i-flex Solutions Limited and subsidiaries CONSOLIDATED BALANCE SHEETS AS AT MARCH 31, 2003 AND MARCH 31, 2002 Thousands of US dollars (Translated)

Transcription

1 i-flex Solutions Limited and subsidiaries CONSOLIDATED BALANCE SHEETS AS AT MARCH 31, 2003 AND MARCH 31, 2002 ASSETS Current assets Thousands of US dollars (Translated) Thousands of Cash and cash equivalents 60,012 2,849,362 1,122,346 Bank deposits 61,289 2,910,000 1,150,000 Marketable securities, available for sale ,288 20,861 Trade receivable from related parties, net 13, , ,980 Trade receivables - others, net 16, , ,106 Employee receivables ,986 8,219 Prepaid expenses 1,803 85,551 98,999 Deferred income taxes, net - - 2,533 Other current assets 5, ,770 67,624 Total current assets 160,090 7,601,084 4,361,668 Property and equipment, net 10, , ,283 Employee receivables ,721 23,984 Other investments 6, ,537 74,875 Investment in equity investee 163 7,738 23,834 Rental deposits 4, , ,541 Deferred income taxes, net ,703 24,624 Other assets ,509 11,949 TOTAL ASSETS 183,721 8,723,054 5,120,758 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable ,218 55,180 Accrued employee costs 7, , ,962 Accrued referral fees/commission 1,649 78,301 70,935 Accrued rates and taxes ,087 48,284 Deferred revenue 5, , ,232 Income taxes payable 2, ,077 68,333 Other current liabilities 4, , ,585 Current portion of capital lease obligations 101 4,786 6,035 Total current liabilities 21,601 1,025, ,546 Deferred revenue ,941 94,969 Capital lease obligations 142 6,761 10,018 Total liabilities 22,289 1,058, ,533 Stockholders' equity Common stock, Rs 5/- par value; 100,000,000 equity shares authorised 37,315,400 ( ,955,400) shares outstanding as of March 31, , , ,777 Additional paid-in capital 47,821 2,270, ,760 Accumulated other comprehensive loss (761) (36,135) (12,341) Loan to Employees Stock Purchase Scheme (ESPS) Trust (5,643) (267,926) (291,649) Retained earnings 116,085 5,511,704 3,787,678 Total stockholders' equity 161,432 7,664,754 4,260, ,721 8,723,054 5,120,758 Rajesh Hukku Y M Kale Chairman Director & Managing Director Nihar Mody Director Deepak Ghaisas Company Secretary Mumbai May 16, 2003

2 i-flex Solutions Limited and subsidiaries CONSOLIDATED STATEMENT OF PROFIT AND LOSS FOR THE YEAR ENDED MARCH 31, 2003 AND YEAR ENDED MARCH 31, 2002 Thousands of (Translated) Thousands of REVENUES 133,895 6,357,356 4,357,175 Cost of Revenues (57,773) (2,743,071) (1,909,411) Gross profit 76,122 3,614,285 2,447,764 Selling and marketing expenses (18,371) (872,270) (603,159) General and administrative expenses (15,409) (731,607) (564,045) Depreciation and amortisation (2,998) (142,327) (140,468) INCOME FROM OPERATIONS 39,344 1,868,081 1,140,092 Other than temporary dimunition in value of securities available for sale - - (16,887) Loss on equity investments (378) (17,924) (40,044) Interest income 4, ,637 66,244 Other income/(expense) (745) (35,395) 34,607 INCOME BEFORE PROVISION FOR INCOME TAXES 42,616 2,023,399 1,184,012 Provision for income taxes (5,323) (252,729) (148,002) NET INCOME 37,293 1,770,670 1,036,010 Basic earnings per share (in US $, Rs) Diluted earnings per share (in US $, Rs) The accompanying notes are an integral part of these financial statements. Rajesh Hukku Chairman & Managing Director Y M Kale Director Nihar Mody Director Deepak Ghaisas Company Secretary Mumbai May 16, 2003

3 i-flex Solutions Limited and subsidiaries CONSOLIDATED STATEMENT OF CASH FLOW FOR THE YEAR ENDED MARCH 31, 2003 AND MARCH 31, 2002 March March March 2002 Thousands of (Translated) Thousands of CASH FLOWS FROM OPERATING ACTIVITIES Net Income 37,293 1,770,670 1,036,010 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 2, , ,468 (Profit)/loss on retirement/sale of property and equipment, net (10) (458) 334 (Profit)/loss on sale of investment (1) (35) 1,500 Other than temporary dimunition in value of securities available for sale ,887 Loss from equity investments ,924 40,044 Provision for doubtful debts, net (395) (18,755) 54,284 Provision for doubtful advances 153 7,253 - Deferred tax benefit, net (106) (5,045) (12,667) 40,310 1,913,881 1,276,860 Change in assets and liabilities Trade receivables 9, ,065 (761,296) Other assets (2,828) (134,280) (73,848) Current liabilities and other liabilities 5, , ,298 Net cash provided by operating activities 52,323 2,484, ,014 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment including capital advances (7,727) (366,883) (240,952) Sale of property and equipment Increase in bank deposits (37,068) (1,760,000) (1,150,000) Purchase of investments (5,423) (257,481) (69,598) Share capital advance for investment in equity investee - - (29,620) Share capital refund from equity investee 190 9,038 - Sale of investment 53 2,504 48,500 Net cash (used in) investing activities (49,956) (2,371,929) (1,441,463) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Initial Public Offering ('IPO') 37,506 1,780,800 - IPO expenses (2,171) (103,073) - Proceeds from private placement of shares ,350 Advance against equity shares to be issued Repayment of loan from Employee Stock Purchase Scheme (ESPS) Trust ,723 8,549 Capital lease payment (131) (6,237) (5,106) Dividend paid (982) (46,644) (41,596) Net cash provided by financing activities 34,729 1,648, ,197

