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 December 31, 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
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Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g 3-2(b) under the Securities Exchange Act of
1934.
Yes No x
------- -------
If "Yes" is marked, indicate below the file number assigned to registrant in
connection with Rule 12g 3-2(b).
Not applicable.
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Currency of Presentation and Certain Defined Terms
Unless the context otherwise requires, references herein to the "company" or to
"Infosys" are to Infosys Technologies Limited, a limited liability company
organized under the laws of the Republic of India. References to "U.S." or
"United States" are to the United States of America, its territories and its
possessions. References to "India" are to the Republic of India. Yantra
Corporation, a Delaware Corporation ("Yantra"), in which the company holds a
minority interest, is considered a subsidiary of the company for purposes of
Indian GAAP. "Infosys" is a registered trademark of the company in India and the
United States. All other trademarks or tradenames used in this Quarterly Report
on Form 6-K ("Quarterly Report") are the property of their respective owners.
In this Quarterly Report, references to "$" or "Dollars" or "U.S. Dollars" are
to the legal currency of the United States, references to "EUR" or "Euro" or
"[EURO SYMBOL]" 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 December 31, 2001, which was Rs. 48.27 per $1.00. For
the convenience of the reader, this Quarterly Report contains translations of
certain Indian rupee amounts into U.S. Dollars which should not be construed as
a representation that such Indian Rupee or U.S. Dollar amounts referred to
herein could have been, or could be, converted to U.S. Dollars or Indian Rupees,
as the case may be, at any particular rate, the rates stated below, or at all.
Any discrepancies in any table between totals and sums of the amounts listed are
due to rounding.
Forward-looking statements may prove inaccurate
In addition to historical information, this quarterly report contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Factors that
might cause such differences include but are not limited to, those discussed in
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this report. Readers are
cautioned not to place undue reliance on these forward- looking statements,
which reflect management's analysis only as of the date hereof. In addition,
readers should carefully review the other information in this quarterly report
and in the company's periodic reports and other documents filed with the
Securities and Exchange Commission ("SEC") from time to time.
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1
Part I - Financial information
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Item 1. Financial statements
Balance Sheets as of
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December 31, 2001 December 31, 2000 March 31, 2001
(Unaudited) (Unaudited) (Audited)
- ----------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 179,964,266 $ 110,891,708 $ 124,084,245
Trade accounts receivable, net of allowances 64,505,813 65,102,262 64,942,062
Deferred tax assets 2,065,475 -- 1,265,142
Prepaid expenses and other current assets 18,875,165 14,306,584 16,452,863
- ----------------------------------------------------------------------------------------------------------
Total current assets 265,410,719 190,300,554 206,744,312
Property, plant and equipment - net 150,661,482 97,928,035 119,773,030
Deferred tax assets 2,574,090 2,766,266 2,070,428
Investments 7,777,393 6,057,693 5,577,393
Advance income taxes 1,869,035 208,740 180,113
Other assets 11,127,466 7,237,419 8,002,543
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Total assets $ 439,420,185 $ 304,498,707 $ 342,347,819
==========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 440 $ 353,474 $ 28,082
Client deposits 2,546,959 1,565,962 1,217,737
Other accrued liabilities 27,279,580 20,809,471 21,830,484
Unearned revenue 5,885,436 10,627,986 7,479,815
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Total current liabilities $ 35,712,415 $ 33,356,893 $ 30,556,118
==========================================================================================================
STOCKHOLDERS' EQUITY
Common stock, $ 0.16 par value; 100,000,000
equity shares authorized, Issued and outstanding
- 66,169,247; 66,152,567 and 66,158,117 as of
December 31, 2001, December 31, 2000 and
March 31, 2001, respectively 8,595,270 8,593,713 8,594,106
Additional paid-in-capital 122,395,526 121,683,464 122,017,518
Accumulated other comprehensive income (39,992,215) (29,392,947) (28,664,972)
Deferred stock compensation (8,771,464) (13,776,773) (12,517,018)
Retained earnings 321,480,653 184,034,357 222,362,067
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Total stockholders' equity 403,707,770 271,141,814 311,791,701
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Total liabilities and stockholders' equity $ 439,420,185 $ 304,498,707 $ 342,347,819
==========================================================================================================
See accompanying notes to financial statements
Assets - December 31, 2001 Liabilities and stockholder's equity -
December 31, 2001
[PIE CHART] [PIE CHART]
Cash and cash equivalents - 41% Current liabilities - 8%
Property, plan and equipment - 34% Stockholders equity - 92%
Other assets - 10%
Accounts receivable - 15%
2
Statements of income
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Three months ended Nine months ended Year ended
Dec. 31, 2001 Dec. 31, 2000 Dec. 31, 2001 Dec. 31, 2000 March 31, 2001
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited)
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REVENUES $137,579,820 $114,911,366 $405,370,712 $293,108,249 $413,850,510
Cost of revenues 73,051,526 60,583,336 214,517,882 152,743,812 213,613,744
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Gross profit 64,528,294 54,328,030 190,852,830 140,364,437 200,236,766
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Operating Expenses:
Selling and marketing expenses 6,840,680 4,752,598 19,752,095 13,944,138 20,682,776
General and administrative
expenses 10,622,444 10,112,440 33,921,600 25,803,921 36,957,609
Amortization of stock
compensation expense 1,234,472 1,270,448 3,745,554 3,822,040 5,081,795
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Total operating expenses 18,697,596 16,135,486 57,419,249 43,570,099 62,722,180
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Operating income 45,830,698 38,192,544 133,433,581 96,794,338 137,514,586
Other income, net 3,106,397 97,184 9,072,796 7,792,422 9,505,343
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Income before income taxes 48,937,095 38,289,728 142,506,377 104,586,760 147,019,929
Provision for income taxes 7,288,077 4,282,892 20,323,580 10,966,366 15,071,825
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Net income $ 41,649,018 $ 34,006,836 $122,182,797 $ 93,620,394 $131,948,104
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Earnings per equity share
Basic $ 0.64 $ 0.52 $ 1.86 $ 1.43 $ 2.01
Diluted $ 0.63 $ 0.51 $ 1.85 $ 1.40 $ 1.98
Weighted equity shares used in
computing earnings
per equity share
Basic 65,545,160 65,593,767 65,557,265 65,625,556 65,771,256
Diluted 66,114,671 66,410,844 66,205,786 66,877,762 66,714,739
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See accompanying notes to the financial statements
3
Statements of Stockholders' Equity and Comprehensive Income
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(Information as of and for the Nine months ended
December 31, 2000 and December 31, 2001 is unaudited)
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Additional
