Summary
This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and consolidated financial statements and notes thereto, appearing elsewhere in this Prospectus. Except as otherwise indicated, the information contained in this Prospectus makes certain assumptions. First, this Prospectus assumes the effectiveness of the Company's 2-for-1 stock split by means of a stock dividend which the Company declared on December 20, 1998, with a record date of March 5, 1999. The Company's Equity Shares will trade on the Indian Stock Exchanges on a post-stock split basis beginning February 20, 1999. Second, this Prospectus assumes that all stock purchase rights issued under the Company's Employees Stock Offer Plan have been exercised. Such exercises are scheduled to occur prior to the effective date of the Offering. Third, this Prospectus assumes no exercise of the Underwriters' over-allotment option.
The Company
Infosys Technologies Limited ("Infosys" or the "Company"), one of India's leading information technology ("IT") services companies, utilizes an extensive non-U.S. based ("offshore") infrastructure to provide managed software solutions to clients worldwide. Headquartered in Bangalore, India, the Company has 11 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 Company's services, which may be offered on a fixed-price, fixed-time frame or time-and- materials basis, include custom software development, maintenance (including Year 2000 conversion) and re-engineering services as well as dedicated offshore software development centers ("OSDCs") for certain clients. In each of its service offerings, the Company assumes full project management responsibility in order to strengthen client relationships, offer higher value-added services and enhance its profitability. In addition, the Company develops and markets certain Company-owned software products. As a result of its extensive network of offshore software development facilities, its quality systems, its disciplined processes and its significant investment in people, the Company has built a platform from which it has been able to achieve significant growth to date. The Company completed its initial public offering on the Bangalore Stock Exchange in 1993. From fiscal 1994 to fiscal 1998, the Company experienced compound annual revenue and net income growth rates of 63.6% and 46.8%, respectively, and grew from approximately 480 IT professionals to approximately 2,200.
Through its worldwide sales headquarters in Fremont, California and 16 other sales offices located in the United States, Canada, the United Kingdom, Germany, Japan and India, the Company markets its services to large IT- intensive businesses. During the fiscal year ended March 31, 1998, the Company derived 82.3% of its revenues from North America, 9.0% from Europe and 2.6% from India. While the Company derives its revenues primarily from the United States, Infosys maintains a diversified client base, with its largest client representing 10.5% of fiscal 1998 revenues. As of December 31, 1998, the Company had approximately 130 clients. This diversified client base is comprised primarily of Fortune 500 companies and other multinational companies. Clients include Bell Atlantic Corporation, NCR Corporation, Nordstrom, Inc., Southern California Edison Company, Goldman, Sachs & Co., Northern Telecom Limited, Salomon S.A. and Toshiba Corporation. During fiscal 1998 and for the nine months ended December 31, 1998, these clients accounted for 34.8% and 28.7%, respectively, of the Company's revenues. As a result of its commitment to quality and client service, the Company enjoys a high level of repeat business. For fiscal 1997 and 1998, existing clients from the previous fiscal year generated approximately 82.3% and 83.1%, respectively, of the Company's revenues.
The Company was incorporated in 1981 by seven founders who shared a vision to build a world class IT services organization based upon the principles of leadership, innovation and integrity. Six of these original founders have remained with the Company and, together with other members of the Company's management council, have pursued their vision by focusing on the following key strategies:
. Pursue World Class Operating Model. Management believes that one of the most critical factors to the Company's success has been its commitment to pursue the highest quality standards in all aspects of its business. In its services and operations, the Company achieves quality through rigorous adherence to highly evolved processes, having been certified under ISO 9001 and TickIT. In addition, the Company has been measured against the Capability Maturity Model, a software specific total quality management model that was developed by the Software Engineering Institute of Carnegie Mellon University (the "Capability Maturity Model") and defines five levels of process maturity for a software organization. Infosys has been certified at Level 4, a level achieved by only 2% of the more than 1,000 software companies tested under the Capability Maturity Model. Similarly, Infosys also adheres to high quality standards in its investor relations. For example, the Company was one of the first public Indian companies to adopt U.S. GAAP reporting in fiscal 1995 and quarterly audited Indian financial statements in fiscal 1998. In recognition of its efforts, the Company was voted "Best Managed Company" in India by Asiamoney in each of the last two years, was selected as the "Company of the Year" by The Economic Times Awards for Corporate Excellence and was awarded the Silver Shield in each of the last three years by the Institute of Chartered Accountants of India as the Indian company with the best presentation of financial statements by a non- financial company.
