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, 2000
Commission File Number 333-72195
INFOSYS TECHNOLOGIES LIMITED
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
Bangalore, Karnataka, India
(Jurisdiction of incorporation or organization)
Electronics City, Hosur Road,
Bangalore, Karnataka
India 561 229
+91-80-852-0261
(Address of principal executive offices)
Indicate by check mark registrant files or will file annual reports under cover
Form 20-F or Form 40-F.
Form 20-F x Form 40-F _______
-------
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g 3-2(b) under the Securities Exchange Act of
1934.
Yes ______ No x
---------
If "Yes" is marked, indicate below the file number assigned to registrant in
connection with Rule 12g 3-2(b).
Not applicable.
Currency of Presentation and Certain Defined Terms
Unless the context otherwise requires, references herein to the "company" or to
"Infosys" are to Infosys Technologies Limited, a limited liability company
organized under the laws of the Republic of India. References to "U.S." or
"United States" are to the United States of America, its territories and its
possessions. References to "India" are to the Republic of India. Yantra
Corporation, a Delaware Corporation ("Yantra"), in which the company holds a
minority interest, is considered a subsidiary of the company for purposes of
Indian GAAP. "Infosys" is a registered Indian trademark of the company. All
other trademarks or tradenames used in this Quarterly Report on Form 6-K
("Quarterly Report") are the property of their respective owners.
In this Quarterly Report, references to "$" or "Dollars" or "U.S. Dollars" are
to the legal currency of the United States and references to "Rs" or "Rupees" or
"Indian Rupees" are to the legal currency of India. The company's financial
statements are presented in Indian Rupees and translated into U.S. Dollars and
are prepared in accordance with United States generally accepted accounting
principles ("U.S. GAAP"). References to "Indian GAAP" are to Indian generally
accepted accounting principles. Except as otherwise specified, financial
information is presented in Dollars. References to a particular "fiscal" year
are to the company's fiscal year ended March 31 of such year.
Unless otherwise specified herein, financial information has been converted into
Dollars at the noon buying rate in New York City for cable transfers in foreign
currencies as certified for customs purposes by the Federal Reserve Bank (the
"Noon Buying Rate") as of June 30, 2000, which was Rs. 44.70 per $1.00. For the
convenience of the reader, this Quarterly Report contains translations of
certain Indian rupee amounts into U.S. Dollars which should not be construed as
a representation that such Indian Rupee or U.S. Dollar amounts referred to
herein could have been, or could be, converted to U.S. Dollars or Indian Rupees,
as the case may be, at any particular rate, the rates stated below, or at all.
Any discrepancies in any table between totals and sums of the amounts listed are
due to rounding.
Forward-Looking Statements May Prove Inaccurate
In addition to historical information, this quarterly report contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Factors that
might cause such differences include but are not limited to, those discussed in
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this report. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. In addition, readers
should carefully review the other information in this annual 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
Balance Sheets as of
- ----------------------------------------------------------------------------------------------------------------------------
June 30, 2000 June 30, 1999 March 31, 2000
(Unaudited) (Unaudited) (Audited)
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $105,756,757 $102,612,617 $116,599,486
Trade accounts receivable, net of allowances 51,164,692 24,632,558 31,233,515
Prepaid expenses and other current assets 12,566,158 6,638,499 11,256,295
- ----------------------------------------------------------------------------------------------------------------------------
Total current assets 169,487,607 133,883,674 159,089,296
Property, plant and equipment - net 61,700,055 25,977,938 47,554,772
Deferred income taxes 2,685,061 1,379,249 2,566,266
Investments 6,177,908 177,938 3,177,938
Other assets 6,977,423 4,224,381 6,894,598
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $247,028,054 $165,643,180 $219,282,870
============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 472,473 $ 55,556 $ 976,840
Client deposits 332,058 15,685 425,724
Other accrued liabilities 12,197,959 8,522,103 13,835,635
Income taxes payable 2,965,746 2,101,206 1,878,977
Unearned revenue 14,394,383 5,201,759 4,029,173
- ----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 30,362,619 15,896,309 21,146,349
STOCKHOLDERS' EQUITY
Common stock, $ 0.16 par value; 100,000,000 equity
shares authorized, Issued and outstanding -
66,151,367, 66,138,800 and 66,150,700 as of June 30,
2000, June 30, 1999 and March 31, 2000 8,593,585 8,592,137 8,593,510
Additional paid-in-capital 121,529,268 121,407,662 121,506,726
Accumulated other comprehensive income (18,765,207) (13,052,834) (14,137,933)
Deferred stock compensation (16,323,017) (21,466,348) (17,598,813)
Retained earnings 121,630,806 54,266,254 99,773,031
- ----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 216,665,435 149,746,871 198,136,521
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $247,028,054 $165,643,180 $219,282,870
============================================================================================================================
See accompanying notes to financial statements
Assets - June 30, 2000 Liabilities and Stockholders' Equity - June 30, 2000
- --------------------------------------------- ----------------------------------------------------
- --------------------------------------- --------------------------------
Cash & cash Current liabilities - 12%
equivalents - 62%
- -----------------------------------
Others -11%
- -------------------------------
Accounts
receivables - 21%v
---------------------
Stockholders'
equity - 88%
- ------------------------
Property, plant
and equipment - 25%
3
Statements of Income
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Three months ended Year ended
- ---------------------------------------------------------------------------------------------------------------------------
June 30, 2000 June 30, 1999 March 31, 2000
(Unaudited) (Unaudited) (Audited)
- ---------------------------------------------------------------------------------------------------------------------------
REVENUES
Revenues $ 80,257,833 $ 39,728,900 $ 203,443,754
Cost of revenues 41,962,161 20,620,264 111,080,546
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 38,295,672 19,108,636 92,363,208
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling and marketing expenses 4,197,515 2,489,358 9,643,970
General and administrative expenses 6,416,913 3,062,698 17,102,550
Amortization of stock compensation expense 1,275,796 1,250,100 5,117,635
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 11,890,224 6,802,156 31,864,155
- ---------------------------------------------------------------------------------------------------------------------------
Operating income 26,405,448 12,306,480 60,499,053
Other income, net 3,403,057 3,210,701 9,038,792
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 29,808,505 15,517,181 69,537,845
Provision for income taxes 2,976,832 2,206,302 8,193,317
- ---------------------------------------------------------------------------------------------------------------------------
Net income available for common stockholders $ 26,831,673 $ 13,310,879 $ 61,344,528
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS PER EQUITY SHARE
Basic $ 0.41 $ 0.20 $ 0.93
Diluted $ 0.40 $ 0.20 $ 0.93
WEIGHTED EQUITY SHARES USED IN COMPUTING EARNINGS
PER EQUITY SHARE
Basic 65,977,267 65,688,666 65,659,625
Diluted 67,281,919 65,688,666 65,863,990
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements
4
Statements of Stockholders' Equity (Information as of and for the three months
ended June 30, 2000 and June 30, 1999 is unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Comp- Accumulated Deferred Loan to
Shares Amount paid-in -rehensive Other Comp- stock Trust
capital income -rehensive compensation
income
- -------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 1998 64,068,800 4,545,811 24,415,920 (7,042,229) (7,831,445) (936,365)
- -------------------------------------------------------------------------------------------------------------------------------
Stock split - 3,800,949 - - - -
Cash dividends - - - - - -
Common stock issued 2,070,000 245,377 70,134,623 - - -
ADR issue expenses (4,108,924)
Compensation related to stock option
grants - - 30,407,892 - (30,407,892) -
Amortization of compensation related
to stock option grants - - - - 16,552,538 -
Comprehensive income
Net income available for common
stockholders - - - 17,446,088 - - -
Other comprehensive income
Translation adjustment - - - (2,058,433) (2,058,433) - -
----------
Comprehensive income - - - 15,387,655 - - -
==========
Adjustment on deconsolidation of - - - - - -
subsidiary
Repayment of loan to trust - - - - - 936,365
- -------------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 1999 66,138,800 8,592,137 120,849,511 (9,100,662) (21,686,799) -
- -------------------------------------------------------------------------------------------------------------------------------
ADR issue expenses - - (471,498) - - -
Compensation related to stock option
grants - - 1,029,649 - (1,029,649) -
Amortization of compensation related
to stock option grants - - - - 1,250,100 -
Comprehensive income
Net income available for common
stockholders - - - 13,310,879 - - -
Other comprehensive income
Translation adjustment - - - (3,952,172) (3,952,172) - -
----------
Comprehensive income - - - 9,358,707 - - -
- -------------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 1999 66,138,800 8,592,137 121,407,662 (13,052,834) (21,466,348) -
- -------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------
in $ except share numbers
- -----------------------------------------------------------------------
Retained Total
earnings stockholders'
equity
- -----------------------------------------------------------------------
Balance as of March 31, 1998 27,994,268 41,145,960
- -----------------------------------------------------------------------
Stock split (3,800,949) -
Cash dividends (3,152,863) (3,152,863)
Common stock issued - 70,380,000
ADR issue expenses (4,108,924)
Compensation related to stock option
grants - -
Amortization of compensation related
to stock option grants - 16,552,538
Comprehensive income
Net income available for common
stockholders 17,446,088 17,446,088
Other comprehensive income
Translation adjustment - (2,058,433)
Comprehensive income - -
Adjustment on deconsolidation of 2,468,831 2,468,831
subsidiary
Repayment of loan to trust - 936,365
- ---------------------------------------------------------------------
Balance as of March 31, 1999 40,955,375 139,609,562
- ---------------------------------------------------------------------
ADR issue expenses - (471,498)
Compensation related to stock option
grants - -
Amortization of compensation related
to stock option grants - 1,250,100
Comprehensive income
Net income available for common
stockholders 13,310,879 13,310,879
Other comprehensive income
Translation adjustment - (3,952,172)
Comprehensive income - -
- ---------------------------------------------------------------------
Balance as of June 30, 1999 54,266,254 149,746,871
- ---------------------------------------------------------------------
5
Statements of Stockholders' Equity (contd.)
(Information as of and for the three months ended June 30, 2000 and June 30, 1999 is unaudited)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Common Stock Additional Comp- Accumulated Deferred
Shares Amount paid-in -rehensive Other Comp- stock
capital income -rehensive compensation
income
- -------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 1999 66,138,800 8,592,137 121,407,662 (13,052,834) (21,466,348)
- -------------------------------------------------------------------------------------------------------------------
Cash dividends - - - - -
Common stock issued 11,900 1,373 405,489 - -
ADR issue expenses (306,425)
Amortization of compensation
related to stock option grants - - - - 3,867,535
Comprehensive income
Net income available for common
stockholders - - - 48,033,649 - -
Other comprehensive income
Translation adjustment - - - (1,085,099) (1,085,099) -
----------
Comprehensive income - - - 46,948,550 - -
- -------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2000 66,150,700 8,593,510 121,506,726 (14,137,933) (17,598,813)
- -------------------------------------------------------------------------------------------------------------------
Cash dividends - - - - -
Common stock issued 667 75 22,542 - -
Compensation related to stock
option grants - - -
Amortization of compensation
related to stock option grants - - - - 1,275,796
Comprehensive income
Net income available for common
stockholders - - - 26,831,673 - -
Other comprehensive income
Translation adjustment - - - (4,627,274) (4,627,274) -
----------
Comprehensive income - - - 22,204,399 - -
- -------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2000 66,151,367 8,593,585 121,529,268 (18,765,207) (16,323,017)
===================================================================================================================
- -----------------------------------------------------------------------------
in $ except share numbers
- -----------------------------------------------------------------------------
Loan to Retained Total
Trust earnings stockholders'
equity
- -----------------------------------------------------------------------------
Balance as of June 30, 1999 - 54,266,254 149,746,871
- -----------------------------------------------------------------------------
Cash dividends - (2,526,872) (2,526,872)
Common stock issued - - 406,862
ADR issue expenses (306,425)
Amortization of compensation
related to stock option grants - - 3,867,535
Comprehensive income
Net income available for common
stockholders - 48,033,649 48,033,649
Other comprehensive income
Translation adjustment - - (1,085,099)
Comprehensive income - - -
- -----------------------------------------------------------------------------
Balance as of March 31, 2000 - 99,773,031 198,136,521
- -----------------------------------------------------------------------------
Cash dividends - (4,973,898) (4,973,898)
Common stock issued - - 22,617
Compensation related to stock
option grants - - -
Amortization of compensation
related to stock option grants - - 1,275,796
Comprehensive income
Net income available for common
stockholders - 26,831,673 26,831,673
Other comprehensive income
Translation adjustment - - (4,627,274)
Comprehensive income - - -
- -----------------------------------------------------------------------------
Balance as of June 30, 2000 - 121,630,806 216,665,435
=============================================================================
See accompanying notes to financial statements
6
Statement of cash flows
- ----------------------------------------------------------------------------------------------------------------------------
Three months ended Year ended
- ----------------------------------------------------------------------------------------------------------------------------
June 30, 2000 June 30, 1999 March 31, 2000
(Unaudited) (Unaudited) (Audited)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,831,673 $ 13,310,879 $ 61,344,528
Adjustments to reconcile net income to net cash
provided by operating activities
Loss (gain) on sale of property, plant and equipment 1,019 (1,110) (20,153)
Depreciation 3,999,662 2,173,425 12,268,169
Deferred tax benefit (118,795) 336,126 (850,891)
Amortization of stock compensation expense 1,275,796 1,250,100 5,117,635
Changes in assets and liabilities
Trade accounts receivable (19,931,177) (4,575,880) (11,176,837)
Prepaid expenses and other current assets (474,461) (903,176) (2,390,039)
Income taxes 1,086,769 1,145,409 923,180
Accounts payable (504,367) (19,749) 901,535
Client deposits (93,666) (2,835) 407,204
Unearned revenue 10,365,210 603,147 (569,439)
Other accrued liabilities (1,879,605) 122,303 5,435,835
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 20,558,058 13,438,639 71,390,727
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditure on property, plant and equipment (18,147,110) (4,253,470) (35,926,030)
Proceeds from sale of property, plant and equipment 1,146 3,530 23,555
Loans to employees (918,227) (1,027,375) (6,828,525)
Purchase of investments (2,999,970) - (3,000,000)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (22,064,161) (5,277,315) (45,731,000)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of equity shares 22,617 - 406,862
ADR issue expenses - (471,498) (777,923)
Payment of cash dividends (4,731,969) - (2,526,872)
Net cash used in financing activities (4,709,352) (471,498) (2,897,933)
- ----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (4,627,274) (3,952,172) (5,037,271)
Net increase in cash and cash equivalents during
the period (10,842,729) 3,737,654 17,724,523
Cash and cash equivalents at the beginning of the
period 116,599,486 98,874,963 98,874,963
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $105,756,757 $102,612,617 $116,599,486
============================================================================================================================
Supplementary information
Cash paid towards taxes $ 1,890,063 $ 1,060,893 $ 7,270,137
See accompanying notes to financial statements
7
Notes to Financial Statements as of and for the three months ended June 30, 2000
- --------------------------------------------------------------------------------
1 Company overview and significant accounting policies
1.1 Company overview
Infosys Technologies Limited (the "company") is a publicly held company
providing information technology ("IT") solutions to Fortune 1000 and emerging
new economy companies. Infosys' range of services includes IT consulting, IT
architecture, application development, e-commerce and Internet consulting, and
software maintenance. In addition, the company develops and markets certain
software products. Headquartered in Bangalore, India, the company has 17
state-of-the-art offshore software development facilities located throughout
India that enable it to provide high quality, cost-effective services to
clients in a resource-constrained environment. The United States ("US")
headquarters of Infosys is located in Fremont, California. The company also
maintains offices throughout the US, Europe and Asia. Using its proprietary
Global Delivery Model, the company leverages talent and infrastructure in
different parts of the world to provide high-quality and rapid time-to-market
software solutions to clients worldwide.
