BALANCE SHEET AS AT JUNE 30, 2004 (All amounts in thousands of Indian rupees, unless otherwise stated) Schedules June 30, 2004 March 31, 2004 SOURCES OF FUNDS SHAREHOLDERS' FUNDS Share capital 1 373,777 373,701 Reserves and surplus 2 9,671,995 9,291,761 10,045,772 9,665,462 APPLICATION OF FUNDS FIXED ASSETS 3 Cost 1,718,050 1,579,584 Less: Accumulated depreciation 703,238 661,332 Net book value 1,014,812 918,252 Capital work-in-progress and advances 68,646 113,596 1,083,458 1,031,848 INVESTMENTS 4 277,234 547,914 DEFERRED TAX ASSET 5 299 1,950 CURRENT ASSETS, LOANS AND ADVANCES 6 Sundry debtors 4,605,533 4,016,150 Cash and bank balances 5,770,311 5,275,787 Other current assets 75,896 25,241 Loans and advances 1,285,606 1,266,341 11,737,346 10,583,519 Less: CURRENT LIABILITIES AND PROVISIONS 7 Current liabilities 2,711,287 2,177,746 Provisions 341,278 322,023 3,052,565 2,499,769 8,684,781 8,083,750 10,045,772 9,665,462 Notes to Accounts 16 The schedules referred to above and notes to accounts form an integral part of the balance sheet.
PROFIT AND LOSS ACCOUNT FOR THE PERIOD ENDED JUNE 30, 2004 (All amounts in thousands of Indian rupees, unless otherwise stated) Period ended Period ended Schedules June 30, 2004 June 30, 2003 Revenues 8 1,806,952 1,622,989 Cost of revenues 9 (994,233) (729,738) Gross profit 812,719 893,251 Selling and marketing expenses 10 (117,645) (137,705) General and administrative expenses 11 (224,015) (237,386) Depreciation and amortisation (46,004) (29,146) INCOME FROM OPERATIONS 425,055 489,014 Provision for dimunition in value of investment (20,680) - Interest income 12 64,402 57,330 Other income/(expense) 13 32,775 (84,765) INCOME BEFORE PROVISION FOR INCOME TAXES 501,552 461,579 Provision for income taxes 14 (125,296) (68,210) NET INCOME 376,256 393,369 Profit and loss account, beginning of the period 443,036 229,372 Profit and loss account, end of the period 819,292 622,741 Weighted average earnings per share of Rs 5/- each (in Rs.) Basic 5.03 5.38 Diluted 4.88 5.29 Number of shares used in computing earnings per share 15 Basic 74,746,270 73,065,868 Diluted 77,133,011 74,427,854 Notes to Accounts 16 The schedules referred to above and notes to accounts form an integral part of the profit and loss account.