4 Net (decrease)/increase in cash and cash equivalents during the period/year 37,095 1,761,213 (345,252) Effect of exchange (loss) on cash and cash equivalents (721) (34,197) (6,792) Cash and cash equivalents at the beginning of the year 23,638 1,122,346 1,474,390 Cash and cash equivalents at the end of the year 60,012 2,849,362 1,122,346 Supplementary information Cash Taxes paid Domestic taxes 3, ,905 47,932 Foreign taxes 1,602 76,071 97,316 Dividend taxes - - 4,243 5, , ,491 Non Cash Assets acquired under capital leases 52 2,447 9,193 The accompanying notes are an integral part of these financial statements Rajesh Hukku Y M Kale Chairman Director & Managing Director Nihar Mody Director Deepak Ghaisas Company Secretary Mumbai May 16, 2003

5 i-flex Solutions Limited and subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE STATEMENT FOR THE YEAR ENDED MARCH 31, 2003 AND MARCH 31, 2002 (Thousands of ) Common Stock No. of Shares Par Value Additional paid-in capital Comprehensive income Accumulated other comprehensive loss Loan to Trust Retained earnings Total stockholders' equity Balance as of March 31, 2001 (As restated) (see note below) 33,276, , ,805 (3,283) (300,198) 2,793,264 2,824,970 Cash dividend declared (41,596) (41,596) Common stock issued upon Preferential allotment 679,000 3, , ,350 Repayment of loan by ESPS Trust ,549-8,549 Net income for the year ,036, ,036,010 1,036,010 Translation gain (2,617) (2,617) - - (2,617) Unrealised loss on securities available for sale, net of deferred tax (6,441) (6,441) - - (6,441) Comprehensive income 1,026,952 Balance as of March 31, ,955, , ,760 (12,341) (291,649) 3,787,678 4,260,225 Cash dividend declared (46,644) (46,644) IPO of stock during the year 3,360,000 16,800 1,764, ,780,800 IPO related expenses - - (103,073) (103,073) Gain on dilution of investment in equity investee (refer Note 10) - - 2, ,847 Repayment of loan by ESPS Trust ,723-23,723 Net income for the year ,770, ,770,670 1,770,670 Translation loss (36,221) (36,221) - - (36,221) Unrealised gain on securities available for sale ,427 12, ,427 Comprehensive income 1,746,876 Balance as of March 31, ,315, ,577 2,270,534 (36,135) (267,926) 5,511,704 7,664,754 (Thousands of ) (Translated) Balance as of March 31, ,315,400 3,930 47,821 (761) (5,643) 116, ,432 The accompanying notes are an integral part of the financial statements Note: These amounts are based on the restated financials for the year ended March 31, 2001

6 1. BACKGROUND i-flex Solutions Limited and subsidiaries NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 2003 AND MARCH 31, 2002 (All amounts in thousands of, unless otherwise stated) i-flex Solutions Limited ('i-flex' or 'the Company'), a public limited company, was incorporated in India with limited liability on September 27, The Company s principal shareholder is OrbiTech Limited ( OrbiTech ) with shareholding of per cent. OrbiTech is a 100 per cent subsidiary of Citicorp Technology Holdings Inc, USA. In June 2002, the Company completed an Initial Public Offering ( IPO ) and issued 3,360,000 equity shares of Rs 5/- each at a price of Rs 530/- per share. Concurrently, 601,700 equity shares held by existing shareholders were also offered for sale. Consequently, on June 28, 2002, the equity shares of the Company were listed on the National Stock Exchange of India and The Stock Exchange, Mumbai. The Company had a controlling/significant influence in the following: i-flex solutions b.v. ( i-flex b.v. ), a 100 per cent owned subsidiary company incorporated in May 2000 under the laws of The Netherlands; i-flex solutions Pte. Ltd., ( i-flex Pte. ), a 100 per cent owned subsidiary company incorporated in November 2001 under the laws of Singapore; i-flex solutions inc., ( i-flex inc ), a 100 per cent owned subsidiary company incorporated in December 2001 under the laws of the United States of America; DotEx International Limited ( DotEx ), a 49 per cent owned investee company incorporated in June 2000 under the Indian laws; and Flexcel International Private Limited ( Flexcel ), a 40 per cent owned investee company incorporated in March 2001 under the Indian laws. The Company along with i-flex b.v., i-flex Pte. and i-flex inc. (hereinafter collectively referred to as the Group ) is principally engaged in the business of providing information technology solutions to the financial services industry worldwide. i-flex has a suite of banking products, which caters to the needs of corporate, retail and investment banking as well as treasury operations and data warehousing. The Group also provides software development services and develops bespoke software for its customers from the financial services industry. The Group derives a substantial portion of its revenues from the overseas markets. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1 Principles of consolidation The accompanying consolidated financial statements of the Group are prepared in conformity with generally accepted accounting principles in the United States of America ( US GAAP ) to reflect the financial position and the results of operations of the Group. DotEx and Flexcel are accounted for using the equity method since the Group exerts significant influence on the operations of DotEx and Flexcel. All material transactions and balances between the Group entities have been eliminated. The Group records losses in excess of its proportionate investment in DotEx since it is committed to provide further financial support to DotEx. 1