1.2 Basis of preparation of financial statements
The accompanying financial statements are prepared in accordance with US
Generally Accepted Accounting Principles ("GAAP"). All amounts are stated in
US dollars, except as specified.
1.3 Principles of consolidation
The financial statements of the company were consolidated with the accounts of
its wholly owned subsidiary, Yantra Corporation ("Yantra") during fiscal 1998.
On October 20, 1998, the company's voting control of Yantra declined to
approximately 47%. Accordingly, the company has followed the equity method of
accounting for Yantra since fiscal 1999. On June 14, 1999, Yantra sold Series
C Convertible Preferred Stock in the amount of US$ 15 million to unrelated
existing and new investors, further reducing the company's voting control to
approximately 25%.
The company continues to own all the outstanding common shares of Yantra but
has no financial obligations or commitments to Yantra and does not intend to
provide Yantra with financial support. Accordingly, the company recognized no
losses of Yantra subsequent to October 20, 1998. The excess of the company's
previously recognized losses over the basis of its investments in Yantra as of
October 20, 1998 were credited to retained earnings.
Yantra was incorporated in the United States in fiscal 1996 for the
development of software products in the retail and distribution areas. All
inter-company transactions between the company and Yantra are eliminated.
1.4 Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 period reported.
Examples of estimates include accounting for expected contract costs to be
incurred to complete software development, allowance for uncollectible
accounts receivable, future obligations under employee benefit plans and
useful lives of property, plant and equipment. Actual results could differ
from those estimates.
1.5 Revenue recognition
The company derives its revenues primarily from software services and also
from the licensing of software products. Revenue with respect to time-and-
material contracts is recognized as related costs are incurred. Revenue from
fixed-price, fixed-time frame contracts is recognized upon the achievement of
specified milestones identified in the related contracts, in accordance with
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 three-month warranty for corrections of errors and telephone
support for all its fixed-price, fixed-time frame contracts. Costs associated
with such services are accrued at the time related revenues are recorded.
Revenue from licensing of software products is recognized upon shipment of
products and fulfillment of acceptance terms, if any, provided that no
significant vendor obligations remain and the collection of the related
receivable is probable. When the company receives advance payments for
software products, such payments are
8
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.
1.6 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 consist of cash, cash on deposit with
banks, marketable securities and deposits with corporations.
1.7 Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. The company depreciates property, plant and equipment over their
estimated useful lives using the straight-line method. The estimated useful
lives of assets are as follows:
Buildings 15 years
Furniture and fixtures 5 years
Computer equipment 2-5 years
Plant and equipment 5 years
Vehicles 5 years
The cost of software purchased for use in software development and services is
charged to the cost of revenues at the time of acquisition. The amount of
third party software expensed in the three months ended June 30, 2000 and June
30, 1999 and in fiscal 2000 was $ 1,703,779, $ 767,066 and $ 3,816,840
respectively.
Deposits paid towards the acquisition of property, plant and equipment
outstanding at each balance sheet date and the cost of property, plant and
equipment not put to use before such date are disclosed under "Capital work-
in-progress".
1.8 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 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. Software product development costs incurred subsequent to the
achievement of technological feasibility are not significant and are expensed
as incurred.
1.10 Foreign currency translation
The accompanying financial statements are reported in US dollars. The
functional currency of the company is the Indian rupee ("Rs."). The
translation of the Indian rupee into US dollars is performed for balance sheet
accounts using the exchange rate in effect at the balance sheet date, and for
revenue and expense accounts using a monthly simple average exchange rate for
the respective periods. The gains or losses resulting from such translation
are reported as "Other comprehensive income", a separate component of
stockholders' equity. The method for translating expenses of overseas
operations depends upon the funds used. If the payment is made from a rupee
denominated bank account, the exchange rate prevailing on the date of the
payment would apply. If the payment is made from a foreign currency, i.e.,
non-rupee denominated account, the translation into rupees is performed at the
average monthly exchange rate.
1.11 Foreign currency transactions
The company enters into foreign exchange forward contracts to limit the effect
of exchange rate changes on its foreign currency receivables. Gains and losses
on these contracts are recognized as income or expense in the statements of
income as incurred, over the life of the contract.
1.12 Earnings per share
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
128, Earnings Per Share, basic earnings per share are computed using the
weighted average number of common shares outstanding during the
9
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.
1.13 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.
1.14 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.
1.15 Concentration of risk
Financial instruments that potentially subject the company to concentrations
of credit risk consist principally of cash equivalents, trade accounts
receivable 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, 2000, June 30, 1999
and March 31, 2000, there was no significant risk of loss in the event of
nonperformance of the counterparties to these financial instruments. 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.
1.16 Retirement benefits to employees
1.16.1 Gratuity
In accordance with Indian law, the company provides for gratuity, a defined
benefit retirement plan (the "Gratuity Plan") covering all employees. The
Gratuity Plan provides a lump sum payment to vested employees at retirement or
termination of employment of an amount based on the respective employee's
salary and the years of employment with the company. The company established
the Infosys Technologies Limited Employees' Group Gratuity Fund Trust (the
"Gratuity Fund Trust") on April 1, 1997. Liabilities with regard to the
Gratuity Plan are determined by actuarial valuation, based upon which the
company makes contributions to the Gratuity Fund Trust. Trustees administer
the contributions made to the Gratuity Fund Trust. The funds contributed to
the Gratuity Fund Trust are invested in specific securities as mandated by the
law and generally consist of federal and state government bonds and the debt
instruments of government-owned corporations.
1.16.2 Superannuation
Apart from being covered under the Gratuity Plan described above, the senior
officers of the company are also participants in a defined contribution plan
maintained by the company. The plan is termed the superannuation plan (the
"plan") to which the company makes monthly contributions based on a specified
percentage of each covered employee's salary. The company has no further
obligations under the plan beyond its monthly contributions.
1.16.3 Provident fund
In addition to the above benefits, all employees receive benefits from a
provident fund, which is a defined contribution plan. Both the employee and
the company make monthly contributions to the plan, each equal to 12% of each
covered employee's salary. The company established a provident fund trust in
August 1996, to which a part of the contributions are made each month. The
remainder of the contributions is made to the Government's provident fund. The
company has no further obligations under provident fund beyond its monthly
contributions.
1.17 Investments
Investments where the company controls between 20% and 50% of the voting
interest are accounted for using the equity method. Investment securities in
which the company controls less than 20% voting interest are currently
classified as "Available-for-sale securities".
10
Investment securities designated as "available-for-sale" are carried at their
fair value based on quoted market prices, with unrealized gains and losses,
net of deferred income taxes, reported as a separate component of
stockholders' equity. 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.
1.18 Stock-based compensation
The company uses the intrinsic value-based method of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, to
account for its employee stock-based compensation plan. The company has
therefore adopted the pro forma disclosure provisions of SFAS No. 123,
Accounting for Stock-Based Compensation.
1.19 Dividends
Dividends are recognized on actual payment.
1.20 Notes to financial statements
1.20.1 Cash and cash equivalents
The cost and fair values for cash and cash equivalents as of June 30, 2000 and
1999 and March 31, 2000, respectively are as follows:
- -------------------------------------------------------------------------------
As of June 30, As of March 31,
2000 1999 2000
- -------------------------------------------------------------------------------
Cost and fair values
Cash and bank deposits $ 95,467,109 $ 89,984,743 $ 99,035,223
Deposits with corporations 10,289,648 12,627,874 17,564,263
$105,756,757 $102,612,617 $116,599,486
================================================================================
1.20.2 Trade accounts receivable
Trade accounts receivable, as of June 30, 2000 and 1999 and March 31, 2000,
net of allowance for doubtful accounts of $ 587,229, $ 570,908 and $ 507,487,
respectively amounted to $ 51,164,692, $ 24,632,558 and $ 31,233,515,
respectively. The age profile of trade accounts receivable is given below.
in %
- ----------------------------------------------------------------------------
As of June 30, As of March 31,
Period (in days) 2000 1999 2000
- ----------------------------------------------------------------------------
0 - 30 76.2 55.0 64.7
31 - 60 10.1 27.4 31.8
61 - 90 7.9 10.2 1.8
More than 90 5.8 7.4 1.7
- ----------------------------------------------------------------------------
100.0 100.0 100.0
============================================================================
Trade accounts receivable includes accounts receivable from Yantra amounting
to $ 376,783, $ 138,032 and Nil as of June 30, 2000 and 1999 and March 31,
2000, respectively.
1.20.3 Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following:
- ----------------------------------------------------------------------------
As of June 30, As of March 31,
2000 1999 2000
- ----------------------------------------------------------------------------
Prepaid expenses $ 3,750,204 $2,303,597 $ 3,602,334
Rent deposits 1,840,268 1,435,060 1,798,738
Deposits with government
organizations 470,338 167,613 721,476
Loans to employees 5,949,654 2,640,844 5,114,253
Costs in excess of billings 224,035 - -
Other advances 331,659 91,385 19,494
- ---------------------------------------------------------------------------
$12,566,158 $6,638,499 $11,256,295
===========================================================================
Other advances represent advance payments to vendors for the supply of goods and
rendering of services. Deposits with government organizations relate principally
to leased telephone lines and electricity supplies. Costs in excess of billings
represent costs incurred on fixed price contracts in respect of which milestones
are yet to be achieved.
11
1.20.4 Property, plant and equipment - net
Property, plant and equipment consist of the following:
- ------------------------------------------------------------------------------------------
As of June 30, As of March 31,
2000 1999 2000
- ------------------------------------------------------------------------------------------
Land $ 5,869,104 $ 2,516,958 $ 833,786
Buildings 20,128,287 7,941,854 13,509,409
Furniture and fixtures 12,543,688 5,353,467 9,156,208
Computer equipment 30,506,203 20,196,616 25,742,780
Plant and equipment 14,625,678 7,882,406 11,871,138
Vehicles 30,563 40,530 31,292
Capital work-in-progress 11,883,037 3,280,144 13,064,301
- ------------------------------------------------------------------------------------------
95,586,560 47,211,975 78,208,914
Accumulated depreciation (33,886,505) (21,234,037) (30,654,142)
- ------------------------------------------------------------------------------------------
$ 61,700,055 $ 25,977,938 $ 47,554,772
=========================================================================================
Depreciation expense amounted $ 3,999,662, $ 2,173,425 and $ 12,268,169 for the
three months ended June 30, 2000 and June 30, 1999 and fiscal 2000,
respectively.
