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United States Securities and Exchange Commission
Washington, DC 20549
FORM 6-K
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934
For the quarter ended June 30, 2001
Commission File Number 333-72195
INFOSYS TECHNOLOGIES LIMITED
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
Bangalore, Karnataka, India
(Jurisdiction of incorporation or organization)
Electronics City, Hosur Road, Bangalore, Karnataka,
India 561 229. +91-80-852-0261
(Address of principal executive offices)
Indicate by check mark registrant files or will file annual reports under cover
Form 20-F or Form 40-F
Form 20-F [X] Form 40-F [ ]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g 3-2(b) under the Securities Exchange Act of
1934.
Yes [ ] No [X]
If "Yes" is marked, indicate below the file number assigned to registrant in
connection with Rule 12g 3-2(b).
Not applicable.
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Currency of Presentation and Certain Defined Terms
Unless the context otherwise requires, references herein to the "company" or to
"Infosys" are to Infosys Technologies Limited, a limited liability company
organized under the laws of the Republic of India. References to "U.S." or
"United States" are to the United States of America, its territories and its
possessions. References to "India" are to the Republic of India. Yantra
Corporation, a Delaware Corporation ("Yantra"), in which the company holds a
minority interest, is considered a subsidiary of the company for purposes of
Indian GAAP. "Infosys" is a registered trademark of the company in India and the
United States. All other trademarks or tradenames used in this Quarterly Report
on Form 6-K ("Quarterly Report") are the property of their respective owners.
In this Quarterly Report, references to "$" or "Dollars" or "U.S. Dollars" are
to the legal currency of the United States, references to "(E)," "EUR" or "Euro"
are to the legal currency of the European Union and references to "Rs." or
"Rupees" or "Indian Rupees" are to the legal currency of India. The company's
financial statements are presented in Indian Rupees and translated into U.S.
Dollars and are prepared in accordance with United States generally accepted
accounting principles ("U.S. GAAP"). References to "Indian GAAP" are to Indian
generally accepted accounting principles. Except as otherwise specified,
financial information is presented in Dollars. References to a particular
"fiscal" year are to the company's fiscal year ended March 31 of such year.
Unless otherwise specified herein, financial information has been converted into
Dollars at the noon buying rate in New York City for cable transfers in foreign
currencies as certified for customs purposes by the Federal Reserve Bank (the
"Noon Buying Rate") as of June 30, 2001, which was Rs. 47.09 per $1.00. For the
convenience of the reader, this Quarterly Report contains translations of
certain Indian rupee amounts into U.S. Dollars which should not be construed as
a representation that such Indian Rupee or U.S. Dollar amounts referred to
herein could have been, or could be, converted to U.S. Dollars or Indian Rupees,
as the case may be, at any particular rate, the rates stated below, or at all.
Any discrepancies in any table between totals and sums of the amounts listed are
due to rounding.
Forward-looking statements may prove inaccurate
In addition to historical information, this quarterly report contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Factors that
might cause such differences include but are not limited to, those discussed in
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this report. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. In addition, readers
should carefully review the other information in this quarterly report and in
the company's periodic reports and other documents filed with the Securities and
Exchange Commission ("SEC") from time to time.
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Part I - Financial information
Item 1. Financial statements
Balance Sheets as of
June 30, 2001 June 30, 2000 March 31, 2001
(Unaudited) (Unaudited) (Audited)
------------- ------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 134,180,176 $ 105,756,757 $ 124,084,245
Trade accounts receivable, net of allowances 65,784,363 51,164,692 64,942,062
Deferred tax assets 1,403,963 - 1,265,142
Prepaid expenses and other current assets 17,193,033 12,566,158 16,452,863
------------- ------------- -------------
Total current assets 218,561,535 169,487,607 206,744,312
Property, plant and equipment, net 132,769,999 61,700,055 119,773,030
Deferred tax assets 2,156,411 2,685,061 2,070,428
Investments 7,777,393 6,177,908 5,577,393
Advance income taxes 2,176,693 - 180,113
Other assets 8,942,540 6,977,423 8,002,543
------------- ------------- -------------
TOTAL ASSETS $ 372,384,571 $ 247,028,054 $ 342,347,819
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,814 $ 472,473 $ 28,082
Client deposits 754,332 332,058 1,217,737
Other accrued liabilities 25,990,088 12,197,959 21,830,484
Income taxes payable - 2,965,746 -
Unearned revenue 7,722,149 14,394,383 7,479,815
------------- ------------- -------------
Total current liabilities 34,471,383 30,362,619 30,556,118
============= ============= =============
STOCKHOLDERS' EQUITY
Common stock, $ 0.16 par value;
100,000,000 equity shares authorized,
Issued and outstanding - 66,160,717,
66,151,367 and 66,158,117 as of June 30,
2001 and 2000 and March 31, 2001, respectively 8,594,383 8,593,585 8,594,106
Additional paid-in capital 122,105,641 121,529,268 122,017,518
Accumulated other comprehensive income (31,496,548) (18,765,207) (28,664,972)
Deferred stock compensation (11,257,263) (16,323,017) (12,517,018)
Retained earnings 249,966,975 121,630,806 222,362,067
------------- ------------- -------------
Total stockholders' equity 337,913,188 216,665,435 311,791,701
------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 372,384,571 $ 247,028,054 $ 342,347,819
============= ============= =============
See accompanying notes to financial statements
Assets - June 30, 2001 Liabilities and stockholders equity - June 30, 2001
- ---------------------- ---------------------------------------------------
CASH AND EQUIVALENTS-36.0% CURRENT LIABILITIES-9.3%
[PIE CHART] [PIE CHART]
ACCOUNTS RECEIVABLE-17.7%
PROPERTY, PLANT AND EQUIPMENT-35.7% STOCKHOLDERS EQUITY-90.7%
OTHER ASSETS-10.6%
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Statements of income
Three months ended Year ended
June 30, 2001 June 30, 2000 March 31, 2001
(Unaudited) (Unaudited) (Audited)
------------ ------------ ------------
REVENUES
Revenues $130,532,758 $ 80,257,833 $413,850,510
Cost of revenues 68,414,968 41,962,161 213,613,744
------------ ------------ ------------
Gross profit 62,117,790 38,295,672 200,236,766
------------ ------------ ------------
Operating Expenses:
Selling and marketing expenses 5,892,341 4,197,515 20,682,776
General and administrative expenses 12,527,878 6,416,913 36,957,609
Amortization of stock compensation expense 1,259,755 1,275,796 5,081,795
------------ ------------ ------------
Total operating expenses 19,679,974 11,890,224 62,722,180
------------ ------------ ------------
Operating income 42,437,816 26,405,448 137,514,586
Other income, net 2,876,099 3,403,057 9,505,343
Income before income taxes 45,313,915 29,808,505 147,019,929
Provision for income taxes 6,072,556 2,976,832 15,071,825
------------ ------------ ------------
Net income $ 39,241,359 $ 26,831,673 $131,948,104
------------ ------------ ------------
Earnings per equity share
Basic $ 0.60 $ 0.41 $ 2.01
Diluted $ 0.60 $ 0.40 $ 1.98
Weighted equity shares used in computing
earnings per equity share
Basic 65,568,850 65,977,267 65,771,256
Diluted 65,809,429 67,281,919 66,714,739
------------ ------------ ------------
See accompanying notes to financial statements
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Statements of Stockholders' Equity and Comprehensive Income
(Information as of and for the three months ended June 30, 2001 and June 30,
2000 is unaudited)
Accumulated
Additional other Deferred
Common stock paid-in Comprehensive comprehensive stock
Shares Par value capital income income compensation
------------ ------------ ------------ ------------ ------------ ------------
Balance as of March 31, 2000 66,150,700 $ 8,593,510 $121,506,726 $(14,137,933) $(17,598,813)
- -------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Cash dividends declared - - - - -
Common stock issued 667 75 22,542 - -
Amortization of compensation
related to stock option grants - - - - 1,275,796
Comprehensive income
Net income - - - $ 26,831,673 - -
Other comprehensive income
Translation adjustment - - - (4,627,274) (4,627,274) -
------------
Comprehensive income - - - 22,204,399 - -
- -------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Balance as of June 30, 2000 66,151,367 8,593,585 121,529,268 (18,765,207) (16,323,017)
- -------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Cash dividends declared - - - - -
Common stock issued 6,750 521 488,250 - -
Amortization of compensation
related to stock option grants - - - - 3,805,999
Comprehensive income
Net income - - - 105,116,431 - -
Other comprehensive income
Translation adjustment - - - (9,899,765) (9,899,765) -
------------
Comprehensive income 95,216,666
- -------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Balance as of March 31, 2001 66,158,117 8,594,106 122,017,518 (28,664,972) (12,517,018)
- -------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Common stock issued 2,600 277 88,123 - -
Cash dividends declared - - - - -
Amortization of compensation
related to stock option grants - - - - 1,259,755
Comprehensive income
Net income - - - 39,241,359 - -
Other comprehensive income - - - - -
Translation adjustment - - - (2,831,576) (2,831,576) -
------------
Comprehensive income - - - $ 36,409,783 - -
- -------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Balance as of June 30, 2001 66,160,717 $ 8,594,383 $122,105,641 $(31,496,548) $(11,257,263)
================================ ============ ============ ============ ============ ============ ============
Total
Retained stockholders'
earnings equity
------------ ------------
Balance as of March 31, 2000 $ 99,773,031 $198,136,521
- --------------------------------- ------------ ------------
Cash dividends declared (4,973,898) (4,973,898)
Common stock issued - 22,617
Amortization of compensation
related to stock option grants - 1,275,796
Comprehensive income
Net income 26,831,673 26,831,673
Other comprehensive income
Translation adjustment - (4,627,274)
Comprehensive income - -
- --------------------------------- ------------ ------------
Balance as of June 30, 2000 121,630,806 216,665,435
- --------------------------------- ------------ ------------
Cash dividends declared (4,385,170) (4,385,170)
Common stock issued - 488,771
Amortization of compensation
related to stock option grants - 3,805,999
Comprehensive income
Net income 105,116,431 105,116,431
Other comprehensive income
Translation adjustment - (9,899,765)
Comprehensive income
- --------------------------------- ------------ ------------
Balance as of March 31, 2001 222,362,067 311,791,701
- --------------------------------- ------------ ------------
Common stock issued - 88,400
Cash dividends declared (11,636,451) (11,636,451)
Amortization of compensation
related to stock option grants - 1,259,755
Comprehensive income
Net income 39,241,359 39,241,359
Other comprehensive income - -
Translation adjustment - (2,831,576)
Comprehensive income - -
- --------------------------------- ------------ ------------
Balance as of June 30, 2001 $249,966,975 $337,913,188
================================= ============ ============
See accompanying notes to financial statements
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Statement of cash flows
Three months ended Year ended
June 30, 2001 June 30, 2000 March 31, 2001
(Unaudited) (Unaudited) (Audited)
------------- ------------- -------------
OPERATING ACTIVITIES
Net income $ 39,241,359 $ 26,831,673 $ 131,948,104
Adjustments to reconcile net income to net cash
provided by operating activities
(Gain)/loss on sale of property, plant and equipment (6,323) 1,019 (20,053)
Depreciation 7,560,175 3,999,662 24,527,867
Deferred tax benefit (224,804) (118,795) (769,304)
Amortization of deferred stock compensation expense 1,259,755 1,275,796 5,081,795
Provision for investments -- -- 3,480,300
Changes in assets and liabilities
Trade accounts receivable (842,301) (19,931,177) (33,708,547)
Prepaid expenses and other current assets 289,163 (474,461) (2,218,954)
Income taxes (1,996,580) 1,086,769 (2,059,090)
Accounts payable (23,268) (504,367) (948,758)
Client deposits (463,405) (93,666) 792,013
Unearned revenue 242,334 10,365,210 3,450,642
Other accrued liabilities 3,853,773 (1,879,605) 7,957,303
------------- ------------- -------------
Net cash provided by operating activities 48,889,878 20,558,058 137,513,318
------------- ------------- -------------
INVESTING ACTIVITIES
Expenditure on property, plant and equipment (20,564,403) (18,147,110) (96,775,745)
Proceeds from sale of property, plant and equipment 13,582 1,146 49,673
Loans to employees (1,969,330) (918,227) (4,085,559)
Purchase of investments (2,200,000) (2,999,970) (5,879,755)
------------- ------------- -------------
Net cash used in investing activities (24,720,151) (22,064,161) (106,691,386)
------------- ------------- -------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 88,400 22,617 511,388
Payment of dividends (11,330,620) (4,731,969) (9,321,522)
------------- ------------- -------------
Net cash used in financing activities (11,242,220) (4,709,352) (8,810,134)
------------- ------------- -------------
Effect of exchange rate changes on cash (2,831,576) (4,627,274) (14,527,039)
------------- ------------- -------------
Net increase in cash and cash equivalents during the period 10,095,931 (10,842,729) 7,484,759
Cash and cash equivalents at the beginning of the period 124,084,245 116,599,486 116,599,486
------------- ------------- -------------
Cash and cash equivalents at the end of the period $ 134,180,176 $ 105,756,757 $ 124,084,245
============= ============= =============
Supplementary information
Cash paid towards taxes $ 8,293,940 $ 1,890,063 $ 16,950,802
------------- ------------- -------------
See accompanying notes to financial statements
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Notes to Financial Statements as of and for the three months ended June 30, 2001
1 Company overview and significant accounting policies
1.1 Company overview
Infosys Technologies Limited ("Infosys" or the "company"), a publicly held
company is an information technology ("IT") consulting and service
provider, providing end-to-end consulting for global corporations. The
company has partnered with several Fortune 500 and other established
corporations in building their next generation information infrastructure
for competitive advantage. Infosys' portfolio of services includes
e-strategy consulting and solutions, large application development and
enterprise integration services. Infosys also has product codevelopment
initiatives with numerous communication and Internet infrastructure
companies that are creating the building blocks for the digital economy. In
addition, the company develops and markets certain software products.
Headquartered in Bangalore, India, the company has 16 state-of-the-art
offshore software development facilities located throughout India, six
proximity development centers in the UK and the US and one global
development center in Canada, that enable it to provide high quality,
cost-effective services to clients in a resource-constrained environment.
The company also maintains offices in North America, Europe and Asia.
1.2 Basis of preparation of financial statements
The accompanying financial statements are prepared in accordance with US
Generally Accepted Accounting Principles ("GAAP"). All amounts are stated
in US dollars, except as otherwise specified.