. Invest Heavily in Human Resources. The Company invests heavily in its personnel by adopting progressive employee-oriented practices, fostering a collegial atmosphere and informal culture, offering challenging assignments and ongoing training and providing one of the first stock option plans adopted by a public Indian company. As a result, management believes the Company has become one of the most sought after employers for Indian engineering graduates and that its attrition rate is significantly below the industry average. As evidence of this, during fiscal 1998, the Company received approximately 70,870 job applications, tested approximately 21,350 applicants, interviewed approximately 5,800 and extended job offers to approximately 1,790, of whom approximately 1,300 accepted. Since India is home to the world's second largest population of English-speaking technical talent, management believes that its ability to recruit is a significant competitive advantage.
. Focus on Managed Software Solutions. The Company is dedicated to providing managed software solutions, many of which are offered on a fixed-price, fixed-time frame basis. By taking full project management responsibility on every project, the Company enables its clients to receive high quality, cost-effective solutions with lower risk. Such services offer the Company the opportunity to build client confidence with the potential benefit of enhanced margins.
. Capitalize on Well-Established Offshore Development Model. As one of the pioneers of the offshore development model, the Company has made significant investments in its infrastructure and has developed the advanced processes and expertise necessary to manage and successfully execute projects in multiple locations. As a result, the Company is able to execute approximately 80% of its project work in India while maintaining high levels of client satisfaction.
. Maintain Disciplined Focus on Business and Client Mix. Infosys provides a wide range of IT services and maintains a disciplined focus on its business mix in an effort to avoid service or client concentration.
. Pursue Growth Opportunities. As part of its growth strategy, the Company intends to: (i) broaden its service offerings by continuously evaluating emerging technologies, particularly in the areas of packaged applications implementation, e-commerce and Internet/intranet services; (ii) increase business with existing clients by both increasing the volume and scope of its projects and expanding the breadth of its service offerings; (iii) develop new clients; (iv) increase revenue per IT professional by building expertise in vertical markets and refining its software development tools and methodologies; (v) expand and diversify its base of IT professionals by building new facilities near large pools of talent and expanding its recruiting from other disciplines; and (vi) pursue selective strategic acquisitions.
Worldwide and Indian Software Services Market Dataquest has estimated that the worldwide market for IT consulting, development, integration and outsourcing will increase to $291 billion in 2001 from $177 billion in 1998. Simultaneously with this significant increase in demand for IT services, the supply of qualified IT professionals has decreased in most developed countries, particularly the United States, Western Europe and Japan. According to the United States Department of Education, from 1986 to 1995, the number of bachelor degrees in computer science awarded annually at U.S. universities fell by 41.7%, from 41,889 to 24,404. This shortage of IT professionals, along with recent advances in telecommunications, has led to the increasing acceptance and use of offshore IT service providers and to the growing globalization of the IT services market.
According to a survey of U.S. software services vendors conducted by the World Bank, India is the leading offshore destination for companies seeking to outsource software development or other IT projects. The increased popularity of and rapid growth in India's software services market can be attributed to three key factors. First, India has a large, highly skilled labor pool that is available at a relatively low labor cost. With over four million engineers, India ranks second only to the United States as the country with the largest population of English-speaking technical personnel. In contrast to the declining number of computer science degrees awarded annually in the United States, according to India's National Association of Software and Service Companies ("NASSCOM"), approximately 68,000 engineers graduate annually from the more than 1,800 engineering and technical institutes in India. Furthermore, according to Software Productivity Research, the average annual wage for software professionals in India is approximately 15% of the average U.S. rate. Second, Indian IT firms have developed the capability to deliver a high quality product. Many of India's leading software and IT services companies have been measured against international quality standards and have received certification and recognition for their processes and quality controls. Finally, recent Indian governments have recognized the importance of the IT sector to the Indian economy and have implemented policies and a variety of incentives to stimulate growth in this sector. As a result of these factors, according to NASSCOM, India's export revenues from software, including software services, are projected to reach $4.0 billion in fiscal 2000, up from approximately $1.8 billion in fiscal 1998.