STATEMENT OF CASH FLOW FOR THE PERIOD ENDED JUNE 30, 2004 (All amounts in thousands of Indian rupees, unless otherwise stated) Period ended June 30, 2004 Period ended June 30, 2003 Cash flows from operating activities Income before provision for income taxes 501,552 461,579 Adjustments to reconcile income before provision for income taxes to cash provided by operating activities : Depreciation and amortisation 46,004 29,146 (Profit)/Loss on retirement/sale of fixed assets, net - 106 Loss/(Profit) on sale/conversion of investments (16,804) 16,877 Provision/(Reversal) for diminution in the value of investments, net 20,680 (16,712) Interest income (64,402) (57,330) Effect of exchange difference on cash and bank balances (44,191) 44,700 Finance charge on leased assets 159 462 Provision for doubtful debts - (58,554) 41,844 59,093 442,998 520,672 Changes in assets and liabilities Increase in sundry debtors (589,383) (428,827) Increase in loans and advances (72,821) (75,244) Increase in current liabilities and provisions 528,312 (133,892) 374,738 (129,333) Cash from operating activities 309,106 391,339 Receipt of refund of previous assessment years 8,353 25,236 Payment of domestic and foreign income taxes (85,966) (92,839) Net cash from operating activities 231,493 323,736 Cash flows from investing activities Additions to fixed assets including capital work in progress (72,120) (106,647) Proceeds from sale of fixed assets - 28 Increase in bank fixed deposits having maturity of more than 90 days (1,767,058) (426,341) Proceeds from maturity of JM High Liquidity Fund 266,804 - Interest received 13,748 10,064 Net cash (used in) investing activities (1,558,626) (522,896) Cash flows from financing activities Proceeds from issuance of share capital 4,054 2,464 Advance against equity shares to be issued under ESOP Scheme 1,219 1,087 Repayment of loan from Employee Stock Purchase Scheme ('ESPS') Trust 7,500 2,467 Payment for lease obligations (2,300) (1,894) Net cash provided by financing activities 10,473 4,124 Effect on exchange difference on cash and bank balances 44,191 (44,700) Net decrease in cash and cash equivalents (1,272,469) (239,736) Cash and cash equivalents at beginning of the period 2,395,932 2,428,240 Cash and cash equivalents at end of the period 1,123,463 2,188,504 Note : The reconciliation to the cash and bank balances as given in Schedule 6(b) is as follows : Cash and bank balances, per Schedule 6(b) 5,770,311 5,527,118 Less: Bank deposits having maturity of more than 90 days (4,644,671) (3,336,341) Unclaimed dividend accounts (2,177) (2,273) 1,123,463 2,188,504
June 30, 2004 March 31, 2004 SCHEDULE 1: SHARE CAPITAL Authorised 100,000,000 equity shares of Rs 5/- each (March 31, 2004-100,000,000 equity shares) 500,000 500,000 Issued, subscribed and paid-up 74,755,450 equity shares of Rs 5/- each, fully paid up (March 31, 2004-74,740,150 equity shares) 373,777 373,701 (a) During the three months period ended June 30, 2004, the Company allotted 15,300 shares (March 31, 2004-87,250 shares) to its employees who exercised their options under the ESOP scheme (Refer Note 6(b) of Schedule 16). (b) Refer Note 6(b) of Schedule 16 for options granted for unissued equity shares. SCHEDULE 2: RESERVES AND SURPLUS Securities premium Balance, beginning of period 2,110,156 2,267,687 Received during the period 3,978 29,157 Capitalized towards issue of bonus shares - (186,688) Balance, end of period 2,114,134 2,110,156 General reserve Balance, beginning of period 6,738,569 5,488,569 Transferred from profit and loss account - 1,250,000 Balance, end of period 6,738,569 6,738,569 Profit and loss account 819,292 443,036 9,671,995 9,291,761 (THIS SPACE IS INTENTIONALLY LEFT BLANK)
SCHEDULE 3: FIXED ASSETS Gross Block Depreciation Net Book Value Particulars As at 31.03.2004 Additions during the period Sale/deletions for the period As at 30.06.2004 As at 31.03.2004 For the period On Sale/deletions for the period As at 30.06.2004 As at 30.06.2004 As at 31.03.2004 Land 232,674 - - 232,674 - - - - 232,674 232,674 Improvement to leasehold premises 84,309 1,270-85,579 54,394 2,852-57,246 28,333 29,915 Buildings * 229,408 7,577-236,985 4,919 2,903-7,822 229,163 224,489 Computer equipment 531,359 70,294 1,201 600,452 413,593 22,835 1,201 435,227 165,225 117,766 Electrical and office equipment 237,862 27,560-265,422 96,676 7,975-104,651 160,771 141,186 Furniture and fixtures 233,286 31,350-264,636 76,264 7,493-83,757 180,879 157,022 Leased Vehicles 30,686 5,762 4,146 32,302 15,486 1,946 2,897 14,535 17,767 15,200 TOTAL 1,579,584 143,813 5,347 1,718,050 661,332 46,004 4,098 703,238 1,014,812 918,252 As at 31.3.2004 886,752 706,635 13,803 1,579,584 549,886 124,525 13,079 661,332 Capital work-in-progress and advances 68,646 113,596 1,083,458 1,031,848 Notes: * Includes 10 shares of Rs.50/- each in Takshila Building No.9, Co-op Housing Society Ltd., Mumbai.