1.3 Use of estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities on the date of the financial statements and the reported
amounts of revenues and expenses during the year. Examples of estimates
include accounting for contract costs expected to be incurred to complete
software development, allowance for uncollectible accounts receivable,
future obligations under employee benefit plans and the useful lives of
property, plant and equipment. Actual results could differ from those
estimates.
1.4 Revenue recognition
The company derives its revenues primarily from software services and also
from the licensing of software products. Revenue on time-and-material
contracts is recognized as the related costs are incurred. Revenue from
fixed-price, fixed-time frame contracts are recognized upon the achievement
of specified milestones identified in the related contracts, as per the
percentage-of-completion method. Provisions for estimated losses on
uncompleted contracts are recorded in the period in which such losses
become probable based on the current contract estimates. The company
provides its clients with a fixed-period warranty for corrections of errors
and telephone support on all its fixed-price, fixed-time frame contracts.
Costs associated with the support services are accrued at the time related
revenues are recorded.
Revenue from licensing of software products is recognized upon shipment of
products and fulfillment of acceptance terms, if any, provided that no
significant vendor obligations remain and the collection of the related
receivable is probable. When the company receives advances for software
development services and products, such amounts are reported as client
deposits until all conditions for revenue recognition are met. Maintenance
revenue is deferred and recognized ratably over the term of the underlying
maintenance agreement, generally 12 months. Revenue from client training,
support and other services arising due to the sale of software products is
recognized as the services are performed.
1.5 Cash and cash equivalents
The company considers all highly liquid investments with a remaining
maturity at the date of purchase/investment of three months or less to be
cash equivalents. Cash and cash equivalents comprise cash, cash on deposit
with banks, marketable securities and deposits with corporations.
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1.6 Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. The company depreciates property, plant and equipment over
their estimated useful lives using the straight-line method. The estimated
useful lives of assets are as follows:
Buildings 15 years
Furniture and fixtures 5 years
Computer equipment 2-5 years
Plant and equipment 5 years
Vehicles 5 years
The cost of software purchased for use in software development and services
is charged to the cost of revenues at the time of acquisition. The amount
of third party software expensed in the three months ended June 30, 2001
and June 30, 2000 and in fiscal 2001 was $1,704,551, $1,703,779 and
$6,979,492, respectively.
Deposits paid towards the acquisition of property, plant and equipment
outstanding at each balance sheet date and the cost of property, plant and
equipment not put to use before such date are disclosed under "Capital
work-in-progress".
1.7 Impairment of long-lived assets
The company evaluates the recoverability of its long-lived assets and
certain identifiable intangibles, if any, whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future undiscounted net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by
which the carrying value of the assets exceeds the fair value of the
assets. Assets to be disposed are reported at the lower of the carrying
value or the fair value less the cost to sell.
1.8 Research and development
Research and development costs are expensed as incurred. Software product
development costs are expensed as incurred until technological feasibility
is achieved. Software product development costs incurred subsequent to
achieving technological feasibility are not significant and are expensed as
incurred.
1.9 Foreign currency translation
The accompanying financial statements are reported in US dollars. The
functional currency of the company is the Indian Rupee ("Rs."). The
translation of Rs. to US dollars is performed for balance sheet accounts
using the exchange rate in effect at the balance sheet date, and for
revenue and expense accounts using a monthly average exchange rate for the
respective periods. The gains or losses resulting from such translation are
reported as "Other comprehensive income", a separate component of
stockholders' equity. The method for translating expenses of overseas
operations depends upon the funds used. If the payment is made from a rupee
denominated bank account, the exchange rate prevailing on the date of the
payment would apply. If the payment is made from a foreign currency, i.e.,
non-rupee denominated account, the translation into rupees is performed at
the average monthly exchange rate.
1.10 Earnings per share
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
128, Earnings Per Share, basic earnings per share are computed using the
weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period,
using the treasury stock method for options and warrants, except where the
result would be anti-dilutive.
1.11 Income taxes
Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities, and their respective
tax bases and operating loss carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in
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the years in which those temporary differences are expected to be recovered
or settled. The effect of changes in tax rates on deferred tax assets and
liabilities is recognized as income in the period that includes the
enactment date. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance for any tax benefits of which future
realization is uncertain.
1.12 Fair value of financial instruments
The carrying amounts reflected in the balance sheets for cash, cash
equivalents, accounts receivable and accounts payable approximate their
respective fair values due to the short maturities of these instruments.
1.13 Concentration of risk
Financial instruments that potentially subject the company to
concentrations of credit risk consist principally of cash equivalents,
trade accounts receivable, investment securities and hedging instruments.
By their nature, all such financial instruments involve risk including the
credit risk of non-performance by counterparties. In management's opinion,
as of June 30, 2001, June 30, 2000 and March 31, 2001, there was no
significant risk of loss in the event of non-performance of the
counterparties to these financial instruments, other than the amounts
already provided for in the financial statements. Exposure to credit risk
is managed through credit approvals, establishing credit limits and
monitoring procedures. The company's cash resources are invested with
corporations, financial institutions and banks with high investment grade
credit ratings. Limitations are established by the company as to the
maximum amount of cash that may be invested with any such single entity.
1.14 Retirement benefits to employees
1.14.1 Gratuity
In accordance with the Payment of Gratuity Act, 1972, Infosys provides for
gratuity, a defined benefit retirement plan (the "Gratuity Plan") covering
eligible employees. The Gratuity Plan provides a lump sum payment to vested
employees at retirement, death, incapacitation or termination of
employment, of an amount based on the respective employee's salary and the
tenure of employment. Liabilities with regard to the Gratuity Plan are
determined by actuarial valuation, based upon which, the company
contributes to the Infosys Technologies Limited Employees' Gratuity Fund
Trust (the "Trust"). Trustees administer contributions made to the Trust
and invest in specific designated securities as mandated by law, which
generally comprise central and state government bonds and debt instruments
of government-owned corporations.
1.14.2 Superannuation
Apart from being covered under the Gratuity Plan described above, certain
employees of Infosys are also participants of a defined contribution plan.
The company makes monthly contributions under the superannuation plan (the
"Plan") to the Infosys Technologies Limited Employees Superannuation Fund
Trust based on a specified percentage of each covered employee's salary.
The company has no further obligations to the Plan beyond its monthly
contributions.
1.14.3 Provident fund
Eligible employees also receive benefits from a provident fund, which is a
defined contribution plan. Both the employee and the company make monthly
contributions to this provident fund plan equal to a specified percentage
of the covered employee's salary. Infosys contributes a part of the
contributions to the Infosys Technologies Limited Employee's Provident Fund
Trust. The remainders of the contributions are made to the Government
administered provident fund. The company has no further obligations under
the provident fund plan beyond its monthly contributions.
1.15 Investments
Investments where the company controls between 20% and 50% of the voting
interest are accounted for using the equity method. Investment securities
in which the company controls less than 20% voting interest are currently
classified as "Available-for-sale securities".
Investment securities designated as "available-for-sale" are carried at
their fair value. Fair value is based on quoted market prices. Unquoted
securities are carried at cost, adjusted for declines in value judged to be
other than temporary. Temporary unrealized gains and losses, net of the
related tax effect are reported as a separate component of stockholders'
equity until realized. Realized gains and losses and declines in value
judged to be other than temporary on available-for-sale securities are
included in the statements of income. The cost of securities sold is based
on the specific identification method. Interest and dividend income is
recognized when earned.
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1.16 Stock-based compensation
The company uses the intrinsic value-based method of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, to account for
its employee stock-based compensation plan. The company has therefore adopted
the pro forma disclosure provisions of SFAS No. 123, Accounting for Stock-Based
Compensation.
1.17 Dividends
Dividend on common stock and the related dividend tax are recorded as a
liability on declaration.
1.18 Derivative financial instruments
Effective April 1, 2001, Infosys adopted SFAS 133, Accounting for Derivative
Instruments and Hedging Activities as amended, when the pronouncement became
effective for companies with fiscal year ending March 31, 2001. SFAS 133 changes
the accounting treatment of derivative contracts (including foreign exchange
contracts) that are employed to manage risks. It establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value. The accounting treatment of
changes in fair value is dependent upon whether or not a derivative instrument
is designated as a hedge and if so, the type of hedge. If the derivative is
designated as a fair value hedge, the changes in the fair value of the
derivative and of the hedged item attributable to the hedged risk are recognized
in earnings. If the derivative is designated as a cash flow hedge, the effective
portions of changes in the fair value of the derivative are recorded in other
comprehensive income and are recognized in the income statement when the hedged
item affects earnings. Ineffective portions of changes in the fair value of cash
flow hedges are recognized in earnings.
1.19 Notes to the Financial Statements
1.19.1 Cash and cash equivalents
The cost and fair values for cash and cash equivalents as of June 30, 2001 and
2000 and March 31, 2001, respectively are as follows:
As of June 30, Year ended
2001 2000 March 31, 2001
------------ ------------ ------------
Cost and fair values
Cash and bank deposits $ 94,975,383 $ 95,467,109 $ 82,702,111
Deposits with corporations 39,204,793 10,289,648 41,382,134
------------ ------------ ------------
$134,180,176 $105,756,757 $124,084,245
============ ============ ============
1.19.2 Trade accounts receivable
Trade accounts receivable, as of June 30, 2001 and 2000 and March 31, 2001, net
of allowance for doubtful accounts of $4,913,007, $587,229 and $3,902,996,
respectively amounted to $65,784,363, $51,164,692 and $64,942,062, respectively.
The age profile of trade accounts receivable is given below.
in %
-----------------------------------------
As of June 30, As of March 31,
Period (in days) 2001 2000 2001
---------- ---------- ----------
0 - 30 81.0 76.2 69.2
31 - 60 12.2 10.1 26.6
61 - 90 5.5 7.9 1.7
More than 90 1.3 5.8 2.5
---------- ---------- ----------
100.0 100.0 100.0
========== ========== ==========
Trade accounts receivable include accounts receivable from Yantra amounting to
$99,818, $376,783 and $214,347 as of June 30, 2001 and 2000 and March 31, 2001,
respectively.
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1.19.3 Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following:
- --------------------------------------------------------------------------------
As of June 30, As of March 31,
2001 2000 2001
----------- ----------- -----------
Rent deposits $ 2,373,808 $ 1,840,268 $ 2,484,794
Deposits with government organizations 1,101,523 470,338 945,189
Loans to employees 9,121,199 5,949,654 8,091,866
Prepaid expenses 3,628,511 3,750,204 4,349,913
Costs in excess of billings 553,647 224,035 503,694
Other advances 414,345 331,659 77,407
----------- ----------- -----------
$17,193,033 $12,566,158 $16,452,863
=========== =========== ===========
Other advances represent advance payments to vendors for the supply of goods and
rendering of services. Deposits with government organizations relate principally
to leased telephone lines and electricity supplies. Costs in excess of billings
represent costs incurred on fixed price contracts in respect of which milestones
are yet to be achieved.
1.19.4 Property, plant and equipment - net
Property, plant and equipment consist of the following:
- --------------------------------------------------------------------------------
As of June 30, As of March 31,
2001 2000 2001
------------- ------------- -------------
Land $ 7,793,377 $ 5,869,104 $ 7,865,351
Buildings 40,178,369 20,128,287 33,871,448
Furniture and fixtures 26,622,814 12,543,688 21,579,707
Computer equipment 54,466,431 30,506,203 48,098,099
Plant and equipment 28,077,279 14,625,678 24,064,927
Vehicles 74,846 30,563 75,537
Capital work-in-progress 34,903,498 11,883,037 36,651,724
------------- ------------- -------------
192,116,614 95,586,560 172,206,793
Accumulated depreciation (59,346,615) (33,886,505) (52,433,763)
------------- ------------- -------------
$ 132,769,999 $ 61,700,055 $ 119,773,030
============= ============= =============
Depreciation expense amounted to $ 7,560,175, $ 3,999,662 and $ 24,527,867 for
the three months ended June 30, 2001 and 2000 and fiscal 2001, respectively.
10
11
1.19.5 Investments
The amortized cost and fair values of available-for-sale securities by major
investment type and class of investment are as follows:
Amortized cost Fair value
-------------- ------------
As of June 30, 2001
M-Commerce Ventures Pte Ltd - 70 units, each unit representing 1 Ordinary Share
of S$ 1 each at par and 9 Redeemable Preference Shares of S$ 1 each at par,
with a premium of S$ 1,110 per
Redeemable Preference Share $ 399,485 $ 399,485
Asia Net Media BVI Limited - 30,000,000 Ordinary Shares at $ 0.05
each, fully paid, par value $ 0.01 each 1,500,000 1,500,000
EC Cubed Inc. - 1,300,108 Series D Convertible Preferred Stock,
at $ 2.3075 each, fully paid, par value $ 0.0001 each - -
Alpha Thinx Mobile Services AG - 27,790 Bearer Shares, at (E) 20 each,
fully paid, par value (E) 1 each - -
CiDRA Corporation - 33,333 Series D Convertible Preferred Stock,
at $ 90 each, fully paid, par value $ 0.01 each 2,999,970 2,999,970
Workadia Inc., USA - 440,000 Series B Preferred Stock at $ 5 each,
fully paid, par value $ 0.001 each 2,200,000 2,200,000
JASDIC Park Company - 480 Common Stock, at(Y)50,000 each,
(fully paid, par value(Y)50,000 each) 177,576 177,576
Purple Yogi Inc. - 276,243 Series D Convertible Preferred Stock,
at $ 1.81 each fully paid, par value $ 0.001 each 500,000 500,000
Others 362 362
------------ ------------
$ 7,777,393 $ 7,777,393
============ ============
As of June 30, 2000
EC Cubed Inc. - 1,300,108 Series D Convertible Preferred Stock,
at $ 2.3075 each, fully paid, par value $ 0.0001 each 3,000,000 3,000,000
CiDRA Corporation - 33,333 Series D Convertible Preferred Stock,
at $ 90 each, fully paid, par value $ 0.01 each 2,999,970 2,999,970
JASDIC Park Company - 480 Common Stock, par value(Y)50,000 each
(fully paid, par value(Y)50,000 each) 177,576 177,576
Others 362 362
------------ ------------
$ 6,177,908 $ 6,177,908
============ ============
As of March 31, 2001
M-Commerce Ventures Pte Ltd - 70 units, each unit representing 1 Ordinary Share
of S$ 1 each at par and 9 Redeemable Preference Shares of S$ 1 each at par,
with a premium of S$ 1,110 per
Redeemable Preference Share 399,485 399,485
Asia Net Media BVI Limited - 30,000,000 Ordinary Shares at $ 0.05 each,
fully paid, par value $ 0.01 each 1,500,000 1,500,000
EC Cubed Inc. - 1,300,108 Series D Convertible Preferred Stock,
at $ 2.3075 each, fully paid, par value $ 0.0001 each - -
Alpha Thinx Mobile Services AG - 27,790 Bearer Shares, at (E) 20 each,
fully paid, par value (E) 1 each - -
CiDRA Corporation - 33,333 Series D Convertible Preferred Stock,
at $ 90 each, fully paid, par value $ 0.01 each 2,999,970 2,999,970
JASDIC Park Company - 480 Common Stock, at(Y)50,000 each,
fully paid, par value(Y)50,000 each 177,576 177,576
Purple Yogi Inc. - 276,243 Series D Convertible Preferred Stock,
at $ 1.81 each fully paid, par value $ 0.001 each 500,000 500,000
Others 362 362
------------ ------------
$ 5,577,393 $ 5,577,393
============ ============
11
12
1.19.6 Other assets
Other assets mainly represent the non-current portion of loans to
employees.
