Y inancials. i-flex solutions inc. Financial statements for the year ended. March 31, 2003.

Transcription

1 Y inancials i-flex solutions inc. Financial statements for the year ended March 31, 2003.

2 Directors report The Directors present their report together with the audited financial statements of the company for the financial year ended March 31, Directors of the Company The Directors in office at the date of this report are: Rajesh Hukku (Appointed on December 5, 2001, the date of incorporation) R. Ravisankar (Appointed on December 5, 2001, the date of incorporation) Deepak Ghaisas (Appointed on December 5, 2001, the date of incorporation) Cafó Boga (Appointed on March 14, 2003) 2 Principal Activities The principal activities of the company in the course of the financial year are those relating to providing information technology solutions, consulting services and development of software to the financial service industry in the United States of America, Canada and South America. 3 Results for the financial year Loss for the year, carried forward is US$ 360, Current assets Before the profit and loss account and the balance sheet of the company were made out, the Directors took reasonable steps to ascertain that any current assets which were unlikely to realize their book values in the ordinary course of business have been written down to their estimated realizable values or had been adequately provided for. 5 Charges and contingent liabilities At the date of this report: (b) There does not exist any contingent liability of the company, which has arisen since the end of the financial year. 6 Contingent or other liabilities enforceable after year-end No contingent or other liability of the company has become enforceable or is likely to become enforceable within the period of twelve months after the end of the financial year which, in the opinion of the Directors, will or may substantially affect the ability of the company to meet its obligations as and when they fall due. 7 Other circumstances As at the date of this report, the Directors are not aware of any circumstances not otherwise dealt with in this report or in the financial statements of the company, which would render any amount stated in the financial statements of the company misleading. 8 Unusual items In the opinion of the Directors, the results of the operation of the company during the financial year have not been substantially affected by any item, transaction, or event of a material and unusual nature. 9 Subsequent events In the opinion of the Directors, no item, transaction or event of a material and unusual nature has arisen in the interval between the end of the financial year and the date of this report, which would affect substantially the results of the operations of the company for the financial year in which this report is made. On behalf of the Board, Rajesh Hukku Director (a) There does not exist any charge on the assets of the company which has arisen since the end of the financial year, which secures the liability of any other person and i-flex annual report

3 Report of independent auditors Board of Directors and Stockholder i-flex solutions inc. We have audited the accompanying balance sheet of i-flex solutions inc. (the Company ) as of March 31, 2003, and the related statements of operations, stockholder s equity and cash flows for the year then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of i-flex solutions inc. at March 31, 2003, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. New York Ernst & Young LLP

4 Balance sheet as at March 31 (US Dollars) Assets Cash and cash equivalents 4,759,322 Accounts receivable 10,527,664 Prepaid expenses and other current assets 400,953 Contract rights 361,564 16,049,503 Fixed assets, net 856,972 Other assets 418,427 Total assets 17,324,902 Liabilities and stockholder s equity Liabilities: Accounts payable 239,056 Accrued expenses 56,653 Employee benefits and bonuses payable 580,470 Due to Parent, net 14,870,701 Note payable to Parent, including accrued interest of USD 8, ,184 Deferred revenue 672,207 Total liabilities 16,927,271 Stockholder s equity: Common stock (USD 0.01 par value), 3,000 shares authorized, 100 shares issued and outstanding 1 Additional paid-in capital 999,999 Accumulated deficit (602,369) Total stockholder s equity 397,631 Total liabilities and stockholder s equity 17,324,902 Ernst & Young LLP R. Ravisankar Cafó Boga Director Chief Operating Officer 2003 New York i-flex annual report

5 Statement of operations for the year ended March 31 (US Dollars) 2003 Revenue 35,591,273 Cost of revenue 30,249,585 5,341,688 General and administrative expenses 5,559,261 Depreciation and amortization 138,645 Operating loss (356,218) Other expenses, net 4,673 Net loss (360,891) Ernst & Young LLP R. Ravisankar Cafó Boga Director Chief Operating Officer New York

