves and reduced travel / recruiting / relocation costs, which were partially offset by a 3.6% increase in compensation levels. For the first nine months of 1999, IntelliSourcing costs of revenues decreased to 55.3% of total IntelliSourcing revenues, from 57.0% for the same period in 1998. The decrease in cost of revenues for the first nine months of 1999 from 1998 was attributable primarily to the release of expiring warranty reserves and reduced travel / relocation costs; partially offset by an increase in average compensation levels of approximately 3.5%. TeamSourcing Revenues. TeamSourcing revenues increased to $21.4 million for the third quarter of 1999, or 50.2% of total revenues, from $16.1 million, or 36.8% of total revenues for the third quarter of 1998. Revenues for the first nine months of 1999 increased to $50.3 million, or 41.6% of total revenues, from $48.8 million, or 38.0% of total revenues for the first nine months of 1998. The revenue increase for both the third quarter and year-to-date was attributable primarily to the acquisitions of Metier and IMG in the third quarter of 1999, increased average bill rates, and growth in the U.K. and Singapore; partially offset by a decrease in the pre-acquisition U.S. based billable consultants. The acquisitions of Metier and IMG contributed $7.7 million to both the third quarter and year-to-date increase, increases in average bill rates contributed $0.3 million and $1.4 million to the third quarter and year-to-date results, respectively, and growth in the U.K. and Singapore contributed $0.4 million and $2.0 million to the third quarter and year-to-date results, respectively. The decrease in the average number of U.S. based billable consultants impacted revenue by approximately $3.1 million and $9.6 million, in the third quarter and year-to-date, 9 10 respectively. TeamSourcing Cost of Revenues. TeamSourcing cost of revenues consist of costs directly associated with billable consultants primarily in the US, including salaries, payroll taxes, benefits, relocation costs, immigration costs, finders fees, trainee compensation, and travel. TeamSourcing cost of revenues decreased to 69.1% of TeamSourcing revenues for the third quarter of 1999, down from 74.2% for the third quarter of 1998. The decrease in cost of revenues as a percent of TeamSourcing revenues was attributable primarily to increased average bill rates, the impact of the Metier and IMG acquisitions, and reduced recruiting and relocation costs, contributing 2.0%, 1.3%, and 2.5% respectively, to the decrease in costs of revenues. These were partially offset by compensation increases of 1.6%. TeamSourcing cost of revenues decreased to 71.0% of TeamSourcing revenues for the first nine months of 1999, down from 74.8% for the first nine months of 1998. The decrease in cost of revenues as a percent of TeamSourcing revenues for the first nine months of 1999 was attributable primarily to increased average bill rates, the impact of the Metier and IMG acquisitions, and reduced recruiting and relocation costs, contributing 2.1%, 0.7%, and 1.2% respectively, to the decrease in costs of revenues. These were partially offset by compensation increases of 1.7%. Selling, General, and Administrative Expenses. Selling, general, and administrative expenses consist primarily of salaries, payroll taxes and benefits for sales, solutions, delivery, finance, administrative, and corporate staff, travel, telecommunications, business promotions, marketing and various facility costs for the Company's Global Development Centers and various offices. Selling, general, and administrative costs for the three months ended September 30, 1999 were $9.5 million, or 22.3% of total revenues, compared to $7.4 million, or 17.0% of total revenues, for the three months ended September 30, 1998. The increase in selling, general, and administrative costs in the third quarter of 1999 over the third quarter of 1998 is attributable primarily to the acquisition of Metier and IMG, goodwill amortization, one-time acquisition costs, and increased professional staffing in sales, marketing, recruiting, and support, contributing $1.4 million, $0.3 million, $0.4 million, and $0.2 million, respectively, partially offset by a reduction in recruiting, relocation, and other administrative costs of $0.2 million Selling, general, and administrative costs for the nine month period ending September 30, 1999 were $24.1 million, or 19.9% of total revenues, compared to $20.4 million, or 15.9% of total revenues, for the nine months ending September 30, 1998. The increase in selling, general, and administrative costs for nine month period ending September 30, 1999 as compared to the same period in 1998 was primarily attributable to the acquisition of Metier and IMG, as well as increased professional staffing in sales, marketing, recruiting, and support, contribuitng $2.1 million and $1.5 million, respectively to the increase. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its working capital needs through operations. Both the Mumbai and Chennai expansion programs, completed in mid-1998, were financed from internally generated funds. Net cash generated by operating activities was $12.8 million for the first nine months of 1999. Cash flows from operating activities included a $6.5 million decrease in deferred revenues attributable principally to the completion of fixed price year 2000 engagements as well as a $4.4 million increase in accounts receivable and a $3.2 million decrease in accrued payroll and other liabilities. The increase in accounts receivable and the decrease in accrued payroll and other liabilities were attributable primarily to the net effect of the third quarter acquisitions, contributing $4.1 million and $3.1 million, respectively, to the net change in accounts receivable and accrued payroll and other liabilities for the nine month period ending September 30, 1999. Net cash generated by operating activities for the first nine months of 1998 were $25.8 million. The $25.8 million increase was attributable primarily to increase in deferred revenues, accrued payroll and other liabilities; partially offset by increased accounts receivables and advance billings and other assets. The increase in deferred revenue was attributable primarily to the ramp-up of fixed price year 2000 engagements, the increase in accrued payroll and other assets was attributable primarily to increase in payroll accruals and warranty reserves, the increase in accounts receivable was attributable 10 11 principally to increased revenues in the third quarter of 1998 over fourth quarter of 1997 levels, and the increase in advanced billings and other assets was attributable principally to increases in advanced tax payments and deferred tax assets. Net cash used in investing activities was $17.4 million for the first nine months of 1999 as compared to $2.8 million for the first nine months of 1998. Cash used for investing activities for the nine months ended September 30, 1999 consisted primarily of $15.9 million in cash payments related to the acquisitions of Metier and IMG, capitalized development costs of $0.9 million and computer equipment of $0.5 million. Cash used for investing activities for the nine months ended September 30, 1998 consisted primarily of $1.8 million for facility expansion and improvements at the Chennai and Mumbai Global Development Centers, $0.4 million in license fees for a new integrated accounting and human resources information system, and $0.6 million for computer hardware. Net cash used in financing activities for the nine months ended September 30, 1999 consisted principally of the purchase of 129,000 shares of treasury stock for $1.1 million, partially offset by $0.1 million in proceeds received from the exercising of stock options. The Company has extended and increased its line of credit with Bank One. The amended agreement increased the line from $30 million to $40 million and was extended to August 31, 2000. The line of credit contains covenants restricting the Company from, among other things, incurring additional debt, issuing guarantees and creating liens on the Company's property, without prior consent of the bank. The line of credit also requires the Company to maintain certain tangible net worth levels and leverage ratios. At September 30, 1999, there was no indebtedness outstanding under the line of credit. Borrowings under the line of credit bear interest at the lower of the Eurodollar rate plus the applicable Eurodollar margin, the bank's prime rate or a negotiated rate established with the bank at the time of borrowing. In addition to the bank line of credit, the Company has a line of credit with Bank One to finance acquisitions. This facility was increased from $15 million to $20 million and was also extended to August 31, 2000. The Company has not borrowed any amounts under this facility. The Company believes that the combination of present cash balances and future operating cash flows will be sufficient to meet the Company's currently anticipated operating cash requirements for at least the next 12 months. YEAR 2000 READINESS The Year 2000 issue is the result of date-sensitive devices, systems, and computer programs that were deployed using two digits rather than four to define the applicable year. Any such technologies may recognize a year containing "00" as 1900 rather than the year 2000. This could result in system failure or miscalculations causing disruptions of operations including, among other things, a temporary inability to process transactions or engage in similar normal business activities. STATE OF READINESS. The Company has a Year 2000 project plan designed to identify and assess the risks of non-compliance associated with its information systems, operations, suppliers, and customers; and to develop and implement remediation and contingency plans to mitigate the risks. The year 2000 project plan consists of the following activities: - - IT and non-IT systems. - Complete inventory of all hardware, software, and firmware components. - Impact assessment - identify and prioritize components that are not Year 2000 compliant. - Develop solution plan - determine and prioritize remediation procedures for each non-compliant component, including decision to replace or repair. - Complete remediation and test systems - Develop contingency plans 11 12 - - Third party confirmations - Obtain written verification from key suppliers that services will not be impacted by Year 2000 issues. - Obtain representations from major customers that their ongoing service requirements as well as accounts payable processes will not be impacted by Year 2000 issues. - Develop contingency plans The Company's internal IT and non-IT issues are minimized by the nature of its service offerings. As an Information Technology company, Syntel's revenues are driven by the extensive knowledge base of its professional IT consultants. IT and non-IT Year 2000 issues are principally associated with the compliance of personal