1.19.7 Related parties
The company grants loans to employees for acquiring assets such as property
and cars. Such loans are repayable over fixed periods ranging from 1 to 100
months. The annual rates of interest at which the loans have been made to
employees vary between 0% through 4%. No loans have been made to employees
in connection with equity issues. The loans are generally secured by the
assets acquired by the employees. As of June 30, 2001 and 2000 and March
31, 2001, amounts receivable from officers amounting to $ 68,489, $ 340,151
and $ 227,121, respectively are included in prepaid expenses and other
current assets, and other assets in the accompanying balance sheets.
The required repayments of loans by employees are as detailed below.
As of June 30, As of March 31,
2001 2000 2001
----------- ----------- -----------
2001 - $ 5,949,654 -
2002 $ 9,121,199 2,013,521 $ 8,091,866
2003 2,890,179 1,431,295 2,517,809
2004 2,022,717 838,738 1,718,884
2005 1,168,246 676,932 1,033,107
2006 866,308 - 800,198
Thereafter 1,995,089 2,016,937 1,932,545
----------- ----------- -----------
Total $18,063,738 $12,927,077 $16,094,409
=========== =========== ===========
The estimated fair values of related party receivables amounted to
$ 14,060,565, $ 9,792,923 and $ 12,465,374 as of June 30, 2001 and June 30,
2000 and March 31, 2001, respectively. These amounts have been determined
using available market information and appropriate valuation methodologies.
Considerable judgement is required to develop these estimates of fair
value. Consequently, these estimates are not necessarily indicative of the
amounts that the company could realize in the market.
1.19.8 Other accrued liabilities
Other accrued liabilities comprise the following:
As of June 30, As of March 31,
2001 2000 2001
----------- ----------- -----------
Accrued compensation to staff $14,754,588 $ 7,388,232 $12,332,869
Accrued dividends 409,249 307,801 103,418
Provision for post sales client support 1,585,115 1,232,322 1,578,859
Employee withholding taxes payable 1,741,260 152,684 25,000
Others 7,499,876 3,116,920 7,790,338
----------- ----------- -----------
$25,990,088 $12,197,959 $21,830,484
=========== =========== ===========
1.19.9 Employee post-retirement benefits
1.19.9.1 Superannuation
The company contributed $ 303,363, $ 209,177 and $ 796,739 to the
superannuation plan in the three months ended June 30, 2001 and 2000 and
fiscal 2001, respectively.
1.19.9.2 Provident fund
The company contributed $ 755,849, $ 463,866 and $ 2,339,794 to the
provident fund in the three months ended June 30, 2001 and 2000 and fiscal
2001, respectively.
1.19.10 Stockholders' equity
The company has only one class of capital stock referred to as equity
shares. All references in these financial statements to number of shares,
per share amounts and market prices of the company's equity shares have
been retroactively restated to reflect stock splits made by the company.
12
13
1.19.11 Equity shares
1.19.11.1 Voting
Each holder of equity shares is entitled to one vote per share.
1.19.11.2 Dividends
Should the company declare and pay dividends, such dividends will be paid
in Indian Rupees. The company paid cash dividends of $ 11,330,620,
$ 4,731,969 and $ 9,321,522 during the three months ended June 30, 2001 and
2000 and fiscal 2001, respectively.
Indian law mandates that any dividend be declared out of distributable
profits only after the transfer of a specified percentage of net income
computed in accordance with current regulations to a general reserve.
Moreover, the remittance of dividends outside India is governed by Indian
law on foreign exchange and is subject to applicable taxes.
1.19.11.3 Liquidation
In the event of a liquidation of the company, the holders of common stock
shall be entitled to receive any of the remaining assets of the company,
after distribution of all preferential amounts. The amounts will be in
proportion to the number of shares of equity shares held by the
stockholders.
1.19.11.4 Stock options
There are no voting, dividend or liquidation rights to the holders of
warrants issued under the company's stock option plan.
1.19.12 Other income, net
Other income, net, consists of the following:
Three months ended June 30, Year ended
2001 2000 March 31, 2001
----------- ----------- -----------
Interest income and others $ 2,514,370 $ 1,684,062 $ 8,526,635
Income from sale of special import licenses - - 14,800
Exchange gains 144,359 1,665,744 4,444,208
Provision for investments - - (3,480,300)
Others 217,370 53,251 -
----------- ----------- -----------
$ 2,876,099 $ 3,403,057 $ 9,505,343
=========== =========== ===========
1.19.13 Operating leases
The company has various operating leases for office buildings that are
renewable on a periodic basis. Rental expense for operating leases in the
three months ended June 30, 2001 and 2000 and in fiscal 2001 were
$ 1,387,575, $ 738,059 and $ 3,689,822, respectively. The operating leases
can be renewed or canceled at the company's option.
The company leases some of its office space under non-cancelable operating
leases for periods ranging between three through ten years. The schedule of
future minimum rental payments in respect of these leases is set out below.
Year ending June 30,
2002 $ 2,363,098
2003 2,534,465
2004 2,557,425
2005 1,897,524
2006 629,664
Thereafter 877,406
-----------
$10,859,582
===========
13
14
1.19.14 Research and development
General and administrative expenses in the accompanying statements of
income include research and development expenses of $ 801,842, $ 744,453
and $ 3,610,550 for the three months ended June 30, 2001 and 2000 and
fiscal 2001, respectively.
1.19.15 Employees' Stock Offer Plans ("ESOP")
1994 Employees Stock Offer Plan (the "1994 Plan"): In September 1994, the
company established the 1994 Plan, which provided for the issuance of
6,000,000 warrants (as adjusted for the stock split effective June 1997,
December 1998 and December 1999) to eligible employees. The warrants were
issued to an employee welfare trust (the "Trust") at Rs. 0.50 each and were
purchased by the Trust using the proceeds of a loan obtained from the
company. The Trust holds the warrants and transfers them to eligible
employees at Rs. 0.50 each. Each warrant entitles the holder to purchase
one of the company's equity shares at a price of Rs. 50 per share. The
warrants and the equity shares received upon the exercise of warrants are
subject to a five-year aggregate vesting period from the date of issue of
warrants to employees. The warrants expire upon the earlier of five years
from the date of issue or September 1999. The fair market value of each
warrant is the market price of the underlying equity shares on the date of
the grant.
In 1997, in anticipation of a share dividend to be declared by the company,
the Trust exercised all warrants held by it and converted them into equity
shares with the proceeds of a loan obtained from the company. In connection
with the warrant exercise and the share dividend, on an adjusted basis,
3,011,200 equity shares were issued to employees of the company who
exercised stock purchase rights and 2,988,800 equity shares were issued to
the Trust for future issuance to employees pursuant to the 1994 Plan.
Following such exercise, there were no longer any rights to purchase equity
shares from the company in connection with the 1994 Plan. Only equity
shares held by the Trust remained for future issues to employees, subject
to vesting provisions. The equity shares acquired upon the exercise of the
warrants vest entirely on completion of five years of service. The warrant
holders were entitled to exercise early, but the shares received are
subject to the five-year vesting period. As of June 30, 2001, the company's
outstanding equity shares included 593,600 equity shares held by the Trust
of which 324,600 equity shares were allotted to employees, subject to
vesting provisions and are included in the earnings per share calculation.
The remaining 269,000 equity shares were not considered outstanding for
purposes of calculating earnings per share. The warrants allotted and the
underlying equity shares are not subject to any repurchase obligations by
the company.
The 1994 plan came to an end in fiscal 2000 and no further options will be
issued under this plan.
1998 Employees Stock Offer Plan (the "1998 Plan").
The company's 1998 Plan provides for the grant of non-statutory stock
options and incentive stock options to employees of the company. The
establishment of the 1998 Plan was approved by the board of directors in
December 1997 and by the stockholders in January 1998. The Government of
India has approved the 1998 Plan, subject to a limit of 1,470,000 equity
shares representing 2,940,000 American Depositary Shares ("ADS") to be
issued under the 1998 Plan. Unless terminated sooner, the 1998 Plan will
terminate automatically in January 2008. All options under the 1998 Plan
will be exercisable for equity shares represented by American Depositary
Shares (ADSs). The 1999 Plan is administered by a Compensation Committee
comprising five members, all of who are independent directors on the Board
of Directors. All options under the 1998 Plan are exercisable for equity
shares represented by ADSs.
1999 Stock Offer Plan (the "1999 Plan").
In fiscal 2000, the company instituted the 1999 Plan. The stockholders and
the Board of Directors approved the 1999 Plan in June 1999. The 1999 Plan
provides for the issue of 6,600,000 equity shares to employees. The 1999
Plan is administered by a Compensation Committee comprising five members,
all of who are independent directors on the Board of Directors. Under the
1999 Plan, options will be issued to employees at an exercise price, which
shall not be less than the Fair Market Value ("FMV"). Under the 1999 Plan,
options may also be issued to employees at exercise prices that are less
than FMV only if specifically approved by the members of the company in a
general meeting.
14
15
1.19.15 Employees' Stock Offer Plans ("ESOP") (continued)
The activity in the warrants/equity shares of the 1994, 1998 and 1999 Employees
Stock Offer Plans in fiscal 2001, 2000 and 1999 are set out below.
Three months ended Three months ended
June 30, 2001 June 30, 2000
---------------------------------- ---------------------------------
Shares Weighted Shares Weighted
arising out of average arising out of average
options exercise price options exercise price
-------------- --------------- -------------- --------------
1994 Option plan:
Outstanding at the
beginning of the year 330,000 341,400
Granted -- -- --
Forfeited (5,400) $ 1.15 (5,400) $ 1.15
Exercised -- -- -- --
------------- ------------- ------------- -------------
Outstanding at the
end of the year 324,600 336,000
------------- ------------- ------------- -------------
Exercisable at the
end of the year -- --
Weighted-average fair
value of grants during
the period at less
than market -- --
1998 Option plan:
Outstanding at the
beginning of the year 782,753 344,750
Granted 48,900 $ 143.74 73,350 $ 324.36
Forfeited (15,810) $ 338.50 (5,750) $ 415.72
Exercised (2,600) $ 34.00 (667) $ 34.00
------------- ------------- ------------- -------------
Outstanding at the
end of the year 813,243 411,683
------------- ------------- ------------- -------------
Exercisable at the
end of the year 57,953 8,383
Weighted-average fair
value of grants during
the year $ 143.74 $ 324.36
------------- -------------
1999 Option plan:
Outstanding at the
beginning of the year 2,793,980 1,006,800
Granted 415,250 $ 82.91 658,650 $ 131.97
Forfeited (41,860) $ 132.08 (23,600) $ 131.89
Exercised -- -- -- --
------------- ------------- ------------- -------------
Outstanding at the
end of the year 3,167,370 1,641,850
------------- ------------- ------------- -------------
Exercisable at the
end of the year 148,030 --
Weighted-average fair
value of grants during
the year $ 82.91 $ 131.97
------------- ------------- ------------- -------------
Year ended
March 31, 2001
---------------------------------
Shares Weighted
arising out average
of options exercise price
------------- --------------
1994 Option plan:
Outstanding at the
beginning of the year 341,400 --
Granted -- --
Forfeited (10,600) $ 1.15
Exercised (800) $ 1.15
------------- -------------
Outstanding at the
end of the year 330,000
------------- -------------
Exercisable at the
end of the year --
Weighted-average fair
value of grants during
the period at less
than market --
1998 Option plan:
Outstanding at the
beginning of the year 344,750 --
Granted 482,420 $ 230.88
Forfeited (38,200) $ 172.58
Exercised (6,217) $ 53.82
------------- -------------
Outstanding at the
end of the year 782,753 --
------------- -------------
Exercisable at the
end of the year 55,558 --
Weighted-average fair
value of grants during
the year $ 230.88
-------------
1999 Option plan:
Outstanding at the
beginning of the year 1,006,800 --
Granted 1,957,830 $ 136.68
Forfeited (169,450) $ 110.06
Exercised (1,200) $ 89.98
------------- -------------
Outstanding at the
end of the year 2,793,980 --
------------- -------------
Exercisable at the
end of the year 93,400 --
Weighted-average fair
value of grants during
the year $ 136.68
------------- -------------
15
16
1.19.15 Employees' Stock Offer Plan (continued)
The following table summarizes information about stock options outstanding as of
June 30, 2001:
Outstanding Exercisable
- -------------------------------------------------------- -----------------------------------------------------------
Number of Weighted average Number of
Range of shares arising remaining Weighted average shares arising Weighted average
exercise prices out of options contractual life exercise price out of options exercise price
- --------------- -------------- ---------------- ---------------- -------------- ----------------
$ 1.15-$ 330.00 4,305,213 2.05 years $ 106.34 205,983 $ 106.16
=============== ============== ================ ================ ============== ================
1.19.16 Income taxes
The provision for income taxes comprises:
Three months ended
-------------------------------- Year ended
June 30, 2001 June 30, 2000 March 31, 2001
------------- ------------- --------------
Current taxes
Domestic taxes $ 1,330,649 $ 1,063,487 $ 5,315,961
Foreign taxes 4,966,711 2,032,140 10,525,168
----------- ------------ ------------
6,297,360 3,095,627 15,841,129
----------- ------------ ------------
Deferred taxes
Domestic taxes (224,804) (118,795) (769,304)
Foreign taxes -- -- --
----------- ------------ ------------
(224,804) (118,795) (769,304)
----------- ------------ ------------
Aggregate taxes $ 6,072,556 $ 2,976,832 $ 15,071,825
=========== ============ ============
The tax effects of significant temporary differences that resulted in deferred
tax assets and liabilities and a description of the financial statement items
that created these differences are as follows:
Three months ended
------------------------------- Year ended
June 30, 2001 June 30, 2000 March 31, 2001
------------- ------------- --------------
Deferred tax assets:
Property, plant and equipment $ 1,649,779 $ 2,685,061 $ 1,519,016
Accounts receivable 1,753,944 -- 1,587,629
Investments 1,468,878 -- 1,598,712
Others 200,150 226,083 217,842
5,072,751 2,911,144 4,923,199
Less: Valuation allowance (1,512,377) (226,083) (1,587,629)
----------- ----------- -----------
Net deferred tax assets $ 3,560,374 $ 2,685,061 $ 3,335,570
=========== =========== ===========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which the temporary differences become deductible. Management considers the
scheduled reversal of the projected future taxable income, and tax planning
strategies in making this assessment. Based on the level of historical taxable
income and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes that it is more likely
than not the company will realize the benefits of those deductible differences,
net of the existing valuation differences at June 30, 2001. The amount of the
deferred tax assets considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carry forward period are
reduced.