Common stock paid-in Comprehensive
Shares Par value capital income
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Balance as of March 31, 2000 66,150,700 $ 8,593,510 $ 121,506,726
Cash dividends declared -- -- --
Common stock issued 1,867 203 176,738
Amortization of compensation
related to stock option grants -- -- --
Comprehensive income
Net income -- -- -- 93,620,394
Other comprehensive income
Translation adjustment -- -- -- (15,255,014)
------------
Comprehensive income 78,365,380
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Balance as of December 31, 2000 66,152,567 8,593,713 121,683,464
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Common stock issued 5,550 393 334,054
Amortization of compensation
related to stock option grants -- -- --
Comprehensive income
Net income -- -- -- 38,327,710
Other comprehensive income
Translation adjustment -- -- -- 727,975
------------
Comprehensive income 39,055,685
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Balance as of March 31, 2001 66,158,117 8,594,106 122,017,518
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Common stock issued 11,130 1,164 378,008
Cash dividends declared -- -- --
Amortization of compensation
related to stock option grants -- -- --
Comprehensive income
Net income -- -- -- 122,182,797
Other comprehensive income
Translation adjustment -- -- -- (11,327,243)
------------
Comprehensive income $ 110,855,554
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Balance as of December 31, 2001 66,169,247 $ 8,595,270 $ 122,395,526
================================================================================================
Statements of Stockholders' Equity and Comprehensive Income
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(Information as of and for the Nine months ended
December 31, 2000 and December 31, 2001 is unaudited)
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Accumulated
other Deferred Total
comprehensive stock Retained stockholders'
income compensation earnings equity
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Balance as of March 31, 2000 $ (14,137,933) $ (17,598,813) $ 99,773,031 $ 198,136,521
Cash dividends declared -- -- (9,359,068) (9,359,068)
Common stock issued -- -- -- 176,941
Amortization of compensation
related to stock option grants -- 3,822,040 -- 3,822,040
Comprehensive income
Net income -- -- 93,620,394 93,620,394
Other comprehensive income
Translation adjustment (15,255,014) -- -- (15,255,014)
Comprehensive income
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Balance as of December 31, 2000 (29,392,947) (13,776,773) 184,034,357 271,141,814
- -------------------------------------------------------------------------------------------------------
Common stock issued -- -- -- 334,447
Amortization of compensation
related to stock option grants -- 1,259,755 -- 1,259,755
Comprehensive income
Net income -- -- 38,327,710 38,327,710
Other comprehensive income
Translation adjustment 727,975 -- -- 727,975
Comprehensive income
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Balance as of March 31, 2001 (28,664,972) (12,517,018) 222,362,067 311,791,701
- -------------------------------------------------------------------------------------------------------
Common stock issued -- -- -- 379,172
Cash dividends declared -- -- (23,064,211) (23,064,211)
Amortization of compensation
related to stock option grants -- 3,745,554 -- 3,745,554
Comprehensive income
Net income -- -- 122,182,797 122,182,797
Other comprehensive income
Translation adjustment (11,327,243) -- -- (11,327,243)
Comprehensive income
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Balance as of December 31, 2001 $ (39,992,215) $ (8,771,464) $ 321,480,653 $ 403,707,770
=======================================================================================================
See accompanying notes to the financial statements
4
Statement of cash flows
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Nine months ended December 31, Year ended
2001 2000 March 31, 2001
(Unaudited) (Unaudited) (Audited)
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OPERATING ACTIVITIES:
Net income $ 122,182,797 $ 93,620,394 $ 131,948,104
Adjustments to reconcile net income to net cash
provided by operating activities
(Gain)/loss on sale of property, plant and equipment (2,456) (17,330) (20,053)
Depreciation 24,402,866 16,381,961 24,527,867
Deferred tax benefit (1,303,995) (200,000) (769,304)
Amortization of deferred stock compensation expense 3,745,554 3,822,040 5,081,795
Provision for investments -- 3,000,000 3,480,300
Changes in assets and liabilities
Trade accounts receivable (1,720,224) (36,859,476) (36,310,272)
Prepaid expenses and other current assets (2,273,638) (2,134,134) (2,654,466)
Income taxes (1,729,558) (2,493,310) (1,973,114)
Accounts payable (27,114) (573,079) (901,961)
Client deposits 1,389,393 1,198,445 833,215
Unearned revenue (1,368,788) 7,041,931 3,770,772
Other accrued liabilities 5,993,281 8,671,937 9,651,967
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Net cash provided by operating activities $ 149,288,118 $ 91,459,379 $ 136,664,850
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INVESTING ACTIVITIES:
Expenditure on property, plant and equipment (59,982,936) (71,399,078) (101,235,420)
Proceeds from sale of property, plant and equipment 236,642 45,465 49,676
Loans to employees (4,169,931) (2,578,313) (4,932,703)
Purchase of investments (2,200,000) (5,879,755) (5,879,755)
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Net cash used in investing activities $ (66,116,225) $ (79,811,681) $(111,998,202)
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FINANCING ACTIVITIES:
Proceeds from issuance of common stock 379,172 176,941 511,388
Payment of dividends (23,064,211) (9,274,887) (9,220,142)
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Net cash used in financing activities $ (22,685,039) $ (9,097,946) $ (8,708,754)
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Effect of exchange rate changes on cash (4,606,833) (8,257,530) (8,473,135)
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Net increase/(decrease) in cash and
cash equivalents during the period 55,880,021 (5,707,778) 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 $ 179,964,266 $ 110,891,708 $ 124,084,245
=============================================================================================================
Supplementary information:
Cash paid towards taxes $ 22,012,502 $ 13,045,342 $ 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 nine months
ended December 31, 2001
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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 nine months ended
December 31, 2001 and 2000 and in fiscal 2001 was $5,507,313, $6,127,359
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.
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 December 31, 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") 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.
7
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". Non-readily marketable
equity securities for which there are no readily determinable fair values
are recorded at cost.
Investment securities designated as "available-for-sale" are carried at
their fair value. Fair value is based on quoted market prices. Unquoted
securities are carried at cost, adjusted for declines in value judged to
be other than temporary. Temporary unrealized gains and losses, net of the
related tax effect are reported as a separate component of stockholders'
equity until realized. Realized gains and losses and declines in value
judged to be other than temporary on available- for-sale securities are
included in the statements of income. The cost of securities sold is based
on the specific identification method. Interest and dividend income is
recognized when earned.