computers, servers, communication equipment, and software residing on both individual personal computers and on the servers. Over 60% of the Company's IT professionals work on-site at the client location. These consultants utilize client provided work stations and software. Virtually all of the approximately 1100 personal computers in operation at the Company's Global Development Centers and Troy headquarters as well as the personal computers at the Company's various sales offices have been made Year 2000 compliant by means of a Bios upgrade and have been tested for compliance. Software testing and remediation has been completed on all personal computers in the Cary, Chennai, Mumbai, and Santa Fe Development Centers. All computer equipment, software, and communication systems used by the Companys recent acquisitions, Metier and IMG, is fully Year 2000 compliant. All proprietary delivery software as well as internal applications are Year 2000 compliant. The Company has implemented Year 2000 compliant, PeopleSoft financial and human resources information systems. The human resource system was placed into live production during the second quarter of 1999. The financial information system, including general ledger, accounts payable, billing, and accounts receivable were placed into production during the third quarter of 1999. The financial information systems in Mumbai and Chennai, India are fully Year 2000 compliant. The most significant internal remediation activities yet to be completed include upgrade of the telephone system for the Troy Headquarters, replacement of the phone system in the Mumbai Global Development Center and replacement of various communication hubs. The Company has completed the final determination of the necessary equipment upgrades / replacements to the phones and hubs, and will complete all remediation activities and testing before the end of 1999. The following chart summarizes the project status as of November 1, 1999:
% completed Expected Completion Task At 11/01/99 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 90% On-going Customer validations & follow-up 80% On-going Remediate non-compliant hardware systems 60% Dec-99 Remediate non-compliant software systems 100% Develop contingency plans 80% Nov-30
COSTS TO ADDRESS YEAR 2000 ISSUES. The Company anticipates total remediation costs to be approximately $456,000. These costs include amounts necessary to replace or upgrade hardware, replace phone systems, 12 13 replace data communications equipment, replace non-compliant software, and compensation costs of individuals assigned full time to the project. The replacement and upgrade of hardware will total approximately $315,000, software will total approximately $21,000, 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 $456,000 has been fully reflected in the Company's 1999 operating plan and forecasts. As of September 30, 1999, year-to-date Year 2000 expenditures totaled approximately $240,000, as the most costly activities, replacement of communications switches and hubs, are not yet completed. 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; followed up with secondary mailings, and is reviewing vendor web sites on the Internet for confirmation of Year 2000 compliance. To date, the Company has mailed approximately 290 confirmations to key suppliers and has received over 230 responses, including positive confirmation from Sprint, its largest communications vendor, ADP the Company's payroll processor, Videsh Sanchar Nigam, Limited, the national telephone company in India, and Bank One, the Company's U.S. bank, as well as all other from whom a disruption in service would impact the Company's operations. A vast majority of the vendors have reported either full Year 2000 compliance or significant progress in Year 2000 remediation efforts with no significant outstanding issues and expect to be fully compliant before the end of the year. The loss of communication capabilities would have an immediate impact on the Company's ability to maintain operations as would the loss of power at any of the Company's Global Development Centers. The occurrence of either situation could cause a material adverse effect on the Company's financial condition. The Mumbai, India Global Development Center, the Company's largest development center, is supported by a back-up power generator which could provide full power to the center indefinitely, in the event of a power failure. The next greatest potential risk is the potential for lost revenue should the Company's customers encounter Year 2000 issues, forcing a reallocation of resources from existing applications and projects. To fully assess the extent of this risk, the Company is exploring customer readiness via direct communication by engagement managers and account executives and by monitoring customer web sites for confirmation of Year 2000 compliance. This risk is partially mitigated by several factors, including: (1) The Company has completed, tested, and delivered Year 2000 compliance services to five of the projected top 10 customers based on projected revenue for 1999 and 2000. (2) The Company's revenue base is comprised primarily of revenues from Fortune 1000 companies. Significant Year 2000 issues by these companies would suggest widespread problems, which in turn would open opportunities to selectively provide additional Year 2000 remediation services, potentially offsetting revenues lost from the suspension of non-year 2000 application support and development