All deferred tax expenses / (benefits) are allocated to the continuing
operations of the company.
16
17
1.19.16 Income taxes (continued)
A reconciliation of the income tax provision to the amount computed by applying
the statutory income tax rate to the income before provision for income taxes is
summarized below.
Three months ended Year ended
--------------------------------- --------------
June 30, 2001 June 30, 2000 March 31, 2001
------------- ------------- --------------
Net income before taxes $ 45,313,915 $ 29,808,505 $ 147,019,929
Enacted tax rates in India 35.70% 38.50% 39.55%
Computed expected tax expense 16,177,068 11,476,274 58,146,382
Less: Tax effect due to non-taxable export income (15,748,798) (11,331,368) (57,334,527)
Others 434,990 483,675 3,437,865
Effect of tax rate change 242,585 -- (8,077)
Effect of prior period tax adjustments -- 316,111 305,014
------------ ------------ -------------
Provision for Indian income tax 1,105,845 944,692 4,546,657
Effect of tax on foreign income 4,966,711 2,032,140 10,525,168
------------ ------------ -------------
Aggregate taxes $ 6,072,556 $ 2,976,832 $ 15,071,825
============ ============ =============
The provision for foreign taxes is due to income taxes payable overseas,
principally in the United States of America. The company benefits from certain
significant tax incentives provided to software firms under Indian tax laws.
These incentives presently include: (i) an exemption from payment of Indian
corporate income taxes for a period of ten consecutive years of operation of
software development facilities designated as "Software Technology Parks" (the
"STP Tax Holiday"); and (ii) a tax deduction for profits derived from exporting
computer software (the "Export Deduction"). All but one of the company's
software development facilities are located in a designated Software Technology
Park ("STP"). The Government of India has recently amended the tax incentives
available to companies set up in designated STPs. The period of the STP Tax
Holiday available to such companies is restricted to 10 consecutive years
beginning from the financial year when the unit started producing computer
software or March 31, 2000, whichever is earlier. Additionally, the Export
Deduction will be phased out equally over a period of five years starting from
fiscal 2000.
1.19.17 Earnings per share
The following is a reconciliation of the equity shares used in the computation
of basic and diluted earnings per equity share:
Three months ended Year ended
----------------------------- --------------
June 30, 2001 June 30, 2000 March 31, 2001
------------- ------------- --------------
Basic earnings per equity share - weighted average
number of common shares outstanding
excluding unallocated shares of ESOP 65,568,850 65,977,267 65,771,256
Effect of dilutive common equivalent shares -
stock options outstanding 240,579 1,304,652 943,483
---------- ---------- ----------
Diluted earnings per equity share -
weighted average number of common
shares and common equivalent shares outstanding 65,809,429 67,281,919 66,714,739
========== ========== ==========
1.19.18 Derivative financial instruments
Infosys generally enters into foreign exchange forward contracts to hedge the
impact of the variability in exchange rates on certain accounts receivable and
forecasted cash flows denominated in certain foreign currencies. Infosys held
foreign exchange forward contracts of $ 35,000,000, Nil and $ 20,000,000 as of
June 30, 2001, June 30, 2000 and March 31, 2001, respectively. The adoption of
SFAS 133 had no significant impact on the results of operations of the company
for the three months ended June 30, 2001 and the year ended March 31, 2001,
respectively.
1.19.19 Segment reporting
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for the way that public business enterprises
report information about operating segments and related disclosures about
products and services, geographic areas, and major customers. The company's
operations predominantly relate
17
18
to providing IT solutions, delivered to customers located globally, across
various industry segments. In the previous year, the company provided segmental
disclosures based on the geographical segment. However, in the current fiscal
year, the Chief Operating Decision Maker evaluates the company's performance and
allocates resources based on an analysis of various performance indicators by
industry classes and geographic segmentation of customers. Accordingly, revenues
represented along industry classes comprise the principal basis of segmental
information set out in these financial statements. Secondary segmental reporting
is performed on the basis of the geographical location of customers. The
accounting principles consistently used in the preparation of the financial
statements are consistently applied to record revenue and expenditure in
individual segments, and are as set out in the summary of significant accounting
policies. Industry segments for the company are primarily financial services
comprising enterprises providing banking finance and insurance services,
manufacturing enterprises, enterprises in the telecommunications ("telecom") and
retail industries, and others such as utilities, transportation and logistics
companies. Revenue in relation to segments is categorized based on items that
are individually identifiable to that segment, while expenditure is categorized
in relation to the associated turnover of the segment. Certain expenses such as
depreciation, which form a significant component of total expenses, are not
specifically allocable to specific segments as the underlying services are used
interchangeably. Management believes that it is not practical to provide segment
disclosures relating to those costs and expenses, and accordingly these expenses
are separately disclosed as "unallocated" and adjusted only against the total
income of the company. Geographic segmentation is driven based on the location
of the respective client. North America comprises the United States of America,
Canada and Mexico; Europe includes continental Europe (both the east and the
west), Ireland and the United Kingdom; and the Rest of the World comprising all
other places except those mentioned above and India. Fixed assets used in the
company's business are not identified to any of the reportable segments, as
these are used interchangeably between segments. Management believes that it is
currently not practicable to provide segment disclosures relating to total
assets and liabilities since a meaningful segregation of the available data is
onerous. Geographical information on revenue and industry revenue information is
collated based on individual customers invoiced or in relation to which the
revenue is otherwise recognized.
1.19.19.1 Industry segments
Three months ended June 30, 2001
In $
Financial
services Manufacturing Telecom Retail Others Total
---------- ------------- ---------- ---------- ---------- -----------
Revenues 48,071,082 23,954,996 21,796,805 14,500,826 22,209,049 130,532,758
Identifiable operating expenses 16,655,766 9,506,579 5,527,419 3,869,375 7,790,866 43,350,005
Allocated expenses 13,769,121 6,436,666 5,856,762 3,896,345 5,967,531 35,926,425
---------- ---------- ---------- ---------- ---------- -----------
Segmental operating income 17,646,195 8,011,751 10,412,624 6,735,106 8,450,652 51,256,328
Unallocable expenses 8,818,512
-----------
Operating income 42,437,816
Other income (expense), net 2,876,099
-----------
Net income before taxes 45,313,915
Taxes 6,072,556
---------- ---------- ---------- ---------- ---------- -----------
Net income after taxes 39,241,359
========== ========== ========== ========== ========== ===========
Three months ended June 30, 2000
In $
Financial
services Manufacturing Telecom Retail Others Total
---------- ------------- ---------- --------- ---------- ----------
Revenues 23,595,802 15,971,309 14,847,699 7,223,205 18,619,818 80,257,833
Identifiable operating expenses 9,884,110 5,693,272 4,030,351 2,669,536 6,167,468 28,444,737
Allocated expenses 6,053,398 3,968,385 3,689,202 1,794,747 4,626,458 20,132,190
---------- ---------- ---------- --------- ---------- ----------
Segmental operating income 7,658,294 6,309,652 7,128,146 2,758,922 7,825,892 31,680,906
Unallocable expenses 5,275,458
----------
Operating income 26,405,448
Other income (expense), net 3,403,057
----------
Net income before taxes 29,808,505
Taxes 2,976,832
---------- ---------- ---------- --------- ---------- ----------
Net income after taxes 26,831,673
========== ========== ========== ========= ========== ==========
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Year ended March 31, 2001
Financial In $
services Manufacturing Telecom Retail Others Total
----------- ---------- ---------- ---------- ---------- -----------
Revenues 139,616,739 74,004,867 76,412,722 37,684,446 86,131,736 413,850,510
Identifiable operating expenses 49,021,150 28,363,069 19,219,376 11,893,574 26,233,048 134,730,217
Allocated expenses 38,589,808 19,736,596 20,423,026 10,057,009 23,189,607 111,996,046
----------- ---------- ---------- ---------- ---------- -----------
Segmental operating income 52,005,781 25,905,202 36,770,320 15,733,863 36,709,081 167,124,247
Unallocable expenses 29,609,661
-----------
Operating income 137,514,586
Other income (expense), net 9,505,343
-----------
Net income before taxes 147,019,929
Taxes 15,071,825
----------- ---------- ---------- ---------- ---------- -----------
Net income after taxes 131,948,104
=========== ========== ========== ========== ========== ===========
1.19.19.2 Geographic segments
Three months ended June 30, 2001 In $
North Rest of
America Europe India the World Total
---------- ---------- --------- --------- -----------
Revenues 94,209,426 25,877,229 3,455,705 6,990,398 130,532,758
Identifiable operating expenses 30,299,129 9,170,999 1,031,965 2,847,912 43,350,005
Allocated expenses 25,597,816 7,031,150 1,309,296 1,988,163 35,926,425
---------- ---------- --------- --------- -----------
Segmental operating income 38,312,481 9,675,080 1,114,444 2,154,323 51,256,328
Unallocable expenses 8,818,512
-----------
Operating income 42,437,816
Other income (expense), net 2,876,099
-----------
Net income before taxes 45,313,915
Taxes 6,072,556
---------- ---------- --------- --------- -----------
Net income after taxes 39,241,359
========== ========== ========= ========= ===========
Three months ended June 30, 2000 In $
North Rest of
America Europe India the World Total
---------- ---------- --------- --------- ----------
Revenues 59,785,038 13,766,329 1,013,388 5,693,078 80,257,833
Identifiable operating expenses 21,043,322 5,004,967 375,031 2,021,417 28,444,737
Allocated expenses 14,953,548 3,445,826 288,262 1,444,554 20,132,190
---------- ---------- --------- --------- ----------
Segmental operating income 23,788,168 5,315,536 350,095 2,227,107 31,680,906
Unallocable expenses 5,275,458
----------
Operating income 26,405,448
Other income (expense), net 3,403,057
----------
Net income before taxes 29,808,505
Taxes 2,976,832
---------- ---------- --------- --------- ----------
Net income after taxes 26,831,673
========== ========== ========= ========= ==========
Year ended March 31, 2001 In $
North Rest of
America Europe India the World Total
----------- ---------- --------- ---------- -----------
Revenues 304,242,537 77,892,656 5,778,286 25,937,031 413,850,510
Identifiable operating expenses 96,358,758 27,210,316 1,943,571 9,217,572 134,730,217
Allocated expenses 82,053,059 20,951,885 1,866,259 7,124,843 111,996,046
----------- ---------- --------- ---------- -----------
Segmental operating income 125,830,720 29,730,455 1,968,456 9,594,616 167,124,247
Unallocable expenses 29,609,661
-----------
Operating income 137,514,586
Other income (expense), net 9,505,343
-----------
Net income before taxes 147,019,929
Taxes 15,071,825
----------- ---------- --------- ---------- -----------
Net income after taxes 131,948,104
=========== ========== ========= ========== ===========
19
20
1.19.19.3 Significant clients
No clients individually accounted for more than 10% of the revenues in
fiscal 2001, 2000 and 1999, respectively.
1.19.20 Commitments and contingencies
The company has outstanding performance guarantees for various statutory
purposes totaling $ 2,547,989, $ 1,279,794 and $ 1,126,611, as of June 30,
2001 and 2000 and March 31, 2001, respectively. These guarantees are
generally provided to governmental agencies.
1.19.21 Litigation
The company is subject to legal proceedings and claims, which have arisen,
in the ordinary course of its business. These actions, when ultimately
concluded and determined, will not, in the opinion of management, have a
material effect on the results of operations or the financial position of
the company.
1.19.22 Non-monetary transaction
During the year ended March 31, 2001, the company transferred certain
Intellectual Property Rights ("IPR") that it had developed and owned in a
product called OnScan to OnMobile Systems Inc. (formerly OnScan, Inc).
OnScan is a comprehensive web-enabled wireless notification product. In
exchange for the transfer, the company received consideration in the form
of securities including 100,000 Common Stock, par value $ 0.001 each,
100,000 Series A Voting Convertible Preferred Stock, par value $ 0.001 each
and 4,400,000 Series A Nonvoting Convertible Preferred Stock, par value
$ 0.001 each. Convertible Preferred Stock is convertible into Common Stock
automatically upon the closing of an Initial Public Offering by OnMobile
Systems Inc. As of June 30, 2001, the company's controlling interest in
Onmobile Systems, Inc. was approximately 12%. The transfer was recorded at
historic cost and, accordingly, no gain was recognized on this transaction
as of the date of transfer of the IPR.
Item 2. Management Discussion and Analysis of Financial Conditions and Results
of Operations
Investors are cautioned that this discussion contains forward-looking
statements that involve risks and uncertainties. When used in this
discussion, the words "anticipate", "believe", "estimate", "intend", "will"
and "expect" and other similar expressions as they relate to the company or
its business are intended to identify such forward-looking statements. The
company undertakes no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events,
or otherwise. Actual results, performances or achievements could differ
materially from those expressed or implied in such forward-looking
statements. Factors that could cause or contribute to such differences
include those described under the heading "Risk Factors" in the Prospectus
filed with the SEC, the factors discussed in the Form 20-F filed with the
SEC, and those factors discussed elsewhere in this report. Readers are
cautioned not to place undue reliance on these forward-looking statements
that speak only as of their dates. The following discussion and analysis
should be read in conjunction with the company's financial statements
included herein and the notes thereto.
2.1 Overview
Infosys, an India-based IT consulting and services company formed in 1981,
provides end-to-end consulting for global corporations. The company has
partnered with several Fortune 500 and emerging companies in building their
next generation information infrastructure for competitive advantage.