1.16 Stock-based compensation
The company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations
including FASB Interpretation No. 44, Accounting for Certain Transactions
involving Stock Compensation (an interpretation of APB Opinion No. 25),
issued in March 2000, to account for its fixed plan stock options. Under
this method, compensation expense is recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise
price. SFAS 123, Accounting for Stock-Based Compensation, established
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed by SFAS
123, the company has elected to continue to apply the intrinsic
value-based method of accounting described above, and has adopted the
disclosure requirements of SFAS 123. 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 on 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 December 31,
2001 and 2000 and March 31, 2001, respectively are as follows:
--------------------------------------------------------------------------
As of December 31, As of March 31,
2001 2000 2001
--------------------------------------------------------------------------
Cost and fair values
Cash and bank deposits $126,620,777 $ 78,191,662 $ 82,702,111
Deposits with corporations 53,343,489 32,700,046 41,382,134
--------------------------------------------------------------------------
$179,964,266 $110,891,708 $124,084,245
==========================================================================
Cash and cash equivalents include restricted cash balances in the amount
of $358,483, $150,053 and $103,418 as of December 31, 2001 and 2000 and
March 31, 2001, respectively.
1.20.2 Trade accounts receivable
Trade accounts receivable, as of December 31, 2001 and 2000 and March 31,
2001, net of allowance for doubtful accounts of $4,025,693, $3,084,311
and $3,902,996, respectively amounted to $64,505,813, $65,102,262 and
$64,942,062, respectively. The age profile of trade accounts receivable,
net of allowances is given below.
in %
-----------------------------------------------------------------------
As of December 31, As of March 31,
Period (in days) 2001 2000 2001
-----------------------------------------------------------------------
0 - 30 68.9 48.3 69.2
31 - 60 26.5 37.1 26.6
61 - 90 4.6 10.2 1.7
More than 90 -- 4.4 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 December 31, As of March 31,
2001 2000 2001
--------------------------------------------------------------------------------------
Rent deposits $ 2,071,632 $ 2,226,754 $ 2,484,794
Deposits with government organizations 1,264,146 739,465 945,189
Loans to employees 8,548,006 6,490,374 8,091,866
Prepaid expenses 5,041,519 4,497,879 4,349,913
Unbilled revenues 1,884,239 281,573 503,694
Other current assets 65,623 70,539 77,407
--------------------------------------------------------------------------------------
$18,875,165 $14,306,584 $16,452,863
======================================================================================
Other current assets represent advance payments to vendors for the supply
of goods and rendering of services. Deposits with government organizations
relate principally to leased telephone lines and electricity supplies.
1.20.4 Property, plant and equipment - net
Property, plant and equipment consist of the following:
--------------------------------------------------------------------------------
As of December 31, As of March 31,
2001 2000 2001
--------------------------------------------------------------------------------
Land $ 9,023,385 $ 7,658,656 $ 7,865,351
Buildings 47,180,823 27,668,822 33,871,448
Furniture and fixtures 29,863,549 15,744,158 21,579,707
Computer equipment 57,407,806 37,155,519 48,098,099
Plant and equipment 32,904,434 19,717,383 24,064,927
Vehicles 73,058 40,103 75,537
Capital work-in-progress 47,039,528 34,293,333 36,651,724
--------------------------------------------------------------------------------
223,492,583 142,277,974 172,206,793
Accumulated depreciation (72,831,101) (44,349,939) (52,433,763)
--------------------------------------------------------------------------------
$ 150,661,482 $ 97,928,035 $ 119,773,030
================================================================================
Depreciation expense amounted to $24,402,866, $16,381,961 and $24,527,867,
for the nine months ended December 31, 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 December 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 E20 each, fully paid,
par value E1 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 - 2,200,000 Series B Convertible Preferred Stock at $1 each,
fully paid, par value $0.0002 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 December 31, 2000
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
Alpha Thinx Mobile Services AG - 27,790 Bearer Shares, at E20 each, fully paid,
par value E1 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 -- --
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
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
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
- --------------------------------------------------------------------------------------------------------------
$6,057,693 $6,057,693
==============================================================================================================
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 E20 each, fully paid, par value E1 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 December 31, 2001 and 2000 and March 31, 2001, amounts
receivable from officers amounting to $465,973, $152,234 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 December 31, As of March 31,
2001 2000 2001
- --------------------------------------------------------------------------------
2001 -- $ 6,490,374 --
2002 $ 8,548,006 2,332,307 $ 8,091,866
2003 3,355,615 1,572,307 2,517,809
2004 2,267,185 929,801 1,718,884
2005 1,367,506 700,522 1,033,107
2006 1,064,996 -- 800,198
Thereafter 3,072,164 1,702,482 1,932,545
- --------------------------------------------------------------------------------
Total $19,675,472 $13,727,793 $16,094,409
================================================================================
The estimated fair values of related party receivables amounted to $14,837,206,
$10,566,802 and $12,465,374 as of December 31, 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 December 31, As of March 31,
2001 2000 2001
- --------------------------------------------------------------------------------------
Accrued compensation to staff $11,560,248 $10,600,704 $12,332,869
Accrued dividends 359,483 150,053 103,418
Provision for post sales client support 1,736,986 1,581,636 1,578,859
Employee withholding taxes payable 2,092,809 1,221,387 25,000
Provision for expenses 7,468,898 3,665,572 3,768,256
Retention money 3,305,421 2,924,107 2,425,439
Others 755,735 666,012 1,596,643
- --------------------------------------------------------------------------------------
$27,279,580 $20,809,471 $21,830,484
======================================================================================
1.20.9 Employee post-retirement benefits
1.20.9.1 Superannuation
The company contributed $913,808, $598,970 and $796,739 to the superannuation
plan in the nine months ended December 31, 2001 and 2000 and in fiscal 2001,
respectively.
