United States Securities and Exchange Commission
Washington, DC 20549
FORM 6-K
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934
For the quarter ended June 30, 2002
Commission File Number 333-72195
INFOSYS TECHNOLOGIES LIMITED
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
Bangalore, Karnataka, India
(Jurisdiction of incorporation or organization)
Electronics City, Hosur Road, Bangalore, Karnataka, India
561 229. +91-80-852-0261
(Address of principal executive offices)
Indicate by check mark registrant files or will file
annual reports under cover Form 20-F or Form 40-F
Form 20-F x Form 40-F
---- -----
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g 3-2(b) under the Securities Exchange Act of
1934.
Yes No x
---- ----
If "Yes" is marked, indicate below the file number assigned to registrant in
connection with Rule 12g 3-2(b).
Not applicable.
Currency of Presentation and Certain Defined Terms
In this Quarterly Report, references to "$" or "dollars" or "U.S. dollars" are
to the legal currency of the United States and references to "Rs." or "rupees"
or "Indian rupees" are to the legal currency of India. Our 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. References to a particular "fiscal" year are to our fiscal year
ended March 31 of such year.
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. "Infosys" is a registered trademark of Infosys Technologies Limited in
the United States and India. All other trademarks or tradenames used in this
Quarterly Report are the property of their respective owners.
Except as otherwise stated in this report, all translations from Indian rupees
to U.S. dollars are based on the noon buying rate in the City of New York on
June 28, 2002, for cable transfers in Indian rupees as certified for customs
purposes by the Federal Reserve Bank of New York which was Rs. 48.91 per $1.00.
No representation is made that the Indian rupee amounts have been, could have
been or could be converted into United States dollars at such a rate or any
other rate. Any discrepancies in any table between totals and sums of the
amounts listed are due to rounding.
Information contained in our website, www.infosys.com, is not part of this
Quarterly Report.
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.
2
Part I - Financial information
Item 1. Financial statements
Consolidated Balance Sheets as of
June 30, 2002 June 30, 2001 March 31, 2002
(Unaudited) (Unaudited) (Audited)
ASSETS
Current Assets
Cash and cash equivalents $ 235,466,369 $ 134,180,176 $ 210,485,940
Trade accounts receivable, net of allowances 84,735,380 65,784,363 69,017,110
Deferred tax assets 541,814 1,403,963 774,107
Prepaid expenses and other current assets 28,175,421 17,193,033 18,875,904
------------- ------------- -------------
Total current assets 348,918,984 218,561,535 299,153,061
Property, plant and equipment, net 147,216,819 132,769,999 147,211,731
Intangible assets, net 7,705,557 -- --
Deferred tax assets 4,932,021 2,156,411 4,560,934
Investments 7,831,771 7,777,393 7,777,393
Advance income taxes -- 2,176,693 --
Other assets 13,613,762 8,942,540 12,458,615
------------- ------------- -------------
TOTAL ASSETS $ 530,218,914 $ 372,384,571 $ 471,161,734
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 56,260 $ 4,814 --
Client deposits 1,595,670 754,332 $ 2,215,001
Other accrued liabilities 30,662,705 25,990,088 22,424,646
Income taxes payable 4,153,534 -- 678,703
Unearned revenue 9,244,091 7,722,149 3,464,018
------------- ------------- -------------
Total current liabilities 45,712,260 34,471,383 28,782,368
------------- ------------- -------------
Non-current liabilities 5,033,140 -- --
Preferred stock of subsidiary
0.0005% Cumulative Convertible Preference Shares, par value $2 each,
4,375,000 preference shares
Authorized, issued and outstanding - 4,375,000 preference shares
as of June 30, 2002 10,000,000 -- --
Stockholders' Equity
Common stock, $ 0.16 par value; 100,000,000 equity shares
authorized, issued and outstanding - 66,188,530, 66,160,717 and
66,186,130 as of June 30, 2002 and 2001 and March 31, 2002, respectively 8,597,246 8,594,383 8,597,001
Additional paid-in capital 123,202,029 122,105,641 123,079,948
Accumulated other comprehensive income (45,600,685) (31,496,548) (45,441,148)
Deferred stock compensation (6,376,652) (11,257,263) (7,620,600)
Retained earnings 389,651,576 249,966,975 363,764,165
------------- ------------- -------------
Total stockholders' equity $ 469,473,514 $ 337,913,188 $ 442,379,366
------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 530,218,914 $ 372,384,571 $ 471,161,734
============= ============= =============
See accompanying notes to the unaudited financial statements
Consolidated Statements of Income
Quarter ended Quarter ended Year ended
June 30, 2002 June 30, 2001 March 31, 2002
(Unaudited) (Unaudited) (Audited)
Revenues $156,314,869 $130,532,758 $545,051,214
Cost of revenues 85,274,775 68,414,968 290,032,232
------------ ------------ ------------
Gross profit 71,040,094 62,117,790 255,018,982
------------ ------------ ------------
Operating Expenses:
Selling and marketing expenses 11,297,734 5,892,341 27,113,122
General and administrative expenses 11,859,128 12,527,878 44,348,181
Amortization of stock compensation expense 1,243,948 1,259,755 5,009,772
Amortization of intangible assets 204,121 -- --
------------ ------------ ------------
Total operating expenses 24,604,931 19,679,974 76,471,075
------------ ------------ ------------
Operating income 46,435,163 42,437,816 178,547,907
Other income, net 5,096,520 2,876,099 13,865,294
------------ ------------ ------------
Income before income taxes 51,531,683 45,313,915 192,413,201
Provision for income taxes 8,687,383 6,072,556 27,946,892
------------ ------------ ------------
Net income $ 42,844,300 $ 39,241,359 $164,466,309
============ ============ ============
Earnings per equity share - Basic $ 0.65 $ 0.60 $ 2.51
Diluted $ 0.64 $ 0.60 $ 2.49
Weighted equity shares used in
computing earnings per equity share - Basic 65,566,930 65,568,850 65,556,648
Diluted 66,374,341 65,809,429 66,084,874
See accompanying notes to the unaudited financial statements
3
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Accumulated
other
Common stock Additional Comprehensive comprehensive
Shares Par value paid-in capital income income
---------- ------------- --------------- ------------- -------------
Balance as of March 31, 2001 66,158,117 $ 8,594,106 $ 122,017,518 $ (28,664,972)
Cash dividends declared -- -- -- --
Common stock issued 2,600 277 88,123 --
Amortization of compensation
related to stock option grants -- -- --
Deferred stock compensation related to
stock option grants -- -- -- -- --
Comprehensive income
Net income -- -- -- 39,241,359 --
Other comprehensive income
Translation adjustment (2,831,576) (2,831,576)
Comprehensive income 36,409,783
---------- ------------- ------------- ------------- -------------
Balance as of June 30, 2001 66,160,717 $ 8,594,383 $ 122,105,641 $ (31,496,548)
---------- ------------- ------------- ------------- -------------
Cash dividends declared -- -- -- --
Common stock issued 25,413 2,618 860,953 --
Amortization of compensation related to
stock option grants -- -- -- --
Deferred stock compensation related to
stock option grants 113,354
Comprehensive income
Net income -- -- -- 125,224,950 --
Other comprehensive income
Translation adjustment -- -- -- (13,944,600) (13,944,600)
Comprehensive income 111,280,350
---------- ------------- ------------- ------------- -------------
Balance as of March 31, 2002 66,186,130 $ 8,597,001 $ 123,079,948 $ (45,441,148)
---------- ------------- ------------- ------------- -------------
Common stock issued 2,400 245 81,238 --
Cash dividends declared -- -- -- --
Deferred stock compensation related to
stock option grants -- -- -- --
Amortization of compensation related to
stock option grants -- -- -- --
Income tax benefit arising on
exercise of stock options -- -- 40,843 --
Comprehensive income -- -- -- 42,844,300 --
Net income -- -- -- --
Other comprehensive income
Translation adjustment -- -- -- (159,537) (159,537)
Comprehensive income -- -- -- 42,684,763 --
---------- ------------- ------------- ------------- -------------
Balance as of June 30, 2002 66,188,530 $ 8,597,246 $ 123,202,029 $ (45,600,685)
========== ============= ============= ============= =============
Deferred Total
stock Retained stockholders'
compensation earnings equity
------------- ------------- -------------
Balance as of March 31, 2001 $ (12,517,018) $ 222,362,067 $ 311,791,701
Cash dividends declared -- (11,636,451) (11,636,451)
Common stock issued -- -- 88,400
Amortization of compensation
related to stock option grants 1,259,755 -- 1,259,755
Deferred stock compensation related to
stock option grants -- -- --
Comprehensive income
Net income -- 39,241,359 39,241,359
Other comprehensive income
Translation adjustment (2,831,576)
Comprehensive income
------------- ------------- -------------
Balance as of June 30, 2001 $ (11,257,263) $ 249,966,975 $ 337,913,188
------------- ------------- -------------
Cash dividends declared -- (11,427,760) (11,427,760)
Common stock issued -- -- 863,571
Amortization of compensation related to
stock option grants 3,750,017 -- 3,750,017
Deferred stock compensation related to
stock option grants (113,354)
Comprehensive income
Net income -- 125,224,950 125,224,950
Other comprehensive income
Translation adjustment -- -- (13,944,600)
Comprehensive income
------------- ------------- -------------
Balance as of March 31, 2002 $ (7,620,600) $ 363,764,165 $ 442,379,366
------------- ------------- -------------
Common stock issued -- -- 81,483
Cash dividends declared -- (16,956,889) (16,956,889)
Deferred stock compensation related to
stock option grants -- -- --
Amortization of compensation related to
stock option grants 1,243,948 -- 1,243,948
Income tax benefit arising on
exercise of stock options -- -- 40,843
Comprehensive income -- 42,844,300 42,844,300
Net income -- -- --
Other comprehensive income
Translation adjustment -- -- (159,537)
Comprehensive income -- -- --
------------- ------------- -------------
Balance as of June 30, 2002 $ (6,376,652) $ 389,651,576 $ 469,473,514
============= ============= =============
See accompanying notes to the unaudited financial statements
4
Consolidated Statements of Cash Flows
Quarter ended Year ended
June 30, 2002 June 30, 2001 March 31, 2002
(Unaudited) (Unaudited) (Audited)
OPERATING ACTIVITIES:
Net income $ 42,844,300 $ 39,241,359 $ 164,466,309
Adjustments to reconcile net income to net cash
provided by operating activities
(Gain)/loss on sale of property, plant and equipment (3,380) (6,323) (16,754)
Depreciation 8,073,148 7,560,175 33,608,391
Amortization 204,121 -- --
Deferred tax benefit (138,794) (224,804) (1,999,471)
Amortization of deferred stock compensation expense 1,243,948 1,259,755 5,009,772
Changes in assets and liabilities
Trade accounts receivable (15,915,743) (842,301) (7,196,700)
Prepaid expenses and other current assets (8,487,580) 289,163 (2,052,721)
Income taxes 3,476,773 (1,996,580) 869,109
Accounts payable 56,260 (23,268) (27,382)
Client deposits (612,993) (463,405) 1,075,855
Unearned revenue 5,789,984 242,334 (3,753,943)
Other accrued liabilities 7,085,996 3,853,773 1,492,616
------------- ------------- -------------
Net cash provided by operating activities 43,616,040 48,889,878 191,475,081
------------- ------------- -------------
INVESTING ACTIVITIES:
Expenditure on property, plant and equipment (7,721,009) (20,564,403) (68,347,644)
Expenditure on intangible asset (2,876,526) -- --
Proceeds from sale of property, plant and equipment 28,065 13,582 335,079
Loans to employees (2,561,614) (1,969,330) (5,547,203)
Purchase of investments (54,378) (2,200,000) (2,200,000)
------------- ------------- -------------
Net cash used in investing activities (13,185,462) (24,720,151) (75,759,768)
------------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 81,483 88,400 963,351
Proceeds from issuance of preferred stock by subsidiary 10,000,000 -- --
Payment of dividends (15,511,483) (11,330,620) (22,902,618)
------------- ------------- -------------
Net cash used in financing activities (5,430,000) (11,242,220) (21,939,267)
------------- ------------- -------------
Effect of exchange rate changes on cash (20,149) (2,831,576) (7,374,351)
Net increase in cash and cash equivalents during the period 24,980,429 10,095,931 86,401,695
Cash and cash equivalents at the beginning of the period 210,485,940 124,084,245 124,084,245
------------- ------------- -------------
Cash and cash equivalents at the end of the period $ 235,466,369 $ 134,180,176 $ 210,485,940
============= ============= =============
Supplementary information:
Cash paid towards taxes $ 5,351,346 $ 8,293,940 $ 27,493,194
Non cash transaction $ 5,033,140 -- --
------------- ------------- -------------
See accompanying notes to the unaudited financial statements
5
Notes to unaudited financial statements as of and for the three months ended
June 30, 2002
1. Company overview and significant accounting policies
1.1 Company overview
Infosys Technologies Limited ("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. On April 3, 2002,
Infosys incorporated a subsidiary, Progeon Limited ("Progeon"), to provide
business process management and transition services to organizations that
outsource their business processes. Infosys and Progeon (together, the
"company") work closely together to provide a complete service to the
client, by addressing the client's technology as well as process
outsourcing needs.
