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 September 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.
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 "EUR" or "Euro" or " "
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 September 30, 2001, which was Rs. 47.90 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.
1
Part I - Financial information
Item 1. Financial statements
Balance Sheets as of
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September 30, 2001 September 30, 2000 March 31, 2001
(Unaudited) (Unaudited) (Audited)
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ASSETS
CURRENT ASSETS
Cash and cash equivalents ....................................... $ 149,392,226 $ 116,475,448 $ 124,084,245
Trade accounts receivable, net of allowances .................... 71,807,005 52,826,967 64,942,062
Deferred tax assets ............................................. 1,817,416 - 1,265,142
Prepaid expenses and other current assets ....................... 17,717,830 13,255,567 16,452,863
------------------------------------------------------------------------------------------------------------------------
Total current assets ............................................ 240,734,477 182,557,982 206,744,312
Property, plant and equipment - net ............................. 149,145,830 79,371,264 119,773,030
Deferred tax assets ............................................. 2,078,817 2,877,129 2,070,428
Investments ..................................................... 7,777,393 8,270,443 5,577,393
Advance income taxes ............................................ 3,799,181 - 180,113
Other assets .................................................... 9,860,592 6,809,063 8,002,543
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Total assets .................................................... $ 413,396,290 $ 279,885,881 $ 342,347,819
========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ................................................ $ 7,843 $ 44,587 $ 28,082
Client deposits ................................................. 980,531 2,061,910 1,217,737
Other accrued liabilities ....................................... 31,483,326 16,076,816 21,830,484
Income taxes payable ............................................ - 2,355,740 --
Unearned revenue ................................................ 6,849,878 15,971,299 7,479,815
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Total current liabilities ....................................... 39,321,578 36,510,352 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
September 30, 2001, September 30, 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 .......................... (37,878,770) (26,112,795) (28,664,972)
Deferred stock compensation ..................................... (10,005,936) (15,047,221) (12,517,018)
Retained earnings ............................................... 291,259,394 154,412,692 222,362,067
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Total stockholders' equity ...................................... 374,074,712 243,375,529 311,791,701
------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity ...................... $ 413,396,290 $ 279,885,881 $ 342,247,819
========================================================================================================================
See accompanying notes to financial statements
<Table>
Assets - September 30, 2001
Cash and cash equivalents....... 36.1%
Property, plant and equipment... 36.1%
Other assets.................... 10.4%
Accounts receivable............. 17.4%
Liabilities and stockholder's
equity - September 30, 2001
Current liabilities............. 9.5%
Stockholders equity............. 90.5%
</Table>
2
Statements of income
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Three months ended Six months ended Year ended
Sept. 30, 2001 Sept. 30, 2000 Sept. 30, 2001 Sept. 30, 2000 March 31, 2001
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited)
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REVENUES .................................. $137,258,134 $ 97,939,050 $267,790,892 $178,196,883 $413,850,510
Cost of revenues .......................... 73,051,389 50,198,315 141,466,357 92,160,476 213,613,744
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Gross profit .............................. 64,206,745 47,740,735 126,324,535 86,036,407 200,236,766
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Operating Expenses:
Selling and marketing expenses ............ 7,019,074 4,994,025 12,911,415 9,191,540 20,682,776
General and administrative
expenses ................................ 10,771,278 9,274,568 23,299,156 15,691,481 36,957,609
Amortization of stock
compensation expense .................... 1,251,327 1,275,796 2,511,082 2,551,592 5,081,795
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Total operating expenses .................. 19,041,679 15,544,389 38,721,653 27,434,613 62,722,180
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Operating income .......................... 45,165,066 32,196,346 87,602,882 58,601,794 137,514,586
Other income, net ......................... 3,090,300 4,292,181 5,966,399 7,695,238 9,505,343
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Income before income taxes ................ 48,255,366 36,488,527 93,569,281 66,297,032 147,019,929
Provision for income taxes ................ 6,962,947 3,706,641 13,035,503 6,683,473 15,071,825
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Net income ................................ $ 41,292,419 $ 32,781,886 $ 80,533,778 $ 59,613,559 $131,948,104
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Earnings per equity share
Basic ................................... $ 0.63 $ 0.50 $ 1.23 $ 0.90 $ 2.01
Diluted ................................. $ 0.62 $ 0.49 $ 1.22 $ 0.89 $ 1.98
Weighted equity shares used in
computing earnings
per equity share
Basic ................................... 65,557,784 65,941,034 65,563,317 65,959,151 65,771,256
Diluted ................................. 66,094,152 66,912,722 66,155,053 67,097,321 66,714,739
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See accompanying notes to the financial statements
3
Statements of Stockholders' Equity and Comprehensive Income
(Information as of and for the six months ended September 30, 2000 and September
30, 2001 is unaudited)
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Common stock Additional Comprehensive Accumulated
Shares Par value paid-in income other
capital comprehensive
income
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Balance as of March 31, 2000 ... 66,150,700 $ 8,593,510 $ 121,506,726 $ (14,137,933)
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Cash dividends declared ........ - - - -
Common stock issued ............ 667 75 22,542 -
Amortization of compensation
related to stock option grants - - - -
Comprehensive income
Net income ................... - - - 59,613,559 -
Other comprehensive income
Translation adjustment ..... - - - (11,974,862) (11,974,862)
Comprehensive income ........... 47,638,697
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Balance as of September 30, 2000 66,151,367 8,593,585 121,529,268 (26,112,795)
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Cash dividends declared ........ - - - -
Common stock issued ............ 6,750 521 488,250 -
Amortization of compensation
related to stock option grants - - - -
Comprehensive income
Net income ................... - - - 72,334,545 -
Other comprehensive income
Translation adjustment ..... - - - (2,552,177) (2,552,177)
Comprehensive income ........... 69,782,368
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Balance as of March 31, 2001 ... 66,158,117 8,594,106 122,017,518 (28,664,972)
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Common stock issued ............ 2,600 277 88,123 -
Cash dividends declared ........ - - - -
Amortization of compensation
related to stock option grants - - - -
Comprehensive income
Net income ................... - - - 80,533,778 -
Other comprehensive income
Translation adjustment ..... - - - (9,213,798) (9,213,798)
Comprehensive income ........... $ 71,319,980
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Balance as of September 30, 2001 66,160,717 $ 8,594,383 $ 122,105,641 $ (37,878,770)
====================================================================================================================================
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Deferred Retained Total
stock earnings stockholders'
compensation equity
----------------------------------------------------------------------------------------------------------
Balance as of March 31, 2000 ... $ (17,598,813) $ 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 2,551,592 - 2,551,592
Comprehensive income
Net income ................... - 59,613,559 59,613,559
Other comprehensive income
Translation adjustment ..... - - (11,974,862)
Comprehensive income ...........