7 2.2 Basis of presentation (a) These financial statements are prepared under the historical cost convention on the accrual basis of accounting in accordance with the accounting and reporting requirements of US GAAP. (b) For the convenience of readers, the financial statements for the year ended March 31, 2003 have been translated into United States Dollars ( US$ ) using the telex transfer average rate as prescribed by Citibank NA as at March 31, 2003 which was 1 US$ = Rs The convenience translation should not be construed as a representation that the Indian Rupee amounts or the US$ amounts referred to in these financial statements have been, could have been, or could in the future be, converted into US$ or Rs, as the case may be, at this or at any other rate of exchange, or at all. (c) On October 9, 1999, the Board of Directors authorised a one-for-one stock split of the Company s equity shares effected in form of a stock dividend. Further on October 31, 2000, there was one-forone stock split of the Group s shares in form of a stock dividend. Also, in accordance with the resolution passed in the shareholders and Board of Directors meetings held on August 14, 2001 and January 7, 2002, respectively, the equity share of par value Rs 10/- each has been split into two equity shares of par value of Rs 5/- each. Subsequent to the sub-division, the authorised Common Stock is 100,000,000 equity shares and issued and outstanding common stock is 37,315,400 equity shares. Accordingly, all share and per share amounts have been retroactively restated. (d) The Group also separately presents its consolidated financial statements for the same period prepared in accordance with generally accepted accounting principles in India. The significant differences between the generally accepted accounting principles in India and those generally accepted in the United States of America so far as concerns the financial statements referred to above are primarily relating to the deferral of revenues pertaining to post-contract support and significant discounts, compensated absences, employee benefit plans, marketable securities and derivatives. 2.3 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the results of operations during the reporting year. Although these estimates are based upon management s best knowledge of current events and actions, actual results could differ from those estimates. 2.4 Foreign currency The functional currency of each entity in the Group is its respective local currency. Monetary assets and liabilities in foreign currencies are remeasured into functional currency at the rates of exchange prevailing at the balance sheet date. Transactions in foreign currencies are remeasured into functional currency at the rates of exchange prevailing at the date of the transaction. All foreign exchange gains and losses are recorded in the accompanying consolidated income statements. The results of each entity in the Group are translated into, the reporting currency, at the average rates of exchange during the year and the balance sheet is translated at the rate in effect at the balance sheet date. Translation adjustments are included as a separate component of stockholders equity. 2

8 2.5 Revenue recognition The Group derives revenues from: Product licensing and related services - The licensing of banking software products, normally sold as perpetual licenses, along with the provision of related implementation services and post contract support ( PCS ); and IT solutions and consulting services - Providing bespoke software development and other consulting services to certain customers, which comprise primarily banking and financial services companies. License revenues are recognised when persuasive evidence of an arrangement exists, delivery has occurred, the license fee is fixed and determinable and the collection of the fee is probable. License revenues from arrangements, which contain extended payment terms is not considered to be fixed and determinable at the outset of the arrangement and revenue is therefore recognized as payments from customers become due (assuming all other conditions for revenue recognition have been satisfied). If a licensing arrangement provides a customer a right to a significant incremental discount (with reference to VSOE of the fair value of that element) on a future purchase of any other software product or a service, a proportionate amount of that discount is applied to each element covered by that arrangement based on each element s fair value. Licensing arrangements, which allow a customer to purchase additional copies of products already licensed and delivered to the customer, do not result in the provision of a significant discount to the customer. Revenues are recognised as each additional copy is purchased by the customer based on the price per copy stated in the agreement. Implementation services essentially comprise, inter alia, minor functional enhancements, interface building, implementation planning, data conversion, training and product walkthrough. Such services are not essential to the functionality of the software and do not affect the realisability of the license fees. Accordingly, implementation services is treated as a separate element. Revenue related to implementation services are recognized as services are provided when arrangements are on a time and material basis. In case of fixed price arrangements, revenue related to implementation services is recognized on a percentage of completion basis. When an arrangement provides for significant modification or customisation of the product or if Implementation Services are essential to the functionality of the product, the revenue related to both the License and Implementation Services is recognized on a percentage of completion basis. The Group enters into support arrangements, which are generally for a period of 12 months and renewable thereafter, to provide technical support, maintenance, query solving and upgrades (on a when and if available basis) to its customers. PCS revenue is recognized ratably over the period of the PCS. The Group allocates a portion of its software revenues to PCS activities provided free of charge to the customer for a specified period as included under the licensing arrangement, based on its Vendor Specific Objective Evidence ( VSOE ) which is derived from the renewals of PCS arrangements. Revenues from IT solutions and consulting services are recognized as services are provided when arrangements are on a time and material basis. Revenues for fixed price contracts is recognized on a percentage of completion basis. Percentage of completion is determined based on the proportion of efforts spent to total efforts to complete or on the basis of contractually determined milestones as certified by the customer. Provisions for estimated losses, if any, on uncompleted contracts are recorded in the period in which such losses become probable based on current contract estimates. 3