1.2 Basis of preparation of financial statements
The accompanying consolidated financial statements are prepared in
accordance with U.S. Generally Accepted Accounting Principles ("GAAP").
Intercompany balances and transactions are eliminated on consolidation.
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, provisions for post sales
customer support and the useful lives of property, plant and equipment and
intangible assets. Actual results could differ from those estimates.
1.4 Revenue recognition
The company derives revenues primarily from software services, licensing
of software products and from business process management and
transitioning services. Revenue on time-and-material contracts is
recognized as the related services are performed. Revenue from
fixed-price, fixed-time frame contracts is recognized 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 such support services are accrued at the
time related revenues are recorded.
In accordance with Statement of Position 97-2, Software Revenue
Recognition, license fee revenues are recognized when persuasive evidence
of an arrangement exists, delivery has occurred, the license fee is fixed
and determinable, and the collection of the fee is probable. When other
services are provided in conjunction with the licensing arrangement, the
revenue from such contracts are allocated to each component of the
contract using the residual method, whereby revenue is deferred for the
undelivered services and the residual amounts are recognized as revenue
for delivered elements. 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.
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 Intangible assets
Intangible assets are amortized over their respective individual estimated
useful lives on a straight-line basis, commencing from the date the asset
is available to the company for its use. Management estimates the useful
lives of acquired rights in software applications to range between two
through five years.
1.8 Impairment of long-lived assets
The company evaluates the recoverability of its long-lived assets and
certain identifiable intangibles, if any, whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future undiscounted net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by
which the carrying value of the assets exceeds the fair value of the
assets. Assets to be disposed are reported at the lower of the carrying
value or the fair value less the cost to sell.
1.9 Research and development
Research and development costs are expensed as incurred. Software product
development costs are expensed as incurred until technological feasibility
is achieved.
1.10 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.
6
1.11 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.
1.12 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.
1.13 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.
1.14 Concentration of risk
Financial instruments that potentially subject the company to
concentrations of credit risk consist principally of cash equivalents,
trade accounts receivable, investment securities and hedging instruments.
By their nature, all such financial instruments involve risk including the
credit risk of non-performance by counterparties. In management's opinion,
as of June 30, 2002, June 30, 2001 and March 31, 2002, 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, if any. 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.
1.15 Retirement benefits to employees
1.15.1 Gratuity
In accordance with the Payment of Gratuity Act, 1972, Infosys provides for
gratuity, a defined benefit retirement plan (the "Gratuity Plan") covering
eligible employees. The Gratuity Plan provides a lump sum payment to
vested employees at retirement, death, incapacitation or termination of
employment, of an amount based on the respective employee's salary and the
tenure of employment. Liabilities with regard to the Gratuity Plan are
determined by actuarial valuation, based upon which, Infosys 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.
1.15.2 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.
Infosys has no further obligations to the Plan beyond its monthly
contributions.
1.15.3 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. There are no further obligations under the
provident fund plan beyond its monthly contributions. In respect of
Progeon, eligible employees 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. Amounts collected under the
provident fund plan are deposited in a Government administered provident
fund. The company has no further obligations under the provident fund plan
beyond its monthly contributions.
1.16 Investments
The company accounts by the equity method for investments between 20% and
50% or where it is otherwise able to exercise significant influence over
the operating and financial policies of the investee. 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.
1.17 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.
1.18 Dividends
Dividend on common stock and the related dividend tax are recorded as a
liability on declaration.
1.19 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 fiscal years ending 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
7
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 designated hedge, or is so designated but is
ineffective per SFAS 133, is marked to market and recognized in earnings
immediately.
1.20 Reclassifications
Certain reclassifications have been made to conform prior period data to
the current presentations. These reclassifications had no effect on
reported earnings.
2 Notes to the unaudited financial statements
2.1 Cash and cash equivalents
The cost and fair values for cash and cash equivalents as of June 30, 2002
and 2001 and March 31, 2002, respectively are as follows:
As of June 30, As of March 31,
2002 2001 2002
------------ ------------ ---------------
Cost and fair values $182,834,347 $ 94,975,383 $158,274,886
Cash and bank deposits 52,632,022 39,204,793 52,211,054
------------ ------------ ------------
Deposits with corporations $235,466,369 $134,180,176 $210,485,940
============ ============ ============
Cash and cash equivalents include restricted cash balances in the amount
$ 2,675,245, $ 409,249 and $ 284,839 as of June 30, 2002, 2001 and March
31, 2002 respectively.
2.2 Trade accounts receivable
Trade accounts receivable, as of June 30, 2002 and 2001 and March 31,
2002, net of allowance for doubtful accounts of $ 3,154,805, $ 4,913,007
and $ 3,941,245, respectively amounted to $ 84,735,380, $ 65,784,363 and
$ 69,017,110, respectively. The age profile of trade accounts receivable,
net of allowances is given below.
in %
----------------------------------
As of June 30, As of March 31,
2002 2001 2002
----- ----- ---------------
Period (in days)
0 - 30 78.6 81.0 69.0
31 - 60 14.5 12.2 30.0
61 - 90 4.9 5.5 0.5
More than 90 2.0 1.3 0.5
----- ----- -----
100.0 100.0 100.0
===== ===== =====
2.3 Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following:
As of June 30, As of March 31,
2002 2001 2002
----------- ----------- ---------------
Rent deposits $ 2,270,608 $ 2,373,808 $ 2,079,155
Deposits with government organizations 1,835,502 1,101,523 1,220,401
Loans to employees 9,728,605 9,121,199 8,331,779
Prepaid expenses 4,325,836 3,628,511 2,990,523
Unbilled revenues 9,584,401 553,647 3,635,989
Other current assets 430,469 414,345 618,057
----------- ----------- -----------
$28,175,421 $17,193,033 $18,875,904
=========== =========== ===========
Other current assets represent advance payments to vendors for the supply
of goods and rendering of services and certain costs incurred towards
software. Deposits with government organizations relate principally to
leased telephone lines and electricity supplies.
2.4 Property, plant and equipment - net
Property, plant and equipment consist of the following:
As of June 30, As of March 31,
2002 2001 2002
------------- ------------- ---------------
Land $ 9,049,277 $ 7,793,377 $ 8,955,962
Buildings 68,611,048 40,178,369 58,481,413
Furniture and fixtures 36,129,333 26,622,814 32,683,315
Computer equipment 61,952,097 54,466,431 59,006,470
Plant and equipment 41,377,494 28,077,279 37,685,337
Vehicles 72,040 74,846 72,085
Capital work-in-progress 18,258,240 34,903,498 30,881,704
235,449,529 192,116,614 227,766,286
Accumulated depreciation (88,232,710) (59,346,615) (80,554,555)
------------- ------------- -------------
$ 147,216,819 $ 132,769,999 $ 147,211,731
============= ============= =============
Depreciation expense amounted to $ 8,073,148, $ 7,560,175 and $ 33,608,391
for the quarter ended June 30, 2002, and 2001 and fiscal 2002
respectively. The amount of third party software expensed during the
quarter ended June 30, 2002, and 2001 and fiscal 2002 was $ 3,216,055,
$ 1,704,551 and $ 7,147,614 respectively.
2.5 Intangible assets
During the quarter ended June 30, 2002, the company acquired the
intellectual property rights of Trade IQ product from IQ Financial Systems
Inc., USA for its banking business unit. The consideration paid amounted
to US$ 2.9 million. An additional US$ 1 million is retained in escrow for
payment to the seller based on the successful renewal of certain customer
contracts in favor of the company. The consideration has been recorded as
an intangible asset, which is being amortized over two years representing
management's estimate of the useful life of the intellectual property.
8
The company also entered into an agreement with the Aeronautical
Development Agency, India ("ADA") for transferring the intellectual
property rights in AUTOLAY, a commercial software application product used
in the design of high performance structural systems. The company will pay
the consideration in the form of a revenue share with a firm commitment of
US$ 5 million payable within 10 years of the contract date. The ownership
of intellectual property in AUTOLAY transfers to the company on remittance
of the consideration to ADA. The committed consideration is recorded as an
intangible asset and is being amortized over five years, which is
management's estimate of the useful life. The amount payable to ADA is
disclosed as a non-current liability as of June 30, 2002 and as a non-cash
transaction in the consolidated statement of cash flows.
As of June 30, 2002, intangible assets (net of accumulated amortization of
$ 204,121) were $ 7,705,557.
2.6 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 June 30, 2002
M-Commerce Ventures Pte Ltd - 80 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 $ 453,863 $ 453,863
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., U.S.A. - 880,000 Series B Preferred Stock at $ 2.5 each,
fully paid, par value $ 0.0005 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
Stratify Inc. (formerly 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
---------- ----------
$7,831,771 $7,831,771
========== ==========
As of June 30, 2001
M-Commerce Ventures Pte Ltd - 70 units, each unit representing 1 Ordinary
Share of S$ 1 each at par and 9 Redeemable Preference Shares of S$1
each at par, with a premium of S$1,110 per Redeemable Preference Share $ 399,485 $ 399,485
Asia Net Media BVI Limited - 30,000,000 Ordinary Shares at $ 0.05 each,
fully paid, par value $0.01 each 1,500,000 1,500,000
EC Cubed Inc. - 1,300,108 Series D Convertible Preferred Stock, at $ 2.3075 each,
fully paid, par value $0.0001 each -- --
Alpha Thinx Mobile Services AG - 27,790 Bearer Shares, at 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., U.S.A. - 880,000 Series B Preferred Stock at $2.5 each,
fully paid, par value $0.0005 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
Stratify Inc. (formerly 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 $7,777,393
========== ==========
As of March 31, 2002
M-Commerce Ventures Pte Ltd - 70 units, each unit representing 1 Ordinary
Share of S$ 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., U.S.A. - 440,000 Series B Preferred Stock at $5 each,
fully paid, par value $0.001 each 2,200,000 2,200,000
JASDIC Park Company - 480 Common Stock, at (Y)50,000 each,
fully paid, par value (Y)50,000 each 177,576 177,576
Stratify Inc. (formerly 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
========== ==========
9
2.7 Other assets
Other assets represent the non-current portion of loans to employees.
2.8 Related parties
The company grants loans to employees for acquiring assets such as
property and cars. Such loans are repayable over fixed periods ranging
from 1 to 100 months. The annual rates of interest at which the loans have
been made to employees vary between 0% through 4%. No loans have been made
to employees in connection with equity issues. The loans are generally
secured by the assets acquired by the employees. As of June 30, 2002 and
June 30, 2001 and March 31, 2002, amounts receivable from officers
amounting to $ 436,562 and $ 68,489 and $ 473,464, respectively are
included in prepaid expenses and other current assets, and other assets in
the accompanying balance sheets.
The required repayments of loans by employees are as detailed below.
As of June 30,
------------------------- As of March 31,
2002 2001 2002
----------- ----------- ---------------
2002 -- $ 9,121,199 --
2003 $ 9,728,605 2,890,179 $ 8,331,779
2004 3,944,178 2,022,717 3,755,840
2005 2,857,804 1,168,246 2,670,075
2006 2,043,428 866,308 1,826,748
2007 1,616,076 -- 1,454,086
Thereafter 3,152,276 1,995,089 2,751,866
----------- ----------- -----------
Total $23,342,367 $18,063,738 $20,790,394
=========== =========== ===========
The estimated fair values of related party receivables amounted to
$ 20,439,737 and $ 14,060,565 and $ 17,905,507 as of June 30, 2002 and
2001 and March 31, 2002. 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.
2.9 Other accrued liabilities
Other accrued liabilities comprise the following:
As of June 30,
------------------------- As of March 31,
2002 2001 2002
----------- ----------- ---------------
Accrued compensation to staff $15,044,071 $14,754,588 $11,575,996
Accrued dividends 1,675,245 409,249 229,839
Provision for post sales client support 2,657,571 1,585,115 2,255,573
Employee withholding taxes payable 3,153,565 1,741,260 2,614,479
Provision for expenses 5,279,651 3,683,875 3,356,760
Retention money 1,887,592 3,354,010 1,918,203
Others 965,010 461,991 473,796
----------- ----------- -----------
$30,662,705 $25,990,088 $22,424,646
=========== =========== ===========
2.10 Employee post-retirement benefits
2.10.1 Superannuation
The company contributed $ 285,013, $ 303,363 and $ 1,220,716 to the
superannuation plan in the quarter ended June 30, 2002, 2001 and fiscal
2002, respectively.