Infosys' portfolio of services includes e-strategy consulting and
solutions, maintenance and re-engineering services, large application
development and enterprise integration services. Infosys also has product
co-development initiatives with numerous communication and Internet
infrastructure companies that are creating the building blocks of the
digital economy. In addition, the company develops and markets certain
software products. The company utilizes an extensive offshore
infrastructure including dedicated offshore software development centers
("OSDCs") to provide managed software solutions to clients worldwide. From
fiscal 1997 through fiscal 2001, total revenue increased from $ 39.6
million to $ 413.8 million, the number of the company's software
professionals worldwide increased from approximately 1,410 to approximately
8,660, and the number of its India-based software development centers
increased from six to sixteen. The company also operationalized proximity
development centers in Croydon in the UK and in Chicago, New Jersey and
Phoenix in the U.S. in fiscal 2001, and one global development center in
Toronto, Canada and two proximity development centers in Fremont and Boston
in the U.S. in fiscal 2000.
The company's revenues are generated principally from software services
provided either on a fixed-price, fixed- time frame or a time-and-materials
basis. Revenues from services provided on a time-and-materials basis are
recognized in the month that services are provided and related costs are
incurred. Revenues from services
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provided on a fixed-price, fixed-time frame basis are recognized upon the
achievement of specified milestones identified in the related contracts, in
accordance with the percentage of completion method. Cost of completion
estimates are subject to periodic revisions. Although the company has
revised its project completion estimates from time to time, such revisions
have not, to date, had a material adverse effect on the company's operating
results or financial condition. Since the company bears the risk of cost
overruns and inflation with respect to its fixed-price, fixed-time frame
projects, the company's operating results could be adversely affected by
inaccurate estimates of contract completion costs and dates, including wage
inflation rates and currency exchange rates that may affect cost
projections. The company also develops and markets certain software
products, including banking software that is licensed primarily to clients
in Asia and Africa. Such software products represented 3.3% of total
revenue during the three months ended June 30, 2001. The company derived
72.2% of its total revenue from North America, 19.8% from Europe, 2.6% from
India and 5.4% from the rest of the world during the three months ended
June 30, 2001.
During the three months ended June 30, 2001 and June 30, 2000, the company
derived 23.0% and 28.7% of its total revenue, respectively, from internet
and e-commerce projects. Due to shorter time-to-market considerations,
e-business projects necessitate higher interaction with clients. This
results in a higher proportion of services being performed at client sites.
Services performed at a client site typically generate higher per capita
revenues, but lower gross margins, than the same quantum of services
performed at the company's own facilities. Consequently, any increase in
work at client sites can decrease gross margins of the company.
Cost of revenue consists, primarily, of salary and other compensation
expenses, depreciation, data communication expenses, computer maintenance,
cost of software purchased for internal use, certain pre-opening expenses
for new software development centers, and foreign travel expenses. The
company depreciates personal computers and servers over two years and
mainframe computers over three years. Third party software is expensed in
the period in which it is acquired.
The company assumes full project management responsibility for each project
that it undertakes. Approximately 69% of the work on a project during the
quarter ended June 30, 2001 was performed at the company's facilities in
India, and the balance of the work was performed at the client site. The
proportion of work performed at company facilities and at client sites
varies from quarter to quarter. The company charges higher rates and incurs
higher compensation expenses for work performed at a client site. Services
performed at a client site typically generate higher revenues per capita,
but lower gross margins, than the same quantum of services performed at the
company's facilities in India. As a result, total revenues, cost of
revenues and gross profit in absolute terms, and as a percentage of
revenues, fluctuate from quarter to quarter based on the proportion of work
performed offshore at company facilities and at client sites.
Revenue and gross profits are also affected by employee utilization rates.
Utilization rates depend, among other factors, on the number of employees
enrolled for in-house training programs, particularly the 14-week classroom
training course provided to new employees. Generally a large percentage of
new hires begin their training in the second quarter, utilization rates
have historically been lower in the second and third quarters of a fiscal
year.
Selling and marketing expenses primarily consist of expenses relating to
advertisements, brand building, rentals of sales and marketing offices,
salaries of marketing personnel, and travel and conveyance. General and
administrative expenses consist of expenses relating to communications,
finance and administration, legal and professional charges, management,
rent, salary and other compensation, travel and miscellaneous
administrative costs.
Other income primarily includes interest income and foreign currency
exchange gains.
The company also intends to substantially expand its software development
infrastructure in India. The company had committed $ 30.5 million towards
various capital acquisitions as of June 30, 2001. The company has not yet
made contractual commitments for the majority of its budgeted capital
expenditure. The company intends to spend an aggregate amount of
approximately $ 60 million on various capital acquisitions for the rest of
fiscal 2002 and intends to use its internal accruals to fund this
expansion.
2.2 Results of operations
2.2.1 Three months ended June 30, 2001 compared to three months ended June
30, 2000 Revenues. Total revenues were $ 130.5 million for the three months
ended June 30, 2001, representing an increase of 62.6% over total revenues
of $ 80.3 million during the same period in the fiscal 2001. This increase
is attributable to an increase in volumes of business transacted of $ 40.4
million or 50.3%, and an increase in prices at which contracts were
executed in the amount of $ 9.9 million or 12.3%. Custom software
development,
21
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re-engineering, maintenance and software development through Offshore
Software Development Centers ("OSDC") formed a majority of the company's
revenues. The increase in revenues was attributable, in part, to an
increase in business from certain existing clients and from certain new
clients, particularly in the insurance, banking and financial services, and
retailing industries. Revenues from insurance, banking and financial
services clients comprised 36.8% and 29.4% of revenues in the three months
ended June 30, 2001 and 2000, respectively. Revenues from retailing clients
comprised 11.1% and 9.0% of revenues in the three months ended June 30,
2001 and 2000, respectively. Net sales of Finacle(TM) and other products
represented 3.3% of total revenues for the three months ended June 30, 2001
as compared to 2.4% in the corresponding period in fiscal 2001. Revenue
from services represented 96.7% of total revenues for the three months
ended June 30, 2001 as compared to 97.6% in the corresponding period in
fiscal 2001. Revenue from fixed-price, fixed-time frame and time-and-
materials contracts represented 27.0% and 73.0%, respectively, of total
revenues in the three months ended June 30, 2001 as compared to 26.6% and
73.4%, respectively, in the three months ended June 30, 2000. Revenue from
North America and Europe represented 72.2% and 19.8%, respectively, of
total revenue for the three months ended June 30, 2001 as compared to 74.5%
and 17.2%, respectively, during the same period in fiscal 2001.
Cost of Revenues. Cost of revenues was $ 68.4 million for the three months
ended June 30, 2001, representing an increase of 63.0% over the cost of
revenues of $ 42.0 million for the same period in fiscal 2001. Cost of
revenues represented 52.4% and 52.3% of total revenues for the three months
ended June 30, 2001 and June 30, 2000, respectively. This marginal increase
in costs as a percentage of revenues was attributable to an increase in
personnel costs from annual salary increments effective April 1, 2001 and
increased personnel costs for new hires. This increase in personnel costs
was partially offset by a decrease in foreign travel and computer
maintenance expenses, which represented 2.8% and 4.9% of revenues for the
three months ended June 30, 2001 and 2000, respectively as well as a
decrease in overseas short-term allowances, which represented 1.9% and 4.2%
of revenues for the three months ended June 30, 2001 and 2000,
respectively.
Gross Profit. As a result of the foregoing, the gross profit was $ 62.1
million for the three months ended June 30, 2001 representing an increase
of 62.2% over gross profit of $ 38.3 million for the three months ended
June 30, 2000. As a percentage of total revenues, gross profit marginally
decreased to 47.6% for the three months ended June 30, 2001 from 47.7% for
the corresponding period in fiscal 2001. This marginal decrease in gross
margins was attributable to an increase in personnel costs from annual
salary increments effective April 1, 2001 and increased personnel costs for
new hires. This increase in personnel costs was partially offset by a
decrease in foreign travel and computer maintenance expenses, as well as a
decrease in overseas short-term allowances.
Selling and Marketing Expenses. Sales and marketing expenses were $ 5.9
million in the three months ended June 30, 2001, an increase of 40.4% over
sales and marketing expenses of $ 4.2 million in the three months ended
June 30, 2000. As a percentage of total revenues, sales and marketing
expenses decreased to 4.5% in the three months ended June 30, 2001 from
5.2% in the three months ended June 30, 2000. This decrease is primarily
due to the benefit of scale of operations, and a reduction in advertisement
and brand building expenses amounting to 0.4% of revenues for the three
months ended June 30, 2001 as compared to 0.7% of revenues for the three
months ended June 30, 2000. This decrease was partially offset by an
increase in the number of marketing offices and sales personnel. The number
of sales offices increased to 26 as of June 30, 2001, up from 22 as of June
30, 2000 and the number of sales and marketing personnel increased to 122,
up from 80 as of June 30, 2000.
General and Administrative Expenses. General and administrative expenses
were $ 12.5 million for the three months ended June 30, 2001, representing
an increase of 95.2% over general and administrative expenses of $ 6.4
million for the three months ended June 30, 2000. General and
administrative expenses were 9.6% and 8.0% of total revenues for the three
months ended June 30, 2001 and 2000, respectively. This increase in general
and administrative expenses as a percentage of revenues was primarily
attributable to an increase in the provision for doubtful debts, which
comprised 1.1% of revenues during the three-month period ended June 30,
2001 as compared to 0.1% in the corresponding previous period as well as
increases in management, finance, administrative and occupancy costs due to
an increase in scale of operations.
Amortization of Stock Compensation Expense. Amortization of deferred stock
compensation expense was $ 1.3 million in each of the three months ended
June 30, 2001 and 2000, respectively. Deferred stock compensation expense
reflects the continued amortization of compensation expense from stock
purchase rights granted in prior periods.
Operating Income. Operating income was $ 42.4 million for the three months
ended June 30, 2001, an increase of 60.6% over the operating income of
$26.4 million for the corresponding period in fiscal 2001. As a percentage
22
23
of revenues, operating income decreased to 32.5% for the three months ended
June 30, 2001 from 32.9% for the corresponding period in fiscal 2001.
Excluding the amortization of deferred stock compensation expense, the
operating margin was 33.5% for the three months ended June 30, 2001 as
compared to 34.5% for the three months ended June 30, 2000.
Other Income. Other income was $2.9 million for the three months ended
June 30, 2001 as compared to $3.4 million for the corresponding period in
fiscal 2001. Other income during the three months ended June 30, 2001
includes $0.1 million arising from exchange differences on translation of
foreign currency deposits and interest income of $2.5 million earned on
deposits of surplus funds. Other income for the three months ended June 30,
2000 includes $1.7 million arising from exchange differences on
translation of foreign currency deposits and interest income of $1.7
million earned on deposits of surplus funds.
Provision for Income Taxes. Provision for income taxes was $6.1 million
for the three months ended June 30, 2001 as compared to $3.0 million for
the corresponding period in fiscal 2001. The company's effective tax rate
increased to 13.5% for the three months ended June 30, 2001 as compared to
10.1% for the corresponding period in fiscal 2001. This increase in
effective tax rate is primarily attributable to an increase in foreign
taxes paid in respect of the overseas operations of the company in the
three months ended June 30, 2001 as compared to the three months ended June
30, 2000 as well as an increase in taxable income earned on deposit of
surplus funds. Overseas operations of the Company contribute 50.5% of
revenues in the three months ended June 30, 2001 as compared to 48.3% of
revenues in the three months ended June 30, 2000. Income earned from the
deposit of surplus funds was $2.5 million and $1.7 million in the three
months ended June 30, 2001, 2000 respectively.
Net Income. Net income was $39.2 million for the three months ended June
30, 2001, an increase of 46.3% over net income of $26.8 million for the
corresponding period in fiscal 2001. As a percentage of total revenues, net
income decreased to 30.1% for the three months ended June 30, 2001 from
33.4% for the corresponding period in fiscal 2001.
2.3 Liquidity and capital resources
The growth of the company has been financed largely from cash generated
from operations and, to a lesser extent, from the proceeds of equity issues
and borrowings. In 1993, the company raised approximately $4.4 million in
gross aggregate proceeds from its initial public offering of equity shares
on Indian stock exchanges. In 1994, the company raised an additional $7.7
million through private placements of its equity shares with foreign
institutional investors, mutual funds, Indian domestic financial
institutions and corporations. In 1999, the company raised $66.3 million
through the issue of American Depositary Shares ("ADS"). As of June 30,
2001, the company had $134.2 million in cash and cash equivalents, $184.1
million in working capital and no outstanding bank borrowings. The
company's treasury policy calls for investing only in highly rated banks,
financial institutions and companies for short maturities with a limit for
individual entities. The company retains the money both in rupee and
foreign currency accounts. The bank balances in overseas accounts are
maintained to meet the expenditure of the overseas branches in the U.S. and
other countries, and to meet project-related expenditure overseas.
Net cash provided by operating activities was $48.9 million and $20.6
million in the three months ended June 30, 2001 and 2000, respectively. Net
cash provided by operations consisted primarily of net income offset, in
part, by an increase in accounts receivable. Accounts receivable as a
percentage of total revenues, represented 12.6% and 15.9% as of June 30,
2001 and 2000, respectively. Further, the average days outstanding of
accounts receivable has increased in the 0-30 and 31-60 aging periods and
decreased in the 61-90 and greater than 90-day aging periods. The company's
policy on accounts receivable includes a periodic review of all such
outstanding. The company reviews the age, amount, and quality of each
account receivable; the relationship with, size of, and history of the
client; and the quality of service delivered by the company for the client,
to determine the classification of an account receivable. Should the review
so demand, the company classifies accounts receivable into secured and
unsecured accounts, further sub-classified between good and doubtful
accounts. The company makes provisions for all accounts receivable
classified as doubtful and for all accounts receivable that are outstanding
for more than 180 days. Management continues pursuing the parties for
recovery of dues, in part or full.
Prepaid expenses and other current assets decreased by $0.3 million during
the three months ended June 30, 2001 as compared to an increase of $0.5
million during the three months ended June 30, 2000, respectively. The
decrease in the three months ended June 30, 2001 was primarily due to a
decrease in rent deposits and prepaid expenses, offset partially by an
increase in costs in excess of billings and other advances.
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The increase in the three months ended June 30, 2000 was primarily
attributable to an increase in prepaid expenses and costs in excess of
billings. Costs in excess of billings represent costs incurred on
fixed-price contracts in respect of which milestones are yet to be
achieved.