The Company was organized under the laws of India in July 1981 as Infosys Consultants Private Limited. The Company's principal executive offices are located at Electronics City, Hosur Road, Bangalore, Karnataka, India 561 229, and its telephone number at that address is +91-80-852-0261.
The Offering
Securities offered by the Company............ 1,800,000 ADSs representing 900,000 Equity Shares Equity Shares to be outstanding after the Offering............... 32,934,400 Equity Shares (1) Use of proceeds......... For capital expenditures to expand the Company's facilities and telecommunications infrastructure and for other general corporate purposes, including working capital. See "Use of Proceeds." Dividend policy......... Consistent with many Indian public companies, the Company has declared and paid dividends. The declaration, payment and amount of dividends are subject to the recommendation of the Company's Board of Directors and the approval of its shareholders. Holders of Equity Shares or ADSs will be entitled to dividends paid in respect thereof. See "Dividend Policy" and "Description of American Depositary Shares--Dividends, Other Distributions and Rights." Proposed Nasdaq National Market symbol.......... INFY (1) Based on the number of Equity Shares outstanding as of February 8, 1999. Includes 668,700 Equity Shares allocated to employees subject to vesting provisions and 208,800 Equity Shares held by the trust responsible for management of the Company's 1994 Employees Stock Offer Plan (the "ESOP") which are reserved for issuance upon the exercise of stock purchase rights to be granted by such trust in the future. See "Management--Benefit Plans."
The following summary consolidated financial data should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. The information presented below assumes the effectiveness of the Company's 2-for-1 stock split by means of a stock dividend which the Company declared on December 20, 1998, with a record date of March 5, 1999. The Company's Equity Shares will trade on the Indian Stock Exchanges on a post-stock split basis beginning February 20, 1999.
Summary Consolidated Financial Data (In thousands, except per Equity Share data)
Nine Months
Fiscal Year Ended March 31, Ended December 31,
1994 1995 1996 1997 1998 1997 1998
Statements of Income Data (1): Revenues................ $9,534 $18,105 $26,607 $39,586 $68,330 $ 48,412 $ 86,101 Cost of revenues........ 5,621 10,606 15,638 22,615 40,157 28,280 47,002 Gross profit............ 3,913 7,499 10,969 16,971 28,173 20,132 39,099 Operating expenses: Selling, general and administrative expenses............. 1,315 3,344 4,350 7,010 13,225 9,108 13,707 Amortization of deferred stock compensation expense (2).................. -- 46 361 768 2,567 2,105 2,404 Total operating ex- penses.............. 1,315 3,390 4,711 7,778 15,792 11,213 16,111 Operating income........ 2,598 4,109 6,258 9,193 12,381 8,919 22,988 Other income, net....... 322 747 1,460 769 801 606 1,212 Income before income taxes.................. 2,920 4,856 7,718 9,962 13,182 9,525 24,200 Provision for income taxes (3).............. 250 893 894 1,320 770 977 3,532 Subsidiary preferred stock dividends (4).... -- -- -- -- 68 34 151 Net income.............. $2,670 $ 3,963 $ 6,824 $ 8,642 $12,344 $ 8,514 $ 20,517 Earnings per Equity Share (5): Basic................. $0.10 $0.14 $0.24 $0.30 $0.41 $0.29 $0.67 Diluted............... $0.10 $0.14 $0.23 $0.29 $0.41 $0.28 $0.67 Equity Shares used in computing earnings per Equity Share (5): Basic................. 26,816 28,292 29,034 29,036 29,788 29,416 30,540 Diluted............... 26,816 28,376 29,284 29,704 30,404 30,260 30,625 Cash dividend per Equity Share (6).............. $0.03 $0.04 $0.04 $0.04 $0.07 $0.02 $0.03 December 31, 1998 Actual As Adjusted (7)
Balance Sheet Data (1): Cash and cash equivalents............................... $22,798 $ 68,729 Total assets............................................ 76,582 122,513 Total long-term debt.................................... -- -- Total shareholders' equity.............................. 63,265 109,196