9 Reimbursement for out-of-pocket expenses Reimbursements of out-of-pocket expenses are included in revenue in accordance with Emerging Issues Task Force Consensus ( EITF ) Income Statement Characterization of Reimbursement received for Out of Pocket expenses incurred. Accordingly out-of-pocket expenses amounting to Rs. 198,134 and Rs. 246,308 for the years ended March 31, 2003 and 2002 are included in revenues. Deferred revenue Deferred revenue primarily represents the unexpired amount of PCS. 2.6 Cost of revenues Cost of revenues comprises of salaries and employee benefits, project related travel costs, application software costs and professional fees. 2.7 Research and development expenses for products Research and development costs are expensed as incurred. Software product development costs are expensed as incurred until technological feasibility is established. Software product development costs incurred subsequent to the achievement of technological feasibility are not material and have been expensed. 2.8 Cash and cash equivalents Cash and cash equivalents include all highly liquid investments with an original maturity of ninety-one days or less. 2.9 Property and equipment Property and equipment including assets under capital lease agreements are stated at cost, less accumulated depreciation and amortisation. Depreciation is computed using the written-down value method, which is an accelerated method of depreciation and is charged to income over the estimated useful life of the assets. Assets under capital leases are amortised over the shorter of the useful life or lease term. Costs of normal repairs and maintenance are charged to income as incurred. Major replacements or betterment of property and equipment are capitalised. When assets are sold or otherwise disposed off, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the profit and loss statement. Advances paid towards the acquisition of property and equipment outstanding at each balance sheet date and the cost of property and equipment not put to use before such date are disclosed under Capital advances Impairment of long-lived assets The Group reviews long-lived assets for impairment, whenever an event or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The carrying values of longlived assets are assessed for recoverability by reference to the estimated future undiscounted cash flows associated with them. Where this assessment indicates a deficit, the assets are written down to market value. For assets, which do not have a readily determinable market value, the assets are written down to their estimated market value, calculated by reference to the estimated future discounted cash flows. Assets to be disposed are reported at the lower of the written down value or the fair value, less the cost to sell. 4

10 2.11 Marketable securities Investments in marketable securities are classified as available for sale and are accounted for at fair value, which is determined by reference to prevailing market prices. Changes in fair value are recorded, net of taxes as comprehensive income (loss) and reported as a separate component of stockholders' equity. Declines in fair value below original cost are recorded in the income statement when they are considered to be other than temporary Other investments Investments where the Group controls between 20 percent and 50 percent of the voting interest are accounted for using the equity method. Investments in unquoted equity and debt securities held to maturity, where the Group controls less than 20 percent voting interest are accounted for at cost. Decline in fair value below original cost is recorded in the income statement when they are considered to be other than temporary Income taxes The current charge for income taxes is calculated in accordance with the relevant tax regulations applicable to the Group. Deferred income taxes are recognised for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities of a change in tax rates is recognised in income statement in the year the change is enacted. Deferred tax assets are recognised in full, subject to a valuation allowance to reduce the amount recognised to that, which is more likely than not to be realised Employee Benefit Plans In accordance with Indian law, all employees of the Company in India, are entitled to receive benefits under the Provident Fund, a defined contribution plan in which both the employee and the Company, contribute monthly at a determined rate (currently 12 per cent of the employees' base salary). These contributions are made to the Government Provident Fund. The Superannuation Plan is a defined contribution pension plan for a certain category of employees of the Company in India. The Company contributes to employees superannuation fund at 5 to 10 per cent of the employee s base salary. The superannuation fund is administered by a trust formed for this purpose through the Group Scheme of the Life Insurance Corporation of India ( LIC ). The Company has no further obligation under the Provident Fund or Superannuation Plan, beyond its contributions. Contributions to defined contribution plans are charged to income in the year in which they accrue. In accordance with Indian law, the Company provides for gratuity, a defined benefit retirement plan ( the Gratuity Plan ) covering all its employees in India. The Gratuity Plan provides a lump sum payment to vested employees on retirement or on termination of employment of an amount based on the respective employees' salary and the years of employment with the Company. The gratuity plan fund benefits of the Company are administered by a trust formed for this purpose through the Group Schemes of Life Insurance Corporation of India ('LIC'). Gratuity benefit cost for the year is calculated on an actuarial basis. The Company s liability towards compensated absences is determined on an actuarial basis for the entire unavailed vacation balance standing to the credit of each employee as at year-end Operating leases Leases of assets under which the lessor effectively retains all the risks and rewards of ownership are classified as operating leases. Lease payments under an operating lease are recognised as an expense on a straight-line basis over the lease term. 5