1.20.9.2 Provident fund
The company contributed $2,337,455, $1,641,939 and $2,339,794, to the provident
fund in the nine months ended December 31, 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 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:
- --------------------------------------------------------------------------------------------
Nine months ended December 31, Year ended
2001 2000 March 31, 2001
- --------------------------------------------------------------------------------------------
Interest income and others $ 7,355,707 $ 6,252,196 $ 8,526,635
Income from sale of special import licenses -- 14,800 14,800
Exchange gains 1,235,221 4,525,426 4,444,208
Provision for investments -- (3,000,000) (3,480,300)
Others 481,868 -- --
- --------------------------------------------------------------------------------------------
$ 9,072,796 $ 7,792,422 $ 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 nine months
ended December 31, 2001 and 2000 and in fiscal 2001 were $3,824,111, $2,505,453
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 December 31,
- --------------------------------------------------------------------------------
2002 $ 3,457,663
2003 3,508,402
2004 3,304,298
2005 2,486,201
2006 1,032,813
Thereafter 1,595,320
- --------------------------------------------------------------------------------
$15,384,697
================================================================================
1.20.14 Research and development
General and administrative expenses in the accompanying statements of income
include research and development expenses of $2,385,215, $2,609,759 and
$3,610,550 for the nine months ended December 31, 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 December 31, 2001, the company's
outstanding equity shares included 634,000 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 nine months ended December 31, 2001 and 2000 and in
fiscal 2001 are set out below.
- ----------------------------------------------------------------------------------------------------------------------------------
Nine months ended Nine months ended Year ended
December 31, 2001 December 31, 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 330,000 341,400 341,400
Granted -- -- --
Forfeited (7,000) $ 1.15 (8,400) $ 1.15 (10,600) $ 1.15
Exercised -- $ 1.15 (800) $ 1.15 (800) $ 1.15
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at the
end of the period 323,000 332,200 330,000
- ----------------------------------------------------------------------------------------------------------------------------------
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 415,425 $ 73.68 156,400 $ 304.03 482,420 $ 230.88
Forfeited (48,885) $ 245.04 (27,450) $ 132.55 (38,200) $ 172.58
Exercised (11,100) $ 60.04 (1,367) $ 97.64 (6,217) $ 53.82
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at the
end of the period 1,138,193 472,333 782,753
- ----------------------------------------------------------------------------------------------------------------------------------
Exercisable at the
end of the period 210,130 59,627 55,558
Weighted-average
fair value of grants
during the period $ 73.68 $ 304.03 $ 230.88
1999 Plan:
Outstanding at the
beginning of the period 2,793,980 1,006,800 1,006,800
Granted 1,979,600 $ 95.05 1,132,300 $ 146.50 1,957,830 $ 136.68
Forfeited (133,035) $ 128.69 (126,600) $ 108.52 (169,450) $ 110.06
Exercised (30) $ 74.29 (500) $ 93.67 (1,200) $ 89.98
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at the
end of the period 4,640,515 2,012,000 2,793,980
- ----------------------------------------------------------------------------------------------------------------------------------
Exercisable at the
end of the period 363,673 90,120 93,400
Weighted-average
fair value of grants
during the period $ 95.05 $ 146.50 $ 136.68
- ----------------------------------------------------------------------------------------------------------------------------------
14
1.20.16 Income taxes
The provision for income taxes comprises:
- -------------------------------------------------------------------------------
Nine months ended Year ended
December 31, 2001 December 31, 2000 March 31, 2001
- -------------------------------------------------------------------------------
Current taxes
Domestic taxes $ 4,201,904 $ 3,168,478 $ 5,315,961
Foreign taxes 16,865,008 7,997,888 10,525,168
- -------------------------------------------------------------------------------
21,066,912 11,166,366 15,841,129
- -------------------------------------------------------------------------------
Deferred taxes (743,332) (200,000) (769,304)
- -------------------------------------------------------------------------------
Aggregate taxes $ 20,323,580 $ 10,966,366 $ 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 of December 31, As of March 31,
2001 2000 2001
- -------------------------------------------------------------------------------------
Deferred tax assets:
Property, plant and equipment $ 2,274,931 $ 3,400,637 $ 1,519,016
Provision for doubtful debts 1,437,172 1,187,460 1,587,629
Investments 1,442,477 1,155,000 1,598,712
Others -- -- 217,842
- -------------------------------------------------------------------------------------
5,154,580 5,743,097 4,923,199
Less: Valuation allowance (515,015) (2,976,831) (1,587,629)
- -------------------------------------------------------------------------------------
Net deferred tax assets $ 4,639,565 $ 2,766,266 $ 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 December 31, 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.
- --------------------------------------------------------------------------------------------------------
Nine months ended Year ended
December 31, 2001 December 31, 2000 March 31, 2001
- --------------------------------------------------------------------------------------------------------
Net income before taxes $ 142,506,377 $ 104,586,760 $ 147,019,929
Enacted tax rates in India 35.70% 38.50% 39.55%
Computed expected tax expense 50,874,777 40,265,903 58,146,382
Less: Tax effect due to non-taxable export income (49,800,528) (39,749,830) (57,334,527)
Others 2,363,510 2,145,637 3,437,865
Effect of tax rate change 20,813 -- (8,077)
Effect of prior period tax adjustments -- 306,768 305,014
- --------------------------------------------------------------------------------------------------------
Provision for Indian income tax 3,458,572 2,968,478 4,546,657
Effect of tax on foreign income 16,865,008 7,997,888 10,525,168
- --------------------------------------------------------------------------------------------------------
Aggregate taxes $ 20,323,580 $ 10,966,366 $ 15,071,825
========================================================================================================
The provision for foreign taxes is due to income taxes payable overseas,
principally in the United States of America. The company benefits from certain
significant tax incentives provided to software firms under Indian tax laws.
These incentives presently include: (i) an exemption from payment of Indian
corporate income taxes for a period of ten consecutive years of operation of
software development facilities designated as "Software Technology Parks" (the
"STP Tax Holiday"); and (ii) a tax deduction for profits derived from exporting
computer software (the "Export Deduction"). All but one of the company's
software development facilities are located in a designated Software Technology
Park ("STP"). The Government of India has recently amended the tax incentives
available to companies set up in designated STPs. The period of the STP Tax
Holiday available to such companies is restricted to 10 consecutive years
beginning
15
from the financial year when the unit started producing computer software or
March 31, 2000, whichever is earlier. Additionally, the Export Deduction will be
phased out equally over a period of five years starting from fiscal 2000.