----------------------------------------------------------------------------------------------------------
Balance as of September 30, 2000 (15,047,221) 154,412,692 243,375,529
----------------------------------------------------------------------------------------------------------
Cash dividends declared ........ - (4,385,170) (4,385,170)
Common stock issued ............ - - 488,771
Amortization of compensation
related to stock option grants 2,530,203 - 2,530,203
Comprehensive income
Net income ................... - 72,334,545 72,334,545
Other comprehensive income
Translation adjustment ..... - - (2,552,177)
Comprehensive income ...........
----------------------------------------------------------------------------------------------------------
Balance as of March 31, 2001 ... (12,517,018) 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 2,511,082 - 2,511,082
Comprehensive income
Net income ................... - 80,533,778 80,533,778
Other comprehensive income
Translation adjustment ..... - - (9,213,798)
Comprehensive income ...........
----------------------------------------------------------------------------------------------------------
Balance as of September 30, 2001 $ (10,005,936) $ 291,259,394 $ 374,074,712
==========================================================================================================
See accompanying notes to the financial statements
4
Statement of cash flows
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Six months ended September 30, Year ended
2001 2000 March 31, 2001
(Unaudited) (Unaudited) (Audited)
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OPERATING ACTIVITIES:
Net income ........................................................... $ 80,533,778 $ 59,613,559 $ 131,948,104
Adjustments to reconcile net income to net cash
provided by operating activities
(Gain) / loss on sale of property, plant and equipment ............... (4,301) 1,199 (20,053)
Depreciation ......................................................... 15,796,701 9,316,317 24,527,867
Deferred tax benefit ................................................. (560,663) (310,863) (769,304))
Amortization of deferred stock compensation expense .................. 2,511,082 2,551,592 5,081,795
Provision for investments ............................................ - - 3,480,300
Changes in assets and liabilities
Trade accounts receivable ............................................ (6,864,943) (21,593,452) (33,708,547)
Prepaid expenses and other current assets ............................ (606,615) (910,657) (2,218,954)
Income taxes ......................................................... (3,619,068) 476,763 (2,059,090)
Accounts payable ..................................................... (20,239) (932,253) (948,758)
Client deposits ...................................................... (237,206) 1,636,186 792,013
Unearned revenue ..................................................... (629,937) 11,942,126 3,450,642
Other accrued liabilities ............................................ 9,596,440 2,212,335 7,957,303
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ............................ 95,895,029 64,002,852 137,513,318
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INVESTING ACTIVITIES:
Expenditure on property, plant and equipment ......................... (45,384,195) (41,139,302) (96,775,745)
Proceeds from sale of property, plant and equipment .................. 218,995 5,294 49,673
Loans to employees ................................................... (2,516,401) (1,003,080) (4,085,559)
Purchase of investments .............................................. (2,200,000) (5,092,505) (5,879,755)
----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ................................ (49,881,601) (47,229,593) (106,691,386)
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FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............................... 88,400 22,617 511,388
Payment of dividends ................................................. (11,580,049) (4,945,052) (9,321,522)
----------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities ................................ (11,491,649) (4,922,435) (8,810,134)
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Effect of exchange rate changes on cash .............................. (9,213,798) (11,974,862) (14,527,039)
----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and
cash equivalents during the period ................................. 25,307,981 (124,038) 7,484,759
Cash and cash equivalents at the beginning of the period ............. 124,084,245 116,599,486 116,599,486
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Cash and cash equivalents at the end of the period ................... $ 149,392,226 $ 116,475,448 124,084,245
==================================================================================================================================
Supplementary information:
Cash paid towards taxes .............................................. $ 13,035,503 $ 6,206,710 $ 16,950,802
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See accompanying notes to the financial statements
5
Notes to unaudited financial statements as of and for the three and six months
ended September 30, 2001
1 Company overview and significant accounting policies
1.1 Company overview
Infosys, a world leader in consulting and information technology services,
partners with Global 2000 companies to provide business consulting, systems
integration, application development and product engineering services.
Through these services, Infosys enables its clients to fully exploit
technology for business transformation. Clients leverage Infosys' Global
Delivery Model to achieve higher quality, rapid time-to-market and
cost-effective solutions.
1.2 Basis of preparation of financial statements
The accompanying financial statements are prepared in accordance with U.S.
Generally Accepted Accounting Principles ("GAAP"). All amounts are stated
in U.S. 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.
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 six months ended September 30, 2001
and September 30, 2000 and in fiscal 2001 was $ 3,631,011, $ 4,391,188 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
6
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 U.S. dollars. The
functional currency of the company is the Indian rupee ("Rs."). The
translation of Rs. to U.S. 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")
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 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 September 30, 2001 and 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
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")
7
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 Employees 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 deemed 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
deemed 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.
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 123,
Accounting for Stock-Based Compensation. All stock options issued to date
have been accounted as a fixed stock option plan.
1.17 Dividend
Dividends on common stock and the related dividend tax are recorded as a
liability upon payment.
1.18 Derivative financial instruments
On April 1, 2001, the company adopted SFAS 133, Accounting for Derivative
Instruments and Hedging Activities as amended, when the rules became
effective for companies with a fiscal year-end of March 31. The company
enters into forward foreign exchange contracts where the counter party is
generally a bank. The company purchases forward foreign exchange contracts
to mitigate the risk of changes in foreign exchange rates on accounts
receivable and forecasted cash flows denominated in certain foreign
currencies. Although these contracts are effective as hedges from an
economic perspective, they do not qualify for hedge accounting under SFAS
133, as amended. Any derivative that is either not a designated hedge, or
is so designated but is ineffective per SFAS 133, is marked to market and
recognized in earnings immediately.