11 2.16 Earnings per share Basic earnings per share is computed by dividing the net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed using the weighted average of common and dilutive common equivalent shares outstanding during the year, using the treasury stock method for shares which have been granted to employees pursuant to the Employees Stock Purchase Scheme ( the Scheme ) adopted by the Group, except where the result would be antidilutive Stock-based compensation The Group accounts for stock-based compensation using the intrinsic value method prescribed in APB No. 25, Accounting for Stock Issued to Employees. Compensation cost for stock options is measured as the excess of the fair value of the Company s stock on the measurement date over the amount an employee must pay to acquire the stock and is recognised over the vesting period. The intrinsic value of the options is measured on the basis of the fair value of the Company s stock at the end of each year. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. The Company has elected its current method of accounting as described above, and has adopted the disclosure requirements of SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, an amendment of SFAS No Had compensation cost for the Group's ESOP been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: March 2003 (in thousands except per share data) Net income As reported 37,293 1,770,670 Pro forma 30,348 1,440,909 Basic earning per share As reported (in US$, Rs) Pro forma (in US$, Rs) Diluted earning per share As reported (in US$, Rs) Pro forma (in US$, Rs) Compensation cost recognized for the fair value of the ESOP as per the requirement of SFAS 123 is based on the Black-Scholes model with the following assumptions: Dividend yield Expected volatility Risk-free interest rates Expected life 0.16 per cent 65 per cent 8.5 per cent 6 years 6

12 2.18 Derivative instruments and hedging activities The Group does not use derivative financial instruments and does not engage in any hedging activities. However, some of the license arrangements entered into by the Group with its customers are denominated in a currency which is neither the functional currency of the Group or the customer, and thus qualify as embedded derivative instruments as per SFAS No Accordingly, gains or losses on such embedded derivative instruments are recognised in the Group s consolidated income statements based on the market value of the embedded derivative contracts at each year end and corresponding asset/liability is recorded in the balance sheet under other current assets or other current liabilities. 3. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of physical cash, cheques on hand and balances available in current accounts and time deposits with banks. Time deposits are interest-bearing deposits for periods ranging from 30 to 91 days. The details of cash and cash equivalents are as follows: Cash on hand Funds in transit 149 7,091 Bank balances Current accounts 51,504 2,445, ,651 Time deposits 8, , ,189 60,012 2,849,362 1,122,346 Cash and cash equivalents of the Company are subject to local exchange control restrictions and can be remitted overseas only with prior approval from the relevant regulatory authorities. 7

13 4. TRADE RECEIVABLES, NET Trade receivable from related parties as of March 31, 2003 and March 31, 2002, net of provision for doubtful accounts of Rs Nil and Rs 1,221, respectively amounted to Rs 651,110 and Rs 902,980, respectively. Trade receivable - others as of March 31, 2003 and March 31, 2002 net of provisions for doubtful accounts of Rs 38,842 and Rs 54,691, respectively amounted to Rs 798,017 and Rs 988,106, respectively. The movement in provision for doubtful accounts is given below: Provision for doubtful debts Trade receivables from related parties Opening balance 26 1,221 Additions 1,221 Reversals related to changes in estimates (26) (1,221) Collections Closing balance 1,221 Trade receivables others Opening balance 1,152 54,691 4,233 Additions 52,198 Reversals related to changes in estimates (179) (8,498) Collections (155) (7,351) (1,740) Closing balance ,842 54,691 8

14 5. PROPERTY AND EQUIPMENT, NET Property and equipment consist of the following: Estimated useful life (years) Rates(%) Land ,734 44,734 Improvement to leasehold premises , ,522 83,479 Building ,116 7,116 Computer equipments , , ,650 Electrical and office equipment , , ,349 Furniture and fixtures , , ,228 Vehicles on lease ,631 26,890 Capital advances 4, ,383 2,412 24,722 1,173, ,858 Less: Accumulated depreciation and amortisation (13,829) (656,599) (521,575) Property and equipment, net 10, , ,283 Depreciation is computed at the rates referred to above, applied to the written-down value of the assets over its useful life estimated. Property and equipment above include the following assets held under capital leases: Vehicles ,631 26,890 Less: Accumulated amortisation (303) (14,390) (12,370) ,241 14, FINANCIAL INSTRUMENTS 6.1 Fair Value of Financial Instruments The fair values of the Group's current assets and current liabilities approximate their carrying values because of their short maturity. Such financial instruments are classified as current and are expected to be liquidated within the next twelve months. Long term employee receivables are loans given to employees to acquire assets such as property and cars. Such loans are repayable over fixed periods ranging from three to ten years. The Group recovers interest on such loans at rates, which closely approximate the market rates. Hence, the fair value of the long-term employee receivables closely approximates the carrying value in the financial statements at Rs 11,721 and Rs. 23,984 for the years ended March 31, 2003 and 2002 respectively. 9