Income taxes payable decreased by $2.0 million during the three months
ended June 30, 2001, primarily due to higher advance tax payments made
during the period, as compared to an increase of $1.1 million during the
three months ended June 30, 2000. Other accrued liabilities increased by
$3.8 million during the three months ended June 30, 2001 as compared to a
decrease of $1.9 million during the three months ended June 30, 2000. The
increase of $3.8 million in other accrued liabilities during the three
months ended June 30, 2001 is primarily attributable to an increase in
accrued staff compensation and employee withholding taxes payable amounting
to $2.4 million and $1.6 million, respectively. The decrease of $1.9
million in other accrued liabilities during the three months ended June 30,
2000 is primarily attributable to a decrease in accrued staff compensation
and employee withholding taxes payable amounting to $0.3 million and $1.4
million, respectively.
Unearned revenue as of June 30, 2001 was $7.7 million compared to $14.4
million as of June 30, 2000 and consists primarily of advance client
billings on fixed-price, fixed-time frame contracts for which related costs
were not yet incurred. The proportion of fixed-price contracts was 27.0%
and 26.6% of revenues for the three months ended June 30, 2001 and 2000
respectively.
Net cash used in investing activities was $24.7 million and $22.1 million
in the three months ended June 30, 2001 and 2000, respectively. Net cash
used in investing activities in the three months ended June 30, 2001 and
2000 consisted primarily of $20.6 million and $18.1 million,
respectively, for property, plant and equipment. Additionally, the company
invested an aggregate amount of $2.2 million to purchase the capital stock
of Workadia Inc., during the three months ended June 30, 2001. The company
invested an aggregate amount of $3 million to purchase the capital stock
of CiDRA Corporation during the three months ended June 30, 2000.
Publicly-traded Indian companies customarily pay dividends. The company
paid cash dividends of $11.3 million and $4.7 million in the three months
ended June 30, 2001 and 2000 respectively.
As of June 30, 2001, the company had contractual commitments for capital
expenditure of $30.5 million. The company has not yet made contractual
commitments for the majority of its budgeted capital expenditure. The
company intends to spend an aggregate amount of approximately $60 million
on various capital expenditure during fiscal 2002 and the same would be met
out of the internal accruals of the company. In the opinion of the company,
the working capital is sufficient for the company's present requirements.
2.4 Reconciliation between U.S. and Indian GAAP
There are material differences between financial statements prepared as per
Indian and U.S. GAAP. These differences arise due to accounting for
stock-based compensation and non-recognition of unrealized gains on
transfers of intellectual property rights, as required by U.S. GAAP. Indian
GAAP does not require amortization of deferred stock compensation and
permits the recognition of unrealized gains on transfers of intellectual
property rights in the financial statements. Prior to April 1, 2001, Indian
GAAP did not also require provision for deferred taxes.
Reconciliation of net income Three months ended June 30,
-------------------------------
2001 2000
------------ ------------
Net profit as per Indian GAAP $ 40,501,114 $ 28,565,885
Amortization of deferred stock compensation
expense under APB opinion number 25 (1,259,755) (1,275,796)
Provision for retirement benefits to employees -- 741,000
Deferred income taxes -- 118,795
Provision for contingency/e-inventing the company -- (87,387)
Transfer of intellectual property rights (net of tax) -- (1,230,824)
------------ ------------
Net income as per US GAAP $ 39,241,359 $ 26,831,673
============ ============
2.5 Investments
2.5.1 Yantra Corporation
Prior to October 20, 1998, the company owned a majority of the voting stock
of Yantra. As a result, all of Yantra's operating losses through October
20, 1998 were recognized in the company's consolidated financial
statements. For fiscal 1998 and fiscal 1999, Yantra's losses recognized in
the company's financial statements were $1.6 million and $2.0 million,
respectively. On October 20, 1998, the company sold a portion of Yantra's
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25
shares held by it, thereby reducing its interest to less than one-half of
the voting stock of Yantra. As of October 20, 1998, the company owned all
of the outstanding common stock of Yantra, but had no financial obligations
or commitments to Yantra and did not intend to extend Yantra with any
financial support. Accordingly, Yantra's results after October 20, 1998
were not recognized in the company's financial statements under U.S. GAAP.
Yantra's revenues were $1.3 million and $2.0 million for fiscal 1998 and
for the period ended October 20, 1998, respectively, while gross profits
were $574,000 and $546,000, respectively, for these same periods.
Yantra's revenues were 1.9% and 2.3% of the company's revenues for fiscal
1998 and for the period ended October 20, 1998, respectively. Its gross
profits were 2.0% and 1.4% of the company's gross profits for these same
periods. Yantra currently provides e-commerce operations solutions through
PureEcommerce(TM), a scalable web-based solution that facilitates real-time
transaction management across the extraprise. In June 1999, Yantra sold
Series C Convertible Preferred Stock in the amount of $15 million to
unrelated existing and new investors, reducing the company's voting control
to approximately 25%. In July 2000, Yantra sold Series D Convertible
Preferred Stock amounting to $49 million, to unrelated existing and new
investors, further reducing the company's voting control to approximately
16% on a fully diluted basis.
2.5.2 Other investments
During the three months ended June 30, 2001 the company also invested in
Workadia Inc. a Delaware corporation by purchasing 440,000 shares of Series
B Convertible Preferred Stock, par value US $0.001 per share, for an
aggregate investment of US $2.2 million.
2.6 Principles of currency translation
In the three months ended June 30, 2001, over 94% of the company's revenues
were generated in U.S. dollars and European currencies. A majority of the
company's expenses were incurred in Rupees, and the balance was incurred in
U.S. dollars and European currencies. The functional currency of the
company is the Indian Rupee. Revenues generated in foreign currencies are
translated into Indian rupees using the exchange rate prevailing on the
dates revenues are recognized. Expenses of overseas operations incurred in
foreign currencies are translated into Indian rupees at either the monthly
average exchange rate or the exchange rate on the date the expense is
incurred, depending on the source of payment. Assets and liabilities of
foreign branches held in foreign currency are translated into Indian rupees
at the end of the applicable reporting period. For U.S. GAAP reporting, the
financial statements are translated into U.S. dollars using the average
monthly exchange rate for revenues and expenses and the period end rate for
assets and liabilities. The gains or losses from such translation are
reported as "Other comprehensive income", a separate component of
stockholders' equity. The company expects that a majority of its revenues
will continue to be generated in U.S. dollars for the foreseeable future
and that a significant portion of the company's expenses, including
personnel costs as well as capital and operating expenditures, will
continue to be denominated in rupees. Consequently, the company's results
of operations will be adversely affected to the extent that the rupee
appreciates against the U.S. dollar.
2.7 Income Tax Matters
The company benefits from certain significant tax incentives provided to
software firms under Indian tax laws. These incentives presently include:
(i) an exemption from payment of Indian corporate income taxes for a period
of ten consecutive years of operation of software development facilities
designated as "Software Technology Parks" (the "STP Tax Holiday") beginning
from the financial year when the unit started producing computer software,
or March 31, 2000, whichever is earlier; and (ii) a tax deduction for
profits derived from exporting computer software (the "Export Deduction").
All but one of the company's software development facilities are located in
a designated Software Technology Park ("STP"). Such Export Deduction will
be phased out equally over a period of five years starting from fiscal
2000. The benefits of these tax incentive programs have historically
resulted in an effective tax rate for the company well below statutory
rates. There is no assurance that the Government of India will continue to
provide these incentives. The company pays corporate income tax in foreign
countries on income derived from operations in those countries.
2.8 Effects of Inflation
The company's most significant costs are salaries and related benefits for
its employees. Competition in India and the United States for IT
professionals with the advanced technological skills necessary to perform
the services offered by the company have caused wages to increase at a rate
greater than the general rate of inflation. As with other IT service
providers, the company must adequately anticipate wage increases and other
cost increases, particularly on its long-term contracts. Historically, the
company's wage costs in India have been significantly lower than prevailing
wage costs in the United States for comparably-skilled employees, although
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wage costs in India are presently increasing at a faster rate than in the
United States. There can be no assurance that the company will be able to
recover cost increases through increases in the prices that it charges for
its services in the United States.
2.9 Accounting Pronouncements
Effective April 1, 2001, the company adopted SFAS 133, Accounting for
Derivative Instruments and Hedging Activities as amended, when the
pronouncement became effective for companies with fiscal year ending March
31, 2001. SFAS 133 changes the accounting treatment of derivative contracts
(including foreign exchange contracts) that are employed to manage risks.
It establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. All derivatives, whether designated
in hedging relationships or not, are required to be recorded on the balance
sheet at fair value. The accounting treatment of changes in fair value is
dependent upon whether or not a derivative instrument is designated as a
hedge and if so, the type of hedge. If the derivative is designated as a
fair value hedge, the changes in the fair value of the derivative and of
the hedged item attributable to the hedged risk are recognized in earnings.
If the derivative is designated as a cash flow hedge, the effective
portions of changes in the fair value of the derivative are recorded in
other comprehensive income and are recognized in the income statement when
the hedged item affects earnings. Ineffective portions of changes in the
fair value of cash flow hedges are recognized in earnings.
2.10 Risk factors
2.10.1 Management of growth
The company has experienced significant growth in recent periods. The
company's revenues in the three months ended June 30, 2001 grew by 62.6%
over the three months ended June 30, 2000. As of June 30, 2001, the company
employed approximately 8,720 software professionals worldwide with 16
software development facilities in India, six proximity development centers
in the United Kingdom and the U.S., and one global development center in
Canada, as compared to approximately 5,590 with 18 facilities in India and
abroad as of June 30, 2000. In fiscal 2001 and 2000, the company approved
major expansions to its existing facilities and the building of new
facilities. The company's growth is expected to place significant demands
on its management and other resources and will require it to continue to
develop and improve its operational, financial and other internal controls,
both in India and elsewhere. In particular, continued growth increases the
challenges involved in: recruiting and retaining sufficient skilled
technical, marketing and management personnel; providing adequate training
and supervision to maintain the company's high quality standards; and
preserving the company's culture and values and its entrepreneurial
environment. The company's inability to manage its growth effectively could
have a material adverse effect on the quality of the company's services and
projects, its ability to attract clients as well as skilled personnel, its
business prospects, and its results of operations and financial condition.
2.10.2 Potential fluctuations in future operating results
Historically, the company's operating results have fluctuated, and may
continue to fluctuate in future, depending on a number of factors,
including: the size, timing and profitability of significant projects; the
proportion of services that are performed at client sites rather than at
the company's offshore facilities; the accuracy of estimates of resources
and time required to complete ongoing projects, particularly projects
performed under fixed-price, fixed-time frame contracts; a change in the
mix of services provided to its clients or in the relative proportion of
services and product revenues; the timing of tax holidays and other
Government of India incentives; the effect of seasonal hiring patterns and
the time required to train and productively utilize new employees; the size
and timing of facilities expansion; unanticipated increases in wage rates;
the company's success in expanding its sales and marketing programs;
currency exchange rate fluctuations and other general economic factors. A
high percentage of the company's operating expenses, particularly personnel
and facilities, are fixed in advance of any particular quarter. As a
result, unanticipated variations in the number and timing of the company's
projects or in employee utilization rates may cause significant variations
in operating results in any particular quarter. The company believes that
period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of
future performance. Due to all of the foregoing factors, it is possible
that in some future quarter the company's operating results may be below
the expectations of public market analysts and investors. In such event,
the market price of the company's equity shares and ADSs are likely to be
materially adversely affected.
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2.10.3 Impact of a slowdown in IT spending in the U.S.
Historically, a significant portion of the company's revenues was derived
from the U.S. For example, in fiscal 2001 and 2000, approximately 70.0% and
73.8% of the company's revenues were derived from the U.S. Currently there
are indications of an economic slowdown in the U.S. Accordingly, the IT
services sector in the U.S. may experience some adjustment as a result of
the economy. The continued growth of companies in this sector will depend
upon their ability to adapt to the changes in the market and justify their
customer's investments in new projects that will drive customer retention
up and costs down. Consequently, the company's competitors may reduce
contract prices to retain customers and win new contracts. This may affect
the company's ability to win new clients and retain existing clients as
well as the company's ability to sustain its current pricing strategy. An
inability to retain current pricing structures, retain clients or win new
client contracts may result in lower revenue growth and lower profit
margins for the company. Due to all of the foregoing factors, it is
possible that in some future quarter the company's operating results may be
below the expectations of public market analysts and investors. In such
event, the market price of the equity shares and ADSs are likely to be
materially adversely affected.
2.10.4 Exposure to industry segments
The company derives a significant proportion of its revenues from certain
industry segments. For example, in fiscal 2001 the company derived 33.7%
and 18.4% of its revenues from the insurance, banking and financial
services, and telecom industry segments respectively, as compared to 30.1%
and 15.4%, respectively in fiscal 2000. There are indications that the
possible economic slowdown in the U.S. may impact the growth prospects of
companies that operate in various industry segments, for example, the
insurance, banking and financial services, and telecom industry segments.
Consequently, these companies may reduce or entirely eliminate their IT
spending, or postpone decisions regarding new expenditures with respect to
IT spending. The company believes that a sustained reduction or elimination
in IT spending by these such companies and a longer client engagement time
that such companies may adopt, may affect the company's ability to win new
clients and retain existing clients as well as the company's ability to
sustain its current pricing strategy. An inability to retain current
pricing structures, retain clients or win new client contracts may result
in lower revenue growth and lower profit margins for the company. Due to
all of the foregoing factors, it is possible that in some future quarter
the company's operating results may be below the expectations of public
market analysts and investors. In such event, the market price of the
equity shares and ADSs are likely to be materially adversely affected.
2.10.5 Exposure to start-ups and venture funded companies
Several of the company's clients are early stage, young companies with
little or limited financing. For example, the company derived 10.8% of its
revenues from such companies in fiscal 2001. The ability of such early
stage companies to raise capital for operations and expansion plans has
recently become more difficult as a result of several factors, including
the U.S. capital market declines and a slowing U.S. economy. Consequently,
these companies may reduce or entirely eliminate their IT spending, or
postpone decisions regarding new expenditures with respect to IT spending.
The company believes that a sustained reduction or elimination in IT
spending by these such companies and a longer client engagement time that
such companies may adopt, may affect the company's ability to win new
clients and retain existing clients as well as the company's ability to
sustain its current pricing strategy. An inability to retain current
pricing structures, retain clients or win new client contracts may result
in lower revenue growth and lower profit margins for the company.