1.20.5 Investments
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair values of available-for-sale securities by major investment type
and class of investment are as follows:
- -----------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized
cost holding gains holding gains Fair value
- -----------------------------------------------------------------------------------------------------------------
As of June 30, 2000
EC Cubed Inc. - 1,300,108
Series D Convertible
Preferred Stock, par value
$0.0001 each $3,000,000 - - $3,000,000
CiDRA Corporation - 33,333
Series D Convertible
Preferred Stock, par value
$0.01 each 2,999,970 - - 2,999,970
JASDIC Park Company - 480
Common Stock, par value
(Yen) 50,000 each 177,576 - - 177,576
Others 362 - - 362
- -----------------------------------------------------------------------------------------------------------------
$6,177,908 - - $6,177,908
=================================================================================================================
As of June 30, 1999
JASDIC Park Company - 480
Common Stock, par value
(Yen) 50,000 each $ 177,576 - - $ 177,576
Others 362 - - 362
- -----------------------------------------------------------------------------------------------------------------
$ 177,938 - - $ 177,938
=================================================================================================================
As of March 31, 2000
EC Cubed Inc. - 1,300,108
Series D Convertible
Preferred Stock, par value
$0.0001 each $3,000,000 - - $3,000,000
JASDIC Park Company - 480
Common Stock, par value
(Yen) 50,000 each 177,576 - - 177,576
Others 362 - - 362
- -----------------------------------------------------------------------------------------------------------------
$3,177,938 - - $3,177,938
=================================================================================================================
1.20.6 Other assets
Other assets mainly represent the non-current portion of loans to employees.
12
1.20.7 Related parties
The company grants loans to employees for acquiring assets such as property and
cars. Such loans are repayable over fixed periods ranging from 1 to 100 months.
The rates at which the loans have been made to employees vary between 0% to 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,
2000 and 1999 and March 31, 2000, amounts receivable from officers amounting to
$ 340,151, $ 421,608 and $ 309,835, 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,
2000 1999 2000
- ----------------------------------------------------------------------------------------------
2000 - $2,640,844 -
2001 $ 5,949,654 1,203,661 $ 5,114,252
2002 2,013,521 963,770 1,887,808
2003 1,431,295 635,195 1,383,397
2004 838,738 482,664 861,752
2005 676,932 - 696,581
Thereafter 2,016,937 939,091 2,065,061
- ----------------------------------------------------------------------------------------------
Total $12,927,077 $6,865,225 $12,008,851
==============================================================================================
The estimated fair values of related party receivables amounted to $ 9,792,923,
$ 6,442,125 and $ 8,959,996 as of June 30, 2000, June 30, 1999 and March 31,
2000, respectively. These amounts were determined using available market
information and appropriate valuation methodologies. Considerable judgement is
required to develop these estimates of fair value. Consequently, these estimates
are not necessarily indicative of the amounts that the company could realize in
the market.
1.20.8 Other accrued liabilities
Other accrued liabilities comprise the following:
- ----------------------------------------------------------------------------------------------
As of June 30, As of March 31,
2000 1999 2000
- ----------------------------------------------------------------------------------------------
Accrued compensation to staff $ 7,388,232 $3,587,142 $ 7,747,965
Accrued dividends 307,801 1,194,438 65,872
Provision for post sales client support 1,232,322 943,728 1,265,849
Employee withholding taxes payable - - 1,530,832
Others 3,269,604 2,796,795 3,225,117
- ----------------------------------------------------------------------------------------------
$12,197,959 $8,522,103 $13,835,635
==============================================================================================
1.20.9 Employee post retirement benefits
1.20.9.1 Superannuation
The company contributed $ 209,177, $ 58,294 and $ 244,248 to the superannuation
plan in the three months ended June 30, 2000 and 1999 and fiscal 2000,
respectively.
1.20.9.2 Provident fund
The company contributed $ 463,866, $ 259,539 and $ 1,198,772 to the provident
fund in the three months ended June 30, 2000 and 1999 and fiscal 2000,
respectively.
1.20.10 Preferred stock of Yantra
In September 1997, Yantra, sold 5,000,000 shares of Series A Convertible
Preferred Stock, par value $ 0.01 per share ("Series A Convertible Preferred")
at $ 0.75 per share for $ 3,750,000 in cash. The related offering costs of $
49,853 were offset against the proceeds of the issue. Of these, 2,000,000 shares
were issued to the company and 3,000,000 shares were issued to third party
investors. The preferred stock issued to the company was eliminated upon
consolidation. Preferred stock issued to third party investors was reported in
the balance sheet as preferred stock of subsidiary.
In August 1998, Yantra sold 4,800,000 shares of Series B Convertible Preferred
Stock, par value $ 0.01 per share ("Series B Convertible Preferred") at $ 1.25
per share for $ 6,000,000 in cash to venture capitalists. The related offering
costs of $ 44,416 were offset against the proceeds of the issue. In connection
with this sale, Yantra issued warrants to purchase 810,811 shares of Series B-1
Convertible Preferred Stock, par value $ 0.01 per share ("Series B-1 Convertible
Preferred"), at $ 0.01 per share for $ 8,108 in cash. Such warrants are
immediately
13
exercisable and expire in seven years. The exercise price of the warrants is
based upon the then current market price of the Series B-1 Convertible Preferred
at the time of exercise.
Holders of Series A Convertible Preferred vote with holders of common stock on
an as-converted basis, except as otherwise required by Delaware law. The Series
A Convertible Preferred are convertible into common stock at a 1:1 ratio
(subject to certain adjustments): (i) automatically in the event of an initial
public offering with gross proceeds of $ 10,000,000 or more; or (ii) at any time
at the holder's option. The holders of Series A Convertible Preferred are
entitled to a 6% cumulative dividend ($ 0.045 per share) and to receive
additional dividends at the same rate of dividends, if any, declared and paid on
the common stock, calculated on an as-converted basis. Upon a liquidation or
sale of Yantra, holders of the Series A Convertible Preferred are entitled to a
liquidation preference of $ 0.75 per share plus accrued and unpaid dividends;
and any remaining assets will be distributed to holders of the common stock. The
Series A Convertible Preferred is redeemable at the election of holders of 75%
of the outstanding shares of Series A Convertible Preferred at any time after
September 29, 2004 at a redemption price of $ 0.75 per share plus accrued but
unpaid dividends.
The holders of Series B and B-1 Convertible Preferred are entitled to similar
rights, privileges and restrictions as that of Series A Convertible Preferred.
In October 1998, Infosys sold 1,363,637 shares of Series A Convertible Preferred
in Yantra, having a cost basis of $ 879,042 to a third party investor for $
1,500,000 thereby recognizing a gain of $ 620,958 and reducing its voting
interest in Yantra to approximately 47%. The company presently accounts for
Yantra by the equity method. Deconsolidation of Yantra has resulted in a credit
to the company's retained earnings of an amount of $ 2,468,831 representing the
excess of Yantra's losses previously recognized by the company, amounting to $
4,445,903, over the company's residual investment basis in Yantra amounting to $
1,977,072.
1.20.11 Stockholders' equity
The company has only one class of capital stock referred to herein as equity
shares. In fiscal 1999, the board of directors authorized a two-for-one stock
split of the company's equity shares effected in the form of a stock dividend.
Also, in November 1999, the board of directors authorized a two-for-one stock
split of the company's equity shares, whereby each issued and outstanding equity
share, par value $ 0.32 each, was split into two equity shares, par value $ 0.16
each. All references in the financial statements to number of shares, per share
amounts and market prices of the company's equity shares have been retroactively
restated to reflect the stock splits.
1.20.12 Equity shares
1.20.12.1 Voting
Each holder of equity shares is entitled to one vote per share.
1.20.12.2 Dividends
Should the company declare and pay dividends, such dividends will be paid in
Indian Rupees and pro rata from the date of holding such shares. The company
paid a cash dividend of $ 4,973,898 during the three months ended June 30, 2000.
Indian law mandates that any dividend be declared out of distributable profits
only after the transfer of up to 10% of net income computed in accordance with
current regulations to a general reserve. Also, the remittance of dividends
outside India is governed by Indian law on foreign exchange. Such dividend
payments are also subject to applicable taxes.
1.20.12.3 Liquidation
In the event of any liquidation of the company, the holders of common stock
shall be entitled to receive all of the remaining assets of the company, after
distribution of all preferential amounts, if any. Such amounts will be in
proportion to the number of shares of equity shares held by the stockholders.
1.20.12.4 Stock options
There are no voting, dividend or liquidation rights to the holders of warrants
issued under the company's stock option plan.
1.20.13 Other income, net
Other income, net, consists of the following:
- ----------------------------------------------------------------------------------------------------------------
Three months ended Year ended
June 30, 2000 June 30, 1999 March 31, 2000
- ----------------------------------------------------------------------------------------------------------------
Interest income and others $1,684,062 $1,313,329 $5,729,653
Income from sale of special import licenses - - 426,407
Exchange gains 1,665,744 1,897,372 2,882,732
14
Others 53,251 - -
- ----------------------------------------------------------------------------------------------------------------
$3,403,057 $3,210,701 $9,038,792
================================================================================================================
1.20.14 Operating leases
The company has various operating leases for office buildings that are renewable
on a periodic basis at its option. Rental expense for operating leases in the
three months ended June 30, 2000 and 1999 and in fiscal 2000 were $ 738,059,
$479,608 and $ 2,387,334, respectively. The operating leases are cancelable at
the company's option.
The company leases some of its office space under several 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,
--------------------------------------------------
2001 $ 992,485
2002 940,330
2003 941,052
2004 962,623
2005 476,366
Thereafter 974,732
--------------------------------------------------
$5,287,588
==================================================
1.20.15 Research and development
General and administrative expenses in the accompanying statements of income
include research and development expenses of $ 744,453, $ 378,983 and $
1,904,123 for the three months ended June 30, 2000 and 1999 and fiscal 2000,
respectively.
1.20.16 Employees' Stock Offer Plans ("ESOP")
1994 Employees Stock Offer Plan (the "1994 Plan"): In September 1994, the
company established the 1994 Plan which provided for the issuance of 6,000,000
warrants (as adjusted for the stock split effective June 1997, December 1998 and
December 1999) to eligible employees. The warrants were issued to an employee
welfare trust (the "Trust") at Rs. 1 each and were purchased by the Trust using
the proceeds of a loan obtained from the company. The Trust holds the warrants
and transfers them to eligible employees at Rs. 1 each. Each warrant entitles
the holder to purchase one of the company's equity shares at a price of Rs. 100
per share. The warrants and the equity shares received upon the exercise of
warrants are subject to a five-year aggregate vesting period from the date of
issue of warrants to employees. The warrants expire upon the earlier of five
years from the date of issue or September 1999. The fair market value of each
warrant is the market price of the underlying equity shares on the date of the
grant.
In 1997, in anticipation of a share dividend to be declared by the company, the
Trust exercised all warrants held by it and converted them into equity shares
with the proceeds of a loan obtained from the company. In connection with the
warrant exercise and the share dividend, on an adjusted basis, 3,011,200 equity
shares were issued to employees of the company who exercised stock purchase
rights and 2,988,800 equity shares were issued to the Trust for future issuance
to employees pursuant to the 1994 Plan. Following such exercise, there were no
longer any rights to purchase equity shares from the company in connection with
the 1994 Plan. Only equity shares held by the Trust remained for future issues
to employees, subject to vesting provisions. The equity shares acquired upon the
exercise of the warrants vests 100% upon the completion of five years of
service. The warrant holders were entitled to exercise early, but the shares
received are subject to the five-year vesting period. As of June 30, 2000, the
company's outstanding equity shares included 520,800 equity shares held by the
Trust of which 336,000 equity shares were allotted to employees, subject to
vesting provisions and are included in the calculation of basic and diluted
earnings per share. The remaining 184,800 equity shares were not considered
outstanding for purposes of calculating diluted earnings per share. The warrants
allotted and the underlying equity shares are not subject to any repurchase
obligations by the company.
The company has elected to use the intrinsic value-based method of APB 25 to
account for its employee stock-based compensation plan. Accordingly, in the
three months ended June 30, 2000 and 1999 and fiscal 2000, the company recorded
deferred compensation of Nil, $ 1,029,649 and $ 1,029,649, respectively for the
difference, on the grant date, between the exercise price and the fair value as
determined by quoted market prices of the common stock underlying the warrants.
The deferred compensation is amortized on a straight-line basis over the vesting
period of the warrants/equity shares.
In fiscal 1999, the company declared a stock split of two equity shares for each
equity share outstanding to all its stockholders including participants in the
1994 Plan in the form of a stock dividend and consequently recognized an
accelerated compensation charge at the time of the stock dividend amounting to $
12,906,962.
15
1998 Employees Stock Offer Plan (the "1998 Plan"). The company's 1998 Plan
provides for the grant of non-statutory stock options and incentive stock
options to employees of the company. The establishment of the 1998 Plan was
approved by the board of directors in December 1997 and by the stockholders in
January 1998. The Government of India has approved the 1998 Plan, subject to a
limit of 1,470,000 equity shares representing 2,940,000 American Depositary
Shares ("ADS") to be issued under the 1998 Plan. Unless terminated sooner, the
1998 Plan will terminate automatically in January 2008. All options under the
1998 Plan will be exercisable for equity shares represented by American
Depositary Shares (ADSs). The board of directors or a committee of the board
may administer the 1998 Plan. 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 a maximum of seven members, the majority of
whom 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.