6 Statement of cash flow for the year ended March 31 (US Dollars) 2003 $ Operating activities Net loss (360,891) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 138,645 Amortization of contract rights 247,323 Changes in operating assets and liabilities: Accounts receivable (10,483,084) Prepaid expenses and other current assets (393,766) Accounts payable 94,126 Accrued expenses 64,837 Employee benefits and bonuses payable 580,470 Due to Parent, net 14,489,928 Deferred revenue 1,071,961 Net cash provided by operating activities 5,449,549 Investing activities Purchases of fixed assets (876,220) Acquisition of contract rights (608,887) Other assets (319,773) Net cash used in investing activities (1,804,880) Financing activities Proceeds from issuance of note to Parent 500,000 Net cash provided by financing activities 500,000 Net increase in cash and cash equivalents 4,144,669 Cash and cash equivalents, beginning of year 614,653 Cash and cash equivalents, end of year 4,759,322 Ernst & Young LLP R. Ravisankar Cafó Boga Director Chief Operating Officer New York i-flex annual report

7 Statement of stockholder s equity for the year ended March 31 (US Dollars) 2003 Common Stock Additional Accumulated Total Shares Amount Paid-in Deficit Stockholder s Capital Equity Balance at March 31, ,999 (241,478) 758,522 Net loss (360,891) (360,891) Balance at March 31, ,999 (602,369) 397,631 Ernst & Young LLP R. Ravisankar Cafó Boga Director Chief Operating Officer New York

8 Notes to financial statements March 31, Organization and significant accounting policies Organization i-flex solutions inc. (the Company ) is a wholly owned subsidiary of i-flex solutions ltd. (a publicly traded company in India, the Parent ). The Company was incorporated on December 5, 2001 in the State of Delaware. The Company is a reseller of the Parent s proprietary banking software products and is principally engaged in the business of providing information technology solutions to the financial services industry in the United States. Revenue recognition The Company derives revenues from the licensing of banking software products, along with providing related implementation services and post contract support and providing software development and other consulting services, primarily to large financial institutions. Software revenues are recognized upon the delivery of the software to the customer, provided that persuasive evidence of an arrangement exists, the license fee is fixed and determinable and collection of the fee is considered probable in accordance with the American Institute of Certified Public Accountants Statement of Position No. 97-2, Software Revenue Recognition. For the year ended March 31, 2003, software revenues approximated $7,215,000. Related maintenance, unspecified, when-and-if available, product updates and customer support services are recognized ratably over the term of the agreement. Revenues from software development and consulting services, which comprise resource augmentation support and onsite and/or offshore development activities, are generally recognized either as services are rendered on a time and materials basis during the period in which the services are provided, or utilizing the percentage of completion method to the extent accepted by the customers. The percentage of completion method generally applies to revenues from fixed fee contracts, which are recognized as a percentage of the costs incurred to date to the estimated total costs for each contract. The cumulative impact of revisions in estimates of the percentage to complete is reflected in the period in which the revisions are made. Provisions for estimated losses on uncompleted contracts are made on a contract-by-contract basis and are recognized in the period in which such losses are determined. For the year ended March 31, 2003, revenues from software development and consulting services approximated $28,376,000. Revenue earned in excess of billings is classified as unbilled revenue under customer contracts. Billings in excess of earned revenues are classified as deferred revenue. Revenue includes reimbursable expenses. In April 2002, the Company entered into a license and service agreement with the Parent under which the Company remits 85% of all related revenues to the Parent (the License and Service Agreement ). The License and Service Agreement expires in 2004 with automatic one-year renewals thereafter upon 90-day notice. The fees paid to the Parent are recorded as cost of revenue. Cash equivalents The Company considers all highly liquid instruments with maturities of three months or less when purchased to be cash equivalents. Fixed assets Fixed assets are recorded at cost. Depreciation and amortization are computed using accelerated methods over the estimated useful lives of the assets. Maintenance and repair costs are charged to expense as incurred and expenditures that extend the useful lives of the assets are capitalized. Income taxes The Company provides for deferred income taxes pursuant to Statement of Financial Accounting Standards ( SFAS ) No. 109, Accounting for Income Taxes, which requires the recognition of deferred taxes utilizing the liability method whereby deferred items are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured based on tax rates expected to be in effect when the differences reverse. Valuation allowances are established when necessary, to reduce deferred income tax assets to the amount expected to be realized. Deferred tax assets primarily result from net operating loss carryforwards. Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentration of credit risk Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company maintains its cash balances in one financial institution. These balances are insured by the Federal Deposit Insurance Corporation up to $100,000. The Company routinely assesses the financial strength of its customers and does not require collateral or other security to support customer receivables. Credit losses, if any, are provided for in the financial statements in the form of an allowance for doubtful accounts. Advertising costs Advertising costs are expensed as incurred. Advertising costs for the year ended March 31, 2003 were approximately $207,000. New accounting pronouncements In July 2001, the Financial Accounting Standards Board ( FASB ) issued SFAS No. 141, Business Combinations, and No. 142, i-flex annual report