15 Long-term rental deposits comprise of interest free deposits maintained for office and residential premises taken on lease. Such deposits are repayable on termination of such lease agreements. The fair value of the long-term rental deposits carried in the financial statements as at March 31, 2003 and 2002 at Rs 217,542 and Rs 291,541, respectively, determined using market rates of interest as at March 31, 2003 and March 31,2002 is approximately Rs 171,144 and Rs 206,814, respectively. 6.2 Concentration of credit risk Financial instrument that potentially subject the Group to concentrations of credit risk consist principally of cash equivalents, trade receivables from related parties, trade receivables from others and bank deposits. By their nature, all such financial instruments involve risk including the credit risk of nonperformance by counter parties. The Group s cash equivalents and bank deposits are invested with banks with high investment grade credit ratings. As at March 31, 2003, 50 per cent (March 31, per cent) and 32 per cent (March 31, per cent) of cash equivalents (primarily denominated in US $) were placed with Citibank and HDFC Bank, respectively. 58 per cent (March 31, per cent) and 38 per cent (March 31, 2002 nil) of bank deposits were placed with HDFC Bank and Bank of India, respectively. Trade receivables (primarily denominated in US $) are typically unsecured and are derived from revenues earned from customers in the financial service industry worldwide. The Group monitors the credit worthiness of its customers to which it grants credit terms in the normal course of the business. As at March 31, 2003 and March 31, 2002, 94 per cent and 69 per cent of trade receivables from related parties was recoverable from various Citibank branches, 5 per cent and 30 per cent are recoverable from CITI. As at March 31, 2003 and March 31, 2002, 13 per cent and Nil per cent are recoverable from Customer 1 of non related parties and 10 per cent and 5 per cent from Customer 2. In management s opinion, as of March 31, 2003, there is no significant risk of loss in the event of nonperformance of the counter parties to these financial instruments, other than the amounts already provided for in the financial statements, if any. 6.3 Derivative Financial Instruments Licence arrangement contract are bifurcated into functional currencty denominated sales contracts and contractual currency denominated forward contracts. As at March 31, 2003 the Company has committed to deliver US $ 6,747,288 pursuant to such contracts, these contracts mature between 0 to 13 months. As a result, the group has accounted Rs 8,861 as derivative loss and Rs 643 as derivative gain for the year ended March 31, 2003 and 2002, respectively. Accordingly, the group has accounted for Rs 8,218 as other current liabilities and Rs 643 as other current assets as at March 31, 2003 and STOCKHOLDERS' EQUITY 7.1 Common stock The Group has only one class of common stock referred to herein as equity shares. 7.2 Voting Each holder of equity shares is entitled to one vote per share. 7.3 Dividends Final dividends proposed by the Board of Directors are payable when formally approved by the shareholders, who have the right to decrease but not increase the amount of the dividend recommended by the Board of Directors. With respect to equity shares issued by the Company during a particular fiscal year, cash dividends declared and paid for such fiscal year generally will be prorated from the date of issuance to the end of such fiscal year. The Company accrues for dividend upon obtaining shareholders 10

16 approval. The Company paid cash dividends of Rs 46,644 and Rs 41,596, during the years ended March 31, 2003 and 2002 respectively. For the years ended March 31, 2003 and 2002 the Company paid Rs nil and Rs 4,243, respectively, as dividend tax. 7.4 Liquidation In the event of liquidation of the Company, the holders of equity shares 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 equity shares held by the shareholders. 7.5 Initial public offering In June 2002, the Company completed an IPO and issued 3,360,000 equity shares of Rs 5/- each at a price of Rs 530/- per share. Concurrently, 601,700 equity shares held by existing shareholders was also offered for sale. The proceeds from the fresh issue of shares was Rs 1,677,727, net of underwriting commissions and other direct offering costs of Rs 103,073. The direct offering costs have been recorded in additional paid-in-capital. On June 28, 2002, the equity shares of the Company were listed on the National Stock Exchange of India and The Stock Exchange, Mumbai. 8. MARKETABLE SECURITIES, AVAILABLE FOR SALE The fair values of the available for sale securities are as follows: Unit Trust of India 1964 Scheme Carrying value/cost ,861 46,688 Less: Other than temporary diminution in value (16,887) Add/(Less): Unrealised gain/(loss) during the year, net of tax ,427 (8,940) ,288 20,861 The Group holds 3,311,258 units (and 278 fractions) of Rs 10 each of Unit Trust of India Scheme ( US 64 ). During March 2003, Unit Trust of India ( UTI ) announced an option of converting these units into Tax-free Bonds or to encash the units at declared rates by UTI. The Tax-free bonds will be issued on June 1, 2003 and will have a 5-year tenure with a coupon rate of 6.75% p.a., payable half-yearly. The Group has opted for the conversion of its units into the Tax-free bonds. Unrealised gain of Rs 12,427 during the current year represents reversal of provisions of unrealised loss during the years ended March 31, 2002 and

17 9. OTHER INVESTMENTS Other investments comprise: Unquoted equity Securities EBZ Online Private Limited ( EBZ ) ,000 45,000 Eastern Software Systems Limited ( ESSL ) Held to maturity debt securities 156 7,406 9,875 1,104 52,406 54, % KEONICS Mahithi Bonds Series ,000 20,000 JM High Liquidity Fund - Serial Plan 2004 (Growth) 5, ,000 National Saving Certificates , ,537 74,875 The Company s ownership interest in EBZ and ESSL is 19.5 percent and 6.62 percent, respectively. The nature of business of each of these companies is as follows: EBZ is a strategic partnership between Brihans Technologies Private Limited ( BTPL ) and the Company to integrate the selected and adapted software provided under Group s products with BTPL s products for Co-operative banking sector in India. ESSL is primarily engaged in catering to the needs of small businesses through its flagship product, ebizframe. During the year ended March 31, 2003, the company accepted the buy-back offer from ESSL for 89,428 shares. As a result the ownership interest has reduced from 6.65 per cent to 6.62 per cent. The Group made a profit of Rs 35 on the acceptance of buy-back offer which has been recognised as part of Other income. The Group does not exert significant influence directly/indirectly on the operations of EBZ and ESSL by way of representation on the Board of Directors, participation in policy-making processes, material inter company transactions, interchange of managerial personnel or technological dependency. Accordingly these investments are valued at cost less any decline in fair value below original cost when considered to be other than temporary. Investments in debt securities of 12.75% KEONICS Mahithi Bonds Series -1 allotted on February 1, 2001 are non-convertible redeemable at par at the end of seven years from the date of allotment. As per the terms of the securities, the Group has a put and call option at par at the end of five years from the date of allotment. During March 2003 the group has invested Rs 250 million in JM High Liquidity - Serial Plan 4 which will mature on April 15, INVESTMENTS IN EQUITY INVESTEES DotEx is a 51:49 joint venture between NSE.IT Limited, a wholly owned subsidiary of The National Stock Exchange of India Limited ( NSE ) and the Company for setting up a Broker Plaza enabling brokers and their clients to transact in stock/securities markets through the internet. 12