The activity in the warrants/equity shares of the 1994, 1998 and 1999
Employees Stock Offer Plans in the three months ended June 30, 2000 and 1999
and in fiscal 2000 is set out below.
------------------------------------------------------------------------------------------------------------
Three months ended Three months ended Year ended
------------------------------------------------------------------------------------------------------------
June 30, 2000 June 30, 1998 March 31, 2000
Shares Weighted Shares Weighted Shares Weighted
arising average arising average arising average
out of exercise out of exercise out of exercise
options price options price options price
------------------------------------------------------------------------------------------------------------
1994 Option plan:
Outstanding at the
beginning of the period 341,400 328,000 328,000
Granted 30,000 $ 1.15 30,000 $ 1.15
Forfeited (5,400) $ 1.15 (3,000) $ 1.15 (16,600) $ 1.15
Exercised - - - - - -
------------------------------------------------------------------------------------------------------------
Outstanding at the
end of the period 336,000 355,000 341,400
-----------------------------------------------------------------------------------------------------------
Exercisable at the end
of the period 336,000 355,000 341,400
Weighted-average fair value
of grants during the period
at less than market $35.48 $ 35.48
====== =======
1998 Option plan:
Outstanding at the
beginning of the period 344,750 213,000 213,000
Granted 73,350 $324.36 - - 147,150 $228.60
Forfeited (5,750) $415.72 - - (3,500) $ 34.00
Exercised (667) $ 34.00 - - (11,900) $ 34.00
------------------------------------------------------------------------------------------------------------
Outstanding at the end
of the period 411,683 213,000 344,750
-------------------------------------------------------------------------------------------------------------
Exercisable at the end
of the period 411,683 213,000 344,750
Weighted-average fair value
of grants during the period $324.36 - $228.60
=======
16
1999 Option plan:
Outstanding at the beginning
of the period 1,006,800 - -
Granted 658,650 $131.97 1,014,500 $ 99.12
Forfeited (23,600) $131.89 (7,700) $127.98
Exercised - - - -
---------------------------------------------------------------------------------------------
Outstanding at the end of the
period 1,641,850 1,006,800
---------------------------------------------------------------------------------------------
Exercisable at the end of the
period 1,641,850 1,006,800
Weighted-average fair value
of grants during the period
$131.97 $ 99.12
---------------------------------------------------------------------------------------------
1.20.16 Employees' Stock Offer Plans (continued)
The following table summarizes information about stock options outstanding as
of June 30, 2000:
Outstanding Exercisable
----------------------------------------------------------------------------------------------------------------------------------
Number of shares Weighted average Number of shares
Range of exercise prices arising out of remaining Weighted average arising out of Weighted average
options contractual life exercise price options exercise price
----------------------------------------------------------------------------------------------------------------------------------
$ 1.15 - $ 324.36 2,389,533 2.52 years $103.19 2,389,533 $103.19
----------------------------------------------------------------------------------------------------------------------------------
1.20.17 Income taxes
The provision for income taxes comprises:
--------------------------------------------------------------------------------------------------------
Three months ended Year ended
June 30, 2000 June 30, 1999 March 31, 2000
--------------------------------------------------------------------------------------------------------
Current taxes
Domestic taxes $1,063,487 $ 642,873 $2,505,952
Foreign taxes 2,032,140 1,227,303 6,538,256
--------------------------------------------------------------------------------------------------------
3,095,627 1,870,176 9,044,208
Deferred taxes
Domestic taxes (118,795) 336,126 (850,891)
Foreign taxes - - -
--------------------------------------------------------------------------------------------------------
(118,795) 336,126 (850,891)
--------------------------------------------------------------------------------------------------------
Aggregate taxes $2,976,832 $2,206,302 $8,193,317
========================================================================================================
The tax effects of significant temporary differences that resulted in deferred
tax assets and liabilities and a description of the financial statement items
that created these differences are as follows:
- --------------------------------------------------------------------------------------------------------------------
Three months ended Year ended
June 30, 2000 June 30, 1999 March 31, 2000
------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Property, plant and equipment 2,685,061 $1,379,249 $2,480,883
Others 226,083 - 195,383
------------------------------------------------------------------------------------------------------------------
2,911,144 1,379,249 2,676,266
Less: Valuation allowance (226,083) - (110,000)
------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $2,685,061 $1,379,249 $2,566,266
==================================================================================================================
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,
2000. 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.
17
1.20.17 Income taxes (continued)
A reconciliation of the income tax provision to the amount computed by
applying the statutory income tax rate to the income before provision for
income taxes is summarized below.
Three months ended Year ended
June 30, 2000 June 30, 1999 March 31, 2000
------------------------------------------------------------------------------------------------------------------------
Net income before taxes $ 29,808,505 $15,517,181 $ 69,537,845
Enacted tax rates in India 38.5% 38.5% 38.5%
------------------------------------------------------------------------------------------------------------------------
Computed expected tax expense 11,476,274 5,974,115 26,772,070
Less: Tax effect due to non-taxable export
income (11,331,368) (5,916,567) (24,019,942)
Others 483,675 378,349 (1,121,972)
Effect of tax rate change - 543,102 (29,771)
Effect of prior period tax adjustments 316,111 - 54,676
------------------------------------------------------------------------------------------------------------------------
Provision for domestic income taxes 944,692 978,999 1,655,061
Effect of tax on foreign income 2,032,140 1,227,303 6,538,256
-------------------------------------------------------------------------------------------------------------------------
Aggregate taxes $ 2,976,832 $ 2,206,302 $ 8,193,317
=========================================================================================================================
The provision for foreign taxes is due to income taxes payable overseas,
principally in the United States. 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"; and
(ii) a tax deduction for profits derived from exporting computer software. All
but one of the company's software development facilities are located in
designated Software Technology Parks. The benefits of these tax incentive
programs have historically resulted in an effective tax rate for the company
well below statutory rates.
1.20.18 Earnings per share
A reconciliation of the equity shares used in the computation of basic and
diluted earnings per equity share is set out below.
--------------------------------------------------------------------------------------------------------------------
Three months ended Year ended
June 30, 2000 June 30, 1999 March 31, 2000
--------------------------------------------------------------------------------------------------------------------
Basic earnings per equity share - weighted average
number of common shares outstanding excluding
unallocated shares of ESOP 65,977,267 65,688,666 65,659,625
Effect of dilutive common equivalent shares - stock
options outstanding 1,304,652 - 204,365
--------------------------------------------------------------------------------------------------------------------
Diluted earnings per equity share - weighted average
number of common shares and common equivalent shares
outstanding 67,281,919 65,688,666 65,863,990
--------------------------------------------------------------------------------------------------------------------
1.20.19 Lines of credit
The company has a line of credit from its bankers for its working capital
requirement of $ 1,120,000 bearing interest at prime lending rates as
applicable from time to time. The prime lending rate of interest as of June
30, 2000 was 15.5%. This line of credit is secured by inventories and
accounts receivable. The line of credit contains certain financial covenants
and restrictions on indebtedness and is renewable every 12 months. As of June
30, 2000, the company had no balance outstanding under this facility.
1.20.20 Financial instruments
Foreign exchange forward contracts
The company enters into foreign exchange forward contracts to offset the
foreign currency risk arising from the accounts receivable denominated in
currencies other than the Indian rupee, primarily the US dollar. The counter
party to the company's foreign currency forward contracts is generally a bank.
Management believes that the risks or economic consequences of non-performance
by the counter party are not material to its financial position or results of
operations. There were no significant foreign exchange gains and losses on
foreign exchange forward contracts during the three months ended June 30, 2000
and 1999 and fiscal 2000. Open foreign exchange forward contracts as of June
30, 2000, June 30, 1999 and March 31, 2000 were Nil, $ 6,000,000 and Nil,
respectively.
18
1.20.21 Segment reporting
1.20.21.1 Revenue by geographic area
--------------------------------------------------------------------------
Three months ended Year ended
June 30, 2000 June 30, 1999 March 31, 2000
--------------------------------------------------------------------------
North America $59,785,038 $30,754,911 $158,723,649
Europe 13,766,329 6,512,367 30,064,939
India 1,013,388 2,064,547 2,912,091
Rest of the world 5,693,078 397,075 11,743,075
--------------------------------------------------------------------------
$80,257,833 $39,728,900 $203,443,754
==========================================================================
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information requires that an enterprise report a measure of profit or loss and
total assets for each reportable segment. Certain expenses such as personnel
costs, communication, depreciation on plant and machinery, etc., which form a
significant component of total expenses, are not specifically allocable to
these geographic segments as the underlying services are used interchangeably
between reportable segments. Management believes that it is not practical to
provide segment disclosures relating to segment costs and expenses, and
consequently segment profits or losses, since a realistic allocation cannot be
made. The fixed assets used in the company's business are not identifiable to
any particular reportable segment and can be used interchangeably among
segments. Consequently, management believes that it is not practical to
provide segment disclosures relating to total assets since a realistic
analysis among the various geographic segments is not possible.
1.20.21.2 Significant clients
No client accounted for more than 10% of the revenues in the three months
ended June 30, 2000 and 1999 and fiscal 2000, respectively.
1.20.22 Commitments and contingencies
The company has outstanding performance guarantees for various statutory
purposes totaling $ 1,279,794, $ 652,175 and $ 1,207,110 as of June 30, 2000,
June 30, 1999 and March 31, 2000, respectively. These guarantees are generally
provided to governmental agencies.
1.20.23 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.
1.20.24 Non-monetary transaction
During the three months ended June 30, 2000, the company transferred certain
Intellectual Property Rights ("IPR") that it had developed and owned in a
product called OnScan to OnScan Inc. OnScan is a comprehensive web-enabled
wireless notification product. In exchange for the transfer, the company
received consideration in the form of securities including 100,000 Common
Stock, par value $ 0.01 each, 100,000 Series A Voting Convertible Preferred
Stock, par value $ 0.0001 each and 4,400,000 Series A Nonvoting Convertible
Preferred Stock, par value $ 0.0001 each. Convertible Preferred Stock is
convertible into Common Stock automatically upon the closing of an Initial
Public Offering by OnScan Inc.
As of June 30, 2000, the company's controlling interest in OnScan Inc. was
approximately 12%. The transfer was recorded at historic cost and,
accordingly, no gain was recognized on this transaction as of the date of
transfer of the IPR.
19
Item 2. Management Discussion and Analysis of Financial Conditions and Results
of Operations
Investors are cautioned that this discussion contains forward-looking statements
that involve risks and uncertainties. When used in this discussion, the words
"anticipate", "believe", "estimate", "intend", "will" and "expect" and other
similar expressions as they relate to the company or its business are intended
to identify such forward-looking statements. The company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events, or otherwise. Actual results,
performances or achievements could differ materially from those expressed or
implied in such forward-looking statements. Factors that could cause or
contribute to such differences include those described under the heading "Risk
Factors" in the Prospectus filed with the SEC, the factors discussed in the Form
20-F filed with the SEC, and those factors discussed elsewhere in this report.
Readers are cautioned not to place undue reliance on these forward-looking
statements that speak only as of their dates. The following discussion and
analysis should be read in conjunction with the company's financial statements
included herein and the notes thereto.
2.1 Overview
Infosys Technologies Limited (the "company") is a publicly held company
providing information technology ("IT") solutions to Fortune 1000 and
emerging new economy companies. Infosys' range of services includes IT
consulting, IT architecture, application development, e-commerce and
Internet consulting, and software maintenance. In addition, the company
develops and markets certain software products. From fiscal 1995 through
fiscal 2000, total revenue increased from $ 18.1 million to $ 203.4
million, the number of the company's software professionals worldwide
increased from approximately 585 to approximately 4,625 and the number of
its India-based software development centers increased from two to
seventeen. The company also operationalized one global development center
at Toronto, Canada in fiscal 2000.
The company's revenues are generated principally from software services
provided either on a fixed-price, fixed-time frame or a time-and-materials
basis. Revenues from services provided on a time-and-materials basis are
recognized in the month that services are provided and related costs are
incurred. Revenues from services provided on a fixed-price, fixed-time
frame basis are recognized upon the achievement of specified milestones
identified in the related contracts, in accordance with the percentage of
completion method. Cost of completion estimates are subject to periodic
revisions. Although the company has revised its project completion
estimates from time to time, such revisions have not, to date, had a
material adverse effect on the company's operating results or financial
condition. Since the company bears the risk of cost overruns and inflation
with respect to its fixed-price, fixed-time frame projects, the company's
operating results could be adversely affected by inaccurate estimates of
contract completion costs and dates, including wage inflation rates and
currency exchange rates that may affect cost projections. The company also
develops and markets certain software products, including banking software
that is licensed primarily to clients in Asia and Africa. Such software
products represented 2.4% of total revenue during the three months ended
June 30, 2000. The company derived 74.5% of its total revenue from North
America, 17.1% from Europe, 1.3% from India and 7.1% from the rest of the
world during the three months ended June 30, 2000.
During the three months ended June 30, 2000 and June 30, 1999, the company
derived 28.7% and 6.4% of its total revenue, respectively, from internet
and e-commerce projects. Due to shorter time-to-market considerations, e-
business projects necessitate higher interaction with clients. This results
in a higher proportion of services being performed at client sites.