June 30, 2004 March 31, 2004 SCHEDULE 4: INVESTMENTS a) Long term investments (i) Trade (unquoted) EBZ Online Private Limited (Note a) 45,000 45,000 242,240 equity shares of Rs.10/- each, fully paid-up (March 31, 2004-242,240) Flexcel International Private Limited (Note b) 20,680 20,680 2,068,000 equity shares of Rs 10/- each, fully paid-up (March 31, 2004-2,068,000) Less : Provision for diminuition in value of investment (20,680) - - 20,680 (ii) Other than trade investments (unquoted) Eastern Software Systems Limited 7,406 7,406 268,283 equity shares of Rs.10/- each, fully paid-up (March 31, 2004-268,283) 12.75% KEONICS Mahithi Bonds Series-1 (Note c) 20,000 20,000 400 Bonds of Rs. 50,000/- each fully paid (March 31, 2004-400) National Savings Certificate - VIII issue 131 131 JM High Liquidity Fund - Serial Plan 2004 (Growth) (Note d) - 250,000 (iii) Other than trade investments (quoted) 6.75% Tax Free US-64 Bonds (Note e) 33,123 33,123 331,225 Bonds of Rs 100/- each fully paid (March 31, 2004-331,225) (iv) In subsidiaries (unquoted) i-flex solutions b.v. (Note f) 25,119 25,119 a wholly owned subsidiary company incorporated in The Netherlands 5,185 equity shares of Euro 100/- each, fully paid-up (March 31, 2004-5,185) i-flex solutions pte limited (Note g) 6,626 6,626 a wholly owned subsidiary company incorporated in Singapore 250,000 equity shares of Singapore $ 1/- each fully paid up (March 31, 2004-250,000) i-flex America inc. (Note h) 139,829 139,829 a wholly owned subsidiary company incorporated in the United States of America 1 equity share of US$ 0.01/- each fully paid up (March 31, 2004-1) 277,234 547,914
Aggregate cost of quoted investments 33,123 33,123 Aggregate market value of quoted investments 35,336 35,898 Aggregate amount of unquoted investments 277,234 547,914 Note a The Company s ownership interest in Eastern Software Systems Limited ('ESSL') is 6.62%. The Company also holds 19.5% shares in EBZ Online Private Limited ('EBZ'). EBZ is a strategic partnership between Brihans Technologies Private Limited ('BTPL') and i-flex to integrate the selected and adapted software provided under i-flex s products with BTPL s products for cooperative banking sector in India. ESSL is primarily engaged in catering to the needs of small businesses through its flagship product, ebizframe. Both companies are unlisted companies. The Company's rights are limited to protecting its investments in ESSL and EBZ and it does not exert significant influence on the operations of these companies by way of representation on the board of directors, participation in policy making processes, material intercompany personnel or technological dependency. Accordingly, these investments are stated at cost less any decline in fair value below original cost when considered to be other than temporary. Management does not believe that currently there is any other than temporary decline in the value of these investments. Note b Flexcel is a 40:40:20 joint venture between i-flex, HDFC Bank Limited and its group companies and Lord Krishna Bank, which provides the capability of Flexcube through an Application Service Provider ( ASP ) model to various banks and financial institutions in India who may not wish to invest in creating and maintaining their own internal IT infrastructure. As per the unaudited financial statements as at June 30, 2004, Flexcel had incurred accumulated losses of Rs. 41 million. Management is of the view that the fair value of its investment in Flexcel has declined permanently. Hence, considering the uncertainty about the future profitability of Flexcel, management has made a provision of Rs. 20.68 million towards diminution in the value of its aggregate investment in Flexcel. Note c Investments in debt securities