2.10.2 Provident fund
The company contributed $ 813,826, $ 755,849 and $ 3,146,742 to the
provident fund in the quarter ended June 30, 2002, 2001 and fiscal 2002,
respectively.
2.11 Stockholders' equity
Infosys 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 equity shares are retroactively
restated to reflect stock splits made. The rights of equity shareholders
are set out below.
2.12 Equity shares
2.12.1 Voting
Each holder of equity shares is entitled to one vote per share. The equity
shares represented by American Depositary Shares ("ADS") carry similar
rights to voting and dividends as the other equity shares. Two ADSs
represent one underlying equity share.
2.12.2 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.
2.12.3 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.
2.12.4 Stock options
There are no voting, dividend or liquidation rights to the holders of
warrants issued under the company's stock option plan.
2.13 Preference shares of subsidiary
During the quarter ended June 30, 2002, Progeon issued 4,375,000 0.0005%
cumulative convertible preference shares of par value $ 2.0 per share to
Citicorp International Finance Corporation ("CIFC") at an issue price of
$ 2.28 (equivalent to Rs. 112) per share, in exchange for an aggregate
consideration
10
of $ 10,000,000. Unless earlier converted pursuant to an agreement in this
behalf between the company and CIFC, these cumulative convertible
preference shares shall automatically be converted into equity shares, (i)
one year prior to the Initial Public Offering ("IPO") date or (ii) June
30, 2005 or (iii) at the holder's option, immediately upon the occurrence
of any Liquidity Event; whichever is earlier. The term "Liquidity Event"
includes any decision of the Board of Directors of the company to make an
IPO, merger, reconstruction, capital reorganization or other event which,
in the sole opinion of the holder of the convertible preference shares,
amounts to an alteration in the capital structure of the company. Each
preference share is convertible into one equity share, par value $ 0.20
each.
Each holder of these cumulative convertible preference shares is entitled
to receive notice of, and to attend, any shareholders' meeting and shall
be entitled to vote together with holders of equity shares on any matters
that affect their rights as preference shareholders including any
resolution for winding up the company or for the repayment or reduction of
the company's share capital.
In the event of any liquidation, dissolution or winding up of the company,
either voluntary or involuntary, each holder of the preference shares will
be paid a dollar equivalent of Rs. 112 per preference share, as adjusted
for stock dividends, combinations, splits, recapitalization and the like,
in preference to any distribution of any assets of the company to the
holders of equity shares.
Upon the completion of the distribution described above, the remaining
assets and funds of the company available for distribution to shareholders
shall be distributed among all holders of preference shares and equity
shares based on the number of equity shares held by each of them (assuming
a full conversion of all the preference shares).
2.14 Other income, net
Other income, net, consists of the following:
Quarter ended Year ended
June 30, March 31,
2002 2001 2002
----------- ----------- -----------
Interest income $ 3,620,516 $ 2,514,370 $10,423,654
Exchange gains 1,328,421 144,359 2,749,162
Others 147,583 217,370 692,478
----------- ----------- -----------
$ 5,096,520 $ 2,876,099 $13,865,294
=========== =========== ===========
2.15 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
quarter ended June 30, 2002 and 2001 and fiscal 2002 were $ 1,254,732,
$ 1,387,575 and $ 5,109,690, respectively. The operating leases can be
renewed or canceled at the company's option.
The company leases some of its office space under non-cancelable operating
leases for periods ranging between three through ten years. The schedule
of future minimum rental payments in respect of these leases is set out
below.
Year ending June 30,
--------------------
2003 $ 3,489,514
2004 3,522,311
2005 2,924,282
2006 1,934,032
2007 478,597
Thereafter 1,356,022
-----------
$13,704,758
===========
2.16 Research and development
General and administrative expenses in the accompanying statements of
income include research and development expenses of $ 705,122 $ 801,842
and $ 3,083,994 for the quarter ended June 30, 2002, 2001 and fiscal 2002,
respectively.
2.17 Employees' Stock Offer Plans ("ESOP")
In September 1994, the company established the 1994 plan, which provided
for the issue of 6,000,000 warrants, as adjusted, to eligible employees.
The warrants were issued to an employee welfare trust (the "Trust"). 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. As and when the Trust issued options/stock to eligible employees,
the difference between the market price and the exercise price was
accounted as deferred stock compensation expense and amortized over the
vesting period. Such amortized deferred compensation expense was
$ 1,243,948, $ 1,259,755 and $ 5,009,772 for the quarter ended June 30,
2002, 2001 and fiscal 2002, respectively. The 1994 plan lapsed in fiscal
2000, and consequently no further shares will be issued to employees 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 ADSs 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. All options under the 1999 Plan are exercised for equity shares.
The options under all of the above plans vest over a period of one through
five years.
11
2.17 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 quarters ended June 30, 2002 and 2001
and fiscal 2002 are set out below.
Quarter ended Quarter ended Year ended
June 30, 2002 June 30, 2001 March 31, 2002
--------------------- --------------------- ---------------------
Shares Weighted Shares Weighted Shares Weighted
arising average arising average arising exercise
out of exercise out of exercise out of average
options price options price options price
--------- -------- --------- -------- --------- --------
1994 Option plan:
Outstanding at the
beginning of the period 321,400 330,000 330,000 --
Granted -- -- -- --
Forfeited (2,200) $ 1.15 (5,400) $ 1.15 (8,600) $ 1.15
Exercised -- -- -- -- --
--------- -------- --------- ------- --------- -------
Outstanding at the end of the period 319,200 -- 324,600 -- 321,400 --
--------- -------- --------- ------- --------- -------
Exercisable at the end of the period -- -- --
Weighted-average fair value of grants
during the period at less than market -- -- --
1998 Option plan:
Outstanding at the
beginning of the period 1,131,247 782,753 782,753
Granted 68,250 $ 119.32 48,900 $143.74 454,250 $ 98.06
Forfeited (8,333) $ 121.90 (15,810) $338.50 (77,773) $240.90
Exercised (2,400) $ 34.00 (2,600) $ 34.00 (27,983) $ 44.32
--------- -------- --------- ------- --------- -------
Outstanding at the end of the period 1,188,764 813,243 1,131,247 --
--------- -------- --------- ------- --------- -------
Exercisable at the end of the period 202,893 57,953 164,527 --
Weighted-average fair value of grants
during the period $ 119.32 $143.74 $ 98.06
1999 Option plan:
Outstanding at the
beginning of the period 4,668,815 2,793,980 2,793,980 --
Granted 66,700 $ 66.55 415,250 $ 82.91 2,050,50 $ 64.74
Forfeited (39,742) $ 100.72 (41,860) $132.08 (175,635) $119.23
Exercised -- -- -- -- (30) $ 84.95
--------- -------- --------- ------- --------- -------
Outstanding at the end of the period 4,695,773 3,167,370 4,668,815 --
--------- -------- --------- ------- --------- -------
Exercisable at the end of the period 594,507 148,030 448,530 --
Weighted-average fair value of grants
during the period $ 66.55 $ 82.91 $ 64.74
--------- -------- --------- ------- --------- -------
2.18 Income taxes
The provision for income taxes comprises:
Quarter ended June 30, Year ended March 31,
---------------------------- --------------------
2002 2001 2002
------------ ------------ --------------------
Current taxes
Domestic taxes $ 3,326,192 $ 1,330,649 $ 6,483,255
Foreign taxes 5,499,985 4,966,711 23,463,108
------------ ------------ ------------
8,826,177 6,297,360 29,946,363
------------ ------------ ------------
Deferred taxes
Domestic taxes (10,014) (224,804) 27,126
Foreign taxes (128,780) -- (2,026,597)
------------ ------------ ------------
(138,794) (224,804) (1,999,471)
------------ ------------ ------------
Aggregate taxes $ 8,687,383 $ 6,072,556 $ 27,946,892
============ ============ ============
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:
Quarter ended June 30, Year ended March 31,
-------------------------- --------------------
2002 2001 2002
----------- ----------- --------------------
Deferred tax assets:
Property, plant and equipment $ 3,350,421 $ 1,649,779 $ 2,989,348
Provision for doubtful debts 1,156,863 1,753,944 1,448,407
Investments 1,581,600 1,468,878 1,571,586
Others -- 200,150 --
----------- ----------- -----------
6,088,884 5,072,751 6,009,341
Less: Valuation allowance (615,049) (1,512,377) (674,300)
----------- ----------- -----------
Net deferred tax assets $ 5,473,835 $ 3,560,374 $ 5,335,041
=========== =========== ===========
12
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which the temporary differences become
deductible. Management considers the scheduled reversal of the projected
future taxable income, and tax planning strategies in making this
assessment. Based on the level of historical taxable income and
projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes that it is more
likely than not the company will realize the benefits of those deductible
differences, net of the existing valuation differences at June 30, 2002.
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.
Quarter ended
June 30, Year ended
------------------------------- March 31,
2002 2001 2002
------------- ------------- -------------
Net income before taxes $ 51,531,683 $ 45,313,915 $ 192,413,201
Enacted tax rates in India 36.75% 35.70% 35.70%
Computed expected tax expense 18,937,893 16,177,068 68,691,513
------------- ------------- -------------
Less: Tax effect due to non-taxable
income for Indian tax purposes (18,588,838) (15,748,798) (67,338,527)
Others 2,782,325 434,990 5,014,830
Effect of tax rate change 56,018 242,585 142,565
------------- ------------- -------------
Provision for Indian income tax 3,187,398 1,105,845 6,510,381
Effect of tax on foreign income 5,499,985 4,966,711 21,436,511
------------- ------------- -------------
Aggregate taxes $ 8,687,383 $ 6,072,556 $ 27,946,892
============= ============= =============
The provision for foreign taxes is due to income taxes payable overseas,
principally in the United States of America. The company benefits from
certain significant tax incentives provided to software firms under Indian
tax laws. These incentives presently include: (i) an exemption from
payment of Indian corporate income taxes for a period of ten consecutive
years of operation of software development facilities designated as
"Software Technology Parks" (the "STP Tax Holiday"); and (ii) a tax
deduction for profits derived from exporting computer software (the
"Export Deduction"). All but one of the company's software development
facilities are located in a designated Software Technology Park ("STP").
The Government of India has recently amended the tax incentives available
to companies set up in designated STPs. The period of the STP Tax Holiday
available to such companies is restricted to 10 consecutive years
beginning from the financial year when the unit started producing computer
software or March 31, 2000, whichever is earlier. The Finance Bill, 2002,
which are yet to be enacted, proposes that the exempt income from an
export oriented undertaking, for the year commencing April 1, 2002, be
restricted to 90% of its aggregate income. Additionally, the Export
Deduction will be phased out equally over a period of five years starting
from fiscal 2000.
2.19 Earnings per share
The following is a reconciliation of the equity shares used in the
computation of basic and diluted earnings per equity share:
Quarter ended
June 30, Year ended
----------------------- March 31,
2002 2001 2002
---------- ---------- ----------
Basic earnings per equity share -
weighted average number of common
shares outstanding excluding
unallocated shares of ESOP 65,566,930 65,568,850 65,556,648
Effect of dilutive common equivalent shares -
stock options outstanding 807,411 240,579 528,226
---------- ---------- ----------
Diluted earnings per equity share -
weighted average number of common
shares and common equivalent shares outstanding 66,374,341 65,809,429 66,084,874
========== ========== ==========
2.20 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 $ 4,000,000, $ 35,000,000 and $ 2,000,000 as
of June 30, 2002 and 2001 and March 31, 2002, respectively. The foreign
forward exchange contracts mature between one to six months.
2.21 Segment reporting
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for the way that public business
enterprises report information about operating segments and related
disclosures about products and services, geographic areas, and major
customers. The company's operations predominantly relate to providing IT
solutions, delivered to customers located globally, across various
industry segments. In the year ended March 31, 2000, the company provided
segmental disclosures based on the geographical segment. However, from the
fiscal year ended March 31, 2001, the Chief Operating Decision Maker
evaluates the company's performance and allocates resources based on an
analysis of various performance indicators by industry classes and
geographic segmentation of customers. Accordingly, revenues represented
along industry classes comprise the principal basis of segmental
information set out in these financial statements. Secondary segmental
reporting is performed on the basis of the geographical location of
customers. The accounting principles consistently used in the preparation
of the financial statements are consistently applied to record revenue and
expenditure in individual segments, and are as set out in the summary of
significant accounting policies.
Industry segments for the company are primarily financial services
comprising enterprises providing banking finance and insurance services,
manufacturing enterprises, enterprises in the telecommunications
("telecom") and retail industries, and others such as utilities,
transportation and logistics companies.
13
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 since
a meaningful segregation of the available data is onerous.
Geographical information on revenue and industry revenue information is
collated based on individual customers invoiced or in relation to which
the revenue is otherwise recognized.