Services performed at a client site typically generate higher per capita
revenues, but lower gross margins, than the same quantum of services
performed at the company's own facilities. Consequently, any increase in
work at client sites can decrease gross margins of the company.
Cost of revenue consists, primarily, of salary and other compensation
expenses, depreciation, data communication expenses, computer maintenance,
cost of software purchased for internal use, certain pre-opening expenses
for new software development centers, and foreign travel expenses. The
company depreciates personal computers and servers over two years and
mainframe computers over three years. Third party software is expensed in
the period in which it is acquired.
The company assumes full project management responsibility for each project
that it undertakes. Approximately 63% of the work on a project is performed
at the company's facilities in India, and the balance of the work is
performed at the client site. The proportion of work performed at company
facilities and at client sites varies from quarter to quarter. The company
charges higher rates and incurs higher compensation expenses for work
performed at a client site. Services performed at a client site typically
generate higher revenues per capita, but at a lower gross margin, than the
same quantum of services performed at company facilities in India. As a
result, total revenues, cost of revenues and gross profit in absolute
terms, and as a percentage of revenue, fluctuate from quarter to quarter
based on the proportions of work performed offshore at company facilities
and at client sites.
20
Revenue and gross profits are also affected by employee utilization rates.
Utilization rates depend, among other factors, on the number of employees
enrolled for in-house training programs, particularly the 14-week classroom
training course provided to new employees. Since a large percentage of new
hires begin their training in the second quarter, utilization rates have
historically been lower in the second and third quarters of a fiscal year.
Selling and marketing expenses primarily consist of expenses relating to
advertising, brand building, sales and marketing office leasing, salaries
of marketing personnel and travel. General and administrative expenses
consist of expenses relating to communications, finance and administration,
legal and professional charges, management, rent, salary and other
compensation, travel and miscellaneous administrative costs.
Other income includes interest income and foreign currency exchange gains.
The company also intends to substantially expand its software development
infrastructure in India. The company had committed $26.6 million towards
various capital acquisitions as of June 30, 2000. The company has not yet
made contractual commitments for the majority of its budgeted capital
expenditure. The company intends to spend approximately $ 56.0 million on
various capital acquisitions during fiscal 2001 and intends to use its
internal accruals to fund this expansion.
2.2 Results of operations
2.2.1 Three months ended June 30, 2000 compared to three months ended June
30, 1999
Revenue. Total revenues were $ 80.3 million for the three months ended June
30, 2000, representing an increase of 102.0% over total revenues of $ 39.7
million during the same period in the fiscal 2000. Revenues continued to
increase in all segments of the company's services. Custom software
development, re-engineering, maintenance and software development through
OSDCs formed a majority of the company's revenues. The increase in revenues
was attributable, in part, to a substantial increase in business from
certain existing clients and from certain new clients, particularly in the
insurance, banking and financial services, and telecommunications
industries. Net sales of Bancs2000 and other products represented 2.4% of
total revenues for the three months ended June 30, 2000 as compared to 1.5%
in the corresponding period in fiscal 2000. Revenue from services
represented 97.6% of total revenues for the three months ended June 30,
2000 as compared to 98.5% in the corresponding period in fiscal 2000.
Revenue from fixed-price, fixed-time frame and time-and-materials contracts
represented 26.6% and 73.4%, respectively, of total revenues in the three
months ended June 30, 2000 as compared to 30.9% and 69.1%, respectively, in
the three months ended June 30, 1999. Revenue from North America and Europe
represented 74.5% and 17.1%, respectively, of total revenue for the three
months ended June 30, 2000 as compared to 77.4% and 16.4%, respectively,
during the same period in fiscal 2000.
Cost of Revenues. Cost of revenues was $ 42.0 million for the three months
ended June 30, 2000, representing an increase of 103.5% over the cost of
revenues of $ 20.6 million for the same period in fiscal 2000. Cost of
revenues represented 52.3% and 51.9% of total revenues for the three months
ended June 30, 2000 and June 30, 1999, respectively. This increase in costs
as a percentage of total revenues was attributable to an increase in
personnel costs arising out of annual salary increments effective April 1,
2000 and increased personnel costs for new hires. Cost of revenues for
services represented 52.1% and 51.0% of revenues from services for the
three months ended June 30, 2000 and June 30, 1999, respectively. Cost of
revenue for product sales represented 59.9% and 108.4% of revenues for
product sales for the quarters ended June 30, 2000 and June 30, 1999,
respectively.
Gross Profit. Gross profit was $ 38.3 million for the three months ended
June 30, 2000 representing an increase of 100.4% over gross profit of $
19.1 million for the three months ended June 30, 1999. This increase was
attributable to a favorable business mix and a decrease in depreciation
expense. As a percentage of total revenues, gross profit decreased to 47.7%
for the three months ended June 30, 2000 from 48.1% for the corresponding
period in fiscal 2000. This decrease was attributable to an increase in
personnel costs arising out of annual salary increments effective April 1,
2000 and increased personnel costs for new hires. Gross profit from
services was $ 37.5 million for the three months ended June 30, 2000, an
increase of 95.3% over gross profit of $ 19.2 million for the three months
ended June 30, 1999. The gross profit from the sales of Bancs2000 and other
products was $0.8 million for the three months ended June 30, 2000 as
compared to the gross loss of $0.05 million for the corresponding period in
fiscal 2000. As a percentage of service revenues, gross profit from
services decreased to 47.9% for the three months ended June 30, 2000 from
49.0% for the three months ended June 30, 1999. Gross profit from product
sales, as a percentage of product revenues, was 40.1% for the three months
ended June 30, 2000 as compared to a gross loss from product sales of 8.4%
for the corresponding period in fiscal 2000.
Selling and marketing expenses. Sales and marketing expenses were $ 4.2
million in the three months ended June 30, 2000, an increase of 68.6% over
sales and marketing expenses of $ 2.5 million in the three months ended
June 30, 1999. As a percentage of total revenues, sales and marketing
expenses decreased to 5.2% in the three months ended June 30, 2000 from
6.3% for the three months ended June 30, 1999 due to the benefits from
economies of scale of operations. The number of sales offices increased to
22 as of June 30, 2000, from 17 as of
21
June 30, 1999. As of June 30, 2000, the number of sales and marketing
personnel increased to 80, up from 65 as of June 30, 1999.
General and administrative expenses. General and administrative expenses
were $ 6.4 million for the three months ended 2000, representing an
increase of 109.5% over general and administrative expenses of $ 3.1
million for the three months ended June 30, 1999. General and
administrative expenses were 8.0% and 7.7% of total revenues for the three
months ended June 30, 2000 and 1999, respectively. This increase in general
and administrative expenses as a percentage of revenues was primarily
attributable to an increase in management, finance and administrative
costs.
Amortization of Deferred Stock Compensation Expense. Amortization of
deferred stock compensation expense was $1.3 million in each of the three
months ended June 30, 2000 and 1999. Deferred stock compensation expense
reflects the continued amortization of compensation expense from stock
purchase rights granted in prior periods.
Operating Income. Operating income was $26.4 million for the three months
ended June 30, 2000, an increase of 114.6% over the operating income of
$12.3 million for the corresponding period in fiscal 2000. As a percentage
of revenues, operating income increased to 32.9% for the three months ended
June 30, 2000 from 31.0% for the corresponding period in fiscal 2000.
Other Income. Other income was $3.4 million for the three months ended June
30, 2000 as compared to $3.2 million for the corresponding period in fiscal
2000. Other income during the three months ended June 30, 2000 includes
$1.7 million arising from exchange differences on translation of foreign
currency deposits and interest income of $1.7 million earned on proceeds
fromthe issue of American Depositary Shares. Other income for the three
months ended June 30, 1999 includes $ 1.9 million from exchange differences
on translation of foreign currency deposits and interest income of $1.3
million earned on proceeds from the issue of American Depositary Shares.
Provision for Income Taxes. Provision for income taxes was $3.0 million for
the three months ended June 30, 2000 as compared to $2.2 million for the
corresponding period in fiscal 2000. The company's effective tax rate
decreased to 10.0% for the three months ended June 30, 2000 as compared to
14.2% for the corresponding period in fiscal 2000. The effective tax rate
decreased as additional company operations became eligible for Government
of India sponsored tax holidays and tax exemptions.
Net Income. Net income was $ 26.8 million for the three months ended June
30, 2000, an increase of 101.6% over net income of $13.3 million for the
corresponding period in fiscal 2000. As a percentage of total revenues, net
income decreased marginally to 33.4% for the three months ended June 30,
2000 from 33.5% for the corresponding period in fiscal 2000.
2.3 Liquidity and capital resources
The growth of the company has been financed largely from cash generated
from operations and, to a lesser extent, from the proceeds of equity issues
and borrowings. In 1993, the company raised approximately $ 4.4 million in
gross aggregate proceeds from its initial public offering of equity shares
on Indian stock exchanges. In 1994, the company raised an additional $7.7
million through private placements of its equity shares with foreign
institutional investors. In 1999, the company raised $66.3 million through
the issue of American Depositary Shares (ADSs). As of June 30, 2000, the
company had $ 105.8 million in cash and cash equivalents, $ 139.1 million
in working capital and no outstanding bank borrowings. As of June 30, 2000,
the company also had an aggregate of $1.2 million in working capital lines
of credit with two commercial banks.
Net cash provided by operating activities was $ 20.6 million and $ 13.4
million in the three months ended June 30, 2000 and 1999, respectively. Net
cash provided by operations consisted primarily of net income offset, in
part, by an increase in accounts receivable. In recent years, accounts
receivable increased at a rate faster than revenues. Accounts receivable as
a percentage of total revenue, represented 15.9% and 15.5% for the three
months ended June 30, 2000 and 1999, respectively. Further, the average
days outstanding of accounts receivable has increased in the 0-30 day aging
period and decreased in the 31-60, 61-90 and greater than 90 day aging
periods. The company believes that this is due to improvedaccount
collection practices. The company's policy on accounts receivable includes
a periodic review of its accounts receivable, including a review of the
age, amount, and quality of each account receivable; the relationship with,
size of, and history of the client; and the quality of service delivered by
the company to the client, to determine the classification of an account
receivable. Should the review so demand, the company will classify the
accounts into secured and unsecured accounts, and further subclassified
between good or doubtful accounts. The company makes provisions for all
accounts receivable classified as unsecured or doubtful and for all
accounts receivable that are outstanding more than 180 days.
22
Prepaid expenses and other current assets increased by $ 1.3 million and $
0.9 million during the three months ended June 30, 2000 and 1999,
respectively. The increases in both periods were primarily due to increases
in loans to employees.
Unearned revenue as of June 30, 2000 was $ 14.4 million compared to $ 5.2
million as of June 30, 1999 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, 2000 over the prior year.
Net cash used in investing activities was $ 22.1 million and $5.3 million
in the three months ended June 30, 2000 and 1999, respectively. Net cash
used in investing activities in the first quarter of fiscal 2000 and 1999
consisted primarily of $ 18.1 million and $ 4.3 million, respectively, for
property, plant and equipment. Additionally, the company purchased
convertible preferred stock in CiDRA Corporation amounting to US$ 3 million
during the three months ended June 30, 2000.
Publicly-traded Indian companies customarily pay dividends. The company
paid cash dividends of $ 4.7 million in the three months ended June 30,
2000 and no dividends in the three months ended June 30, 1999. In fiscal
2000, the company declared a dividend of $ 7.26 million, which was paid
partly in fiscal 2000
As of June 30, 2000, the company had contractual commitments for capital
expenditure of $ 26.6 million.
2.4 Reconciliation between the US and the Indian GAAP
There are material differences between the financial statements prepared in
Indian and U.S. GAAP. The material differences primarily attributable to
provision for deferred taxes, accounting for stock-based compensation and
valuation of short-term investments, (which are marked to market and
adjusted against retained earnings) and the consolidation of accounts of
subsidiary, as required by U.S. GAAP. Indian GAAP does not require a
provision for deferred taxes, amortization of deferred stock compensation,
the consolidation of accounts of subsidiaries and only requires a provision
for diminution in the value of current investments.
- ----------------------------------------------------------------------------------------------------
Reconciliation of net income Three months ended
June 30, 2000 June 30, 1999
- ----------------------------------------------------------------------------------------------------
Net profit as per Indian GAAP $28,565,885 $14,119,925
Adjustments:
Amortization of deferred stock compensation (1,275,796) (1,250,100)
Provision for retirement benefits to employees 741,000 -
Deferred income taxes 118,795 (336,126)
Transfer of intellectual property rights(net of tax) (1,230,824) -
Provision for contingencies (87,387) 777,180
Net income as per US GAAP $26,831,673 $13,310,879
- ----------------------------------------------------------------------------------------------------
2.5 Investments
2.5.1 Yantra Corporation
Prior to October 20, 1998, the company owned a majority of the voting stock
of Yantra. As a result, all of Yantra's operating losses through October
20, 1998 were recognized in the company's consolidated financial
statements. For fiscal 1998 and fiscal 1999, Yantra's losses recognized in
the company's financial statements were $ 1.6 million and $ 2.0 million,
respectively. On October 20, 1998, the company sold a portion of Yantra's
shares held by it, thereby reducing its interest to less than one-half of
the voting stock of Yantra. The company continues to own all of the
outstanding common stock of Yantra, but has no financial obligations or
commitments to Yantra and does not intend to provide Yantra with financial
support. Accordingly, Yantra's results after October 20, 1998 were not
recognized in the company's financial statements under U.S. GAAP. Yantra's
revenues were $ 1.3 million and $ 2.0 million for fiscal 1998 and for the
period ended October 20, 1998, respectively, while gross profits were $
574,000 and $ 546,000, respectively, for these same periods. Yantra's
revenues were 1.9% and 2.3% of the company's revenues for fiscal 1998 and
for the period ended October 20, 1998, respectively. Its gross profits were
2.0% and 1.4% of the company's gross profits for these same periods. Yantra
currently provides e-commerce operations solutions through
PureEcommerce(TM), a scalable web-based solution that facilitates real-time
transaction management across the extraprise. On June 14, 1999, Yantra sold
Series C Convertible Preferred Stock in the amount of $ 15 million to
unrelated existing and new investors, further reducing the company's voting
control to approximately 25%.