18 Flexcel is a 40:40:20 joint venture with the Company, HDFC Bank Limited and Lord Krishna Bank Limited to provide the Group s products through an Application Service Provider ( ASP ) model to various banks and financial institutions in India. Original Cost DotEx 1,187 56,350 49,000 Flexcel , Add: Advance against shares given to Flexcel 29,620 Add: Gain on dilution of equity in Flexcel 60 2,847 Less: Group's share of accumulated losses in DotEx (1,187) (56,350) (45,402) Flexcel (333) (15,789) (9,482) 163 7,738 23,834 The analysis of the carrying amount of investments and the earnings of the investee included in net income is as follows: Share of net assets DotEx 3,598 Flexcel 163 7,738 10,172 Advance against share capital paid to Flexcel in excess of committed share 10,064 Carrying value 163 7,738 23,834 DotEx 3,598 Flexcel 163 7,738 20,236 Share of (loss) of equity investee 163 7,738 23,834 DotEx (245) (11,617) (30,562) Flexcel (133) (6,307) (9,482) (Loss) included in net income (378) (17,924) (40,044) DotEx (245) (11,617) (30,562) Flexcel (133) (6,307) (9,482) (378) (17,924) (40,044) 13

19 The summarised unaudited financial statements of DotEx are as follows: Balance sheet Current assets 26 1,218 9,586 Fixed assets, (net) 62 2,961 17,677 Total assets 88 4,179 27,263 Current liabilities 48 2,284 15,438 Unsecured loans 69 3,267 4,484 Shareholder s equity Share Capital 2, , ,000 Accumulated losses (2,451) (1,16,372) (92,659) Total liabilities and stockholders equity 88 4,179 27,263 Income statement Revenues 114 5,427 3,778 Expenses (614) (29,140) (66,149) Loss from operations (500) (23,713) (62,371) Net loss (500) (23,713) (62,371) The summarised unaudited financial statements of Flexcel are as follows: Balance sheet Current assets ,430 33,318 Fixed assets, (net) ,940 11,551 Total assets ,370 44,869 Current liabilities 167 7,895 24,314 Unsecured Loans 108 5,133 Shareholder s equity Share Capital 1,089 51, Share Premium Advance against Share application 39,520 Accumulated losses (698) (33,134) (19,163) Total liabilities and stockholders equity ,370 44,869 14

20 Income statement Revenues 93 4, Expenses (387) (18,402) (19,706) Loss from operations (294) (13,970) (19,164) Net loss (294) (13,970) (19,164) 11. OTHER CURRENT LIABILITIES Other current liabilities primarily comprise of: Communication expenses ,301 11,291 Travelling expenses ,418 47,394 Professional fees 1,730 82,128 22,681 Embedded derivatives 173 8,219 Other liabilities 1,262 59,937 30,219 4, , ,585 15

21 12. EMPLOYEE BENEFIT PLANS The Group s cost related to defined contribution plans and compensated absences is as follows: Provident Fund ,849 28,048 Superannuation ,412 9,942 Compensated absences 1,982 94,122 65,673 3, , ,663 Based on the disclosure requirements of SFAS 132 the change in benefit obligation and funded status of the Gratuity Plan for the years ended March 31, 2003 and 2002 is as follows: March 2003 March 2002 Change in benefit obligation Benefit obligation at beginning of year ,959 10,955 Service cost 96 4,549 2,480 Interest cost 39 1,847 1,011 Benefits paid (11) (500) (158) Actuarial loss 165 7,821 5,671 Benefit obligation at end of year (A) ,676 19,959 Change in plan assets Fair value of plan assets at beginning of year 140 6,640 6,243 Return on plan assets 23 1, Actual contribution 25 1,186 Benefits paid (11) (500) (158) Fair value of plan assets at end of year (B) 177 8,425 6,640 Funded status (A-B) ,251 13,319 Unrecognised net transition obligation (7) (314) (628) Unrecognised net actuarial loss (268) (12,745) (5,650) Accrued benefit cost ,192 7,041 16

22 Net gratuity cost for the years ended March 31, 2003 and 2002 comprises of the following components: March 2003 March 2002 Components of net yearly benefit cost Service cost 96 4,549 2,480 Interest cost 39 1,847 1,011 Expected return on plan assets (13) (596) (534) Amortisation of Transition liabilities Recognised net actuarial loss Net yearly benefit cost 133 6,337 3,271 The assumptions used in accounting for the gratuity plan for the year ended March 31, 2003 are set out below: March 2003 March 2002 % % Discount rate Expected return on plan assets Rate of compensation increase The Company evaluates these assumptions based on its long-term plans of growth and industry standards. 13. OTHER INCOME/(EXPENSE) Other income/(expense) comprises of the following: Foreign exchange gain/(loss), net (774) (36,750) 32,782 Dividend 3,311 Profit/(Loss) on sale of investment 1 35 (1,500) Miscellaneous income 28 1, (745) (35,395) 34,607 17