2.21 Segment reporting (continued)
2.21.1 Industry segments
Quarter ended June 30, 2002
in $
Financial services Manufacturing Telecom Retail Others Total
------------------ ------------- ------------ ------------ ------------ ------------
Revenues $ 57,624,002 $ 25,687,049 $ 23,741,447 $ 18,101,706 $ 31,160,665 $156,314,869
Identifiable operating expenses 23,998,076 11,051,170 7,895,059 5,975,232 11,059,874 59,979,411
Allocated expenses 16,016,037 6,341,160 5,860,865 4,468,626 7,692,390 40,379,078
------------ ------------ ------------ ------------ ------------ ------------
Segmental operating income $ 17,609,889 $ 8,294,719 $ 9,985,523 $ 7,657,848 $ 12,408,401 55,956,380
Unallocable expenses 9,521,217
------------
Operating income 46,435,163
Other income (expense), net 5,096,520
Net income before taxes 51,531,683
------------
Taxes 8,687,383
------------
Net income after taxes $ 42,844,300
============
Quarter ended June 30, 2001
Financial services Manufacturing Telecom Retail Others Total
------------------ ------------- ----------- ------------- ------------ ------------
Revenues $ 48,071,082 $ 23,954,996 $ 21,796,805 $ 14,500,826 $ 22,209,049 $130,532,758
Identifiable operating expenses 16,655,766 9,506,579 5,527,419 3,869,375 7,790,866 43,350,005
Allocated expenses 13,769,121 6,436,666 5,856,762 3,896,345 5,967,531 35,926,425
------------ ------------ ------------ ------------ ------------ ------------
Segmental operating income $ 17,646,195 $ 8,011,751 $ 10,412,624 $ 6,735,106 $ 8,450,652 51,256,328
Unallocable expenses 8,818,512
------------
Operating income 42,437,816
Other income (expense), net 2,876,099
------------
Net income before taxes 45,313,915
Taxes 6,072,556
------------
Net income after taxes $ 39,241,359
============
Year ended March 31, 2002
Financial services Manufacturing Telecom Retail Others Total
------------------ ------------- ------------ ------------- ------------ -------------
Revenues $199,725,558 $ 93,404,474 $ 85,190,054 $ 67,027,323 $ 99,703,805 $ 545,051,214
Identifiable operating expenses 74,364,097 38,112,096 23,873,023 18,696,233 34,831,145 189,876,594
Allocated expenses 51,905,935 23,321,898 21,273,366 16,667,939 24,840,829 138,009,967
------------ ------------ ------------ ------------ ------------ -------------
Segmental operating income $ 73,455,526 $ 31,970,480 $ 40,043,665 $ 31,663,151 $ 40,031,831 217,164,653
Unallocable expenses 38,616,746
-------------
Operating income 178,547,907
Other income (expense), net 13,865,294
-------------
Net income before taxes 192,413,201
Taxes 27,946,892
-------------
Net income after taxes $ 164,466,309
=============
14
2.21.2 Geographic segments
Quarter ended June 30, 2002
Rest of the
North America Europe India World Total
------------- ------------ ------------ ------------ ------------
Revenues $112,948,058 $ 30,152,941 $ 2,880,770 $ 10,333,100 $156,314,869
Identifiable operating expenses 44,304,784 11,120,956 1,202,559 3,351,112 59,979,411
Allocated expenses 28,365,671 7,517,730 1,235,357 3,260,320 40,379,078
------------ ------------ ------------ ------------ ------------
Segmental operating income $ 40,277,603 $ 11,514,255 $ 442,854 $ 3,721,668 55,956,380
Unallocable expenses 9,521,217
------------
Operating income 46,435,163
Other income (expense), net 5,096,520
------------
Net income before taxes 51,531,683
Taxes 8,687,383
------------
Net income after taxes $ 42,844,300
============
Quarter ended June 30, 2001
Rest of the
North America Europe India World Total
------------- ------------ ------------ ------------ ------------
Revenues $ 94,209,426 $ 25,877,229 $ 3,455,705 $ 6,990,398 $130,532,758
Identifiable operating expenses 30,299,129 9,170,999 1,031,965 2,847,912 43,350,005
Allocated expenses 25,597,816 7,031,150 1,309,296 1,988,163 35,926,425
------------ ------------ ------------ ------------ ------------
Segmental operating income $ 38,312,481 $ 9,675,080 $ 1,114,444 $ 2,154,323 51,256,328
Unallocable expenses 8,818,512
------------
Operating income 42,437,816
Other income (expense), net 2,876,099
------------
Net income before taxes 45,313,915
Taxes 6,072,556
------------
Net income after taxes $ 39,241,359
============
Year ended March 31, 2002
Rest of the
North America Europe India World Total
------------- ------------ ------------ ------------ -------------
Revenues $388,168,447 $106,103,448 $ 10,735,626 $ 40,043,693 $ 545,051,214
Identifiable operating expenses 135,362,671 38,013,083 4,183,775 12,317,065 189,876,594
Allocated expenses 98,093,268 26,809,588 3,119,373 9,987,738 138,009,967
------------ ------------ ------------ ------------ -------------
Segmental operating income $154,712,508 $ 41,280,777 $ 3,432,478 $ 17,738,890 217,164,653
Unallocable expenses 38,616,746
-------------
Operating income 178,547,907
Other income (expense), net 13,865,294
-------------
Net income before taxes 192,413,201
Taxes 27,946,892
-------------
Net income after taxes $ 164,466,309
=============
2.21.3 Significant clients
No clients individually accounted for more than 10% of the revenues in
fiscal 2002, 2001 and 2000, respectively.
2.22 Commitments and contingencies
The company has outstanding performance guarantees for various statutory
purposes totaling $ 2,847,097, $ 2,547,989 and $ 3,334,700 as of June 30,
2002 and 2001 and March 31, 2002, respectively. These guarantees are
generally provided to governmental agencies.
2.23 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.
15
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", "expect" and other similar expressions as they relate to us or our
business are intended to identify such forward-looking statements. We
undertake 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 Securities and Exchange Commission, as well as the risk
factors discussed in this quarter 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 our financial statements included herein and the notes
thereto.
Overview
We are an India based IT consulting and services company that utilizes an
extensive infrastructure in India, which we call Offshore Software
Development Centers or "OSDCs", to provide managed software solutions to
clients worldwide. Our service offerings include business consulting,
systems integration, application development, maintenance, re-engineering
and product engineering. From fiscal 1998 through fiscal 2002, our total
revenue increased from $68.3 million to $545.1 million. During the same
period, the total number of our IT professionals increased from 2,200 to
9,400, and our OSDCs increased from nine to 16. We also commenced
operations in four proximity development centers in the U.K. and the U.S.
in fiscal 2001, one global development center in Canada and two proximity
development centers in the U.S. in fiscal 2000.
Our revenues are generated principally from software services provided on
either a time-and-materials or a fixed-price, fixed-time frame basis.
Revenues from services provided on a time-and-materials basis are
recognized as the related services are performed. Revenues from services
provided on a fixed-price, fixed-time frame basis are recognized pursuant
to the percentage of completion method. Since we bear the risk of cost
overruns and inflation with respect to fixed-price, fixed-time frame
projects, our operating results could be adversely affected by inaccurate
estimates of contract completion costs and dates, including wage inflation
rates and currency exchange rates that may affect cost projections.
Although we revise our project completion estimates from time to time,
such revisions have not, to date, had a material adverse effect on our
operating results or financial condition. We also develop and market
certain software application products, including banking software that is
licensed primarily to clients in Asia and Africa. Such software products
represented 4.0% of total revenues in fiscal 2002. We earned 71.2% of our
total revenues from North America, 19.5% from Europe, 2.0% from India and
7.3% from the rest of the world in fiscal 2002.
Our cost of revenues primarily consists of salary and other compensation
expenses, depreciation, data communications expenses, computer
maintenance, cost of software purchased for internal use and foreign
travel expenses. We depreciate our personal computers and servers over two
years and mainframe computers over three years and we amortize
intellectual property rights over a period of two through five years.
Third party software is expensed at the time of acquisition.
We assume full project management responsibility for each project that we
undertake. Approximately, 67.4% of the work on a project during the
quarter ended June 30, 2002 was performed at our facilities in India, and
the balance of the work is performed at the client site. The proportion of
work performed at our facilities and at client sites varies from quarter
to quarter. We charge higher rates and incur higher compensation expenses
for work performed at the client site. Services performed at a client site
typically generate higher revenues per-capita at a lower gross margin than
the same services performed at our 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 our facilities and at client
sites. Additionally, any increase in work at client sites can decrease our
gross margins.
Revenues and gross profits are affected by employee utilization rates.
Utilization rates depend, among other factors, on the number of employees
enrolled in training programs, particularly our 14.5 week training course
for new employees. Because a large percentage of new hires begin their
initial training in the second quarter, our utilization rates have
historically been lower in the second and third quarters of our fiscal
year.
Our selling and marketing expenses primarily consist of expenses relating
to advertisements, brand building, rentals of sales and marketing offices,
salaries of marketing personnel, and traveling and conveyance. Our general
and administrative expenses comprise expenses relating to communications,
finance and administration, legal and professional charges, management,
rent, salary and other compensation, travel, and miscellaneous
administrative costs.
Other income includes interest income and foreign currency exchange gains.
Results of operations
Results for three months ended June 30, 2002 compared to three months ended June
30, 2001
Revenue. Our total revenues were $156.3 million in the three months ended
June 30, 2002, representing an increase of $25.8 million or 19.7% over
total revenues of $130.5 million during the same period in the three
months ended June 30, 2001. This increase was attributable to an increase
of $34.8 million or 26.6% in the number of projects executed, offset by a
$9.0 million or 6.9% decrease in prices at which contracts were executed.
Revenues continued to increase in most segments of our services. Custom
software development, re-engineering, maintenance and software development
through OSDCs formed the majority of our revenues. The increase in
revenues was attributable, in part, to a steady increase in business from
existing clients and from certain new clients, particularly in the retail
industry segment and others comprising the energy, utilities,
transportation and logistics segments. Our retail clients comprised 11.6%
and 11.1% of revenues in each of the three months ended June 30, 2002 and
2001, while our clients in other segments comprised 20.0% and 17.0% of
revenues in each of the three months ended June 30, 2002 and 2001. Net
sales of FINACLE(TM) and other products represented 3.8% of our total
revenues in the three months ended June 30, 2002, as compared to 3.3%
during the three months ended June 30, 2001. Revenues from services
represented 96.2% of total revenues in the three months ended June 30,
2002, as compared to 96.7% in the three months ended June 30, 2001.
Revenues from fixed-price, fixed-time frame contracts and from
time-and-materials contracts represented 35.5% and 64.5% of total revenues
for the three months ended June 30, 2002, as compared to 27.0% and 73.0%
for the three months ended June 30, 2001. Revenues from North America and
Europe represented 72.3% and 19.3% of total revenues for the three months
ended June 30, 2002, as compared to 72.2% and 19.8% for the corresponding
period in the three months ended June 30, 2001.
Cost of revenues. Our cost of revenues was $85.3 million for the three
months ended June 30, 2002, representing an increase of 24.7% over cost of
revenues of $68.4 million for the corresponding period in the three months
ended June 30, 2001. Cost of revenues represented 54.6% and 52.4% of total
revenues in the three months ended June 30, 2002 and 2001. This increase
in our cost of revenues as a percentage of revenues was attributable to:
(i) an increase in compensation paid to our U.S. based Indian employees to
comply with new immigration regulations introduced in the U.S. effective
July 2001; (ii) increased personnel costs for new hires; and (iii) an
increase in foreign travel costs. This increase was offset by a decrease
in our data communication expenses and depreciation, which represented
0.9% and 5.2% of revenues in the three months ended June 30, 2002 as
compared to 1.7% and 5.8% of revenues for the corresponding period in the
three months ended June 30, 2001.
Gross profit. Our gross profit was $71.0 million for the three months
ended June 30, 2002, representing an increase of 14.3% over gross profit
of $62.1 million for the three months ended June 30, 2001. As a percentage
of total revenues, gross profit decreased to 45.4% for the three months
ended June 30, 2002
16
from 47.6% for the corresponding period in the three months ended June 30,
2001. This decrease was attributable to: (i) an increase in compensation
paid to our U.S. based Indian employees to comply with new immigration
regulations introduced in the U.S. effective July 2001; (ii) increased
personnel costs for new hires; and (iii) an increase in foreign travel
costs. This increase was offset by a decrease in our data communication
expenses and depreciation.
Selling and marketing expenses. We incurred sales and marketing expenses
of $11.3 million in the three months ended June 30, 2002, representing an
increase of 91.5% over sales and marketing expenses of $5.9 million for
the corresponding period in the three months ended June 30, 2001. The
increase was primarily attributable to additional investment in brand
building activities, increased participation in marketing seminars and
conferences, increased hiring of sales and marketing employees and
provisions for bonus payments to sales and marketing personnel. As a
percentage of total revenues, sales and marketing expenses were 7.2% and
4.5% for the three months ended June 30, 2002 and June 30, 2001,
respectively. The number of our sales offices increased to 28 as of June
30, 2002 up from 26 as of June 30, 2001, and the number of our sales and
marketing personnel increased to 152 as of June 30, 2002, up from 122 as
of June 30, 2001.