2.5.2 Other Investments
During the three months ended June 30, 2000, the company invested in OnScan
Inc., a Delaware corporation by transferring the rights to its proprietary
technology also named OnScan in exchange for 100,000 shares of Common
Stock, par value $ 0.01 per share; 100,000 shares of Series A Voting
Convertible Preferred Stock, par value $ 0.0001 per share and 4,400,000
shares of Series A Nonvoting Convertible Preferred Stock, par value
23
$ 0.0001 per share. The company's voting interest represents approximately
12% of OnScan Inc. voting securities.
During the same period, the company also invested in CiDRA Corporation by
purchasing 33,333 shares of Series D Convertible Preferred Stock of CiDRA,
par value $ 0.01 per share for an aggregate investment of $ 2,999,970.
2.6 Principles of Currency Translation
In the three months ended June 30, 2000, over 96% of the company's revenues
were generated in U.S. dollars and European currencies. A majority of the
company's expenses were incurred in rupees, and the balance was incurred in
U.S. dollars and European currencies. The functional currency of the
company is the Indian rupee. Revenues generated in foreign currencies are
translated into Indian rupees using the exchange rate prevailing on the
dates revenues are recognized. Expenses of overseas operations incurred in
foreign currencies are translated into Indian rupees at either the monthly
average exchange rate or the exchange rate on the date the expense is
incurred, depending on the source of payment. Assets and liabilities of
foreign branches held in foreign currency are translated into Indian rupees
at the end of the applicable reporting period. For U.S. GAAP reporting, the
financial statements are translated into U.S. dollars using the average
monthly exchange rate for revenues and expenses and the period end rate for
assets and liabilities. The gains or losses from such translation are
reported as "Other comprehensive income", a separate component of
stockholders' equity. The company expects that a majority of its revenues
will continue to be generated in U.S. dollars for the foreseeable future
and that a significant portion of the company's expenses, including
personnel costs as well as capital and operating expenditures, will
continue to be denominated in rupees. Consequently, the company's results
of operations will be adversely affected to the extent that the rupee
appreciates against the U.S. dollar.
2.7 Income Tax Matters
The company benefits from certain significant tax incentives provided to
software firms under Indian tax laws. These incentives presently include:
(i) an exemption from payment of Indian corporate income taxes for a period
of ten consecutive years of operation of software development facilities
designated as "Software Technology Parks" (the "STP Tax Holiday"); and (ii)
a tax deduction for profits derived from exporting computer software (the
"Export Deduction"). All but one of the company's software development
facilities are located in a designated Software Technology Park ("STP").
The Government of India has recently amended the tax incentives available
to companies set up in designated STPs. The period of the STP tax holiday
available to such companies is restricted to 10 consecutive years beginning
from the financial year when the unit started producing computer software
or March 31, 2000, whichever is earlier. Additionally, the export deduction
will be phased out equally over a period of five years starting from fiscal
2001. The benefits of these tax incentive programs have historically
resulted in an effective tax rate for the company well below statutory
rates. There is no assurance that the Government of India will continue to
provide these incentives. The company pays corporate income tax in foreign
countries on income derived from operations in those countries.
2.8 Effects of Inflation
The company's most significant costs are salaries and related benefits for
its employees. Competition in India and the United States for IT
professionals with the advanced technological skills necessary to perform
the services offered by the company have caused wages to increase at a rate
greater than the general rate of inflation. As with other IT service
providers, the company must adequately anticipate wage increases and other
cost increases, particularly on its long-term contracts. Historically, the
company's wage costs in India have been significantly lower than prevailing
wage costs in the United States for comparably-skilled employees, although
wage costs in India are presently increasing at a faster rate than in the
United States. There can be no assurance that the company will be able to
recover cost increases through increases in the prices that it charges for
its services in the United States.
2.9 Year 2000 Compliance
The company has evaluated each of its IT services and software products and
believes that each is substantially Year 2000 compliant. The company
believes that its internal systems are substantially Year 2000 compliant.
As of the date of this Quarterly Report, the company has not experienced
any material Year 2000 related problems. However, there can be no assurance
that modifications and upgrades made to its internal systems will be able
to anticipate all of the problems resulting from the actual impact of the
Year 2000 problem. There can also be no assurance that the company may not
face any problems in the future.
2.10 Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 133
establishes standards for the recognition and measurement of derivatives
and hedging activities. It requires an entity to record, at fair value, all
derivatives either as assets or
24
liabilities in the balance sheet as well as establishing specific
accounting rules for certain types of hedges. SFAS 133 is effective for all
fiscal years beginning after June 15, 1999 and will be adopted by the
company when required, if not earlier. Adoption of SFAS 133 is not expected
to have a material adverse effect on the company's business, financial
condition and results of operations.
2.11 Risk factors
2.11.1 Management of growth
The company has experienced significant growth in recent periods. The
company's revenues in the three months ended June 30, 2000 grew by 102.0%
over the three months ended June 30, 1999. As of June 30, 2000, the company
employed approximately 5,590 software professionals worldwide with 17
software development facilities in India as compared to approximately 3,320
with 11 facilities as of June 30, 1999. The company's growth is expected to
place significant demands on its management and other resources and will
require it to continue to develop and improve its operational, financial
and other internal controls, both in India and elsewhere. In particular,
continued growth increases the challenges involved in: recruiting and
retaining sufficient skilled technical, marketing and management personnel;
providing adequate training and supervision to maintain the company's high
quality standards; and preserving the company's culture and values and its
entrepreneurial environment. The company's inability to manage its growth
effectively could have a material adverse effect on the quality of the
company's services and projects, its ability to attract clients as well as
skilled personnel, its business prospects, and its results of operations
and financial condition.
2.11.2 Potential fluctuations in future operating results
Historically, the company's operating results have fluctuated, and may
continue to fluctuate in future, depending on a number of factors,
including: the size, timing and profitability of significant projects; the
proportion of services that are performed at client sites rather than at
the company's offshore facilities; the accuracy of estimates of resources
and time required to complete ongoing projects, particularly projects
performed under fixed-price, fixed-time frame contracts; a change in the
mix of services provided to its clients or in the relative proportion of
services and product revenues; the timing of tax holidays and other
Government of India incentives; the effect of seasonal hiring patterns and
the time required to train and productively utilize new employees; the size
and timing of facilities expansion; unanticipated increases in wage rates;
the company's success in expanding its sales and marketing programs;
currency exchange rate fluctuations and other general economic factors. A
high percentage of the company's operating expenses, particularly personnel
and facilities, are fixed in advance of any particular quarter. As a
result, unanticipated variations in the number and timing of the company's
projects or in employee utilization rates may cause significant variations
in operating results in any particular quarter. The company believes that
period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of
future performance. Due to all of the foregoing factors, it is possible
that in some future quarter the company's operating results may be below
the expectations of public market analysts and investors. In such event,
the market price of the company's equity shares and ADSs are likely to be
materially adversely affected.
2.11.3 Risks related to investments in Indian securities
The company is incorporated in India and substantially all of its assets,
and a substantial majority of its employees are located in India.
Consequently, the company's performance may be affected by changes in
exchange rates and controls, interest rates, Government of India policies,
including taxation policy, as well as political, social and economic
developments affecting India.
Political and economic environment. During the past decade and particularly
since 1991, the Government of India has pursued policies of economic
liberalization, including significant relaxations of restrictions on the
private sector. Nevertheless, the role of the Indian central and state
Governments in the Indian economy as producers, consumers and regulators
has remained significant. Additionally, since 1996, the Government of India
has changed three times. The current Government of India, formed in October
1999, has announced policies and taken initiatives that support the
continuation of the economic liberalization policies pursued by previous
governments and has, in addition, set up a special IT task force to promote
the IT industry. However, the speed of economic liberalization could
change, and specific laws and policies affecting IT companies, foreign
investment, currency exchange rates and other matters affecting investment
in the company's securities could change as well. Further, there can be no
assurance that the liberalization policies will continue in the future. A
significant change in the Government of India's economic liberalization and
deregulation policies could adversely affect business and economic
conditions in India generally and the company's business in particular.
South Asia has from time to time experienced instances of civil unrest and
hostilities among neighboring countries. Events of this nature in the
future could influence the Indian economy and could have a material adverse
effect on the market for securities of Indian companies and on the business
of the company.
25
In recent years, financial turmoil in certain Asian countries, Russia and
elsewhere in the world have affected market prices in the world's
securities markets, including the United States and Indian markets. Events
of this nature could cause decreases in the securities prices on United
States and Indian stock exchanges, including the market prices of the
company's equity shares and ADSs.
Government of India incentives and regulation. The company benefits from a
variety of incentives given to software firms in India, such as relief from
import duties on hardware, a tax exemption for income derived from software
exports, and tax holidays and infrastructure support for companies, such as
Infosys, operating in specially designated "Software Technology Parks".
There can be no assurance that these incentives will continue in future.
Further, there is a risk that changes in tax rates or laws affecting
foreign investment, currency exchange rates or other regulations will
render the Government of India's regulatory scheme less favorable to the
company and could adversely affect the market price of the company's equity
shares and its ADSs. Should the regulations and incentives promulgated by
the Government of India become less favorable to the company, the company's
results of operations and financial condition could be adversely affected.
Restrictions on foreign investment. Foreign investment in Indian securities
is generally regulated by the Foreign Exchange Management Act, 1999. In
certain emerging markets, including India, Global Depositary Shares and
ADSs may trade at a discount or premium, as the case may be, to the
underlying shares, in part because of restrictions on foreign ownership of
the underlying shares. In addition, under current Indian laws and
regulations, the Depositary cannot accept deposits of outstanding equity
shares and issue ADRs evidencing ADSs representing such equity shares.
Therefore, a holder of ADSs who surrenders ADSs and withdraws equity shares
is not permitted subsequently to deposit such equity shares and obtain ADSs
nor would a holder to whom such equity shares are transferred be permitted
to deposit such equity shares. This inability to convert equity shares into
ADSs increases the probability that the price of the ADSs will not trade on
par with the price of the equity shares as quoted on the Indian stock
exchanges. Holders who seek to sell in India any equity shares withdrawn
from the depositary facility and to convert the rupee proceeds from such
sale into foreign currency and repatriate such foreign currency from India
will have to obtain Reserve Bank of India ("RBI") approval for each such
transaction. Further, under current Indian regulations and practice, the
approval of the RBI is required for the sale of equity shares underlying
ADSs by a non-resident of India to a resident of India as well as for
renunciation of rights to a resident of India. There can be no assurance
that any such approval can be obtained.
Exchange rate fluctuations. The exchange rate between the rupee and the
U.S. dollar has changed substantially in recent years and may fluctuate
substantially in the future. During the five-year period from March 31,
1995 through March 31, 2000, the value of the rupee against the U.S. dollar
declined by approximately 38.9%. For the three months ended June 30, 2000
and for fiscal 2000 and 1999, the company's U.S. dollar-denominated
revenues represented 89.4%, 88.3% and 88.1%, respectively, of total
revenues. The company expects that a majority of its revenues will continue
to be generated in U.S. dollars for the foreseeable future and that a
significant portion of the company's expenses, including personnel costs as
well as capital and operating expenditures, will continue to be denominated
in rupees. Consequently, the company's results of operations will be
adversely affected to the extent the rupee appreciates against the U.S.
dollar. The company has in the past sought to reduce the effect of exchange
rate fluctuations on operating results by purchasing foreign exchange
forward contracts to cover a portion of outstanding accounts receivable on
a need basis. These contracts typically mature within three months, must be
settled on the day of maturity and may be canceled subject to the payment
of any gains or losses in the difference between the contract exchange rate
and the market exchange rate on the date of cancellation. The company uses
these instruments only as a hedging mechanism and not for speculative
purposes. As of June 30, 2000, the company had no outstanding forward
contracts and is currently not actively hedging against exchange rate
fluctuations. There can be no assurance that the company will purchase
contracts adequate to insulate itself from foreign exchange currency risks
or that any such contracts will perform adequately as a hedging mechanism.
Devaluation of the rupee will result in foreign currency translation
losses. For example, for the three months ended June 30, 2000 and for
fiscal 2000 and fiscal 1999, the company's foreign currency translation
losses were approximately $ 4.6 million, $ 5.0 million and $ 2.1 million,
respectively.