1.19 Recently issued accounting standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
141, Business Combinations and SFAS 142, Goodwill and Other Intangible
Assets. SFAS 141 requires that all business combinations be accounted for
under a single method-the purchase method. Use of the pooling-of-interests
method is no longer permitted and is effective for business combinations
initiated after June 30, 2001. SFAS 142 requires that goodwill no longer be
amortized to earnings, but instead be reviewed for impairment and is
effective for fiscal years beginning after December 15, 2001, with earlier
application permitted for entities with fiscal years beginning after March
31, 2001.
In August 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes
a cost by increasing the carrying amount of the related long-lived asset.
Over time, the liability is accreted to its present value each period, and
the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement. The standard is effective for fiscal years beginning after June
15, 2002, with earlier application encouraged.
In August 2001, the FASB also issued SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or in
discontinued operations. Under this standard, discontinued operations will
no longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. The provisions of SFAS 144 are
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and, generally, are to be applied prospectively. Early
application is encouraged.
Both SFAS 141 and 142 are not currently applicable to the operations of the
company. The company is evaluating the impact of SFAS 143 and 144 on its
operations.
8
1.20 Notes to the Financial Statements
1.20.1 Cash and cash equivalents
The cost and fair values for cash and cash equivalents as of September 30,
2001 and 2000 and March 31, 2001, respectively are as follows:
-------------------------------------------------------------------------------------------
As of September 30, As of March 31,
2001 2000 2001
-------------------------------------------------------------------------------------------
Cost and fair values
Cash and bank deposits ... $ 89,380,370 $ 92,216,742 $ 82,702,111
Deposits with corporations 60,011,856 24,258,706 41,382,134
-------------------------------------------------------------------------------------------
$149,392,226 $116,475,448 $124,084,245
===========================================================================================
1.20.2 Trade accounts receivable
Trade accounts receivable, as of September 30, 2001 and 2000 and March 31,
2001, net of allowance for doubtful accounts of $ 4,618,969, $ 1,550,118
and $ 3,902,996, respectively amounted to $ 71,807,005, $ 52,826,967 and $
64,942,062, respectively. The age profile of trade accounts receivable, net
of allowances is given below.
-------------------------------------------------------------------------------------------
in %
As of September 30, As of March 31,
Period (in days) 2001 2000 2001
-------------------------------------------------------------------------------------------
0 - 30 74.9 75.6 69.2
31 - 60 17.2 13.6 26.6
61 - 90 7.2 6.7 1.7
More than 90 0.7 4.1 2.5
-------------------------------------------------------------------------------------------
100.0 100.0 100.0
===========================================================================================
1.20.3 Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following:
---------------------------------------------------------------------------------
As of September 30, As of March 31,
2001 2000 2001
---------------------------------------------------------------------------------
Rent deposits ............. $ 2,030,494 $ 1,995,378 $ 2,484,794
Deposits with government
organizations ............. 1,364,705 527,971 945,189
Loans to employees ........ 8,750,218 6,202,867 8,091,866
Prepaid expenses .......... 4,698,466 4,378,992 4,349,913
Costs in excess of billings 855,220 70,729 503,694
Other advances ............ 18,727 79,630 77,407
---------------------------------------------------------------------------------
$17,717,830 $13,255,567 $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 Costs in excess of
electricity supplies. billings represent costs incurred on fixed price
contracts in respect of which milestones are yet to be achieved.
1.20.4 Property, plant and equipment - net
Property, plant and equipment consist of the following:
--------------------------------------------------------------------------------------------
As of September 30, As of March 31,
2001 2000 2001
--------------------------------------------------------------------------------------------
Land ................... $ 7,653,308 $ 6,507,118 $ 7,865,351
Buildings .............. 42,371,265 24,548,112 33,871,448
Furniture and fixtures . 28,385,473 13,667,773 21,579,707
Computer equipment ..... 56,249,166 32,139,320 48,098,099
Plant and equipment .... 29,968,047 17,816,936 24,064,927
Vehicles ............... 73,501 26,723 75,537
Capital work-in-progress 49,363,019 22,730,386 36,651,724
--------------------------------------------------------------------------------------------
214,063,779 117,436,368 172,206,793
Accumulated depreciation (64,917,949) (38,065,104) (52,433,763)
--------------------------------------------------------------------------------------------
$ 149,145,830 $ 79,371,264 $ 119,773,030
============================================================================================
Depreciation expense amounted to $ 15,796,701, $ $ 24,527,867, for the six
months ended 9,316,317 and September 30, 2001 and 2000 and fiscal 2001,
respectively.
9
1.20.5 Investments
The amortized cost and fair values of available-for-sale securities by major
investment type and class of investment are as follows:
-------------------------------------------------------------------------------------------------------------------
Carrying cost Fair value
-------------------------------------------------------------------------------------------------------------------
As of September 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 20 each, fully paid,
par value 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 $7,777,393
===================================================================================================================
As of September 30, 2000
M-Commerce Ventures Pte Ltd - 20 units, each unit representing 1 Ordinary Share
of S$ 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 $ 112,235 $ 112,235
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
Alpha Thinx Mobile Services AG - 27,790 Bearer Shares, at 20 each, fully paid,
par value C 1 each 480,300 480,300
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, at Y 50,000 each, fully paid,
par value Y 50,000 each 177,576 177,576
Others 362 362
-------------------------------------------------------------------------------------------------------------------
$8,270,443 $8,270,443
===================================================================================================================
As of March 31, 2001
M-Commerce Ventures Pte Ltd - 70 units, each unit representing 1 Ordinary
Share of S$ 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 20 each, fully paid, par value 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
===================================================================================================================
10
1.20.6 Other assets
Other assets mainly represent the non-current portion of loans to
employees.