General and administrative expenses. Our general and administrative
expenses were $11.9 million for the three months ended June 30, 2002,
representing a decrease of 4.8% over general and administrative expenses
of $12.5 million for the three months ended June 30, 2001. General and
administrative expenses were 7.6% and 9.6% of total revenues for the three
months ended June 30, 2002 and June 30, 2001, respectively. This decrease
in general and administrative expense as a percentage of revenues was
primarily attributable to a decrease in the provision for doubtful
accounts receivable, which comprised Nil and 1.1% of revenues in the three
months ended June 30, 2002 and June 30, 2001, 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 June 30, 2002 and June 30, 2001 respectively.
Amortization of intangible assets. Amortization of intangible assets was
$0.2 million in the three months ended June 30, 2002. This represents
amortization of certain intellectual property rights acquired by the
company in the three months ended June 30, 2002.
Operating income. Our operating income was $46.4 million for the three
months ended June 30, 2002, representing an increase of 9.4% over
operating income of $42.4 million for the three months ended June 30,
2001. As a percentage of revenues, operating income decreased to 29.7% for
the three months ended June 30, 2002, from 32.5% for the three months
ended June 30, 2001. Excluding the amortization of deferred stock
compensation expense, the operating margin was 30.5% for the three months
ended June 30, 2002, as compared to 33.5% for the three months ended June
30, 2001.
Other income. Other income was $5.1 million for the three months
ended June 30, 2002, an increase of 75.9% over other income of $2.9
million for the three months ended June 30, 2001. Other income increased
due to an increased investible surplus and increased foreign exchange
gains. Other income in the three months ended June 30, 2002 primarily
comprised of interest income of $3.6 million and exchange gains of $1.3
million. Other income in the three months ended June 30, 2001 mainly
comprised interest income of $2.5 million and exchange gains of $0.1
million.
Provision for income taxes. Our provision for income taxes was $8.7
million in the three months ended June 30, 2002 compared to $6.1 million
in the corresponding period in the three months ended June 30, 2001. Our
effective tax rate increased to 16.9% for the three months ended June 30,
2002, as compared to 13.5% for the three months ended June 30, 2001. The
increase in the effective tax rate was primarily attributable to an
increase in foreign taxes paid in respect of our overseas operations in
the three months ended June 30, 2002, as compared to the three months
ended June 30, 2001. The increase is also due to the provisions of the
Finance Act, 2002, which taxed 10% of the profits generated by our
operations under the STP scheme in the current fiscal year. These
operations enjoyed a 100% tax holiday in the previous fiscal year.
Net income. Our net income was $42.8 million for the three months ended
June 30, 2002, an increase of 9.2% over the net income of $39.2 million
for the three months ended June 30, 2001. As a percentage of total
revenues, net income decreased to 27.4% for the three months ended June
30, 2002 from 30.1% for the three months ended June 30, 2001.
Liquidity and capital resources
Our growth has been financed largely by cash generated from operations
and, to a lesser extent, from the proceeds of equity issues and
borrowings. In 1993, we raised approximately $4.4 million in gross
aggregate proceeds from our initial public offering of equity shares on
Indian stock exchanges. In 1994, we raised an additional $7.7 million
through private placements of our equity shares with foreign institutional
investors, mutual funds, Indian domestic financial institutions and
corporations. On March 11, 1999 we raised $70.4 million in gross aggregate
proceeds from our initial U.S. public offering of ADSs on the NASDAQ.
As of June 30, 2002, we had $235.5 million in cash and cash equivalents,
$303.2 million in working capital and no outstanding bank borrowings. We
believe that a sustained cut in IT spending, the longer decision time that
may be taken by our customers, and the continued downturn in any of the
various industry segments that we operate in, will result in the decline
of our revenue growth and affect our liquidity and cash resources.
Net cash provided by operating activities was $43.6 million and $48.9
million in the three months ended June 30, 2002 and 2001. Net cash
provided by operations consisted primarily of net income offset, in part,
by an increase in accounts receivable. Accounts receivable as a percentage
of total revenues, represented 13.5% and 12.6% as of June 30, 2002 and
June 30, 2001, respectively.
Prepaid expenses and other current assets increased by $8.5 million during
the three months ended June 30, 2002, as compared to a decrease of $ 0.3
million during the three months ended June 30, 2001. The increase during
the three months ended June 30, 2002 was primarily due to an increase in
prepaid expenses and unbilled revenues. Unbilled revenues comprise
revenues recognized in respect of which the company was not yet
contractually permitted to invoice customers. Other accrued liabilities
increased by $7.1 million and $3.8 million in the three months ended June
30, 2002 and 2001 primarily due to an increase in accrued compensation to
staff and provisions for expenses in both periods.
The increase in unearned revenues during the three months ended June 30,
2002 was $5.8 million compared to $0.2 million during the three months
ended June 30, 2001, 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 increased as of June 30,
2002 over the prior year.
Net cash used in investing activities was $13.2 million and $24.7 million
in the three months ended June 30, 2002 and June 30, 2001, respectively.
Net cash used in investing activities for acquiring property, plant and
equipment in the three months ended June 30, 2002 and 2001 was $7.7
million and $20.6 million. Additionally, the company acquired intangible
assets in the amount of $2.9 million and made loans to employees in the
amount of $2.6 million during the three months ended June 30, 2002. During
the three months ended June 30, 2001, cash used in investing activities
also included loans made to employees of $2.0 million and purchase of
investments amounting to $2.2 million.
Net cash used in financing activities for the three months ended June 30,
2002 was $5.4 million, primarily comprising cash raised by the issue of
preferred stock of the company's subsidiary of $10.0 million offset by
dividend payments of $15.5 million. Net cash used in financing activities
for the three months ended June 30, 2001 primarily comprised dividend
payments of $11.3 million.
As of June 30, 2002, we had contractual commitments for capital
expenditure of $14.3 million.
17
Reconciliation between U.S. and Indian GAAP
There are material differences between financial statements prepared as
per Indian and U.S. GAAP. The material differences are primarily
attributable to U.S. GAAP requirements for the:
- accounting for stock-based compensation; and
- consolidation of majority owned subsidiaries.
Three months ended June 30
-------------------------------
2002 2001
------------ ------------
Net profit as per Indian GAAP (unconsolidated) $ 44,338,245 $ 40,501,114
Amortization of deferred stock compensation expense under APB Opinion 25 (1,243,948) (1,259,755)
Loss of consolidated subsidiary (249,997) --
Net income as per US GAAP (consolidated) $ 42,844,300 $ 39,241,359
------------ ------------
Income taxes
Our net income earned from providing services in client premises outside
India is subject to tax in the country where we perform the work.
Most of our tax paid in countries other than India can be applied as a
credit against our Indian tax liability to the extent that the same income
is subject to tax in India.
Currently, we benefit from the tax holidays the Government of India gives
to the export of information technology services from specially designated
"Software Technology Parks" in India. As a result of these incentives, our
operations have been subject to relatively insignificant tax liabilities.
These tax incentives include a 10-year tax holiday from payment of Indian
corporate income taxes for the operation of our Indian facilities, all but
one of which are "Export Oriented Undertakings" or located in "Software
Technology Parks" or "Export Processing Zones"; and an income tax
deduction of 100% for profits derived from exporting information
technology services. We can use either of these two tax incentives. As a
result of these two tax exemptions, a substantial portion of our pre-tax
income has not been subject to significant tax in recent years. For the
three months ended June 30, 2002 and 2001, with out accounting for double
taxation treaty set offs, our tax benefits were $18.6 million and $15.7
million, from such tax incentives.
The Finance Act, 2000 phases out the 10-year tax holiday over a ten-year
period from fiscal 2000 through fiscal 2009. Accordingly, facilities set
up in India on or before March 31, 2000 have a 10-year tax holiday, new
facilities set up on or before March 31, 2001 have a 9-year tax holiday
and so forth until March 31, 2009, after which the tax holiday will no
longer be available to new facilities. Our current tax holidays expire in
stages by 2009. Additionally, the Finance Act, 2002 had proposed that ten
percent of all income derived from services located in "Software
Technology Parks" be subject to income tax for a one-year period ending
March 31, 2003.
The Finance Act, 2000 also restricts the scope of the tax exemption to
export income earned by software development centers that are "Export
Oriented Undertakings" or located in "Software Technology Parks" or
"Export Processing Zones" as compared to the earlier exemption which was
available to business profits earned by them. For companies opting for the
100% tax deduction for profits derived from exporting information
technology services, the Finance Act, 2000 phases out the income tax
deduction over the next five years beginning on April 1, 2000.
Quantitative and qualitative disclosures about market risk
General
Market risk is the loss of future earnings, to fair values or to future
cash flows that may result from a change in the price of a financial
instrument. The value of a financial instrument may change as a result of
changes in the interest rates, foreign currency exchange rates, commodity
prices, equity prices and other market changes that affect market risk
sensitive instruments. Market risk is attributable to all market sensitive
financial instruments including foreign currency receivables and payables.
Our exposure to market risk is a function of our borrowing activities and
revenue generating activities in foreign currency. The objective of market
risk management is to avoid excessive exposure of our earnings and equity
to loss. Most of our exposure to market arises out of our foreign currency
accounts receivable.
Risk management procedures
Management is responsible for our internal controls and financial
reporting process. The independent auditors are responsible for performing
an independent audit of our financial statements in accordance with the
generally accepted auditing standards, and for issuing a report thereon.
Our audit committee's responsibility is to monitor these processes. The
audit committee is also responsible for overseeing the processes related
to financial reporting and information dissemination, in order to ensure
that the financial statements are fair, sufficient and credible. In
addition, the audit committee recommends to the board of directors, the
appointment of our internal and statutory auditors.
Components of market risk
Our exposure to market risk arises principally from exchange rate risk.
Exchange rate risk: Even though our functional currency is the Indian
rupee, we transact a major portion of our business in foreign currencies,
particularly the U.S. dollar. Our exchange rate risk primarily arises from
our foreign currency revenues, receivables and payables. Although we
constantly evaluate our net exchange rate exposure arising from these
transactions, we do not actively hedge against such exposure. We may, in
the future, adopt more active hedging policies, and have done so in the
past. As a result, changes in exchange rates may adversely affect our
operating results. As of June 30, 2002 and 2001, we had outstanding
foreign exchange forward contracts in the aggregate amounts of $4.0
million and $35.0 million. These contracts typically mature within three
months, must be settled on the day of maturity, and may be canceled
subject to the payment of any gains or losses in the difference between
the contract exchange rate and the market rate on the date of
cancellation.
Principles of currency translation
The exchange rate between the rupee and the dollar has changed
substantially in recent years and may fluctuate substantially in the
future. For the three months ended June 30, 2002 and in fiscal 2002 and
2001, our U.S. dollar denominated revenues represented 87.3%, 87.7% and
89.6% of our total revenues.
Our revenues generated in foreign currencies are translated into rupees at
the exchange rate prevailing on the dates we recognized these revenues.
The expenses of our overseas operations incurred in foreign currencies are
translated in rupees at either the monthly average exchange rate or the
exchange rate on the date the expense is incurred, depending on the source
of the payment for such expense. Assets and liabilities of our foreign
branches held in foreign
18
currency are translated into rupees at the end of the applicable reporting
period. For U.S. GAAP reporting, our financial statements are translated
into 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. We expect that a majority of
our total revenues will continue to be generated in dollars and that
significant portion of our expenses, including personnel costs as well as
capital expenditure, will continue to be incurred in rupees. Consequently,
our operating results may be adversely affected to the extent the rupee
appreciates against the dollar.
Critical accounting policies
High-quality financial statements require rigorous application of
high-quality accounting policies. We consider the policies discussed below
to be critical to an understanding of our financial statements as their
application places the most significant demands on management's judgment,
with financial reporting results relying on estimation about the effect of
matters that are inherently uncertain. Specific risks for these critical
accounting policies are described in the following paragraphs. For all of
these policies, future events rarely develop exactly as forecast, and the
best estimates routinely require adjustment.
We prepare financial statements in conformity with U.S. GAAP which
requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities on the date of the financial statements and the reported
amounts of revenues and expenses during the financial reporting period. We
primarily make estimates of contract costs expected to be incurred to
complete development of software, allowances for doubtful accounts
receivable, our future obligations under employee retirement and benefit
plans, useful lives of property, plant and equipment, and contingencies
and litigation.