23 14. INCOME TAXES Under the Indian Income-tax Act, 1961, for the year ended March 31, 2003 the Company is eligible to claim benefits with respect to 90 per cent as against 100 per cent till last year of the profits earned from export revenues from its five units registered under the Software Technology Parks ('STP') and one unit forming part of a Special Economic Zone ('SEZ'). The benefit as per the current tax laws is restricted to 10 consecutive assessment years, beginning with the assessment year relevant to the previous year in which the Company commences operations from each location. These benefits will expire for certain of the Company's units beginning from April 1, Foreign taxes are towards income taxes payable in the United States of America, Malaysia, United Kingdom, Kuwait, Japan and Singapore. The provision for income tax consists of the following: Current tax expense Domestic Indian taxes 3, ,778 53,550 Subsidiaries 46 2,188 Foreign taxes 1,807 85, ,119 Deferred taxes (106) (5,045) (12,667) 5, , ,002 The components of the deferred tax asset are as follows: March 2003 March 2002 Loss on sale of investment 10,815 10,506 Other than temporary diminution in value of investments 3,546 3,445 Unrealised loss on marketable securities 2,499 Share of loss in equity investees 14,968 11,196 Difference between book and tax depreciation 29,703 24,624 Other differences 34 59,032 52,304 Less: Valuation allowance (29,329) (25,147) Total deferred tax asset 29,703 27,157 The Group has created a valuation allowance, for the deferred tax asset related to loss on sale of investment, provision for other than temporary diminution in value of investments, unrealised loss on marketable securities and share of losses in equity investees. The above items would be deductible for tax only when the investments are sold and if the Group has offsetting capital gains. No provision for deferred taxes have been made on the unremitted earnings which are considered to be indefinitely invested in foreign subsidiaries. 18

24 The following is a reconciliation of the statutory tax rate under the Indian Income-tax Act, 1961 and the Group's effective tax rate: Accounting profit 42,616 2,023,399 1,184,012 Enacted tax rate % 36.75% 36.75% 35.70% Computed tax expense 15, , ,692 Tax effect on exempt profit/income (12,513) (594,137) (455,820) Difference in tax rate between Indian and Foreign taxes (62) (2,945) Incremental taxes paid in foreign jurisdictions 1,807 85, ,119 Taxes on dividend paid 4,243 Impact of change in tax rates 22 1,038 10,578 Tax effect on loss of subsidiaries ,670 36,656 Double taxation relief (94) (4,467) Valuation allowance 88 4,182 22,795 Others (20) (261) Income tax expense, net 5, , ,002 The total deferred tax asset has been presented in the balance sheet as follows: Current deferred tax asset 2,533 Non current deferred tax asset ,703 24, ,703 27,157 19

25 15. LEASES The Group takes vehicles under capital lease upto five years. Future minimum lease payments under capital leases as at March 31, 2003 are as follows: March 31, , , , , Total minimum payments ,228 Less: Amount representing future interest (56) (2,681) Present value of minimum payments ,547 Less: Current portion of capital lease obligation (101) (4,786) Long term capital lease obligation 142 6,761 The Group has taken certain office premises, residential premises and vehicles for employees under operating lease, which expire at various dates through to Gross rental expense for the years ended March 31, 2003 and year ended March 31, 2002 was Rs 120,794 and Rs 99,393, respectively. The minimum rental payments to be made in future in respect of these leases: March 31, ,018 95, ,154 54, , , ,153 Thereafter till ,175 55,811 20

26 16. RELATED PARTY TRANSACTIONS The Group has entered into transactions with various Citibank branches, Citicorp Information Technology, Inc ('CITI'), e-serve International Limited ('e-serve') over which Citigroup and its affiliates have significant ownership interest, controlling interest or exercise significant influence. The Group utilised services of professionals from OrbiTech Solutions Limited, a subsidiary of OrbiTech towards software development. The Group has also entered into certain transactions with its investee companies DotEx and Flexcel. The related party transactions other than disclosed elsewhere in the financial statements can be categorised as follows: 16.1 Revenues Banking product revenues Citibank branches 23,868 1,133, ,326 CITI ,798 3,646 e-serve DotEx 100 Flexcel 44 2, Total 24,162 1,147, ,599 IT solutions and consulting service revenues Citibank branches 29,602 1,405, ,536 CITI 693,396 DotEx 60 2,864 9,560 e-serve 21 29,662 1,408,359 1,320,513 21

27 16.2 Expenses Communication expenses paid to Citibank branches ,811 Finance lease payments to e-serve (Interest) 32 1,532 2,630 Professional fees paid to OrbiTech Solutions Limited for software development 36 1,696 25,155 Professional fees payments to Flexcel 34 1,619 Provision for doubtful debts for Citibank branches (26) (1,221) 1,221 Bank charges paid to Citibank branches 57 2,729 1,852 1,056 50,166 30, Assets Trade receivables Citibank branches net of provision for doubtful debts Rs Nil (March ,221 and March 2003 Rs NIL) 12, , ,835 CITI , ,761 DotEx 33 1,574 6,999 Flexcel 74 3, e-serve 13, , ,980 Loans outstanding i-flex ESPS Trust 5, , ,649 Key managerial personnel 84 4,000 4,844 5, , ,493 22