1.20.7 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 September 30, 2001 and 2000 and
March 31, 2001, amounts receivable from officers amounting to $ 473,446, $
204,730 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 September 30, As of March 31,
2001 2000 2001
---------------------------------------------------------------
2001 - $ 6,202,867 -
2002 $ 8,750,218 2,051,248 $ 8,091,866
2003 3,119,998 1,415,237 2,517,809
2004 2,165,452 826,563 1,718,884
2005 1,316,536 640,456 1,033,107
2006 1,023,402 - 800,198
Thereafter 2,235,204 1,875,559 1,932,545
---------------------------------------------------------------
Total $18,610,810 $13,011,930 $16,094,409
===============================================================
The estimated fair values of related party receivables amounted to $
14,305,838, $ 9,953,461 and $ 12,465,374 as of September 30, 2001 and 2000
and March 31, 2001, respectively. These amounts have been determined using
available market information and appropriate valuation methodologies.
Considerable judgment 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.
1.20.8 Other accrued liabilities
Other accrued liabilities comprise the following:
---------------------------------------------------------------------------------------------
As of September 30, As of March 31,
2001 2000 2001
---------------------------------------------------------------------------------------------
Accrued compensation to staff $16,589,239 $ 8,603,416 $12,332,869
Accrued dividends 159,820 94,718 103,418
Provision for post sales client support 1,755,916 1,374,475 1,578,859
Employee withholding taxes payable 183,717 - 25,000
Provision for expenses 6,326,568 2,862,094 3,768,256
Retention money 3,946,821 2,366,731 2,425,439
Others 2,521,245 775,382 1,596,643
---------------------------------------------------------------------------------------------
$31,483,326 $16,076,816 $21,830,484
=============================================================================================
1.20.9 Employee post-retirement benefits
1.20.9.1 Superannuation
The company contributed $ 609,610, $ 387,397 and $ 796,739 to the
superannuation plan in the six months ended September 30, 2001 and 2000 and
in fiscal 2001, respectively.
1.20.9.2 Provident fund
The company contributed $ 1,536,668, $ 1,010,547 and $ 2,339,794, to the
provident fund in the six months ended September 30, 2001 and 2000 and in
fiscal 2001, respectively.
1.20.10 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.
1.20.11 Equity shares
1.20.11.1 Voting
Each holder of equity shares is entitled to one vote per share.
11
1.20.11.2 Dividends
Should the company declare and pay dividends, such dividends will be paid
in Indian Rupees. 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.
1.20.11.3 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.
1.20.11.4 Stock options
There are no voting, dividend or liquidation rights to the holders of
warrants issued under the company's stock option plan.
1.20.12 Other income, net
Other income, net, consists of the following:
-------------------------------------------------------------------------------------------------
Six months ended September 30, Year ended
2001 2000 March 31, 2001
Interest income and others $ 4,829,985 $ 3,892,724 $ 8,526,635
Income from sale of special import licenses - 14,800 14,800
Exchange gains 805,506 3,787,714 4,444,208
Provision for investments - - (3,480,300)
Others 330,908 - -
-------------------------------------------------------------------------------------------------
$ 5,966,399 $ 7,695,238 $ 9,505,343
=================================================================================================
1.20.13 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
six months ended September 30, 2001 and 2000 and in fiscal 2001 were $
2,551,105, $ 1,545,988 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 September 30,
-------------------------------------------------------------
2002 $ 3,322,412
2003 3,462,467
2004 3,492,642
2005 2,916,011
2006 1,564,556
Thereafter 3,152,555
-------------------------------------------------------------
$ 17,910,643
=============================================================
1.20.14 Research and development
General and administrative expenses in the accompanying statements of
income include research and development expenses of $ 1,654,750, $
1,623,703 and $ 3,610,550 for the six months ended September 30, 2001 and
2000 and fiscal 2001 respectively.
1.20.15 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.
12
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 September 30, 2001, the
company's outstanding equity shares included 621,600 equity shares held by
the Trust of which 323,000 equity shares were allotted to employees,
subject to vesting provisions and are not included in the earnings per
share calculation. The warrants allotted and the underlying equity shares
are not subject to any repurchase obligations by the company.
The 1994 Plan expired 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 ADSs. The 1998 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.
13
1.20.15 Employees' Stock Offer Plans ("ESOP") (continued)
The activity in the warrants/equity shares of the 1994, 1998 and 1999
Employees Stock Offer Plans in the six months ended September 30, 2001 and
2000 and in fiscal 2001 is set out below.