9 Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, Under the new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to annual impairment tests in accordance with the statements. Other intangible assets continue to be amortized over their estimated useful lives. The Company adopted the new rules on accounting for goodwill and other intangible assets beginning on April 1, SFAS No. 141 and No. 142 were effective for the Company beginning on April 1, 2002 and their adoption did not have a material impact on the Company s financial position or results of operations for the year ended March 31, In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective for fiscal years beginning after December 15, This Statement superseded SFAS No. 121, Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of, and provided a single accounting model for long-lived assets to be disposed of. The new Statement also superseded the provisions of APB Opinion No. 30 with regard to reporting the effects of a disposal of a segment of a business and required expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred. SFAS No. 144 was effective for the Company beginning on April 1, 2002 and its adoption did not have a material impact on the Company s financial position or results of operations for the year ended March 31, Fixed assets Fixed assets consist of the following at March 31, 2003: $ Furniture and fixtures 332,879 Software and equipment 298,508 Leasehold improvements 366, ,942 Less: accumulated depreciation and amortization (140,970) Fixed assets, net 856,972 3 Acquisition of contract rights In November 2002, the Company acquired certain contract rights from an unrelated party for approximately $609,000. Consideration for acquiring these contract rights consisted of cash payments of approximately (i) $250,000 to the seller, (ii) $284,000 for salaries, accrued vacations and unreimbursed expenses of terminated employees of the seller subsequently hired by the Company in the US and in India and (iii) $75,000 for related transaction fees. The resulting assets are being amortized on a straight-line basis over 12 months. The amortization of such assets is recorded as cost of revenue. For the year ended March 31, 2003, the Company amortized approximately $247,000 into cost of revenue. 4 Related party transactions Approximately $34,680,000 of revenues for the year ended March 31, 2003 were generated in accordance with the License and Service Agreement. Approximately $23,232,000 of revenues were earned from services rendered to a stockholder of the Parent. As of March 31, 2003, approximately $7,237,000 of accounts receivable was due from this stockholder. Balance due from and to the Parent as of March 31, 2003 is as follows: $ Amount due under License and Service Agreement 24,690,111 Other 241,675 Total due to Parent 24,931,786 Amount due from Parent 10,488,139 Net due to Parent 14,443,647 In June 2002, the Company borrowed $500,000 from the Parent, under a loan agreement under which up to $1,000,000 can be borrowed, in exchange for a note. The note bears interest at a rate of LIBOR plus 50 basis points (2.25% at March 31, 2003) as adjusted from time to time and payable annually. 5 Income taxes There was no provision for federal and state income taxes for the year ended March 31, The Company s gross deferred tax assets of approximately $233,000 at March 31, 2003 result primarily from net operating loss carryforwards. The Company has established a valuation allowance equal to the deferred tax assets as of March 31, 2003 due to uncertainties about their realization. During the year ended March 31, 2003, the valuation allowance increased by approximately $136,000. At March 31, 2003, the Company has net operating loss carryforwards of approximately $583,000 which expire through 2023 for federal and state income tax purposes, respectively.

10 6 Commitments The Company leases office space under non-cancelable operating leases expiring through The future minimum payments required under these leases are approximately as follows: Amount $ Year ending March 31: , , , , ,000 Thereafter 581,000 2,194,000 Rent expense pursuant to these operating leases for the year ended March 31, 2003 was approximately $267, Major customers For the year ended March 31, 2003, fees earned from one customer accounted for approximately 65% of revenues (see Note 4). i-flex annual report