We continually evaluate these estimates and assumptions based on the most
recently available information, our own historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Since the use of estimates is an integral
component of the financial reporting process, actual results could differ
from those estimates. Certain of our accounting policies require higher
degrees of judgment than others in their application. These include
revenue recognition as well as accounting for income taxes. Our accounting
policy and related procedures for revenue recognition on such contracts
and on income taxes are set out below.
Revenue recognition
We derive our revenues primarily from software services and licensing of
software products. We make and use significant management judgments and
estimates in connection with the revenue that we recognize in any
accounting period. Material differences may result in the amount and
timing of our revenue for any period, if we made different judgments or
utilized different estimates.
We enter into contracts for software services with clients either on a
time-and-material basis or on a fixed-price, fixed-timeframe basis. Such
contracts require us to deliver software that involves significant
production, modification or customization. We therefore apply the
provisions of Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," as amended, read together with certain provisions of SOP
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts," and Accounting Research Bulletin 45,
"Long-Term Construction-Type Contracts and Certain Production-Type
Contracts," in recognizing revenue arising from such contracts for
software services. For contracts that are entered into on a time-and-
material basis, we recognize revenue as the related services are rendered.
For contracts that are entered into on a fixed-price, fixed-timeframe
basis, we recognize revenue under the percentage-of-completion method.
This is because we believe that estimates of costs to complete and extent
of progress toward completion of such contracts are reasonably dependable.
We estimate the percentage-of-completion based on the ratio of efforts
performed to date to estimated total efforts at completion.
Clients with whom we have entered into contracts for software services on
a fixed-price, fixed-timeframe basis are provided with a fixed-period
warranty for correction of errors and telephone support. We accrue for
costs associated with such support services at the time related revenues
are recorded based on our historical experience.
We also earn fees from clients for the license of software products. We
apply the provisions of SOP 97-2, "Software Revenue Recognition," as
amended by SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions" to all transactions
involving the sale of software products. In accordance with SOP 97-2, we
recognize license fee revenues when persuasive evidence of an arrangement
exists, delivery has occurred, the license fee is fixed and determinable,
and the collection of the fee is probable. At the time of the transaction,
we assess whether the fee associated with our revenue transactions is
fixed and determinable and whether or not collection is reasonably
assured. We assess whether the fee is fixed and determinable based on the
payment terms associated with the transaction. We assess collection based
on a number of factors, including the credit-worthiness of the client. We
also provide other services in conjunction with such licensing
arrangements. In such cases, we allocate the total revenue from such
contracts to each component of the contract using the residual method.
Under this method, we defer revenue for the undelivered services and
recognize only the residual amounts as revenue for delivered elements.
We recognize revenue for maintenance services ratably over the term of the
underlying maintenance agreement, generally 12 months. We earn revenues
from client training, support, and other services related to the license
of software products, which is generally recognized as these services are
performed. In certain instances, we receive advances for software
development services and products. We report such amounts as client
deposits until all conditions for revenue recognition are met.
Income taxes
As part of our financial reporting process, we are required to estimate
our liability to income taxes in each of the tax jurisdictions in which we
operate. This process requires us to estimate our actual current tax
exposure together with an assessment of temporary differences resulting
from differing treatment of items, such as depreciation on property, plant
and equipment, for tax and accounting purposes. These differences result
in deferred tax assets and liabilities, which are included within our
balance sheet.
We face challenges from domestic and foreign tax authorities regarding the
amount of current taxes due. These challenges include questions regarding
the timing and amount of deductions and the allocation of income among
various tax jurisdictions. Based on our evaluation of our tax position, we
believe we have adequately accrued for probable exposures. To the extent
we are able to prevail in matters for which accruals have been established
or are required to pay amounts in excess of our reserves, our effective
tax rate in a given financial statement period may be materially impacted.
Our deferred tax assets comprise assets arising from basis differences in
depreciation on property, plant and equipment, investments for which the
ultimate realization of the tax asset may be dependent on the availability
of future capital gains, and provisions for doubtful accounts receivable.
We assess the likelihood that our deferred tax assets will be recovered
from future taxable income. This assessment takes into consideration tax
planning strategies, including levels of historical taxable income and
assumptions regarding the availability and character of future taxable
income over the periods in which the deferred tax assets are deductible.
We believe it is more likely than not that we will realize the benefits of
those deductible differences, net of the existing valuation differences at
June 30, 2002. The ultimate amount of deferred tax assets realized may be
materially different from those recorded, as influenced by potential
changes in income-tax laws in the tax jurisdictions where we operate.
19
To the extent we believe that realization of a deferred tax asset is not
likely, we establish a valuation allowance or increase this allowance in
an accounting period and include an expense within the tax provision in
our statements of income. As of June 30, 2002 and 2001 and March 31, 2002,
we recorded valuation allowances of $0.6 million, $1.5 million and $0.7
million due to uncertainties related to our ability to utilize some of our
deferred tax assets comprising provisions for doubtful accounts
receivable. In the event that actual results differ from these estimates
of valuation allowance or if we adjust these estimates in future periods,
we may need to establish an additional valuation allowance, which could
materially impact our financial position and results of operations.
Risk factors
Risks related to our company
Any inability to manage our rapid growth could disrupt our business and
reduce our profitability.
We have experienced significant growth in recent periods. Our revenues
increased 31.7% in fiscal 2002 as compared to fiscal 2001, and increased
103.4% in fiscal 2001 as compared to fiscal 2000. As of March 31, 2002, we
employed approximately 9,400 IT professionals worldwide as compared to
8,660 and 4,625 IT professionals as of March 31, 2001 and 2000. As of June
30, 2002, we employed approximately 9,940 software professionals worldwide
as compared to 8,720 software professionals as of June 30, 2001. In the
last four fiscal years we have approved and undertaken major expansions of
our existing facilities as well as the construction of new facilities.
We expect our growth to place significant demands on our management and
other resources. It will require us to continue to develop and improve our
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 our high
quality standards; and
- preserving our culture and values and our entrepreneurial environment.
Inability to manage our growth effectively could adversely affect our
business and reduce our profitability.
Our revenues are difficult to predict and can vary significantly from
quarter to quarter which could cause our share price to decline
significantly.
Our revenues have historically fluctuated and may fluctuate significantly
in the future depending on a number of factors, including:
- the size, timing and profitability of significant projects;
- the proportion of services that we perform at client sites rather than
at our offshore facilities;
- the accuracy of our estimates of the resources required to complete
ongoing projects, particularly projects per formed under fixed price,
fixed-timeframe contracts;
- a change in the mix of services provided to our clients, or in the
relative proportion of services and product revenues;
- the effect of seasonal hiring patterns and the time required to train
and productively utilize new employees;
- the size and timing of facilities expansion; and
- unanticipated variations in the duration, size and scope of our
projects.
The majority of our total operating expenses, particularly of personnel
and facilities, are fixed in advance of any particular quarter. As a
result, unanticipated variations in the number and timing of our projects
or employee utilization rates may cause significant variations in our
operating results in any particular quarter. There are also a number of
factors other than our performance and not within our control that could
cause fluctuations in our operating results from quarter to quarter. These
include:
- the timing of tax holidays and other Government of India incentives;
- currency exchange rate fluctuations; and
- other general economic factors.
We believe that period-to-period comparisons of our results of operations
are not necessarily meaningful and should not be relied upon as an
indication of our future performance. Thus, it is possible that in the
future some of our quarterly results of operations may be below the
expectations of market analysts and our investors, and the share price of
our equity shares and our ADSs could decline significantly.
Our customers may defer or terminate projects before completion or choose
not to renew contracts, most of which are terminable at will, which could
adversely affect our profitability.
Our contracts with customers do not commit our customers to provide us
with a specific volume of business and can typically be terminated by our
clients with or without cause, with little or no advance notice and
without penalty, which could reduce our revenues significantly.
Additionally, our contracts with clients typically are limited to a
specific project without any commitment of future work. There are also a
number of factors other than our performance and not within our control
that could cause the loss of a client, including:
- financial difficulties for a client;
- a demand for price reductions;
- a change in outsourcing strategy by moving more work in-house; and
- the replacement of existing software with packaged software supported
by licensors.
Any of these factors could reduce our profitability.
A significant portion of our revenues is earned from the United States and
derived from clients in only a few industry segments. This increases the
likelihood that the slowdown in IT spending in the United States will
affect our profitability.
We have historically earned a significant portion of our revenues from the
United States. For the three months ended June 30, 2002 and in fiscal 2002
and 2001, approximately 70.8%, 69.1% and 70.0% of our revenues were from
the United States. In addition, we derive a significant proportion of our
revenues from certain industry segments. For the three months ended June
30, 2002 and in fiscal 2002 and 2001, we earned 36.8%, 36.6% and 33.7% of
our revenues from the financial services segment, and 11.6%, 12.3% and
9.1% from the retail segment. During an economic slowdown, our clients in
the United States may reduce or postpone their IT spending significantly,
which may in turn, lower the demand for our services and affect our
profitability. Additionally, any significant decrease in the growth of the
financial services or retail industry segments may reduce the demand for
our services and affect our profitability significantly.
Currency exchange rate fluctuations may affect the value of the ADSs.
Market risks relating to our operations result primarily from changes in
interest rates and changes in foreign exchange rates. Our functional
currency is the Indian rupee although we transact a major portion of our
business in foreign currencies and accordingly face foreign currency
exposure through our sales
20
in the United States and purchases from overseas suppliers in dollars. In
our U.S. operations, we do not actively hedge against exchange rate
fluctuations, although we may elect to do so in the future. Accordingly,
changes in exchange rates may have a material adverse effect on our net
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
our business, operating results and financial condition. The exchange rate
between the rupee and the dollar has changed substantially in recent years
and may fluctuate substantially in the future. During the four-year period
from March 31, 1998 through March 31, 2002, the value of the rupee against
the dollar declined by approximately 29.5%. For the three months ended
June 30, 2002 and in fiscal 2002 and 2001, our dollar-denominated revenues
represented 87.3%, 87.7% and 89.5% of our total revenues. We expect that a
majority of our revenues will continue to be generated in dollars for the
foreseeable future and that a significant portion of our expenses,
including personnel costs as well as capital and operating expenditures,
will continue to be denominated in Indian rupees. Consequently, the
results of our operations will be adversely affected to the extent the
rupee appreciates against the dollar. We have sought to reduce the effect
of exchange rate fluctuations on our operating results by purchasing
foreign exchange forward contracts to cover a portion of outstanding
accounts receivable on a need basis. As of June 30, 2002, we had
outstanding forward contracts in the amount of $4.0 million. 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. We use these instruments only
as a hedging mechanism and not for speculative purposes. We cannot assure
you that we will purchase contracts adequate to insulate ourselves from
foreign exchange currency risks or that any such contracts will perform
adequately as a hedging mechanism. Devaluation of the Indian rupee will
result in foreign currency translation losses. For example, for the three
months ended June 30, 2002, fiscal 2002 and 2001, our foreign currency
translation losses were approximately $0.2 million, $16.7 million and
$14.5 million.
Fluctuations in the exchange rate between the rupee and the dollar will
also affect the 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 rupee and the dollar will
affect the dollar equivalent of the rupee price of equity shares on the
Indian Stock Exchanges and, as a result, are likely to affect the prices
of our ADSs in the United States. 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. We cannot assure you that holders will be able to convert rupee
proceeds into dollars or any other currency or with respect to the rate at
which any such conversion could occur.
We are investing substantial cash assets in new facilities.
As of June 30, 2002, we had contractual commitments of $14.3 million for
capital expenditure and have budgeted for significant infrastructure
expansion in the near future. Although we have successfully developed new
facilities in the past, we may still encounter cost overruns or project
delays in connection with the new facilities. Additionally, future
financing for additional facilities, whether within India or elsewhere,
may not be available on attractive terms or at all. Such an expansion will
significantly increase our fixed costs. Therefore, if we are unable to
grow our business proportionately, our profitability will be reduced.
Restrictions on immigration may affect our ability to compete for and
provide services to clients in the United States, which could hamper our
growth and cause our revenues to decline.
If U.S. immigration laws change and make it more difficult for us to
obtain H-1B and L-1 visas for our employees, our ability to compete for
and provide services to clients in the United States could be impaired.
This in turn could hamper our growth and cause our revenues to decline.
Our employees who work onsite at client facilities or at our facilities in
the United States on temporary and extended assignments typically must
obtain visas. As of June 30, 2002, the majority of our personnel in the
United States held H-1B visas (1,734 persons) or L-1 visas (629 persons).
An H-1B visa is a temporary work visa, which allows the employee to remain
in the U.S. while he or she remains an employee of the sponsoring firm,
and the L-1 visa is an intra-company transfer visa, which only allows the
employee to remain in the United States temporarily. Although there is no
limit to new L-1 petitions, there is a limit to the aggregate number of
new H-1B petitions that the U.S. Immigration and Naturalization Service
("USINS") may approve in any government fiscal year. We may not be able to
obtain the H-1B visas necessary to bring critical Indian professionals to
the United States on an extended basis during the years in which this
limit is reached. This limit was reached in March 2000 for the U.S.