-----------------------------------------------------------------------------------------------------------------------------------
Six months ended Six months ended Year ended
September 30, 2001 September 30, 2000 March 31, 2001
Shares Weighted Shares Weighted Shares Weighted
arising out of average arising out of average arising out average
options exercise price options exercise price of options exercise price
-----------------------------------------------------------------------------------------------------------------------------------
1994 Plan:
Outstanding at the
beginning of the period 330,000 $ 1.15 341,400 341,400
Granted
Forfeited (7,000) $ 1.15 (7,200) $ 1.15 (10,600) $ 1.15
Exercised (800) $ 1.15
-----------------------------------------------------------------------------------------------------------------------------------
Outstanding at the
end of the period 323,000 334,200 330,000
-----------------------------------------------------------------------------------------------------------------------------------
Exercisable at the
end of the period
Weighted-average
fair value of grants
during the period
at less than market
1998 Plan:
Outstanding at the
beginning of the period 782,753 344,750 344,750
Granted 301,350 $ 92.72 116,000 $ 324.60 482,420 $ 230.88
Forfeited (26,595) $ 286.44 (24,350) $ 124.80 (38,200) $ 172.58
Exercised (2,600) $ 34.00 (667) $ 34.00 (6,217) $ 53.82
-----------------------------------------------------------------------------------------------------------------------------------
Outstanding at the
end of the period 1,054,908 435,733 782,753
-----------------------------------------------------------------------------------------------------------------------------------
Exercisable at the
end of the period 60,580 34,659 55,558
Weighted-average
fair value of grants
during the period $ 92.72 $ 324.60 $ 230.88
1999 Plan:
Outstanding at the
beginning of the period 2,793,980 $ 124.70 1,006,800 1,006,800
Granted 1,452,820 $ 63.75 954,100 $ 144.36 1,957,830 $ 136.68
Forfeited (105,740) $ 132.98 (77,900) $ 114.53 (169,450) $ 110.06
Exercised (1,200) $ 89.98
-----------------------------------------------------------------------------------------------------------------------------------
Outstanding at the
end of the period 4,141,060 1,883,000 2,793,980
-----------------------------------------------------------------------------------------------------------------------------------
Exercisable at the
end of the period 172,699 93,400
Weighted-average
fair value of grants
during the period $ 63.64 $ 144.36 $ 136.68
-----------------------------------------------------------------------------------------------------------------------------------
14
1.20.16 Income taxes
The provision for income taxes comprises:
--------------------------------------------------------------------------------
Six months ended Year ended
September 30, 2001 September 30, 2000 March 31, 2001
--------------------------------------------------------------------------------
Current taxes
Domestic taxes $ 2,674,305 $ 1,831,956 $ 5,315,961
Foreign taxes 10,921,861 5,162,380 10,525,168
--------------------------------------------------------------------------------
13,596,166 6,994,336 15,841,129
--------------------------------------------------------------------------------
Deferred taxes (560,663) (310,863) (769,304)
--------------------------------------------------------------------------------
Aggregate taxes $ 13,035,503 $ 6,683,473 $ 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:
---------------------------------------------------------------------------------------
As at September 30, As at March 31,
2001 2000 2001
---------------------------------------------------------------------------------------
Deferred tax assets:
Property, plant and equipment $ 1,777,845 $ 2,835,241 $ 1,519,016
Provision for doubtful debts 1,781,641 - 1,587,629
Investments 1,442,477 - 1,598,712
Others - 596,795 217,842
---------------------------------------------------------------------------------------
5,001,963 3,432,036 4,923,199
Less: Valuation allowance (1,105,730) (554,907) (1,587,629)
---------------------------------------------------------------------------------------
Net deferred tax assets $ 3,896,233 $ 2,877,129 $ 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 September 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.
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.
---------------------------------------------------------------------------------------------------------------
Six months ended Year ended
September 30, 2001 September 30, 2000 March 31, 2001
---------------------------------------------------------------------------------------------------------------
Net income before taxes $ 93,569,281 $ 66,297,032 $ 147,019,929
Enacted tax rates in India 35.70% 38.50% 39.55%
---------------------------------------------------------------------------------------------------------------
Computed expected tax expense 33,404,233 25,524,357 58,146,382
Less: Tax effect due to non-taxable export income (32,660,107) (25,226,339) (57,334,527)
Others 1,098,544 911,820 3,437,865
Effect of tax rate change 270,972 - (8,077)
Effect of prior period tax adjustments - 311,255 305,014
---------------------------------------------------------------------------------------------------------------
Provision for Indian income tax 2,113,642 1,521,093 4,546,657
Effect of tax on foreign income 10,921,861 5,162,380 10,525,168
---------------------------------------------------------------------------------------------------------------
Aggregate taxes $ 13,035,503 $ 6,683,473 $ 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 Deduc-
tion"). 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
15
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 over a period of five years starting from fiscal 2000.
1.20.17 Earnings per share
The following is a reconciliation of the equity shares used in the
computation of basic and diluted earnings per equity share:
----------------------------------------------------------------------------------------------------------------
Six months ended September 30, Year ended
2001 2000 March 31, 2001
----------------------------------------------------------------------------------------------------------------
Basic earnings per equity share -
weighted average number of common
shares outstanding excluding unallocated
shares of ESOP 65,563,317 65,959,151 65,771,256
Effect of dilutive common equivalent shares -
stock options outstanding 591,736 1,138,170 943,483
----------------------------------------------------------------------------------------------------------------
Diluted earnings per equity share -
weighted average number of common
shares and common equivalent shares outstanding 66,155,053 67,097,321 66,714,739
----------------------------------------------------------------------------------------------------------------
1.20.18 Derivative financial instruments
The Company enters into forward foreign exchange contracts where the
counter party is generally a bank. The Company considers the risks of
non-performance by the counter party as non-material. Infosys held foreign
exchange forward contracts of $ 26,000,000, Nil and $ 20,000,000 as of
September 30, 2001, September 30, 2000 and March 31, 2001, respectively.
The foreign forward exchange contracts mature between one to six months.
1.20.19 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 to providing IT
solutions, delivered to customers located globally, across various industry
segments. In the year ended March 31, 2000, the company provided segmental
disclosures based on the geographical segment. However, from the fiscal
year ended March 31, 2001, 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.