Additionally, such companies may become greater risks and not be able to
adequately pay for past services rendered. Due to all of the foregoing
factors, it is possible that in some future quarter the company's operating
results may be below the expectations of public market analysts and
investors. In such event, the market price of the equity shares and ADSs
are likely to be materially adversely affected.
2.10.6 Risks related to investments in Indian securities
The company is incorporated in India and substantially all of its assets,
and a substantial majority of its employees are located in India.
Consequently, the company's performance may be affected by changes in
exchange rates and controls, interest rates, Government of India policies,
including taxation policy, as well as political, social and economic
developments affecting India.
Political and economic environment. During the past decade and particularly
since 1991, the Government of India has pursued policies of economic
liberalization, including significant relaxations of restrictions on the
private sector. Nevertheless, the role of the Indian central and state
Governments in the Indian economy as producers, consumers and regulators
has remained significant. Additionally, since 1996, the Government of India
has changed three times. The current Government of India, formed in October
1999, has announced
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policies and taken initiatives that support the continuation of the
economic liberalization policies pursued by previous governments and has,
in addition, set up a special IT task force to promote the IT industry.
However, the speed of economic liberalization could change, and specific
laws and policies affecting IT companies, foreign investment, currency
exchange rates and other matters affecting investment in the company's
securities could change as well. Further, there can be no assurance that
the liberalization policies will continue in the future. A significant
change in the Government of India's economic liberalization and
deregulation policies could adversely affect business and economic
conditions in India generally and the company's business in particular.
South Asia has from time to time experienced instances of civil unrest and
hostilities among neighboring countries. Events of this nature in the
future could influence the Indian economy and could have a material adverse
effect on the market for securities of Indian companies and on the business
of the company.
Government of India incentives and regulation. The company benefits from a
variety of incentives given to software firms in India, such as relief from
import duties on hardware, a tax exemption for income derived from software
exports, and tax holidays and infrastructure support for companies, such as
Infosys, operating in specially designated "Software Technology Parks".
There can be no assurance that these incentives will continue in future.
Further, there is a risk that changes in tax rates or laws affecting
foreign investment, currency exchange rates or other regulations will
render the Government of India's regulatory scheme less favorable to the
company and could adversely affect the market price of the company's equity
shares and its ADSs. Should the regulations and incentives promulgated by
the Government of India become less favorable to the company, the company's
results of operations and financial condition could be adversely affected.
Restrictions on foreign investment. Foreign investment in Indian securities
is generally regulated by the Foreign Exchange Management Act, 1999. In
certain emerging markets, including India, Global Depositary Shares and
ADSs may trade at a discount or premium, as the case may be, to the
underlying shares, in part because of restrictions on foreign ownership of
the underlying shares. In addition, under current Indian laws and
regulations, the Depositary can accept deposits of outstanding equity
shares and issue ADRs evidencing ADSs representing such equity shares
provided the shares so accepted for conversion into ADSs shall not exceed
the number of equity shares which were released by the custodian pursuant
to conversions of ADSs into equity shares under the Depositary Agreement.
Therefore, a holder of ADSs who surrenders ADSs and withdraws equity shares
is not permitted subsequently to deposit such equity shares and obtain ADSs
if such ADSs obtained on conversion are in excess of the ADSs originally
converted or surrendered. This limited ability to convert equity shares
into ADSs increases the probability that the price of the ADSs will not
trade on par with the price of the equity shares as quoted on the Indian
stock exchanges. Holders who seek to sell in India any equity shares
withdrawn from the depositary facility and to convert the rupee proceeds
from such sale into foreign currency and repatriate such foreign currency
from India will have to obtain Reserve Bank of India ("RBI") approval for
each such transaction. Further, under current Indian regulations and
practice, the approval of the RBI is required for the sale of equity shares
underlying ADSs by a non-resident of India to a resident of India as well
as for renunciation of rights to a resident of India. There can be no
assurance that any such approval can be obtained.
Exchange rate fluctuations. Market risks relating to the company's
operations result primarily from changes in interest rates and changes in
foreign exchange rates. The company's functional currency is the Indian
Rupee although it transacts a major portion of its business in foreign
currencies and accordingly has foreign currency exposure through its sales
in the United States and purchases from overseas suppliers in U.S. dollars.
In its U.S. operations, the company does not actively hedge against
exchange rate fluctuations, although it may elect to do so in the future.
Accordingly, changes in exchange rates may have a material adverse affect
on the company's sales, cost of services sold, gross margin and net income,
any of which alone or in the aggregate may in turn have a material adverse
affect on the company's business, operating results and financial
condition. The exchange rate between the rupee and the U.S. dollar has
changed substantially in recent years and may fluctuate substantially in
the future. During the four-year period from March 31, 1997 through March
31, 2001, the value of the rupee against the U.S. dollar declined by
approximately 29.8%. For the three months ended June 30, 2001 and for
fiscal 2001 and 2000, the company's U.S. dollar-denominated revenues
represented 87.0%, 89.5% and 88.3%, respectively, of total revenues. The
company expects that a majority of its revenues will continue to be
generated in U.S. dollars for the foreseeable future and that a significant
portion of the company's expenses, including personnel costs as well as
capital and operating expenditures, will continue to be denominated in
rupees. Consequently, the company's results of operations will be adversely
affected to the extent the rupee appreciates against the U.S. dollar. The
company has in the past sought to reduce the effect of exchange rate
fluctuations on operating results by purchasing foreign exchange forward
contracts to cover a portion of outstanding accounts receivable on a need
basis. As of June 30, 2001, the company had outstanding forward contracts
in the amount
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of $ 35,000,000. These contracts typically mature within three months, must
be settled on the day of maturity and may be cancelled subject to the
payment of any gains or losses in the difference between the contract
exchange rate and the market exchange rate on the date of cancellation. The
company uses these instruments only as a hedging mechanism and not for
speculative purposes. There can be no assurance that the company will
purchase contracts adequate to insulate itself from foreign exchange
currency risks or that any such contracts will perform adequately as a
hedging mechanism. Devaluation of the rupee will result in foreign currency
translation losses. For example, for the three months ended June 30, 2001
and for fiscal 2001 and fiscal 2000, the company's foreign currency
translation losses were approximately $ 2.8 million, $ 14.5 million and
$ 5.0 million, respectively.
Fluctuations in the exchange rate between the rupee and the U.S. dollar
also will affect the U.S. dollar conversion by the Depositary of any cash
dividends paid in rupees on the equity shares represented by the ADSs. In
addition, fluctuations in the exchange rate between the Indian rupee and
the U.S. dollar will affect the U.S. dollar equivalent of the Indian rupee
price of equity shares on the Indian Stock Exchanges and, as a result, are
likely to affect the market prices of the ADSs in the United States, and
vice versa. Such fluctuations will also affect the dollar value of the
proceeds a holder would receive upon the sale in India of any equity shares
withdrawn from the Depositary under the Depositary Agreement. There can be
no assurance that holders will be able to convert rupee proceeds into U.S.
dollars or any other currency or with respect to the rate at which any such
conversion could occur.
2.10.7 Substantial investment in new facilities
As of June 30, 2001, the company had contractual commitments of $ 30.5
million for capital expenditure and has budgeted for significant expansion
of infrastructure in the near future. Since such an expansion will
significantly increase the company's fixed costs, the company's results of
operations will be materially adversely affected if the company is unable
to grow its business proportionately. Although the company has successfully
developed new facilities in the past, there can be no assurance that the
company will not encounter cost overruns or project delays in connection
with any or all of the new facilities. Furthermore, there can be no
assurance that future financing for additional facilities, whether within
India or elsewhere, would be available on attractive terms or at all.
2.10.8 Restrictions on US immigration
The company's professionals who work on-site at client facilities in the
United States on temporary and extended assignments are typically required
to obtain visas. As of June 30, 2001, substantially all of the company's
personnel in the United States were working pursuant to H-1B visas (1,280
persons) or L-1 visas (294 persons). Although there is no limit to new L-1
petitions, there is a limit to the number of new H-1B petitions that the
United States Immigration and Naturalization Service may approve in any
government fiscal year. In years in which this limit is reached, the
company may be unable to obtain the H-1B visas necessary to bring its
critical Indian IT professionals to the United States on an extended
basis. The H-1B limit had recently been increased to 195,000 for the next
two years ending September 30, 2002. This limit has not yet been reached by
the U.S. Government for its fiscal year ended September 30, 2001 While the
company anticipates that this limit will be reached prior to the end of the
US government's fiscal year and has made efforts to plan accordingly, there
can be no assurance that the company will continue to be able to obtain a
sufficient number of H-1B visas. Changes in existing U.S. immigration laws
that make it more difficult for the company to obtain H-1B and L-1 visas
could impair the company's ability to compete for and provide services to
clients and could have a material adverse effect on the company's results
of operations and financial condition.
2.10.9 Risks related to international operations
While most of the company's software development facilities are currently
located in India, the company intends to develop new software development
facilities in other regions, including potentially South-East Asia, Latin
America and Europe. The company has not yet made substantial contractual
commitments to develop such new software development facilities, and there
can be no assurance that the company will not significantly alter or reduce
its proposed expansion plans. The company's lack of experience with
facilities outside of India subject the company to further risk with regard
to foreign regulation and overseas facilities management. Increasing the
number of software development facilities and the scope of operations
outside of India subjects the company to a number of risks, including,
among other things, difficulties relating to administering its business
globally, managing foreign operations, currency exchange rate fluctuations,
restrictions against the repatriation of earnings, export requirements and
restrictions, and multiple and possibly overlapping tax structures. Such
developments could have a material adverse effect on the company's
business, results of operations and financial condition.
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2.10.10 Dependence on skilled personnel; risks of wage inflation
The company's ability to execute project engagements and to obtain new
clients depends, in large part, on its ability to attract, train, motivate
and retain highly skilled IT professionals, particularly project managers,
software engineers and other senior technical personnel. An inability to
hire and retain additional qualified personnel will impair the company's
ability to bid for or obtain new projects and to continue to expand its
business. The company believes that there is significant competition for IT
professionals with the skills necessary to perform the services offered by
the company. There can be no assurance that the company will be able to
assimilate and manage new IT professionals effectively. Any increase in the
attrition rates experienced by the company, particularly the rate of
attrition of experienced software engineers and project managers, would
adversely affect the company's results of operations and financial
condition. There can be no assurance that the company will be successful in
recruiting and retaining a sufficient number of replacement IT
professionals with the requisite skills to replace those IT professionals
who leave. Further, there can be no assurance that the company will be able
to re-deploy and retrain its IT professionals to keep pace with continuing
changes in IT, evolving standards and changing client preferences.
Historically, the company's wage costs in India have been significantly
lower than wage costs in the United States for comparably skilled IT
professionals. However, wage costs in India are presently increasing at a
faster rate than those in the United States. Changes in immigration laws of
the countries where the company's personnel are on short-term assignments,
requiring the company to pay a minimum threshold wage higher than the
current wage of these personnel as a condition for obtaining visas or work
permits may impact the profitability of the company. In the long-term, wage
increases may have an adverse effect on the company's profit margins unless
the company is able to continue increasing the efficiency and productivity
of its professionals.
2.10.11 Client concentration
The company has derived, and believes that it will continue to derive, a
significant portion of its revenues from a limited number of large
corporate clients. For the three months ended June 30, 2001 and for fiscal
2001 and 2000, the company's largest client accounted for 6.7%, 7.3% and
7.2%, respectively, of the company's total revenues and its five largest
clients accounted for 27.4%, 26.0% and 30.2%, respectively, of the
company's total revenues. The volume of work performed for specific clients
is likely to vary from year to year, particularly since the company is
usually not the exclusive outside software service provider for its
clients. Thus, a major client in one year may not provide the same level of
revenues in a subsequent year. The loss of any large client could have a
material adverse effect on the company's results of operations and
financial condition. Since many of the contracted projects are critical to
the operations of its clients' businesses, any failure to meet client
expectations could result in a cancellation or non-renewal of a contract.
However, there are a number of factors other than the company's performance
that could cause the loss of a client and that may not be predictable. For
example, in 1995, the company chose to reduce significantly the services
provided to its then-largest client rather than accept the price reductions
and increased company resources sought by the client. In other
circumstances, the company reduced significantly the services provided to
its client when the client either changed its outsourcing strategy by
moving more work in-house and reducing the number of its vendors, or
replaced its existing software with packaged software supported by the
licensor. There can be no assurance that the same circumstances may not
arise in future.
2.10.12 Fixed-price, fixed-time frame contracts
As a core element of its business strategy, the company continues to offer
a significant portion of its services on a fixed-price, fixed-time frame
basis, rather than on a time-and-materials basis. Although the company uses
specified software engineering processes and its past project experience to
reduce the risks associated with estimating, planning and performing
fixed-price, fixed-time frame projects, the company bears the risk of cost
overruns, completion delays and wage inflation in connection with these
projects. The company's failure to estimate accurately the resources and
time required for a project, future rates of wage inflation and currency
exchange rates or its failure to complete its contractual obligations
within the time frame committed could have a material adverse effect on the
company's results of operations and financial condition.
2.10.13 Infrastructure and potential disruption in telecommunications
A significant element of the company's business strategy is to continue to
leverage its various software development centers in Bangalore,
Bhubaneswar, Chennai, Mangalore, Pune, Hyderabad, Mohali and Mysore, India
and to expand the number of such centers in India as well as outside India.
The company believes that the use of a strategically located network of
software development centers will provide the company with cost advantages,
the ability to attract highly skilled personnel in various regions, the
ability to service clients on a regional and global basis, and the ability
to provide 24-hour service to its clients. Pursuant to its service delivery
model, the company must maintain active voice and data communication
between its main offices in Bangalore, the offices
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of its clients, and its other software development facilities. Although the
company maintains redundant software development facilities and satellite
communications links, any significant loss of the company's ability to
transmit voice and data through satellite and telephone communications
would have a material adverse effect on the company's results of operations
and financial condition.
2.10.14 Competition
The market for IT services is highly competitive. Competitors include IT
services companies, large international accounting firms and their
consulting affiliates, systems consulting and integration firms, temporary
employment agencies, other technology companies and client in-house IS
departments. Competitors include international firms as well as national,
regional and local firms located in the United States, Europe and India.