Government's fiscal year ended September 30, 2000. While we anticipated
that this limit would be reached before the end of the U.S. Government's
fiscal year, and made efforts to plan accordingly, we cannot assure you
that we will continue to be able to obtain a sufficient number of H-1B
visas. In response to the recent terrorist attacks in the United States,
the USINS has increased the level of scrutiny in granting visas. As a
result, we may not be able to obtain a sufficient number of H-1B visas for
our employees.
Our international operations subject us to risks inherent in doing
business on an international level. This could harm our operating results.
While to date most of our software development facilities are located in
India and in the United States, we intend to establish new development
facilities, potentially in Southeast Asia and Europe. We have not yet made
substantial contractual commitments to establish any new facilities and we
cannot assure you that we will not significantly alter or reduce our
proposed expansion plans. Because of our limited experience with
facilities outside of India, we are subject to additional risks including,
among other things, difficulties in regulating our business globally,
export requirements and restrictions, and multiple and possibly
overlapping tax structures. Any of these events could harm our future
performance.
Our success depends in large part upon our management team and other
highly skilled professionals. If we fail to retain and attract these
personnel, our business may be unable to grow and our revenues could
decline, which may decrease the value of our shareholders' investment.
We are highly dependent on the senior members of our management team,
including the continued efforts of our Chairman, our CEO, our COO, other
executive members of the board and the management council members. Our
ability to execute project engagements and to obtain new clients depends
in large part on our ability to attract, train, motivate and retain highly
skilled professionals, especially project managers, software engineers and
other senior technical personnel. If we cannot hire and retain additional
qualified personnel, our ability to bid on and obtain new projects, and to
continue to expand our business will be impaired and our revenues could
decline. We believe that there is significant competition for
professionals with the skills necessary to perform the services we offer.
We may not be able to hire and retain enough skilled and experienced
employees to replace those who leave. Additionally, we may not be able to
redeploy and retrain our employees to keep pace with continuing changes in
technology, evolving standards and changing client preferences.
Our revenues are highly dependent upon a small number of clients.
We have historically earned, and believe that in the future too will
continue to derive, a significant portion of our revenues from a limited
number of corporate clients. For the three months ended June 30, 2002 and
in fiscal 2002 and fiscal 2001, our largest client accounted for 5.8%,
6.1% and 7.3%, of our total revenues, and our five largest clients
accounted for 23.6%, 24.1% and 26.0% of our total revenues. The volume of
work we perform for specific clients is likely to vary from year to year,
particularly since we are usually not the exclusive outside software
service provider for our clients. Thus, a major client in one year may not
provide the same level of revenues in a subsequent year. There are a
number of factors other than our performance that could cause the loss of
a client and that may not be predictable. For example, in 1995, we chose
to reduce significantly the services provided to our then-largest client
rather than accept the price reductions and increased resources sought by
the client. In other circumstances, we reduced significantly the services
21
provided to a 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. As a result, if we were to lose one of our
major clients or have it significantly reduce its volume of business with
us, our profitability could be reduced.
Our costs could increase if the Government of India reduces or withholds
tax benefits and other incentives it provides to us.
Currently, we benefit from certain tax incentives under Indian tax laws.
As a result of these incentives, our operations have been subject to
relatively insignificant Indian tax liabilities. These tax incentives
include a 10-year tax holiday from payment of Indian corporate income
taxes for the operation of our Indian facilities, all but one of which are
"Export Oriented Undertakings" or located in "Software Technology Parks"
or "Export Processing Zones"; and an income tax deduction of 100% for
profits derived from exporting information technology services. As a
result, a substantial portion of our pre-tax income has not been subject
to significant tax in recent years. For the three months ended June 30,
2002 and in fiscal 2002 and 2001, without accounting for double taxation
treaty set-offs, our tax benefits were $18.6 million, $67.3 million and
$57.3 million from such tax incentives. We are currently also eligible for
exemptions from other taxes, including customs duties. The Finance Act,
2000 phases out the 10-year tax holiday over a ten-year period from fiscal
1999-2000 through fiscal 2008-2009. Our current tax holidays expire in
stages by 2009. Additionally, the Finance Act, 2002 has proposed that ten
percent of all income derived from services located in "Software
Technology Parks" be subject to income tax for the one-year period ending
March 31, 2003. For companies opting for the 100% tax deduction for
profits derived from exporting information technology services, the
Finance Act, 2000 phases out the income tax deduction over the next five
years beginning on April 1, 2000. When our tax holiday and income tax
deduction exemptions expire or terminate, our costs will increase.
Additionally, the Government of India could enact similar laws in the
future, which could further impair our other tax incentives.
Our failure to complete fixed-price, fixed-timeframe contracts on budget
and on time may negatively affect our profitability, which could decrease
the value of our shareholders' investment.
As a core element of our business strategy, we offer a portion of our
services on a fixed-price, fixed-timeframe basis, rather than on a time
and material basis. Although we use specified software engineering
processes and our past project experience to reduce the risks associated
with estimating, planning and performing fixed-price, fixed-timeframe
projects, we bear the risk of cost overruns, completion delays and wage
inflation in connection with these projects. If we fail to accurately
estimate the resources and time required for a project, future wage
inflation rate and currency exchange rates, or if we fail to complete our
contractual obligations within the contracted timeframe, our profitability
may suffer.
Disruptions in telecommunications could harm our service model, which
could result in a reduction of our revenues.
A significant element of our business strategy is to continue to leverage
and expand our software development centers in Bangalore, Bhubaneshwar,
Chennai, Hyderabad, Mangalore, Mohali, Mysore and Pune, all in India, as
well as overseas. We believe that the use of a strategically located
network of software development centers will provide us with cost
advantages, the ability to attract highly skilled personnel in various
regions of the country and the world, the ability to service clients on a
regional and global basis, and the ability to provide services to our
clients 24 hours a day, seven days a week. Part of our service model is to
maintain active voice and data communications between our main offices in
Bangalore, our clients' offices, and our other software development and
support facilities. Although we maintain redundant facilities and
satellite communications links, any significant loss in our ability to
transmit voice and data through satellite and telephone communications
would result in a reduction of our revenues.
Intense competition in the market for IT services could affect our cost
advantages, which could decrease our revenues.
The market for IT services is highly competitive. Our competitors include
software companies, IT companies, large international accounting firms and
their consulting affiliates, systems consulting and integration firms,
other technology companies and client in-house information services
departments, both international and domestic. Many of our competitors have
significantly greater financial, technical and marketing resources and
generate greater revenue than we do. We cannot be reasonably certain that
we will be able to compete successfully against such competitors, or that
we will not lose clients to such competitors. Additionally, we believe
that our ability to compete also depends in part on factors outside our
control, such as our ability to attract, motivate and retain skilled
employees, the price at which our competitors offer comparable services,
and the extent of our competitors' responsiveness to their clients' needs.
Wages in India have historically been lower than wages in the United
States and Europe, which has been one of our competitive advantages. Wage
increases in India may prevent us from sustaining this competitive
advantage and may reduce our profit margins.
Wage costs in India have historically been significantly lower than wage
costs in the United States and Europe for comparably skilled
professionals, which has been one of our competitive advantages. However,
wage increases in India may prevent us from sustaining this competitive
advantage and may negatively affect our profit margins. We may need to
increase the levels of our employee compensation more rapidly than in the
past to remain competitive. Additionally, recent and future changes in the
immigration laws of the countries where our employees are working on-site
at client facilities on short-term assignments may require us to
compensate such employees at a minimum wage level that is higher than our
current India-based wage rates. Unless we are able to continue to increase
the efficiency and productivity of our employees, wage increases in the
long term may reduce our profit margins.
We may be liable to our clients for damages caused by system failures,
which could damage our reputation and cause us to lose customers.
Many of our contracts involve projects that are critical to the operations
of our clients' businesses, and provide benefits which may be difficult to
quantify. Any failure in a client's system could result in a claim for
substantial damages against us, regardless of our responsibility for such
failure. Although we attempt to limit our contractual liability for
damages resulting from negligent acts, errors, mistakes or omissions, in
rendering our services, we cannot be assured that the limitations on
liability we provide for in our service contracts will be enforceable in
all cases, or that it will otherwise protect us from liability for
damages. Although we maintain general liability insurance coverage,
including coverage for errors or omissions, we cannot be assured 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. A
successful assertion of one or more large claims against us that exceeds
our available insurance coverage or changes in our insurance policies,
including premium increases or the imposition of a large deductible or
co-insurance requirement, could reduce our operating results.
We may engage in future acquisitions, investments, strategic partnerships
or other ventures that may harm our performance, dilute the holdings of
our shareholders and cause us to incur debt or assume contingent
liabilities.
We may acquire or make investments in complementary businesses,
technologies, services or products, or enter into strategic partnerships
with parties who can provide access to those assets. We may not identify
suitable acquisition, investment or strategic partnership candidates, or
if we do identify suitable candidates, we may not complete those
transactions on terms commercially acceptable to us or at all. If we
acquire another company, we could have difficulty in assimilating that
company's personnel, operations, technology and software. In addition, the
key personnel of the acquired company may decide not to work for us. If we
make other types of acquisitions, we could have difficulty in integrating
the acquired products, services or technologies into our operations. These
difficulties could disrupt our ongoing business, distract our management
and employees and increase our expenses. As of the date of this report, we
have no agreement to enter into any material investment or acquisition
transaction.
22
If our strategic investments fail, the write-offs on such investments
could affect our profitability.
We make strategic investments in new technology start-ups in order to gain
experience in niche technologies. We had invested an aggregate amount of
$2.2 million in strategic investments in fiscal 2002. However, we cannot
assure you that our investments will be successful and we will benefit
from such investments. The loss of any such investments could have a
material adverse effect on our operating results. In fiscal 2001, we wrote
off our investments in EC Cubed Inc. and Alpha Thinx Mobile Services AG.
We may be unable to recoup our investment costs to develop our software
products.
In the three months ended June 30, 2002 and in fiscal 2002 and 2001, we
earned 3.8%, 4.0% and 2.5% of our total revenue from the sale of software
products. The development of our software products requires significant
investments. The markets for our primary software product are competitive
and currently located in developing countries, and we cannot assure you
that such a product will continue to be commercially successful. Also, we
cannot assure you that any new products we develop will be commercially
successful or that the costs of developing such new products will be
recouped. Since software product revenues typically occur in periods
subsequent to the periods in which the costs are incurred for development
of such products, delayed revenues may cause periodic fluctuations of our
operating results.
Our officers and directors can continue to control our board and may have
interests which conflict with those of our other shareholders or holders
of our ADSs.
Our officers and directors, together with members of their immediate
families, in the aggregate, beneficially own approximately 24.34% of our
issued equity shares. As a result, acting together, this group has the
ability to exercise significant control over most matters requiring our
shareholders' approval, including the election and removal of directors
and significant corporate transactions. Additionally, our Articles provide
that Mr. N. R. Narayana Murthy, our Chairman and one of our principal
founders, shall serve as the Chairman of our board and shall not be
subject to re-election as long as he and his relatives own at least 5% of
our outstanding equity shares. This control could delay, defer or prevent
a change in control of our company, impede a merger, consolidation,
takeover or other business combination involving us, or discourage a
potential acquiror from attempting to obtain control over us.
You may be restricted in your ability to exercise preemptive rights under
Indian law and thereby suffer dilution of your ownership position.
Under the Indian Companies Act, 1956 or the "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 shares voted on the resolution. 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, or "Securities Act", is effective with
respect to such rights or an exemption from the registration requirements
of the Securities Act is available. Our 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 we consider appropriate at the time. We may elect not to
file a registration statement related to preemptive rights otherwise
available by law to you. In the case of future issuances, the new
securities may be issued to our depositary, which may sell the securities
for your benefit. The value, if any, our depositary would receive upon the
sale of such securities cannot be predicted. To the extent that you are
unable to exercise preemptive rights granted in respect of the equity
shares represented by your ADSs, your proportional interests in our
company would be reduced.
Holders of ADSs may be restricted in their ability to exercise voting
rights.
At our request, the depositary bank will mail to you any notice of
shareholders' meeting received from us together with information
explaining how to instruct the depositary bank to exercise the voting
rights of the securities represented by ADSs. If the depositary bank
receives voting instructions from you in time, it will endeavor to vote
the securities represented by your ADSs in accordance with such voting
instructions. However, the ability of the depositary bank to carry out
voting instructions may be limited by practical and legal limitations and
the terms of the securities on deposit. We cannot assure that you will
receive voting materials in time to enable you to return voting
instructions to the depositary bank in a timely manner. Securities for
which no voting instructions have been received will not be voted.
Risks related to investments in Indian companies.