1.20.17 Earnings per share
The following is a reconciliation of the equity shares used in the computation
of basic and diluted earnings per equity share:
- ----------------------------------------------------------------------------------------------
Nine months ended December 31 Year ended
2001 2000 March 31, 2001
- ----------------------------------------------------------------------------------------------
Basic earnings per equity share -
weighted average number of common
shares outstanding excluding unallocated
shares of ESOP 65,557,265 65,625,556 65,771,256
Effect of dilutive common equivalent shares -
stock options outstanding 648,521 1,252,206 943,483
Diluted earnings per equity share -
weighted average number of common
shares and common equivalent shares outstanding 66,205,786 66,877,762 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 $20,000,000, Nil and $20,000,000 as of December 31, 2001 and 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 indus-
tries, 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 practical to provide segment
disclosures relating to total assets and liabilities.
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
Nine months ended December 31, 2001 in $
- -----------------------------------------------------------------------------------------------------------------------
Financial services Manufacturing Telecom Retail Others Total
- -----------------------------------------------------------------------------------------------------------------------
Revenues 147,615,021 69,386,637 63,617,079 48,997,683 75,754,292 405,370,712
Identifiable operating expenses 54,101,958 28,839,432 16,603,048 13,307,077 26,339,106 139,190,621
Allocated expenses 39,119,169 17,665,432 16,192,692 12,421,760 19,200,455 104,599,508
- -----------------------------------------------------------------------------------------------------------------------
Segmental operating income 54,393,894 22,881,773 30,821,339 23,268,846 30,214,731 161,580,583
Unallocable expenses 28,147,002
- -----------------------------------------------------------------------------------------------------------------------
Operating income 133,433,581
Other income (expense), net 9,072,796
- -----------------------------------------------------------------------------------------------------------------------
Net income before taxes 142,506,377
Taxes 20,323,580
- -----------------------------------------------------------------------------------------------------------------------
Net income after taxes 122,182,797
=======================================================================================================================
Nine months ended December 31, 2000 in $
- -----------------------------------------------------------------------------------------------------------------------
Financial services Manufacturing Telecom Retail Others Total
- -----------------------------------------------------------------------------------------------------------------------
Revenues 98,854,701 52,300,841 54,187,187 24,174,167 63,591,353 293,108,249
Identifiable operating expenses 35,027,880 19,653,814 14,318,585 8,796,463 19,776,525 97,573,267
Allocated expenses 27,093,541 13,834,686 14,379,300 6,383,205 16,845,911 78,536,643
- -----------------------------------------------------------------------------------------------------------------------
Segmental operating income 36,733,280 18,812,341 25,489,302 8,994,499 26,968,917 116,998,339
Unallocable expenses 20,204,001
- -----------------------------------------------------------------------------------------------------------------------
Operating income 96,794,338
Other income (expense), net 7,792,422
- -----------------------------------------------------------------------------------------------------------------------
Net income before taxes 104,586,760
Taxes 10,966,366
- -----------------------------------------------------------------------------------------------------------------------
Net income after taxes 93,620,394
=======================================================================================================================
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
Nine months ended December 31, 2001 in $
- --------------------------------------------------------------------------------------------------------
Rest of
North America Europe India the World Total
- --------------------------------------------------------------------------------------------------------
Revenues 289,382,482 78,551,232 8,559,625 28,877,373 405,370,712
Identifiable operating expenses 98,476,100 28,315,359 3,048,190 9,350,972 139,190,621
Allocated expenses 74,490,566 20,226,600 2,587,309 7,295,033 104,599,508
- --------------------------------------------------------------------------------------------------------
Segmental operating income 116,415,816 30,009,273 2,924,126 12,231,368 161,580,583
Unallocable expenses 28,147,002
- --------------------------------------------------------------------------------------------------------
Operating income 133,433,581
Other income (expense), net 9,072,796
- --------------------------------------------------------------------------------------------------------
Net income before taxes 142,506,377
Taxes 20,323,580
- --------------------------------------------------------------------------------------------------------
Net income after taxes 122,182,797
========================================================================================================
17
1.20.19 Segment reporting (continued)
1.20.19.2 Geographic segments (continued)
Nine months ended December 31, 2000 in $
- ------------------------------------------------------------------------------------------------------
Rest of
North America Europe India the World Total
- ------------------------------------------------------------------------------------------------------
Revenues 217,779,566 53,168,697 3,756,654 18,403,332 293,108,249
Identifiable operating expenses 70,928,273 19,177,472 1,165,350 6,302,172 97,573,267
Allocated expenses 58,220,480 14,136,994 1,186,170 4,992,999 78,536,643
- ------------------------------------------------------------------------------------------------------
Segmental operating income 88,630,813 19,854,231 1,405,134 7,108,161 116,998,339
Unallocable expenses 20,204,001
- ------------------------------------------------------------------------------------------------------
Operating income 96,794,338
Other income (expense), net 7,792,422
- ------------------------------------------------------------------------------------------------------
Net income before taxes 104,586,760
Taxes 10,966,366
- ------------------------------------------------------------------------------------------------------
Net income after taxes 93,620,394
======================================================================================================-
Year ended March 31, 2001 in $
- ------------------------------------------------------------------------------------------------------
Rest of
North America Europe India the World Total
- ------------------------------------------------------------------------------------------------------
Revenues 304,242,537 77,892,656 5,778,286 25,937,031 413,850,510
Identifiable operating expenses 96,358,758 27,210,316 1,943,571 9,217,572 134,730,217
Allocated expenses 82,053,059 20,951,885 1,866,259 7,124,843 111,996,046
- ------------------------------------------------------------------------------------------------------
Segmental operating income 125,830,720 29,730,455 1,968,456 9,594,616 167,124,247
Unallocable expenses 29,609,661
- ------------------------------------------------------------------------------------------------------
Operating income 137,514,586
Other income (expense), net 9,505,343
- ------------------------------------------------------------------------------------------------------
Net income before taxes 147,019,929
Taxes 15,071,825
- ------------------------------------------------------------------------------------------------------
Net income after taxes 131,948,104
======================================================================================================
1.20.19.3 Significant clients
No client individually accounted for more than 10% of the revenues in the nine
months ended December 31, 2001 and 2000 and in fiscal 2001.
1.20.20 Commitments and contingencies
The company has outstanding performance guarantees for various
statutory purposes totaling $3,330,910, $1,123,474 and $1,126,611 as of
December 31, 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
Non-voting 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 December 31, 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 4.1% of total revenue during the three months ended December
31, 2001. The company derived 70.9% of its total revenue from North
America, 19.4% from Europe, 1.9% from India and 7.8% from the rest of the
world during the three months ended December 31, 2001.