16
1.20.19 Segment reporting (continued)
1.20.19.1 Industry segments
Six months ended September 30, 2001
-----------------------------------------------------------------------------------------------------------------------------------
in $
Financial services Manufacturing Telecom Retail Others Total
-----------------------------------------------------------------------------------------------------------------------------------
Revenues 100,520,519 47,571,396 42,782,273 30,291,606 46,625,098 267,790,892
Identifiable operating expenses 35,633,367 19,435,593 11,229,057 8,223,894 17,056,592 91,578,503
Allocated expenses 27,170,703 12,277,543 11,046,949 7,801,767 12,006,180 70,303,142
-----------------------------------------------------------------------------------------------------------------------------------
Segmental operating income 37,716,449 15,858,260 20,506,267 14,265,945 17,562,326 105,909,247
Unallocable expenses 18,306,365
-----------------------------------------------------------------------------------------------------------------------------------
Operating income 87,602,882
Other income (expense), net 5,966,399
-----------------------------------------------------------------------------------------------------------------------------------
Net income before taxes 93,569,281
Taxes 13,035,503
-----------------------------------------------------------------------------------------------------------------------------------
Net income after taxes 80,533,778
===================================================================================================================================
Six months ended September 30, 2000
------------------------------------------------------------------------------------------------------------------------------------
in $
Financial services Manufacturing Telecom Retail Others Total
------------------------------------------------------------------------------------------------------------------------------------
Revenues 56,797,140 33,110,643 33,847,875 14,176,878 40,264,347 178,196,883
Identifiable operating expenses 21,130,346 11,891,229 8,771,785 5,643,973 12,703,803 60,141,136
Allocated expenses 15,432,644 8,753,644 8,994,004 3,736,195 10,669,557 47,586,044
------------------------------------------------------------------------------------------------------------------------------------
Segmental operating income 20,234,150 12,465,770 16,082,086 4,796,710 16,890,987 70,469,703
Unallocable expenses 11,867,909
------------------------------------------------------------------------------------------------------------------------------------
Operating income 58,601,794
Other income (expense), net 7,695,238
------------------------------------------------------------------------------------------------------------------------------------
Net income before taxes 66,297,032
Taxes 6,683,473
------------------------------------------------------------------------------------------------------------------------------------
Net income after taxes 59,613,559
====================================================================================================================================
Year ended March 31, 2001
------------------------------------------------------------------------------------------------------------------------------------
in $
Financial 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
====================================================================================================================================
1.20.19.2 Geographic segments
Six months ended September 30, 2001
--------------------------------------------------------------------------------------------------------------------
in $
North America Europe India Rest of the World Total
--------------------------------------------------------------------------------------------------------------------
Revenues 191,835,922 51,822,645 5,965,421 18,166,904 267,790,892
Identifiable operating expenses 64,286,137 18,905,458 2,072,447 6,314,461 91,578,503
Allocated expenses 50,042,047 13,527,498 2,022,931 4,710,666 70,303,142
--------------------------------------------------------------------------------------------------------------------
Segmental operating income 77,507,738 19,389,689 1,870,043 7,141,777 105,909,247
Unallocable expenses 18,306,365
--------------------------------------------------------------------------------------------------------------------
Operating income 87,602,882
Other income (expense), net 5,966,399
--------------------------------------------------------------------------------------------------------------------
Net income before taxes 93,569,281
Taxes 13,035,503
--------------------------------------------------------------------------------------------------------------------
Net income after taxes 80,533,778
====================================================================================================================
17
1.20.19 Segment reporting (continued)
1.20.19.2 Geographic segments (continued)
Six months ended September 30, 2000
-----------------------------------------------------------------------------------------------------------------------------------
in $
North America Europe India Rest of the World Total
-----------------------------------------------------------------------------------------------------------------------------------
Revenues 133,191,257 31,540,046 2,080,597 11,384,983 178,196,883
Identifiable operating expenses 44,072,166 11,403,953 788,656 3,876,361 60,141,136
Allocated expenses 35,609,222 8,442,308 553,165 2,981,349 47,586,044
-----------------------------------------------------------------------------------------------------------------------------------
Segmental operating income 53,509,869 11,693,785 738,776 4,527,273 70,469,703
Unallocable expenses 11,867,909
-----------------------------------------------------------------------------------------------------------------------------------
Operating income 58,601,794
Other income (expense), net 7,695,238
-----------------------------------------------------------------------------------------------------------------------------------
Net income before taxes 66,297,032
Taxes 6,683,473
-----------------------------------------------------------------------------------------------------------------------------------
Net income after taxes 59,613,559
===================================================================================================================================
Year ended March 31, 2001
-----------------------------------------------------------------------------------------------------------------------------------
in $
North America Europe India Rest of 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
===================================================================================================================================
1.20.19.3 Significant clients
No client individually accounted for more than 10% of the revenues in the
six months ended September 30, 2001 and 2000 and in fiscal 2001.
1.20.20 Commitments and contingencies
The company has outstanding performance guarantees for various statutory
purposes totaling $ 3,275,340, $ 1,415,562 and $ 1,126,611 as of September
30, 2001 and 2000 and March 31, 2001, respectively. These guarantees are
generally provided to governmental agencies.
1.20.21 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.
1.20.22 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 September 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.
18
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 as related costs are incurred. Revenues from services 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. 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 3.8% of total revenue during the three months ended September
30, 2001. The company derived 71.1% of its total revenue from North
America, 18.9% from Europe, 1.8% from India and 8.1% from the rest of the
world during the three months ended September 30, 2001.
During the three months ended September 30, 2001 and September 30, 2000,
the company derived 23.5% and 31.4% 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. During the three months ended September 30, 2001,
approximately 69% of the work on a project is performed at the company's
facilities in India, and the balance of the work is 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
19
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. Since 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
advertising, brand building, sales and marketing office leasing, salaries
of marketing personnel and travel. 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 $ 14.1 million towards
various capital acquisitions as of September 30, 2001. The company has not
yet made contractual commitments for the majority of its budgeted capital
expenditure. The company intends to spend an amount of approximately $ 35
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 September 30, 2001 compared to three months ended
September 30, 2000
Revenue. Total revenues were $ 137.3 million for the three months ended
September 30, 2001, representing an increase of 40.2% over total revenues
of $ 97.9 million during the same period in the fiscal 2001. Revenues
continued to increase in all segments of the company's services. Custom
software development, 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 a substantial increase in business from certain existing clients and
from certain new clients, particularly in the insurance, banking and
financial services, and telecommunications industries. Net sales of
Finacle(TM) and other products represented 3.8% of total revenues for the
three months ended September 30, 2001 as compared to 2.7% in the
corresponding period in fiscal 2001. Revenue from services represented
96.2% of total revenues for the three months ended September 30, 2001 as
compared to 97.3% in the corresponding period in fiscal 2001. Revenue from
fixed-price, fixed-time frame and time-and-materials contracts represented
29.9% and 70.1%, respectively, of total revenues in the three months ended
September 30, 2001 as compared to 27.6% and 72.4%, respectively, in the
three months ended September 30, 2000. Revenue from North America and
Europe represented 71.1% and 18.9%, respectively, of total revenue for the
three months ended September 30, 2001 as compared to 75.0% and 18.1%,
respectively, during the same period in fiscal 2001.