(1) The functional currency of the Company is the Indian rupee. For U.S. GAAP reporting, the Company's financial statements that are prepared in rupees are translated into U.S. dollars using the average monthly exchange rate for revenues and expenses and the exchange rate at the end of the reporting period for assets and liabilities. In addition, the consolidated financial statements through the nine months ended December 31, 1998 include the results of the Company's formerly majority-owned subsidiary, Yantra. Prior to October 20, 1998, the Company owned a majority of Footnotes continued from previous page 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 for the nine months ended December 31, 1998, the Yantra losses recognized in the Company's consolidated financial statements were $1.6 million and $2.0 million, respectively. On October 20, 1998, the Company sold a portion of the Yantra shares held by the Company, thereby reducing the Company's interest to less than one-half of the voting stock of Yantra. As a result, Yantra's results after October 20, 1998 are not recognized in the Company's consolidated financial statements under U.S. GAAP. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Investment in Yantra Corporation " and "--Principles of Currency Translation."
(2) In September 1994, the Company adopted the ESOP. Indian GAAP does not require the Company to recognize a compensation expense in connection with the grant of stock purchase rights to purchase Equity Shares under the ESOP with an exercise price less than the market price of the Equity Shares on the date of grant. However, under U.S. GAAP, the difference between the exercise price and the market price on the date of grant is required to be treated as a non-cash compensation expense and amortized over the applicable vesting period of the Equity Shares underlying the stock purchase rights. In fiscal 1998, the Company recognized $2.6 million in compensation expense in connection with stock purchase rights granted under the ESOP, including a compensation expense of $1.6 million recognized in the third quarter of fiscal 1998. Charges were higher in that quarter because Equity Shares issued to participants in the ESOP as part of a declared stock dividend were not subject to vesting, and accordingly, the compensation expense for such Equity Shares was accelerated in one quarter rather than amortized over the remaining vesting period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Deferred Stock Compensation Expense."
(3) The Company benefits from certain significant tax incentives provided to software firms under the Indian tax laws, which have historically resulted in an effective tax rate for the Company well below statutory rates. See "Risk Factors--Effect of Deferred Stock Compensation Expense Under U.S. GAAP; Loss Expected to be Reported for Fourth Quarter of Fiscal 1999," "-- Risks Related to Investments in Indian Securities" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Income Tax Matters."
(4) Represents accrued dividends on preferred stock issued in September 1997 by the Company's formerly majority-owned subsidiary, Yantra. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Investment in Yantra Corporation."
(5) All earnings per share calculations have been computed per Equity Share, each of which is equivalent to two of the ADSs offered hereby. As of December 31, 1998, after giving effect to the Company's stock dividend declared in December 1998, the Company's outstanding Equity Shares included 877,500 Equity Shares held by the trust responsible for management of the ESOP. Of such shares, 668,700 were allocated to employees subject to vesting provisions and 208,800 were reserved for future grants. None of such shares have been included in the basic earnings per share calculations, and only the 668,700 Equity Shares allocated to employees have been included in the diluted earnings per share calculations.
(6) It is customary for public companies in India to pay cash dividends, although the amount may vary. Dividends are declared in Indian rupees. Amounts presented have been translated into U.S. dollars, and historical amounts reflect dividends paid per Equity Share, each of which is equivalent to two ADSs offered hereby. See "Dividend Policy."
(7) Adjusted to give effect to the sale by the Company of 1,800,000 ADSs (representing 900,000 Equity Shares) offered hereby and the application of the estimated net proceeds therefrom at an assumed offering price per ADS of $27.88. The Company has sought and received approval from its shareholders and the Government of India for an offering with aggregate proceeds of up to $75 million, inclusive of the Underwriters' over- allotment option. See "Use of Proceeds" and "Capitalization."