Fluctuations in the exchange rate between the rupee and the U.S. dollar
also will affect the U.S. dollar conversion by the Depositary of any cash
dividends paid in rupees on the equity shares represented by the ADSs. In
addition, fluctuations in the exchange rate between the Indian rupee and
the U.S. dollar will affect the U.S. dollar equivalent of the Indian rupee
price of equity shares on the Indian Stock Exchanges and, as a result, are
likely to affect the market prices of the ADSs in the United States, and
vice versa. Such fluctuations will also affect the dollar value of the
proceeds a holder would receive upon the sale in India of any equity shares
withdrawn from the Depositary under the Depositary Agreement. There can be
no assurance that holders will be able to convert rupee proceeds into U.S.
dollars or any other currency or with respect to the rate at which any such
conversion could occur.
26
2.11.4 Substantial investment in new facilities
As of June 30, 2000, the company had contractual commitments of $ 26.6
million for capital expenditure and has budgeted for significant expansion
of infrastructure in the near future. Since such an expansion will
significantly increase the company's fixed costs, the company's results of
operations will be materially adversely affected if the company is unable
to grow its business proportionately. Although the company has successfully
developed new facilities in the past, there can be no assurance that the
company will not encounter cost overruns or project delays in connection
with any or all of the new facilities. Furthermore, there can be no
assurance that future financing for additional facilities, whether within
India or elsewhere, would be available on attractive terms or at all.
2.11.5 Restrictions on US immigration
The company's professionals who work on-site at client facilities in the
United States on temporary and extended assignments are typically required
to obtain visas. As of June 30, 2000, substantially all of the company's
personnel in the United States were working pursuant to H-1B visas (912
persons) or L-1 visas (330 persons). Although there is no limit to new L-1
petitions, there is a limit to the number of new H-1B petitions that the
United States Immigration and Naturalization Service may approve in any
government fiscal year. In years in which this limit is reached, the
company may be unable to obtain the H-1B visas necessary to bring its
critical Indian IT professionals to the United States on an extended basis.
This limit was reached in March 2000 by the U.S. Government for its fiscal
year ended September 30, 2000 and in May 1999 for the fiscal year ended
September 30, 1999. While the company anticipated that such limit would be
reached prior to the end of the US government's fiscal year and made
efforts to plan accordingly, there can be no assurance that the company
will continue to be able to obtain a sufficient number of H-1B visas.
Changes in existing U.S. immigration laws that make it more difficult for
the company to obtain H-1B and L-1 visas could impair the company's ability
to compete for and provide services to clients and could have a material
adverse effect on the company's results of operations and financial
condition.
2.11.6 Risks related to international operations
While most of the company's software development facilities are currently
located in India, the company intends to develop new software development
facilities in other regions, including potentially South-East Asia, Latin
America and Europe. The company has not yet made substantial contractual
commitments to develop such new software development facilities, and there
can be no assurance that the company will not significantly alter or reduce
its proposed expansion plans. The company's lack of experience with
facilities outside of India subject the company to further risk with regard
to foreign regulation and overseas facilities management. Increasing the
number of software development facilities and the scope of operations
outside of India subjects the company to a number of risks, including,
among other things, difficulties relating to administering its business
globally, managing foreign operations, currency exchange rate fluctuations,
restrictions against the repatriation of earnings, export requirements and
restrictions, and multiple and possibly overlapping tax structures. Such
developments could have a material adverse effect on the company's
business, results of operations and financial condition.
2.11.7 Dependence on skilled personnel; risks of wage inflation
The company's ability to execute project engagements and to obtain new
clients depends, in large part, on its ability to attract, train, motivate
and retain highly skilled IT professionals, particularly project managers,
software engineers and other senior technical personnel. An inability to
hire and retain additional qualified personnel will impair the company's
ability to bid for or obtain new projects and to continue to expand its
business. The company believes that there is significant competition for IT
professionals with the skills necessary to perform the services offered by
the company. There can be no assurance that the company will be able to
assimilate and manage new IT professionals effectively. Any increase in the
attrition rates experienced by the company, particularly the rate of
attrition of experienced software engineers and project managers, would
adversely affect the company's results of operations and financial
condition. There can be no assurance that the company will be successful in
recruiting and retaining a sufficient number of replacement IT
professionals with the requisite skills to replace those IT professionals
who leave. Further, there can be no assurance that the company will be able
to redeploy and retrain its IT professionals to keep pace with continuing
changes in IT, evolving standards and changing client preferences.
Historically, the company's wage costs in India have been significantly
lower than wage costs in the United States for comparably skilled IT
professionals. However, wage costs in India are presently increasing at a
faster rate than those in the United States. In the long-term, wage
increases may have an adverse effect on the company's profit margins unless
the company is able to continue increasing the efficiency and productivity
of its professionals.
2.11.8 Client concentration
The company has derived, and believes that it will continue to derive, a
significant portion of its revenues from a limited number of large
corporate clients. For the three months ended June 30, 2000 and for fiscal
2000 and 1999,
27
the company's largest client accounted for 7.0%, 7.2% and 6.4%,
respectively, of the company's total revenues and its five largest clients
accounted for 24.7%, 30.2% and 28.4%, respectively, of the company's total
revenues. The volume of work performed for specific clients is likely to
vary from year to year, particularly since the company is usually not the
exclusive outside software service provider for its clients. Thus, a major
client in one year may not provide the same level of revenues in a
subsequent year. The loss of any large client could have a material adverse
effect on the company's results of operations and financial condition.
Since many of the contracted projects are critical to the operations of its
clients' businesses, any failure to meet client expectations could result
in a cancellation or non-renewal of a contract. However, there are a number
of factors other than the company's performance that could cause the loss
of a client and that may not be predictable. For example, in 1995, the
company chose to reduce significantly the services provided to its then-
largest client rather than accept the price reductions and increased
company resources sought by the client. In other circumstances, the company
reduced significantly the services provided to its client when the client
either changed its outsourcing strategy by moving more work in-house and
reducing the number of its vendors, or replaced its existing software with
packaged software supported by the licensor. There can be no assurance that
the same circumstances may not arise in future.
2.11.9 Fixed-price, fixed-time frame contracts
As a core element of its business strategy, the company continues to offer
a significant portion of its services on a fixed-price, fixed-time frame
basis, rather than on a time-and-materials basis. Although the company uses
specified software engineering processes and its past project experience to
reduce the risks associated with estimating, planning and performing fixed-
price, fixed-time frame projects, the company bears the risk of cost
overruns, completion delays and wage inflation in connection with these
projects. The company's failure to estimate accurately the resources and
time required for a project, future rates of wage inflation and currency
exchange rates or its failure to complete its contractual obligations
within the time frame committed could have a material adverse effect on the
company's results of operations and financial condition.
2.11.10 Infrastructure and potential disruption in telecommunications
A significant element of the company's business strategy is to continue to
leverage its various software development centers in Bangalore,
Bhubaneswar, Chennai, Mangalore, Pune, Hyderabad, Mohali and Mysore, India
and to expand the number of such centers in India as well as outside India.
The company believes that the use of a strategically located network of
software development centers will provide the company with cost advantages,
the ability to attract highly skilled personnel in various regions, the
ability to service clients on a regional and global basis, and the ability
to provide 24-hour service to its clients. Pursuant to its service delivery
model, the company must maintain active voice and data communication
between its main offices in Bangalore, the offices of its clients, and its
other software development facilities. Although the company maintains
redundant software development facilities and satellite communications
links, any significant loss of the company's ability to transmit voice and
data through satellite and telephone communications would have a material
adverse effect on the company's results of operations and financial
condition.
2.11.11 Decreased demand for Year 2000 services
Year 2000 conversion projects represented 0%, 6.3% and 19.8% of the
company's total revenue for the three months ended June 30, 2000 and for
fiscal 2000 and 1999, respectively. The high demand for these time-
sensitive projects resulted in pricing and margins that were favorable to
the company. There is no assurance that the company will be successful in
generating additional business from its Year 2000 clients for other
services, that the company will be successful in replacing Year 2000
conversion projects with other projects as the Year 2000 business declines
or that margins from any such future projects will be comparable to those
obtained from Year 2000 conversion projects. There is an additional risk
that the company may be unable to retrain and redeploy IT professionals who
were assigned to Year 2000 conversion projects involving legacy computer
systems after such projects are completed. Furthermore, since Year 2000
conversion projects are now essentially completed, there is a likelihood of
increased competition for other types of projects from firms formerly
dependent on Year 2000 business.
2.11.12 Competition
The market for IT services is highly competitive. Competitors include IT
services companies, large international accounting firms and their
consulting affiliates, systems consulting and integration firms, temporary
employment agencies, other technology companies and client in-house MIS
departments. Competitors include international firms as well as national,
regional and local firms located in the United States, Europe and India.
The company expects that future competition will increasingly include firms
with operations in other countries, potentially including countries with
lower personnel costs than those prevailing in India. Historically, one of
the company's key competitive advantages has been a cost advantage relative
to service providers in the United States and Europe. Since wage costs in
India are presently increasing at a faster rate than those in the United
States, the
28
company's ability to compete effectively will become increasingly dependent
on its reputation, the quality of its services, and its expertise in
specific markets. Many of the company's competitors have significantly
greater financial, technical and marketing resources and generate greater
revenue than the company, and there can be no assurance that the company
will be able to compete successfully with such competitors and will not
lose existing clients to such competitors. The company believes that its
ability to compete also depends in part on a number of factors outside its
control, including the ability of its competitors to attract, train,
motivate and retain highly skilled IT professionals, the price at which its
competitors offer comparable services, and the extent of its competitors'
responsiveness to client needs.
2.11.13 Dependence on key personnel
The company's success depends to a significant degree upon continued
contributions of members of the company's senior management and other key
research and development and sales and marketing personnel. The company
generally does not enter into employment agreements with its senior
management and other key personnel that provide for substantial
restrictions on such persons leaving the company. The loss of any of such
persons could have a material adverse effect on the company's business,
financial condition and results of operations.
2.11.14 Potential liability to clients; risk of exceeding insurance
coverage
Many of the company's contracts involve projects that are critical to the
operations of its clients' businesses and provide benefits that may be
difficult to quantify. Any failure in a client's system could result in a
claim for substantial damages against the company, regardless of the
company's responsibility for such failure. Although the company attempts to
limit its contractual liability for damages arising from negligent acts,
errors, mistakes or omissions in rendering its services, there can be no
assurance the limitations of liability set forth in its service contracts
will be enforceable in all instances or will otherwise protect the company
from liability for damages. The company maintains general liability
insurance coverage, including coverage for errors or omissions; however,
there can be no assurance that such coverage will continue to be available
on reasonable terms or will be available in sufficient amounts to cover one
or more large claims, or that the insurer will not disclaim coverage as to
any future claim. The successful assertion of one or more large claims
against the company that exceed available insurance coverage or changes in
the company's insurance policies, including premium increases or the
imposition of large deductible or co-insurance requirements, could
adversely affect the company's results of operations and financial
condition.
2.11.15 Risks associated with possible acquisitions
The company intends to evaluate potential acquisitions on an ongoing basis.
As of the date of this Quarterly Report, however, the company has no
understanding, commitment or agreement with respect to any material future
acquisition. Since the company has not made any acquisitions in the past,
there can be no assurance that the company will be able to identify
suitable acquisition candidates available for sale at reasonable prices,
consummate any acquisition, or successfully integrate any acquired business
into the company's operations. Further, acquisitions may involve a number
of special risks, including diversion of management's attention, failure to
retain key acquired personnel and clients, unanticipated events or
circumstances, legal liabilities and amortization of acquired intangible
assets, some or all of which could have a material adverse effect on the
company's results of operations and financial condition. Under Indian law,
except in certain limited circumstances, the company may not make any
acquisition of, or investment in, a non-Indian company without RBI and, in
most cases, Government of India approval. Even if the company does
encounter an attractive acquisition candidate, there can be no assurance
that RBI and, if required, Government of India approval can be obtained.
2.11.16 Risks associated with strategic investments
The company has made, and continues to make, strategic investments in
various companies. However, there can be no assurance that the company will
be successful in its investments and will benefit from such investments.
The loss of any of such investments could have a material adverse effect on
the company's business, financial condition and results of operations.
2.11.17 Risks associated with incubation
The company incubates employee ideas that it expects to be commercially
viable. The company may incur significant expenditures until the successful
commercialization of these ideas. The company may also hold equity in these
incubation ventures in return for transfers of intellectual property rights
related to incubated ideas. However, there can be no assurance that the
company will be successful in incubating ideas, will be successful in
commercializing such ideas, or will benefit from such incubation ventures.
The failure of any of such incubation ventures could have a material
adverse effect on the company's reputation, business, financial condition
and results of operations.
29
2.11.18 Risks related to software product sales
The company derived 2.4%, 2.6% and 3.2% of its total revenue from the sale
of software products in the three months ended June 30, 2000, fiscal 2000
and fiscal 1999, respectively. The development of the company's software
products requires significant investments. The markets for the company's
primary software product are competitive and currently located in
developing countries, and there can be no assurance that such a product
will continue to be commercially successful. In addition, there can be no
assurance that any new products developed by the company will be
commercially successful or that the costs of developing such new products
will be recouped. A decrease in the company's product revenues or margins
could adversely affect the company's results of operations and financial
condition. Additionally, software product revenues typically occur in
periods subsequent to the periods in which the costs are incurred for
development of such products. There can be no assurance that such delayed
revenues will not cause periodic fluctuations of the company's results of
operations and financial condition.