Cost of Revenues. Cost of revenues was $ 73.1 million for the three months
ended September 30, 2001, representing an increase of 45.6% over the cost
of revenues of $ 50.2 million for the same period in fiscal 2001. Cost of
revenues represented 53.2% and 51.3% of total revenues for the three months
ended September 30, 2001 and September 30, 2000, respectively. This
increase in costs as a percentage of revenues was attributable to: (i) an
increase in personnel costs from annual salary increments effective April
1, 2001; (ii) an increase in compensation paid to U.S. based employees to
comply with new immigration regulations introduced in the U.S. effective
July 2001; (iii) increased personnel costs for new hires as well as an
increase in depreciation. This increase was offset by a decrease in foreign
travel expenses and cost of software purchased for internal use, which
represented 2.9% and 1.4% respectively, of revenues for the quarter ended
September 30, 2001 as compared to 4.2% and 2.7% respectively, of revenues
for the quarter ended September 30, 2000.
Gross Profit. Gross profit was $ 64.2 million for the three months ended
September 30, 2001 representing an increase of 34.6% over gross profit of $
47.7 million for the three months ended September 30, 2000. As a percentage
of total revenues, gross profit decreased to 46.8% for the three months
ended September 30, 2001 from 48.7% for the corresponding period in fiscal
2001. This decrease in gross profit as a percentage of revenues was
attributable to: (i) an increase in personnel costs from annual salary
increments effective April 1, 2001; (ii) an increase in compensation paid
to U.S. based employees to comply with new immigration regulations
introduced in the U.S. effective July 2001; (iii) increased personnel costs
for new hires; (iv) an increase in depreciation. This increase was offset
by a decrease in foreign travel expenses and cost of software purchased for
internal use.
Selling and marketing expenses. Sales and marketing expenses were $ 7.0
million in the three months ended September 30, 2001, an increase of 40%
over sales and marketing expenses of $ 5.0 million in the three months
ended September 30, 2000. Sales and marketing expenses as a percentage of
total revenues was 5.1% in each of the three months ended September 30,
2001 and 2000, respectively. The number of sales offices increased to 26 as
of September 30, 2001, from 22 as of September 30, 2000. As of September
30, 2001, the number of sales and marketing personnel increased to 133, up
from 87 as of September 30, 2000.
20
General and administrative expenses. General and administrative expenses
were $ 10.8 million for the three months ended September 30, 2001,
representing an increase of 16.1% over general and administrative expenses
of $ 9.3 million for the three months ended September 30, 2000. General and
administrative expenses were 7.9% and 9.5% of total revenues for the three
months ended September 30, 2001 and 2000, respectively. This decrease in
general and administrative expenses as a percentage of revenues was
primarily attributable to a decrease in the provision for doubtful debts
and traveling and conveyance expenses, which comprised 0.5% and 0.6% of
revenues, respectively during the three-month period ended September 30,
2001 as compared to 1.1% and 1.0%, respectively, in the corresponding
previous period as well as a benefit due to scale of operations.
Amortization of Deferred Stock Compensation Expense. Amortization of
deferred stock compensation expense was $ 1.3 million in each of the three
months ended September 30, 2001 and 2000. Deferred stock compensation
expense reflects the continued amortization of compensation expense from
stock purchase rights granted in prior periods.
Operating Income. Operating income was $ 45.1 million for the three months
ended September 30, 2001, an increase of 40.5% over the operating income of
$ 32.1 million for the corresponding period in fiscal 2001. As a percentage
of revenues, operating income was 32.9% in each of the three months ended
September 30, 2001 and 2000, respectively.
Other Income. Other income was $ 3.1 million for the three months ended
September 30, 2001 as compared to $ 4.3 million for the corresponding
period in fiscal 2001. Other income during the three months ended September
30, 2001 includes $ 0.7 million arising from exchange differences on
translation of foreign currency deposits and interest income of $ 2.3
million earned on foreign currency deposits. Other income for the three
months ended September 30, 2000 primarily includes $ 2.1 million arising
from exchange differences arising on the translation of foreign currency
deposits and interest income of $ 2.2 million earned on proceeds from the
issue of American Depositary Shares.
Provision for Income Taxes. Provision for income taxes was $ 7.0 million
for the three months ended September 30, 2001 as compared to $ 3.7 million
for the corresponding period in fiscal 2001. The company's effective tax
rate increased to 14.5% for the three months ended September 30, 2001 as
compared to 10.2% for the corresponding period in fiscal 2001. The increase
in the effective tax rate was primarily attributable to an increase in
foreign taxes paid in respect of overseas operations of the company in the
three months ended September 30, 2001 as compared to the three months ended
September 30, 2000.
Net Income. Net income was $ 41.2 million for the three months ended
September 30, 2001, an increase of 26.0% over net income of $ 32.7 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
September 30, 2001 from 33.5% 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. In 1999, the company raised $ 66.3 million through
the issue of American Depositary Shares (ADSs). As of September 30, 2001,
the company had $ 149.4 million in cash and cash equivalents, $ 201.4
million in working capital and no outstanding bank borrowings.
Net cash provided by operating activities was $ 95.9 million and $ 64.0
million in the six months ended September 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 13.4% and 14.8% as of September
30, 2001 and 2000, respectively. Further, the average days outstanding of
accounts receivable has decreased in the 0-30 and greater than 90-day aging
periods and increased in the 31-60 and 61-90 day aging periods as of
September 30, 2001 compared to September 30, 2000. The company's policy on
accounts receivable includes a periodic review of its accounts receivable,
including a review of the age, amount, and quality of each account
receivable; the relationship with, size of, and history of the client; the
quality of service delivered by the company to the client and the current
economic environment, to determine the classification of an account
receivable. Should the review so demand, the company will classify the
accounts into secured and unsecured accounts, and further subclassified
between good or doubtful accounts. The company makes provisions for all
accounts receivable classified as unsecured or doubtful and for all
accounts receivable that are outstanding more than 180 days. Management
continues pursuing the parties for recovery of dues, in part or full.