projects. The Company has received direct confirmations and/or has noted positve representations on customer web sites from a large number of the customers including all of the largest ten customers. YEAR 2000 CONTINGENCY PLANS. The Company is in the process of developing contingency plans. Because the major risks (communications and utilities) are associated with large, external service providers for which the Company has no influence or control, and for which the implementation of substitute processes are not practical, contingency plans will include migrating activity from vendors for which Year 2000 compliance has not been confirmed and in shifting work to Global Development Centers for which Year 2000 compliance for utilities and communications have been confirmed. The Company has also developed plans for addressing potential facility, travel, payroll, and banking disruptions. The facility contingency plan includes provisions for backup generator support at each of the development centers, 13 14 advance purchases of key supplies, increased security, and emergency procedures. In regard to air travel, the Company will attempt to reduce the impact from a temporary termination of services by assessing new customer placement requirements for early January 2000, and will suggest an earlier start date to ensure that key placements are not delayed. The probability of encountering payroll problems is considered low as both ADP and Bank One have confirmed full compliance and the Company's first pay date of year 2000 is not until January 10; however, contingency plans include employee mailings to increase direct deposit participation and to confirm direct deposits to all accounts with the bank immediately following the transfers. The Company has implemented a significant program to identify, evaluate, and remediate Year 2000 issues; however, as the Year 2000 project continues, additional Year 2000 issues may be discovered or the Company may find that the costs of these activities exceed current expectations. In many cases the Company must rely on assurances from suppliers that key services will be Year 2000 compliant. While the Company plans to validate representations wherever possible, it cannot be sure that validations will be adequate, or that if problems are identified, they will be addressed in a timely and satisfactory manner. Even if the Company, in a timely manner, completes all of its assessments, implements and tests all remediation plans believed to be adequate, and develops contingency plans believed to be adequate, some problems may not be identified or corrected in time to prevent material adverse consequences or business interruptions to the Company. FORWARD LOOKING STATEMENTS This report contains forward-looking statements, including those with respect to future levels of business for Syntel, Inc. These statements are necessarily subject to risk and uncertainty. Actual results could differ materially from those projected in these forward-looking statements as a result of certain risk factors set forth in the Company's Annual Report Form 10-K document dated March 30, 1999. Factors that could cause results to differ materially from those set forth above include general trends and developments in the information technology industry, which is subject to rapid technological changes, and the Company's concentration of sales in a relatively small number of large customers, as well as intense competition in the information technology industry, which the Company believes will increase. 14 15 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is currently not a party to any material pending legal proceedings. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. The remainder of the proceeds from the Corporations's issuance of common stock pursuant to a Registration Statement on Form S-1 (Commission file number 333-28655, effective date August 12, 1997) were applied towards the acquisition of certain of the assets of Metier, Inc. as reported by the Company on a Form 8-K filed with the Commission and dated September 22, 1999. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits
Exhibit No. Description - --------------------------------- 27 Financial Data Schedule
(b) Reports on Form 8-K On October 7, 1999 the Company filed a Report on Form 8-K, dated September 22, 1999 reporting its acquisition of certain of the net assets of Metier, Inc. (Metier) pursuant to an Asset Purchase Agreement dated as of July 1, 1999 entered into by and among the Company, Metier and ther shareholders of Metier. 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Syntel, Inc. (Registrant) Date November 11, 1999 By /s/ Bharat Desai ----------------- ------------------------------------ Bharat Desai, President and Chief Executive Officer Date November 11, 1999 By /s/ John Andary ----------------- ------------------------------------ John Andary, Chief Financial Officer (principal financial and chief accounting officer) 16 17 EXHIBIT INDEX
Sequentially Numbered Exhibit No. Description Page - ------------------------------------------------------------------- 27 Financial Data Schedule 18
17 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) FINANCIAL STATEMENTS FOR THE PERIOD ENDED JUNE 30, 1999. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 58,970 0 24,297 0 0 93,677 14,744 8,617 119,322 35,588 0 0 0 1 84,337 119,322 0 121,015 0 74,797 24,053 0 (1,648) 23,813 7,807 16,006 0 0 0 16,006 .42 .41
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