During the three months ended December 31, 2001 and December 31, 2000, the
company derived 23.1% and 28.3% 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 December 31, 2001, approximately 70% of the work on a
project was performed at the company's facilities in India, and the
balance of the work was performed at the client site. The proportion of
work performed at company facilities and at client sites varies from
quarter to quarter. The company charges higher rates and incurs higher
compensation expenses for work performed at a client site. Services
performed at a client site typically generate higher revenues per capita,
but lower gross margins, than the same quantum of services performed at
the company's facilities in India. As a result, total revenues, cost of
revenues and gross profit in absolute terms, and as a percentage of
revenues, fluctuate from quarter to quarter based on the proportion of
work performed offshore at company facilities and at client sites.
Revenue and gross profits are also affected by employee utilization rates.
Utilization rates depend, among other factors, on the number of employees
enrolled for in-house training programs, particularly the 14-week
classroom training course provided to new employees. 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.
19
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 $13.6 million towards
various capital acquisitions as of December 31, 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 $12
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 December 31, 2001 compared to three months ended
December 31, 2000
Revenue. Total revenues were $137.6 million for the three months ended
December 31, 2001, representing an increase of 19.8% over total revenues
of $114.9 million during the same period in the fiscal 2001. 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, retailing and manufacturing industries. Net sales of
Finacle(TM) and other products represented 4.1% of total revenues for the
three months ended December 31, 2001 as compared to 2.3% in the
corresponding period in fiscal 2001. Revenue from services represented
95.9% of total revenues for the three months ended December 31, 2001 as
compared to 97.7% in the corresponding period in fiscal 2001. Revenue from
fixed-price, fixed-time frame and time-and-materials contracts represented
35.1% and 64.9%, respectively, of total revenues in the three months ended
December 31, 2001 as compared to 29.4% and 70.6%, respectively, in the
three months ended December 31, 2000. Revenue from North America and
Europe represented 70.9% and 19.4%, respectively, of total revenue for the
three months ended December 31, 2001 as compared to 73.6% and 18.8%,
respectively, during the same period in fiscal 2001.
Cost of Revenues. Cost of revenues was $73.1 million for the three months
ended December 31, 2001, representing an increase of 20.6% over the cost
of revenues of $60.6 million for the same period in fiscal 2001. Cost of
revenues represented 53.1% and 52.7% of total revenues for the three
months ended December 31, 2001 and December 31, 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 2.5% and 1.4% respectively, of revenues for the quarter
ended December 31, 2001 as compared to 4.3% and 1.5% respectively, of
revenues for the quarter ended December 31, 2000.
Gross Profit. Gross profit was $64.5 million for the three months ended
December 31, 2001 representing an increase of 18.8% over gross profit of
$54.3 million for the three months ended December 31, 2000. As a
percentage of total revenues, gross profit decreased to 46.9% for the
three months ended December 31, 2001 from 47.3% 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 $6.8
million in the three months ended December 31, 2001, an increase of 41.7%
over sales and marketing expenses of $4.8 million in the three months
ended December 31, 2000. Sales and marketing expenses as a percentage of
total revenues was 4.9% and 4.2% in each of the three months ended
December 31, 2001 and 2000, respectively. The number of sales offices
increased to 27 as of December 31, 2001, from 23 as of December 31, 2000.
As of December 31, 2001, the number of sales and marketing personnel
increased to 144, up from 98 as of December 31, 2000.
General and administrative expenses. General and administrative expenses
were $10.6 million for the three months ended December 31, 2001,
representing an increase of 4.9% over general and administrative expenses
of $10.1 million for the three months ended December 31, 2000. General and
administrative expenses were 7.7% and 8.8% of total revenues for the three
months ended December 31, 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
comprised 0.4% and 1.4% of revenues, during the three-month period ended
December 31, 2001 and 2000, respectively.
Amortization of Deferred Stock Compensation Expense. Amortization of
deferred stock compensation expense was $1.2 million and $1.3 million, in
the three months ended December 31, 2001 and 2000, respectively. Deferred
stock compensation expense reflects the continued amortization of
compensation expense from stock purchase rights granted in prior periods.
20
Operating Income. Operating income was $45.8 million for the three months
ended December 31, 2001, an increase of 19.9% over the operating income of
$38.2 million for the corresponding period in fiscal 2001. As a
percentage of revenues, operating income was 33.3% and 33.2% in the three
months ended December 31, 2001 and 2000, respectively. Other Income. Other
income was $3.1 million for the three months ended December 31, 2001 as
compared to $0.1 million for the corresponding period in fiscal 2001.
Other income during the three months ended December 31, 2001 primarily
includes $0.4 million arising from exchange differences on foreign
currency translation and interest income of $2.5 million earned on
deposits. Other income for the three months ended December 31, 2000
primarily includes $0.7 million arising from exchange differences arising
on the foreign currency translation and interest income of $2.4 million
earned on deposits, offset by provision for investments in EC Cubed Inc.,
one of the companies in which the company had made a strategic investment,
in the aggregate of $3 million. Provision for Income Taxes. Provision for
income taxes was $7.3 million for the three months ended December 31,
2001 as compared to $4.3 million for the corresponding period in fiscal
2001. The company's effective tax rate increased to 14.9% for the three
months ended December 31, 2001 as compared to 11.2% 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 December 31,
2001 as compared to the three months ended December 31, 2000.
Net Income. Net income was $41.6 million for the three months ended
December 31, 2001, an increase of 22.3% over net income of $34.0 million
for the corresponding period in fiscal 2001. As a percentage of total
revenues, net income increased to 30.2% for the three months ended
December 31, 2001 from 29.6% 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
December 31, 2001, the company had $180.0 million in cash and cash
equivalents, $229.7 million in working capital and no outstanding bank
borrowings.
Net cash provided by operating activities was $149.3 million and $91.5
million in the nine months ended December 31, 2001 and 2000, respectively.
Net cash provided by operations consisted primarily of net income offset,
in part, by an increase in accounts receivable. Accounts receivable as a
percentage of total revenues, represented 12.0% and 16.7% as of December
31, 2001 and 2000, respectively. Further, the average days outstanding of
accounts receivable has increased in the 0-30 aging period and decreased
in the 31-60, 61-90 and greater than 90 day aging periods as of December
31, 2001 compared to December 31, 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 $2.3 million and
$2.1 million during the nine months ended December 31, 2001 and 2000,
respectively. The increases in both periods were primarily due to
increases in prepaid expenses and unbilled revenues. Other accrued
liabilities increased by $6.0 million and $8.7 million in the nine months
ended December 31, 2001 and 2000, respectively, primarily due to an
increase in employee withholding taxes payable and provisions for expenses
in both periods.