2.11.19 Restrictions on exercise of preemptive rights by ADS holders
Under the Indian Companies Act, 1956 ("Indian Companies Act"), a company
incorporated in India must offer its holders of equity shares preemptive
rights to subscribe and pay for a proportionate number of shares to
maintain their existing ownership percentages prior to the issuance of any
new equity shares, unless such preemptive rights have been waived by three-
fourths of the company's shareholders. U.S. holders of ADSs may be unable
to exercise preemptive rights for equity shares underlying ADSs unless a
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), is effective with respect to such rights or an exemption
from the registration requirements of the Securities Act is available. The
company's decision to file a registration statement will depend on the
costs and potential liabilities associated with any such registration
statement as well as the perceived benefits of enabling the holders of ADSs
to exercise their preemptive rights and any other factors the company
considers appropriate at the time. No assurance can be given that the
company would file a registration statement under these circumstances. If
the company issues any such securities in the future, such securities may
be issued to the Depositary, which may sell such securities for the benefit
of the holders of the ADSs. There can be no assurance as to the value, if
any, the Depositary would receive upon the sale of such securities. To the
extent that holders of ADSs are unable to exercise preemptive rights
granted in respect of the equity shares represented by their ADSs, their
proportional interests in the company would be reduced.
2.11.20 Intellectual property rights
The company relies upon a combination of non-disclosure and other
contractual arrangements and copyright, trade secrets and trademark laws to
protect its proprietary rights. Ownership of software and associated
deliverables created for clients is generally retained by or assigned to
the client, and the company does not retain an interest in such software
and deliverables. The company also develops foundation and application
software products, or software "tools", which are licensed to clients and
remain the property of the company. The company has obtained registration
of INFOSYS as a trademark in India and the United States, and does not have
any patents or registered copyrights in the United States. The company
currently requires its IT professionals to enter into non-disclosure and
assignment of rights agreements to limit use of, access to, and
distribution of its proprietary information. There can be no assurance that
the steps taken by the company in this regard will be adequate to deter
misappropriation of proprietary information or that the company will be
able to detect unauthorized use and take appropriate steps to enforce its
intellectual property rights.
Although the company believes that its services and products do not
infringe upon the intellectual property rights of others, there can be no
assurance that such a claim will not be asserted against the company in the
future. Assertion of such claims against the company could result in
litigation, and there can be no assurance that the company would be able to
prevail in such litigation or be able to obtain a license for the use of
any infringed intellectual property from a third party on commercially
reasonable terms. There can be no assurance that the company will be able
to protect such licenses from infringement or misuse, or prevent
infringement claims against the company in connection with its licensing
efforts. The company expects that the risk of infringement claims against
the company will increase if more of the company's competitors are able to
obtain patents for software products and processes. Any such claims,
regardless of their outcome, could result in substantial cost to the
company and divert management's attention from the company's operations.
Any infringement claim or litigation against the company could, therefore,
have a material adverse effect on the company's results of operations and
financial condition.
2.11.21 Control by principal shareholders, officers and directors; anti-
takeover provisions
The company's officers and directors, together with members of their
immediate families, in the aggregate, beneficially own approximately 25.4%
of the company's issued equity shares. As a result, such persons, acting
together, will likely still have the ability to exercise significant
control over most matters requiring approval by the shareholders of the
company, including the election and removal of directors and significant
corporate
30
transactions. Such control by the company's officers and directors could
delay, defer or prevent a change in control of the company, impede a
merger, consolidation, takeover or other business combination involving the
company, or discourage a potential acquiror from making a tender offer or
otherwise attempting to obtain control of the company.
The Indian Companies Act and the company's Articles of Association (the
"Articles") require that: (i) at least two-thirds of the company's
directors shall serve for a specified term and shall be subject to re-
election by the company's shareholders at the expiration of such terms; and
(ii) at least one-third of the company's directors who are subject to re-
election shall be up for re-election at each annual meeting of the
company's shareholders. In addition, the company's Articles provide that
Mr. N. R. Narayana Murthy, one of the company's principal founders and its
Chairman of the Board and Chief Executive Officer, shall serve as the
company's Chairman of the Board and shall not be subject to re-election as
long as he and his relatives, own at least 5% of the company's outstanding
equity securities. Furthermore, any amendment to the company's Articles
would require the affirmative vote of three-fourths of the company's
shareholders. Finally, foreign investment in Indian companies is highly
regulated. These provisions could delay, defer or prevent a change in
control of the company, impede a business combination involving the company
or discourage a potential acquiror from attempting to obtain control of the
company.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
3.1 Foreign Currency Market Risk
This information is set forth under the caption "Exchange rate
fluctuations" under item 2.11.3, Risks related to Investments in Indian
securities, above, and is incorporated herein by reference.
31
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
During the three months ended June 30, 2000, the members of the company in its
Annual General Meeting held on May 27, 2000, through a special resolution,
authorized the company to increase the allowable limit of investment by
Foreign Institutional Investors in the equity share capital of the company,
either by direct investment, by purchase or otherwise by acquiring from the
market under the portfolio investment scheme, from the existing limit of 30%
to an aggregate of 40% of the paid-up share capital of the company, or such
other limit as may be prescribed from time to time by the Central Government
and/or Reserve Bank of India or any other related authority.
As of June 30, 2000, $ 48.34 million of the net proceeds were used for capital
expenditure incurred on construction of the company's software development
facilities at Pune, Mangalore, Chennai, Bhubaneshwar and construction of
Infosys Park, Phase I & II, adjacent to the company's headquarters in
Electronics City.
Item 3. Default upon senior securities
None
Item 4. Submission of matters to a vote of security holders
a) During the quarterly period ending June 30, 2000 the company convened its
Annual General Meeting of the Shareholders ("AGM") on May 27, 2000.
b) The following directors retired by rotation at the AGM held on May 27,
2000, were eligible for re-election, and were re-elected unanimously:
Nandan M. Nilekani
K. Dinesh
S. M. Datta -- retired by rotation, but did not seek re-election, though
being eligible for re-election. The members of the company in the AGM
approved an ordinary resolution for retaining the vacancy in the Board
created by the retirement of Mr. S. M. Datta.
c) The following are the other directors whose term of office as a director
continues after this meeting:
N. R. Narayana Murthy
S. Gopalakrishnan
S. D. Shibulal
Deepak M. Satwalekar
Prof. Marti G.
Subrahmanyam
Ramesh Vangal
d) The following is a brief description of the matters voted upon at the
AGM of the company held on May 27, 2000 along with votes cast for, against
or withheld, as well as the number of abstentions and broker non-votes, as
to each matter. The matters to be voted upon were notified to the
shareholders on record and all Registered Holders of the American
Depositary Receipts (the "ADRs") who were holding the ADRs as on a record
date determined by the Depositary.
ORDINARY BUSINESS
- -----------------------------------------------------------------------------------------------------------------------------------
Brief Description of the matter put to vote
Votes for Votes against/ Abstentions/
(1) (2) (3) Withheld Broker Non-votes
(1) (2) (3) (1) (2) (3)
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1. To receive, consider and adopt the Balance Sheet as at March 31,
2000 and the Profit & Loss Account for the year ended on that date
and the Report of Directors' and Auditors' thereon. 1,272 - -
2. To declare a final dividend of Rs. 3.00 per share pro-rata 1,272 - -
3. To appoint a director in place of Mr. Nandan M. Nilekani who retires by
rotation and is eligible for re-election. 1,272 - -
32
4. To appoint a director in place of Mr. K. Dinesh who retires by rotation
and is eligible for re-election. 1,272 - -
5. To consider the vacancy in the board due to the retirement of Mr. S. M.
Datta who retires by rotation and does not seek re-election. 1,272 - -
6. 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. 1,272 - -
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SPECIAL BUSINESS
7. Approval of the re-appointment of Mr. S. Gopalakrishnan as Deputy
Managing Director for a period of five years with effect from October 18,
1999 1,272 - -
8. Approval of the appointment of Mr. Philip Yeo as a Director of the
company. 1,272 - -
9. Approval to increase the maximum limit of the investment by Foreign
Institutional Investors in the equity share capital of the company from
the existing 30% to 40% or such other limit as may be fixed by the
Government of India or the Reserve Bank of India or any other authority. 1,272 - -
10. Approval of the deletion of the existing Article `106' of the Articles
of Association of the Company and the substitution in its place the new
Article `106'. 1,272 - -
11. Approval that, pursuant to Section 258 and 259 and other applicable
provisions, if any, of the Companies Act, 1956, the number of directors
of the company be increased from twelve to eighteen. 1,272 - -
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(1) Under the Indian Companies Act, 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 a member present by proxy shall be entitled to
vote only on a poll but not on a show of hands, unless such member is a
body corporate present by a representative in which case such proxy shall
have a vote on the show of hand as if he were a member.
(2) Under the Indian Companies Act and as per the Articles of the Company, on
a show of hands every member present in person shall have one vote and
upon a poll the voting rights of every member whether present in person or
by proxy, shall be in proportion to his share of the paid-up capital of
the Company.
(3) The votes represent the number of votes in a show of hands. No poll was
demanded during the AGM.
Item 5. Other Information
The Board in its meeting held on May 27, 2000, appointed Mr. Phaneesh Murthy,
Mr. T. V. Mohandas Pai, Mr. Srinath Batni as Additional Directors of the
company with effect from May 27, 2000, pursuant to Section 260 of the
Companies Act, 1956. They will hold office up to the date of the next Annual
General Meeting, when their appointments, as whole-time directors will be
sought The Abstract of the terms and conditions of their appointments as
Whole-time Directors was issued to the members of the company pursuant to
section 302 of the Companies Act, 1956 and circulated to the shareholders on
record and all registered holders of ADRs who were holding ADRs as on a record
date determined by the Depository. This Abstract is filed as an exhibit with
this Quarterly Report on Form 6-K
T. V. Mohandas Pai is currently Chief Financial Officer and Senior Vice
President - Finance and Administration. He has served as Senior Vice
President, Head - Finance and Administration and Chief Financial Officer of
Infosys since 1996. From 1994 to 1996, he served as Vice President of Finance
at Infosys. From 1988 to 1994, Mr. Pai was Executive Director of Prakash
Leasing Ltd.. He was also a member of the Capital Markets Committee of the
Institute of Chartered Accountants of India. Mr. Pai received a B.Com. from
St. Joseph's College of Commerce, Bangalore and an LL.B. from the University
Law College, Bangalore. Mr. Pai is a Fellow Member of the Institute of
Chartered Accountants of India and a law graduate. As a member of the board,
he will
33
continue to be the Chief Financial Officer and will be responsible for
finance, administration and infrastructure activities.
Phaneesh Murthy is currently Senior Vice President - Sales & Marketing and
Communication & Product Services. He served as Senior Vice President and Head-
Worldwide Sales of Infosys from 1996 to March 2000. From 1992 to 1996, Mr.
Murthy was a Marketing Manager for Infosys based in the United States. From
1987 to 1992, he worked in sales and marketing for Sonata, the software
division of Indian Organic Chemicals Ltd. Mr. Murthy received a B.Tech. in
Mechanical Engineering from IIT Madras and a post graduate diploma in business
administration from IIM Ahmedabad. As a member of the board, he will continue
to be responsible for sales and marketing activities and will continue to head
the Communications & Product Services group.
Srinath Batni is currently Senior Vice President - Delivery - West North
America and has worked with the company since 1992. He served as Senior Vice
President and Head - Retail and Telecommunications Business Unit of Infosys
from April 1996 to March 2000. Prior to this, Mr. Batni served as a Project
Manager of Infosys. From 1990 to 1992, he was Manager of Technical Support for
PSI Bull, an Indian software development subsidiary of Bull, S.A., a French
company. Mr. Batni received a B.E. in Mechanical Engineering from Mysore
University and an M.E. in Mechanical Engineering from the Indian Institute of
Science, Bangalore. As a member of the board, he will continue his current
responsibilities in Delivery.
Item 6. Exhibits and Reports
Infosys filed no reports on Form 8-K during the quarter ended June 30, 2000.
34
EXHIBIT INDEX
- --------------------------------------------------------------------------------
Exhibit Number Description of Document
- --------------------------------------------------------------------------------
3.1 Articles of Association, as amended.
19.1 Infosys Quarterly report to the shareholders for the quarter
ended June 30, 2000.
27.1 Financial Data Schedule.
99.1 Abstract of the Terms of Appointments of Mr. T. V. Mohandas
Pai, Mr. Srinath Batni and Mr. Phaneesh Murthy as Directors
mailed to shareholders.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly organized.
Dated: July 27, 2000. INFOSYS TECHNOLOGIES LIMITED
By: /s/ Narayana N. R. Murthy
- --------------------------------------------------------------------------------
Narayana N. R. Murthy,
Chairman and Chief Executive Officer
/s/ Nandan M. Nilekani
- --------------------------------------------------------------------------------
Nandan M. Nilekani,
Managing Director, President and
Chief Operating Officer
36