The company expects that future competition will increasingly include firms
with operations in other countries, potentially including countries with
lower personnel costs than those prevailing in India. Historically, one of
the company's key competitive advantages has been a cost advantage relative
to service providers in the United States and Europe. Since wage costs in
India are presently increasing at a faster rate than those in the United
States, the company's ability to compete effectively will become
increasingly dependent on its reputation, the quality of its services, and
its expertise in specific markets. Many of the company's competitors have
significantly greater financial, technical and marketing resources and
generate greater revenue than the company, and there can be no assurance
that the company will be able to compete successfully with such competitors
and will not lose existing clients to such competitors. The company
believes that its ability to compete also depends in part on a number of
factors outside its control, including the ability of its competitors to
attract, train, motivate and retain highly skilled IT professionals, the
price at which its competitors offer comparable services, and the extent of
its competitors' responsiveness to client needs.
2.10.15 Dependence on key personnel
The company's success depends to a significant degree upon continued
contributions of members of the company's senior management and other key
research and development and sales and marketing personnel. The company
generally does not enter into employment agreements with its senior
management and other key personnel that provide for substantial
restrictions on such persons leaving the company. The loss of any of such
persons could have a material adverse effect on the company's business,
financial condition and results of operations.
2.10.16 Potential liability to clients; risk of exceeding insurance
coverage
Many of the company's contracts involve projects that are critical to the
operations of its clients' businesses and provide benefits that may be
difficult to quantify. Any failure in a client's system 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 its contractual liability for damages arising from negligent acts,
errors, mistakes or omissions in rendering its services, there can be no
assurance the limitations of liability set forth in its service contracts
will be enforceable in all instances or will otherwise protect the company
from liability for damages. The company maintains general liability
insurance coverage, including coverage for errors or omissions; however,
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 exceed available insurance coverage or changes in
the company's insurance policies, including premium increases or the
imposition of large deductible or co-insurance requirements, could
adversely affect the company's results of operations and financial
condition.
2.10.17 Risks associated with possible acquisitions
The company intends to evaluate potential acquisitions on an ongoing basis.
As of the date of this Quarterly Report, however, the company has no
understanding, commitment or agreement with respect to any material future
acquisition. Since the company has not made any acquisitions in the past,
there can be no assurance that the company will be able to identify
suitable acquisition candidates available for sale at reasonable prices,
consummate any acquisition, or successfully integrate any acquired business
into the company's operations. Further, acquisitions may involve a number
of special risks, including diversion of management's attention, failure to
retain key acquired personnel and clients, unanticipated events or
circumstances, legal liabilities and amortization of acquired intangible
assets, some or all of which could have a material adverse effect on the
company's results of operations and financial condition. Under Indian law,
except in certain limited circumstances, the company may not make any
acquisition of, or investment in, a non-Indian company without RBI and, in
most cases, Government of India approval. Even if the company does
encounter an attractive acquisition candidate, there can be no assurance
that RBI and, if required, Government of India approval can be obtained.
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2.10.18 Risks associated with strategic investments
The company has made and continues to make strategic investments in early
stage technology companies in order to gain experience in niche
technologies. The company invested an aggregate of $5.9 million in
strategic investments in fiscal 2001. However, there can be no assurance
that the company will be successful in its investments and will benefit
from such investments. The loss of any of such investments could have a
material adverse effect on the company's business, financial condition and
results of operations.
2.10.19 Risks associated with incubation
The company incubates employee ideas that it expects to be commercially
viable. The company may incur significant expenditures until the successful
commercialization of these ideas. The company may also hold equity in these
incubation ventures in return for transfers of intellectual property rights
related to incubated ideas. However, there can be no assurance that the
company will be successful in incubating ideas, will be successful in
commercializing such ideas, or will benefit from such incubation ventures.
The failure of any of such incubation ventures could have a material
adverse effect on the company's reputation, business, financial condition
and results of operations.
2.10.20 Risks related to software product sales
The company derived 3.3%, 2.5% and 2.6% of its total revenue from the sale
of software products in the three months ended June 30, 2001, fiscal 2001
and fiscal 2000, respectively. The development of the company's software
products requires significant investments. The markets for the company's
primary software product are competitive and currently located in
developing countries, and there can be no assurance that such a product
will continue to be commercially successful. In addition, there can be no
assurance that any new products developed by the company will be
commercially successful or that the costs of developing such new products
will be recouped. A decrease in the company's product revenues or margins
could adversely affect the company's results of operations and financial
condition. Additionally, software product revenues typically occur in
periods subsequent to the periods in which the costs are incurred for
development of such products. There can be no assurance that such delayed
revenues will not cause periodic fluctuations of the company's results of
operations and financial condition.
2.10.21 Restrictions on exercise of preemptive rights by ADS holders
Under the Indian Companies Act, 1956 ("Indian Companies Act"), a company
incorporated in India must offer its holders of equity shares preemptive
rights to subscribe and pay for a proportionate number of shares to
maintain their existing ownership percentages prior to the issuance of any
new equity shares, unless such preemptive rights have been waived by
three-fourths of the company's shareholders. U.S. holders of ADSs may be
unable to exercise preemptive rights for equity shares underlying ADSs
unless a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), is effective with respect to such rights or
an exemption from the registration requirements of the Securities Act is
available. The company's decision to file a registration statement will
depend on the costs and potential liabilities associated with any such
registration statement as well as the perceived benefits of enabling the
holders of ADSs to exercise their preemptive rights and any other factors
the company considers appropriate at the time. No assurance can be given
that the company would file a registration statement under these
circumstances. If the company issues any such securities in the future,
such securities may be issued to the Depositary, which may sell such
securities for the benefit of the holders of the ADSs. There can be no
assurance as to the value, if any, the Depositary would receive upon the
sale of such securities. To the extent that holders of ADSs are unable to
exercise preemptive rights granted in respect of the equity shares
represented by their ADSs, their proportional interests in the company
would be reduced.
2.10.22 Intellectual property rights
The company relies upon a combination of non-disclosure and other
contractual arrangements and copyright, trade secrets and trademark laws to
protect its proprietary rights. Ownership of software and associated
deliverables created for clients is generally retained by or assigned to
the client, and the company does not retain an interest in such software
and deliverables. The company also develops foundation and application
software products, or software "tools", which are licensed to clients and
remain the property of the company. The company has obtained registration
of INFOSYS as a trademark in India and the United States, and does not have
any patents or registered copyrights in the United States. The company
currently requires its IT professionals to enter into non-disclosure and
assignment of rights agreements to limit use of, access to, and
distribution of its proprietary information. There can be no assurance that
the steps taken by the company in this regard will be adequate to
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deter misappropriation of proprietary information or that the company will
be able to detect unauthorized use and take appropriate steps to enforce
its intellectual property rights.
Although the company believes that its services and products do not
infringe upon 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. Assertion of such claims against the company could result in
litigation, and there can be no assurance that the company would be able to
prevail in such litigation or be able to obtain a license for the use of
any infringed intellectual property from a third party on commercially
reasonable terms. There can be no assurance that the company will be able
to protect such licenses from infringement or misuse, or prevent
infringement claims against the company in connection with its licensing
efforts. The company expects that the risk of infringement claims against
the company will increase if more of the company's competitors are able to
obtain patents for software products and processes. Any such claims,
regardless of their outcome, could result in substantial cost to the
company and divert management's attention from the company's operations.
Any infringement claim or litigation against the company could, therefore,
have a material adverse effect on the company's results of operations and
financial condition.
2.10.23 Control by principal shareholders, officers and directors;
anti-takeover provisions
The company's officers and directors, together with members of their
immediate families, in the aggregate, beneficially own approximately 24.9%
of the company's issued equity shares. As a result, such persons, acting
together, will likely still have the ability to exercise significant
control over most matters requiring approval by the shareholders of the
company, including the election and removal of directors and significant
corporate transactions. Such control by the company's officers and
directors could delay, defer or prevent a change in control of the company,
impede a merger, consolidation, takeover or other business combination
involving the company, or discourage a potential acquirer from making a
tender offer or otherwise attempting to obtain control of the company.
The Indian Companies Act and the company's Articles of Association (the
"Articles") require that: (i) at least two-thirds of the company's
directors shall serve for a specified term and shall be subject to
re-election by the company's shareholders at the expiration of such terms;
and (ii) at least one-third of the company's directors who are subject to
re-election shall be up for re-election at each annual meeting of the
company's shareholders. In addition, the company's Articles provide that
Mr. N. R. Narayana Murthy, one of the company's principal founders and its
Chairman of the Board and Chief Executive Officer, shall serve as the
company's Chairman of the Board and shall not be subject to re-election as
long as he and his relatives, own at least 5% of the company's outstanding
equity securities. Furthermore, any amendment to the company's Articles
would require the affirmative vote of three-fourths of the company's
shareholders. Finally, foreign investment in Indian companies is highly
regulated. These provisions could delay, defer or prevent a change in
control of the company, impede a business combination involving the company
or discourage a potential acquirer from attempting to obtain control of the
company.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
3.1 Foreign currency market risk
This information is set forth under the caption "Exchange rate
fluctuations" under Item 2.10.6, Risks related to Investments in Indian
securities, above, and is incorporated herein by reference.
Part II - Other information
Item 1. Legal proceedings
The company, its directors, senior executive officers and affiliates are
not currently a party to any material legal proceedings.
Item 2. Changes in securities and use of proceeds
None
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Item 3. Default upon senior securities
None
Item 4. Submission of matters to a vote of security holders
a) The company held its Annual General Meeting of the Shareholders ("AGM")
on June 2, 2001.
b) The following directors retired by rotation at the AGM held on June 2,
2001, were eligible for re-election, and were re-elected by a requisite
majority vote:
Deepak M. Satwalekar S. Gopalakrishnan
Ramesh Vangal S. D. Shibulal
Prof. Marti G. Subrahmanyam
c) The following are the other directors whose term of office as a
director continues after the AGM:
N. R. Narayana Murthy Phaneesh Murthy
Nandan M. Nilekani Prof. Jitendra Vir Singh
K. Dinesh Dr. Omkar Goswami
Philip Yeo Senator Larry Pressler
T. V. Mohandas Pai Ms. Rama Bijapurkar
Srinath Batni
Item 5. Other Information
The following is a brief description of the matters voted upon at the
AGM of the company held on June 2, 2001 along with votes cast for,
against or withheld, as well as the number of abstentions and broker
non- votes, as to each matter. The matters to be voted upon were
notified to the shareholders on record and all Registered Holders of
the American Depositary Receipts (the "ADRs") who were holding the
ADRs as on a record date determined by the Depositary.
ORDINARY BUSINESS
Brief Description of the matter put to vote Votes against/ Abstentions/
Votes for Withheld Broker Non-votes
(1)(2)(3) (1)(2)(3) (1)(2)(3)
--------- -------------- ----------------
1. To receive, consider and adopt the Balance Sheet
as at March 31, 2001 and the Profit & Loss
Account for the year ended on that date and the
Report of Directors' and Auditors' thereon. 770 1 -
2. To declare a final dividend of Rs. 7.50 per
share pro-rata 770 1 -
3. To appoint a director in place of
Mr. Deepak M. Satwalekar who retires by rotation
and is eligible for re-election. 770 1 -
4. To appoint a director in place of Mr. Ramesh Vangal
who retires by rotation and is eligible for re-election. 770 1 -
5. To appoint a director in place of
Prof. Marti G. Subrahmanyam who retires by
rotation and is eligible for re-election. 770 1 -
6. To appoint a director in place of
Mr. S. Gopalakrishnan who retires by rotation and
is eligible for re-election. 770 1 -
7. To appoint a director in place of Mr. S. D. Shibulal
who retires by rotation and is eligible for re-election. 770 1 -
8. To appoint Auditors to hold office from the
conclusion of this meeting until the conclusion of
the next Annual General Meeting and to fix their
remuneration. 770 1 -
--------- -------------- ----------------
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SPECIAL BUSINESS
Brief Description of the matter put to vote Votes against/ Abstentions/
Votes for Withheld Broker Non-votes
(1) (2) (3) (1) (2) (3) (1) (2) (3)
----------- -------------- ----------------
9. Approval of the appointment of
Mr. T. V. Mohandas Pai as a Wholetime Director for
a period of five years with effect from May 27, 2000 771 - -
10. Approval of the appointment of Mr. Srinath Batni
as a Wholetime Director for a period of five years
with effect from May 27, 2000 771 - -
11. Approval of the appointment of
Mr. Phaneesh Murthy as a Wholetime Director for a
period of five years with effect from May 27, 2000 771 - -
12. Approval of the appointment of
Prof. Jitendra Vir Singh as a Director of the company. 771 - -
13. Approval of the appointment of
Dr. Omkar Goswami as a Director of the company. 771 - -
14. Approval of the appointment of
Senator Larry Pressler as a Director of the company. 771 - -
15. Approval of the appointment of
Ms. Rama Bijapurkar as a Director of the company. 771 - -
16. Approval to increase the maximum limit of the
investment by Foreign Institutional Investors in the
equity share capital of the company from the
existing 40% to 49% or such other limit as may be
fixed by the Government of India or the Reserve
Bank of India or any other authority. 770 1 -
----------- -------------- ----------------
(1) Under the Indian Companies Act 1956, voting is by show of hands unless
a poll is demanded by a member or members present in person, or by
proxy holding at least one-tenth of the total shares entitled to vote
on the resolution or by those holding paid-up capital of at least Rs.
50,000. Under the Articles of the Company member present by proxy shall
be entitled to vote only on a poll but not on a show of hands, unless
such member is a body corporate present by a representative in which
case such proxy shall have a vote on the show of hand as if he were a
member.
(2) Under the Indian Companies Act and as per the Articles of the Company,
on a show of hands every member present in person shall have one vote
and upon a poll the voting rights of every member whether present in
person or by proxy, shall be in proportion to his share of the paid-up
capital of the Company.
(3) The votes represent the number of votes in a show of hands. No poll was
demanded during the AGM.
Item 6. Exhibits and Reports
Infosys filed no reports on Form 8-K during the quarter ended June 30,
2001.
EXHIBIT INDEX
Exhibit Number Description of Document
-------------- -----------------------
19.1 Infosys Quarterly report to the shareholders for the
quarter ended June 30, 2001.
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 organized.
Dated: July 24, 2001. INFOSYS TECHNOLOGIES LIMITED
By: /s/ Narayana N. R. Murthy
------------------------------------
Narayana N. R. Murthy,
Chairman and Chief Executive Officer
/s/ Nandan M. Nilekani
------------------------------------
Nandan M. Nilekani,
Managing Director, President and
Chief Operating Officer
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EXHIBIT INDEX
Exhibit Number Description of Document
-------------- -----------------------
19.1 Infosys Quarterly report to the shareholders for the
quarter ended June 30, 2001.