Unearned revenue as of December 31, 2001 was $5.8 million compared to
$10.6 million as of December 31, 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 December 31, 2001 over the prior year.
Net cash used in investing activities was $66.1 million and $79.8 million
in the nine months ended December 31, 2001 and 2000, respectively. Net
cash used in investing activities in the nine months ended December 31,
2001 and 2000 consisted primarily of $60.0 million and $71.4 million,
respectively, for property, plant and equipment and $4.2 million and $2.6
million, respectively, towards loans given to employees. Additionally, the
company invested an aggregate amount of $2.2 million to purchase the
capital stock of Workadia Inc., during the nine months ended December 31,
2001. The company invested $5.9 million to purchase stock in M-Commerce
Ventures Pte. Limited ($0.4 million), Asia Net Media BVI Limited ($1.5
million), Alpha Thinx Mobile Services AG ($0.5 million), Purple Yogi Inc.
($0.5 million) and CiDRA Corporation ($3 million) during the nine months
ended December 31, 2000. Publicly-traded Indian companies customarily pay
dividends. The company paid cash dividends of $23.1 million and $9.3
million in the nine months ended December 31, 2001 and 2000, respectively.
As of December 31, 2001, the company had contractual commitments for
capital expenditure of $13.6 million.
21
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 Nine months ended
December 31, December 31,
2001 2000 2001 2000
------------------------------------------------------------------------------------------------------------------
Net profit as per Indian GAAP $ 42,883,490 $ 35,388,147 $ 125,928,351 $ 97,819,645
Amortization of deferred stock
compensation expense (1,234,472) (1,270,448) (3,745,554) (3,822,040)
Provision for retirement benefits to employees -- -- -- 741,000
Deferred income taxes -- (110,863) -- 200,000
Provision for contingency /
e-inventing the company -- -- -- (87,387)
Transfer of intellectual property rights -- -- -- (1,230,824)
------------------------------------------------------------------------------------------------------------------
Net income as per US GAAP $ 41,649,018 $ 34,006,836 $ 122,182,797 $ 93,620,394
------------------------------------------------------------------------------------------------------------------
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 nine months ended December 31, 2001 the company also invested
in Workadia Inc., a Delaware corporation, by purchasing 2,200,000 shares
of Series B Convertible Preferred Stock, par value US$0.0002 per share,
for an aggregate investment of US $2.2 million.
2.6 Principles of currency translation
In the nine months ended December 31, 2001, 95.4% 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.
22
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 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
December 31, 2001, the company employed approximately 9,360 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
7,820 with 17 facilities in India as of December 31, 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.
23
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 the quarter ended December 31, 2001 and
2000, approximately 71% and 74% 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 the quarter ended December 31, 2001 the
company derived 34.2% and 15.1% of its revenues from the insurance,
banking and financial services, and telecom industry segments
respectively, as compared to 36.6% and 17.7%, respectively in the quarter
ended December 31, 2000. There are indications 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
Some of the company's clients are early stage, young companies with little
or limited financing. 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
24
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 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 effect 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 nine months ended December 31, 2001 and for
fiscal 2001 and 2000, the company's U.S. dollar-denominated revenues
represented 87.1%, 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
25
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 December 31, 2001, the company had outstanding forward contracts in
the amount of $20,000,000. 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 nine months
ended December 31, 2001 and for fiscal 2001 and fiscal 2000, the company's
foreign currency translation losses were approximately $11.3 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 December 31, 2001, the company had contractual commitments of $13.6
million for capital expenditure and has budgeted for significant expansion
of infrastructure in the near future. Since such an expansion will
significantly increase the company's fixed costs, the company's results of
operations will be materially adversely affected if the company is unable
to grow its business proportionately. Although the company has
successfully developed new facilities in the past, there can be no
assurance that the company will not encounter cost overruns or project
delays in connection with any or all of the new facilities. Furthermore,
there can be no assurance that future financing for additional facilities,
whether within India or elsewhere, would be available on attractive terms
or at all.
2.10.8 Restrictions on US immigration
The company's professionals who work on-site at client facilities in the
United States on temporary and extended assignments are typically required
to obtain visas. As of December 31, 2001, substantially all of the
company's personnel in the United States were working pursuant to H-1B
visas (1,367 persons) or L-1 visas (361 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
26
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 December 31, 2001 and for
fiscal 2001 and 2000, the company's largest client accounted for 5.5%,
7.3% and 7.2% respectively, of the company's total revenues and its five
largest clients accounted for 24.1%, 26.0% and 30.2%, respectively, of the
company's total revenues. The volume of work performed for specific
clients is likely to vary from year to year, particularly since the
company is usually not the exclusive outside software service provider for
its clients. Thus, a major client in one year may not provide the same
level of revenues in a subsequent year. The loss of any large client could
have a material adverse effect on the company's results of operations and
financial condition. Since many of the contracted projects are critical to
the operations of its clients' businesses, any failure to meet client
expectations could result in a cancellation or non-renewal of a contract.
However, there are a number of factors other than the company's
performance that could cause the loss of a client and that may not be
predictable. 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
27
compete also depends in part on a number of factors outside its control,
including the ability of its competitors to attract, train, motivate and
retain highly skilled IT professionals, the price at which its competitors
offer comparable services, and the extent of its competitors'
responsiveness to client needs.
2.10.15 Dependence on key personnel
The company's success depends to a significant degree upon continued
contributions of members of the company's senior management and other key
research and development and sales and marketing personnel. The company
generally does not enter into employment agreements with its senior
management and other key personnel that provide for substantial
restrictions on such persons leaving the company. The loss of any of such
persons could have a material adverse effect on the company's business,
financial condition and results of operations.