Prepaid expenses and other current assets increased by $ 0.6 million and $
0.9 million during the six months ended September 30, 2001 and 2000,
respectively. The increases in both periods were primarily due to increases
in loans to employees. Other accrued liabilities increased by $ 9.6 million
and $ 2.2 million in the six months ended September 30, 2001 and 2000,
respectively, primarily due to an increase in accrued compensation to staff
and provisions for expenses in both periods.
21
Unearned revenue as of September 30, 2001 was $ 6.8 million compared to $
16.0 million as of September 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 under which the company was entitled to bill clients in advance
decreased as of September 30, 2001 over the prior year.
Net cash used in investing activities was $ 49.9 million and $ 47.2 million
in the six months ended September 30, 2001 and 2000, respectively. Net cash
used in investing activities in the six months ended September 30, 2001 and
2000 consisted primarily of $ 45.4 million and $ 41.1 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 six months ended September 30, 2001. The
company invested $ 5.1 million to purchase stock in M-Commerce Ventures
Pte. Limited ($ 0.1 million), Asia Net Media BVI Limited ($ 1.5 million),
Alpha Thinx Mobile Services AG ($ 0.5 million) and CiDRA Corporation ($ 3
million) during the six months ended September 30, 2000.
Publicly-traded Indian companies customarily pay dividends. The company
paid cash dividends of $ 11.6 million and $ 4.9 million in the six months
ended September 30, 2001 and 2000, respectively.
As of September 30, 2001, the company had contractual commitments for
capital expenditure of $ 14.1 million.
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 requires only a provision for diminution in the value of current
investments 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 and
consolidation of accounts of subsidiaries.
-----------------------------------------------------------------------------------------------------------------------------
Reconciliation of net income Three months ended Six months ended
September 30, September 30,
2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------------------------
Net profit as per Indian GAAP $ 42,543,746 $ 33,865,614 $ 83,044,860 $ 62,431,499
Amortization of deferred stock
compensation expense (1,251,327) (1,275,796) (2,511,082) (2,551,592)
Provision for retirement benefits to employees - - - 741,000
Deferred income taxes - 192,068 - (310,863)
Provision for contingency / e-inventing the company - - - (87,387)
Transfer of intellectual property rights - - - (1,230,824)
-----------------------------------------------------------------------------------------------------------------------------
Net income as per US GAAP $ 41,292,419 $ 32,781,886 $ 80,533,778 $ 59,613,559
=============================================================================================================================
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
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 $ 49.0 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 six months ended September 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.
22
2.6 Principles of Currency Translation
In the six months ended September 30, 2001, 95.0% 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"); 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 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
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
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
141, Business Combinations and SFAS 142, Goodwill and Other Intangible
Assets. SFAS 141 requires that all business combinations be accounted for
under a single method-the purchase method. Use of the pooling-of-interests
method is no longer permitted and is effective for business combinations
initiated after June 30, 2001. SFAS 142 requires that goodwill no longer be
amortized to earnings, but instead be reviewed for impairment and is
effective for fiscal years beginning after December 15, 2001, with earlier
application permitted for entities with fiscal years beginning after March
31, 2001.
In August 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes
a cost by increasing the carrying amount of the related long-lived asset.
Over time, the liability is accreted to its present value each period, and
the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement. The standard is effective for fiscal years beginning after June
15, 2002, with earlier application encouraged.
In August 2001, the FASB also issued SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or in
discontinued operations. Under this standard, discontinued operations will
no
23
longer be measured at net realizable value or include amounts for operating
losses that have not yet occurred. The provisions of SFAS 144 are effective
for financial statements issued for fiscal years beginning after December
15, 2001 and, generally, are to be applied prospectively. Early application
is encouraged. Both SFAS 141 and 142 are not currently applicable to the
company. The company is evaluating the impact of SFAS 143 and 144 on its
operations.
2.10 Risk factors
2.10.1 Management of growth
The company has experienced significant growth in recent periods. As of
September 30, 2001, the company employed approximately 9,300 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 6,940
with 17 facilities in India as of September 30, 2000. In fiscal 2001, 2000
and 1999, 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.
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 lowered 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
24
that the possible economic slowdown in the U.S. may impact the growth
prospects of companies that operate in 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
lowered 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. 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
lowered 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 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. The potential for such hostilities
has recently increased as a result of terrorist attacks in the U.S. 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
25
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 six months ended September 30, 2001 and for
fiscal 2001 and 2000, the company's U.S. dollar-denominated revenues
represented 86.8%, 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. 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. As of September 30, 2001, the company had outstanding forward
contracts in the amount of $ 26,000,000. 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 six months ended
September 30, 2001 and for fiscal 2001 and fiscal 2000, the company's
foreign currency translation losses were approximately $ 9.2 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 September 30, 2001, the company had contractual commitments of $14.1
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
26
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 September 30, 2001, substantially all of the
company's personnel in the United States were working pursuant to H-1B
visas (1,311 persons) or L-1 visas (320 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
("USINS") 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. In response to recent terrorist attacks in the
United States, the USINS has increased the level of scrutiny in granting
visas to people of South-East Asian origin. As a result, the company may
not be able to obtain a sufficient number of H-1B visas for its personnel
on time schedules it has in the past, or at all. These restrictions and
other 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.
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 September 30, 2001 and for
fiscal 2001 and 2000, the company's largest client accounted for 6.4%, 7.3%
and 7.2% respectively, of the company's total revenues and its five largest
clients accounted for 25.3%, 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
27
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. 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 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 MIS
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
28
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.
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 has invested an aggregate of $ 5.9 million in
strategic investments in fiscal 2001 and $ 2.2 million for the six months
ended September 30, 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 3.8%, 2.5% and 2.6% of its total revenue from the sale
of software products in the three months ended September 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
29
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 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 29.83%
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 acquiror 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 acquiror from attempting to obtain control of the
company.
30
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
Item 3. Default upon senior securities
None
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports
Infosys filed no reports on Form 8-K during the quarter ended September 30,
2001.
EXHIBIT INDEX
Exhibit Number Description of Document
19.1 Infosys Quarterly report to the shareholders for the quarter
ended September 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: November 07, 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
31