We are incorporated in India, and a substantial amount of our assets and
our employees are located in India. Consequently, our financial
performance and the market price of our ADSs will be affected by
political, social and economic developments affecting India, Government of
India policies, including taxation and foreign investment policies,
government currency exchange control, as well as changes in exchange rates
and interest rates.
Regional conflicts in South Asia could adversely affect the Indian
economy, disrupt our operations and cause our business to suffer.
South Asia has from time to time experienced instances of civil unrest and
hostilities among neighboring countries, including between India and
Pakistan. In recent years there have been military confrontations between
India and Pakistan that have occurred in the region of Kashmir. 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, including our ADSs, and on the market for our services.
Political instability or changes in the government in India could delay
the liberalization of the Indian economy and adversely affect economic
conditions in India generally, which could impact our financial results
and prospects.
Since 1991, successive Indian governments have pursued policies of
economic liberalization, including significantly relaxing 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. The Government of India has changed five times
since 1996. The current Government of India, formed in October 1999, has
announced policies and taken initiatives that support the continued
economic liberalization policies that have been pursued by previous
governments. We cannot assure you that these liberalization policies will
continue in the future. The rate of economic liberalization could change,
and specific laws and policies affecting technology companies, foreign
investment, currency exchange and other matters affecting investment in
our securities could change as well. A significant change in India's
economic liberalization and deregulation policies could adversely affect
business and economic conditions in India generally, and our business in
particular.
Indian law limits our ability to raise capital outside India and may limit
the ability of others to acquire us, which could prevent us from operating
our business or entering into a transaction that is in the best interests
of our shareholders.
Indian law relating to foreign exchange management constrains our ability
to raise capital outside India through the issuance of equity or
convertible debt securities. Generally, any foreign investment in, or an
acquisition of, an Indian company requires approval from relevant
government authorities in India including the Reserve Bank of India.
However, the Government of India currently does not require prior
approvals for IT companies, subject to certain exceptions. Under any such
exception, if the Government of India does not approve the investment or
implements a limit on the foreign equity ownership of IT companies, our
ability to seek and obtain additional equity investment by foreign
investors will be constrained. In addition, these restrictions, if
23
applied to us, may prevent us from entering into a transaction, such as an
acquisition by a non-Indian company, which would otherwise be beneficial
for our company and the holders of our equity shares and ADSs.
Indian law imposes foreign investment restrictions that limit a holder's
ability to convert equity shares into ADSs, which may cause our equity
shares to trade at a discount or premium to the market price of our ADSs.
Recently, the Government of India has permitted two-way fungibility of
ADSs, subject however to sectoral caps and certain conditions.
Additionally, investors who exchange ADSs for the underlying equity shares
and are not holders of record will be required to declare to us details of
the holder of record, and the holder of record will be required to
disclose the details of the beneficial owner. Any investor who fails to
comply with this requirement may be liable for a fine of up to Indian
Rs.1,000 for each day such failure continues. Such restrictions on foreign
ownership of the underlying equity shares may cause our equity shares to
trade at a discount or premium to the ADSs.
Except for limited circumstances, the Reserve Bank of India must approve
the sale of equity shares underlying ADSs by a non-resident of India to a
resident of India. Since currency exchange controls are in effect in
India, the Reserve Bank of India will approve the price at which equity
shares are transferred based on a specified formula, and a higher price
per share may not be permitted. Additionally, except in certain limited
circumstances, if an investor seeks to convert the rupee proceeds from a
sale of equity shares in India into foreign currency and then repatriate
that foreign currency from India, he or she will have to obtain an
additional Reserve Bank of India approval for each transaction. We cannot
assure our ADS holders that any required approval from the Reserve Bank of
India or any other government agency can be obtained on any terms or at
all.
Our ability to acquire companies organized outside India depends on the
approval of the Government of India and/or the Reserve Bank of India. Our
failure to obtain approval from the Government of India and/or the
Reserve Bank of India for acquisitions of companies organized outside
India may restrict our international growth, which could negatively affect
our revenues.
The Ministry of Finance of the Government of India and the Reserve Bank of
India must approve our acquisition of any company organized outside of
India. The Government of India has recently issued a policy statement
permitting acquisitions of companies organized outside India with a
transaction value:
- if in cash, effective April 28, 2001 up to 100% of the proceeds from an
ADSs offering; and
- if in stock, the greater of $100 million or ten times the acquiring
company's previous fiscal year's export earnings.
We cannot assure you that any required approval from the Reserve Bank of
India and the Ministry of Finance or any other government agency can be
obtained. Our failure to obtain approval from the Government of India for
acquisitions of companies organized outside India may restrict our
international growth, which could negatively affect our revenues.
The laws of India do not protect intellectual property rights to the same
extent as those of the United States, and we may be unsuccessful in
protecting our intellectual property rights. Unauthorized use of our
intellectual property may result in development of technology, products or
services which compete with our products.
Our intellectual property rights are important to our business. We rely on
a combination of copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect our
intellectual property. However, the laws of India do not protect
proprietary rights to the same extent as laws in the United States.
Therefore, our efforts to protect our intellectual property may not be
adequate. Our competitors may independently develop similar technology or
duplicate our products or services. Unauthorized parties may infringe upon
or misappropriate our products, services or proprietary information.
The misappropriation or duplication of our intellectual property could
disrupt our ongoing business, distract our management and employees,
reduce our revenues and increase our expenses. We may need to litigate to
enforce our intellectual property rights or to determine the validity and
scope of the proprietary rights of others. Any such litigation could be
time-consuming and costly. As the number of patents, copyrights and other
intellectual property rights in our industry increases, and as the
coverage of these rights increase, we believe that companies in our
industry will face more frequent patent infringement claims. Defense
against these claims, even if not meritorious, could be expensive and
divert our attention and resources from operating our company. Although
there are no pending or threatened intellectual property lawsuits against
us, if we become liable to third parties for infringing their intellectual
property rights, we could be required to pay a substantial damage award
and forced to develop non-infringing technology, obtain a license or cease
selling the applications or products that contain the infringing
technology. We may be unable to develop non-infringing technology or to
obtain a license on commercially reasonable terms, or at all.
It may be difficult for you to enforce any judgment obtained in the United
States against us or our affiliates.
We are incorporated under the laws of India and many of our directors and
executive officers, and some of the experts named in this document, reside
outside the United States. In addition, virtually all of our assets and
the assets of many of these persons are located outside the United States.
As a result, you may be unable to:
- effect service of process upon us outside India, or these persons
outside the jurisdiction of their residence; or
- enforce against us in courts outside of India, or these persons outside
the jurisdiction of their residence, judgments obtained in U.S. courts,
including judgments predicated solely upon the federal securities laws
of the United States.
We have been advised by our Indian counsel that the United States and
India do not currently have a treaty providing for reciprocal recognition
and enforcement of judgments (other than arbitration awards) in civil and
commercial matters. Therefore, a final judgment for the payment of money
rendered by any federal or state court in the United States on civil
liability, whether or not predicated solely upon the federal securities
laws of the United States, would not be enforceable in India. However, the
party in whose favor such final judgment is rendered may bring a new suit
in a competent court in India based on a final judgment which has been
obtained in the United States. If and to the extent Indian courts are of
the opinion that fairness and good faith so required, it would, under
current practice, give binding effect to the final judgment which had been
rendered in the United States unless such a judgment contravened
principles of public policy of India.
24
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 risk" under
components of market risk, 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
a) The company held its Annual General Meeting of the Shareholders ("AGM")
on June 8, 2002.
b) The following directors retired by rotation at the AGM held on June 8,
2002, were eligible for re-election, and were re-elected by a requisite
majority vote:
Nandan M. Nilekani T. V. Mohandas Pai
Philip Yeo Phaneesh Murthy K. Dinesh
c) The following are the other directors whose term of office as a
director continues after the AGM:
N. R. Narayana Murthy Senator Larry Pressler S. Gopalakrishnan Rama Bijapurkar
Deepak M. Satwalekar Claude Smadja Prof. Marti G. Subrahmanyam S. D. Shibulal
Prof. Jitendra Vir Singh Srinath Batni Dr. Omkar Goswami
Item 5. Other Information
a) The following is a brief description of the matters voted upon at the
AGM of the company held on June 8, 2002 along with votes cast for,
against or withheld, as well as the number of abstentions and broker
non-votes, as to each matter. The matters to be voted upon were
notified to the shareholders on record and all Registered Holders
of the American Depositary Receipts (the "ADRs") who were holding the
ADRs as on a record date determined by the Depositary.
ORDINARY BUSINESS
Votes against/ Abstentions/
Votes for Withheld Broker Non-votes
Brief Description of the matter put to vote (1)(2)(3) (1)(2)(3) (1)(2)(3)
- ------------------------------------------- --------- -------------- ----------------
1. To receive, consider and adopt the Balance Sheet as at March 31, 2002
and the Profit & Loss Account for the year ended on that date and the
Report of Directors' and Auditors' thereon 186 1 --
2. To declare a final dividend of Rs.12.50 per share pro-rata 186 1 --
3. To appoint a director in place of Mr. Nandan M. Nilekani who retires
by rotation and is eligible for re-election 186 1 --
4. To appoint a director in place of Mr. Philip Yeo who retires by rotation and
is eligible for re-election 186 1 --
5. To appoint a director in place of Mr. K. Dinesh who retires by rotation and
is eligible for re-election 186 1 --
6. To appoint a director in place of Mr. T. V. Mohandas Pai who retires by rotation
and is eligible for re-election 186 1 --
7. To appoint a director in place of Mr. Phaneesh Murthy who retires by rotation
and is eligible for re-election 186 1 --
8. To appoint Auditors to hold office from the conclusion of this meeting until the
conclusion of the next Annual General Meeting and to fix their remuneration 186 1 --
SPECIAL BUSINESS
9. Appointment of Mr. N. R. Narayana Murthy as the Chairman and Chief Mentor of the
company for a further period of five years with effect from May 1, 2002 186 1 --
10. Appointment of Mr. Nandan M. Nilekani as the Chief Executive Officer, President and
Managing Director of the company for a further period of five years with effect
from May 1, 2002 186 1 --
11. Appointment of Mr. K. Dinesh as a Wholetime Director of the company for a
further period of five years with effect from May 1, 2002 186 1 --
12. Appointment of Mr. S. D. Shibulal as a Wholetime Director of the company for a
further period of five years with effect from January 10, 2002 186 1 --
13. Approval of the appointment of Mr. Claude Smadja as a Director of
the company 186 1 --
14. Approval to increase the maximum limit of the investment of Foreign
Institutional Investors in the equity share capital of the company from 49%
to 100% or such other limit as may be fixed by the Government of India or
the Reserve Bank of India or any
other authority 185 2 --
25
1. Under the Indian Companies Act 1956, voting is by show of hands
unless a poll is demanded by a member or members present in person,
or by proxy holding at least one-tenth of the total shares entitled
to vote on the resolution or by those holding paid-up capital of at
least Rs.50,000. Under the Articles of the company member present by
proxy shall be entitled to vote only on a poll but not on a show of
hands, unless such member is a body corporate present by a
representative in which case such proxy shall have a vote on the
show of hand as if he were a member.
2. Under the Indian Companies Act and as per the Articles of the
company, on a show of hands every member present in person shall
have one vote and upon a poll the voting rights of every member
whether present in person or by proxy, shall be in proportion to his
share of the paid-up capital of the company.
3. The votes represent the number of votes in a show of hands. No poll
was demanded during the AGM.
b) On July 23, 2002 Mr. Phaneesh Murthy, Director and Head - Worldwide Sales
and Communications and Product Services, resigned from the company's
Board of Directors and as Head - Sales & Marketing and Communications &
Product Services effective July 23, 2002. Mr. Phaneesh Murthy cited as
the reason for his resignation the need for personal time to devote
attention to, and pursue a successful defense of, a recent lawsuit filed
against him and the company alleging wrongful termination and sexual
harassment.
Item 6. Exhibits and Reports
Infosys filed no reports on Form 8-K during the quarter ended June
30, 2002.
EXHIBIT INDEX
Exhibit Number Description of Document
-------------- -----------------------
19.1 Infosys Quarterly report to the shareholders for
the quarter ended June 30, 2002.
99.1 Certification of Chief Executive Officer and
Chief Financial Officer.
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: August 02, 2002 INFOSYS TECHNOLOGIES LIMITED
By: /s/ Narayana N. R. Murthy
------------------------------------
Narayana N. R. Murthy,
Chairman and Chief Mentor
/s/ Nandan M. Nilekani
------------------------------------
Nandan M. Nilekani,
Chief Executive Officer, President
and Managing Director
26
EXHIBIT INDEX
Exhibit Number Description of Document
-------------- -----------------------
19.1 Infosys Quarterly report to the shareholders for
the quarter ended June 30, 2002.
99.1 Certification of Chief Executive Officer and Chief
Financial Officer.