2.10.16 Potential liability to clients; risk of exceeding insurance
coverage
Many of the company's contracts involve projects that are critical to the
operations of its clients' businesses and provide benefits that may be
difficult to quantify. Any failure in a client's system could result in a
claim for substantial damages against the company, regardless of the
company's responsibility for such failure. Although the company attempts
to limit its contractual liability for damages arising from negligent
acts, errors, mistakes or omissions in rendering its services, there can
be no assurance the limitations of liability set forth in its service
contracts will be enforceable in all instances or will otherwise protect
the company from liability for damages. The company maintains general
liability insurance coverage, including coverage for errors or omissions;
however, there can be no assurance that such coverage will continue to be
available on reasonable terms or will be available in sufficient amounts
to cover one or more large claims, or that the insurer will not disclaim
coverage as to any future claim. The successful assertion of one or more
large claims against the company that exceed available insurance coverage
or changes in the company's insurance policies, including premium
increases or the imposition of large deductible or co-insurance
requirements, could adversely affect the company's results of operations
and financial condition.
2.10.17 Risks associated with possible acquisitions
The company intends to evaluate potential acquisitions on an ongoing
basis. As of the date of this Quarterly Report, however, the company has
no understanding, commitment or agreement with respect to any material
future acquisition. Since the company has not made any acquisitions in the
past, there can be no assurance that the company will be able to identify
suitable acquisition candidates available for sale at reasonable prices,
consummate any acquisition, or successfully integrate any acquired
business into the company's operations. Further, acquisitions may involve
a number of special risks, including diversion of management's attention,
failure to retain key acquired personnel and clients, unanticipated events
or circumstances, legal liabilities and amortization of acquired
intangible assets, some or all of which could have a material adverse
effect on the company's results of operations and financial condition.
Under Indian law, except in certain limited circumstances, the company may
not make any acquisition of, or investment in, a non-Indian company
without RBI and, in most cases, Government of India approval. Even if the
company does encounter an attractive acquisition candidate, there can be
no assurance that RBI and, if required, Government of India approval can
be obtained.
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 nine months
ended December 31, 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 4.1%, 2.5% and 2.6% of its total revenue from the sale
of software products in the three months ended December 31, 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.
28
2.10.21 Restrictions on exercise of preemptive rights by ADS holders
Under the Indian Companies Act, 1956 ("Indian Companies Act"), a company
incorporated in India must offer its holders of equity shares preemptive
rights to subscribe and pay for a proportionate number of shares to
maintain their existing ownership percentages prior to the issuance of any
new equity shares, unless such preemptive rights have been waived by
three-fourths of the company's shareholders. U.S. holders of ADSs may be
unable to exercise preemptive rights for equity shares underlying ADSs
unless a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), is effective with respect to such rights
or an exemption from the registration requirements of the Securities Act
is available. The company's decision to file a registration statement will
depend on the costs and potential liabilities associated with any such
registration statement as well as the perceived benefits of enabling the
holders of ADSs to exercise their preemptive rights and any other factors
the company considers appropriate at the time. No assurance can be given
that the company would file a registration statement under these
circumstances. If the company issues any such securities in the future,
such securities may be issued to the Depositary, which may sell such
securities for the benefit of the holders of the ADSs. There can be no
assurance as to the value, if any, the Depositary would receive upon the
sale of such securities. To the extent that holders of ADSs are unable to
exercise preemptive rights granted in respect of the equity shares
represented by their ADSs, their proportional interests in the company
would be reduced.
2.10.22 Intellectual property rights
The company relies upon a combination of non-disclosure and other
contractual arrangements and copyright, trade secrets and trademark laws
to protect its proprietary rights. Ownership of software and associated
deliverables created for clients is generally retained by or assigned to
the client, and the company does not retain an interest in such software
and deliverables. The company also develops foundation and application
software products, or software "tools", which are licensed to clients and
remain the property of the company. The company has obtained registration
of INFOSYS as a trademark in India and the United States, and does not
have any patents or registered copyrights in the United States. The
company currently requires its IT professionals to enter into
non-disclosure and assignment of rights agreements to limit use of, access
to, and distribution of its proprietary information. There can be no
assurance that the steps taken by the company in this regard will be
adequate to 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.
29
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
On October 24, 2001, the Board of Directors of the company appointed Mr.
Claude Smadja, Principal Adviser of the World Economic Forum and
President of Smadja & Associates Strategy Advisory, to the Board of
Directors as an Additional Director pursuant to Section 260 of the
Companies Act, 1956. Mr. Smadja's appointment took effect from October
25, 2001. He will hold office until the date of the company's next
Annual General Meeting, when his appointment as a non-executive director
will be submitted to the company's shareholders for approval. Mr. Smadja
was appointed as an Additional Director to fill the vacancy caused by
the resignation of Mr. Ramesh Vangal. Mr. Smadja is President of Smadja
& Associates and also holds the position of Strategic Advisory and
Principal Adviser of the World Economic Forum. From January 1996 to
April 2001, Claude Smadja was the Managing Director of the World
Economic Forum. From 1993 to 1996, Mr. Smadja had been Director for the
News and Current Affairs Department of the Swiss Broadcasting
Corporation in Geneva, and a Senior Adviser to the World Economic Forum.
From mid 1987 to January 1993 he was a Director and Member of the
Executive Board of the World Economic Forum. During his tenure at the
World Economic Forum he created and headed World Link, the Magazine of
the World Economic Forum, and the Forum's first Regional Economic Summit
- The East Asia Economic Summit.
Mr. Smadja is a regular contributor to international publications on
major issues concerning the global economic agenda and the trends
shaping the macroeconomic and political environment. He is also on the
board of other international corporations and is the Chairman of the
International Board of Overseers of the Illinois Institute of
Technology.
The Board of Directors appointed Mr. Nandan M. Nilekani as the Chief
Executive Officer, President and Managing Director, and Mr. S.
Gopalakrishnan as the Chief Operating Officer and Deputy Managing
Director, effective March 31, 2002. Mr. N. R. Narayana Murthy continues
to be the Chairman of the company and his new designation will be
Chairman and Chief Mentor, effective March 31, 2002.
Item 6. Exhibits and Reports
Infosys filed no reports on Form 8-K during the quarter ended December
31, 2001.
EXHIBIT INDEX
------------------------------------------------------------------------
Exhibit Number Description of Document
------------------------------------------------------------------------
19.1 Infosys Quarterly report to the shareholders for the quarter ended
December 31, 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: January 24, 2002 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
30
EXHIBIT INDEX
------------------------------------------------------------------------
Exhibit
Number Description of Document
------------------------------------------------------------------------
19.1 Infosys Quarterly report to the shareholders for the
quarter ended December 31, 2001.