of 12.75% KEONICS Mahithi Bonds Series -1 allotted on February 1, 2001 are redeemable at par at the end of seven years from the date of allotment and have a put and call option at the end of five years from the date of allotment. Note d Investment in JM High Liquidity Fund - Serial Plan 2004 (Growth) was an investment in debt instrument funds. Consideration amounting to Rs. 266,804 was received on maturity of the fund in April 2004. Note e On June 1, 2003 units in UTI US-64 were converted into 6.75 % Tax free US-64 bonds.the first 5,000 units were converted at the repurchase price of Rs 12/- each and the balance 3,306,258.278 units at Rs 10/- each. These bonds are redeemable at par on June 1, 2008. Note f i-flex b.v. was incorporated as a 100% subsidiary in The Netherlands to undertake marketing of the Company's software products and information technology services to clients in Europe and work on the business development efforts in the region. As per the unaudited financial statements, i-flex b.v. has losses of Euro 0.54 million (approximately Rs. 31.41 million) during the period ended June 30, 2004 and accumulated losses as at June 30, 2004 of Euro 3.56 million (approximately Rs. 189.87 million). Management considers that there is no permanent diminution in the value of its investment in i-flex b.v. and hence is stated at cost. Note g i-flex Pte. was incorporated as a 100% subsidiary in Singapore to undertake marketing of the Company's software products and provide software and related services to clients in Asia Pacific region and work on the business development efforts in the region. As per the unaudited financial statements as at June 30, 2004 i-flex pte. has a net profit of S$ 1.82 million (approximately Rs. 48.73 million) for the period ended June 30, 2004 and an accumulated profit of S$ 3.94 million (approximately Rs. 104.23 million) and it is stated at cost. Note h In December 2003, i-flex America inc., a Delaware based company, was incorporated as a 100% subsidiary in the United States of America to hold the investments of the Company in various ventures/companies in the United States of America. As per the unaudited consolidated financial statements, i-flex America inc. has a net profit of US$ 0.44 million (approximately Rs. 19.19 million) during the period ended June 30, 2004. Management believes that the accumulated losses as per the unaudited financial statements as at June 30, 2004 of US$ 0.02 million (approximately Rs. 0.42 million) are in the nature of start up losses. Accordingly, management does not consider that there is any diminution in the value of its investments in i-flex America inc. and it is stated at cost.
June 30, 2004 March 31, 2004 SCHEDULE 5: DEFERRED TAX ASSET Difference between book and tax depreciation 299 1,950 SCHEDULE 6: CURRENT ASSETS, LOANS AND ADVANCES (a) Sundry debtors (unsecured) Debts outstanding for a period exceeding six months: -Considered good 1,768,174 1,264,795 -Considered doubtful 32,005 30,582 1,800,179 1,295,377 Other debts - considered good [includes unbilled revenues of Rs. 107,274 (March 31, 2004 - Rs 59,145)] 2,837,359 2,751,355 4,637,538 4,046,732 Less: Provision for doubtful debts (32,005) (30,582) 4,605,533 4,016,150 Amount due from subsidiaries 3,682,694 2,973,860 (b) Cash and bank balances Cash in hand 582 427 Balances with scheduled banks: -Current accounts in foreign currency 759,101 1,185,988 -Deposit accounts 3,827,599 2,997,554 -Deposit amount of unutilised IPO funds 890,584 929,233 -Margin money deposit 121,389 121,330 -Other current accounts 168,879 38,790 -Unclaimed dividend accounts 2,177 2,242 Balances with non-scheduled banks: -Current accounts in foreign currency - 223 5,770,311 5,275,787 Balances with non-scheduled banks Citibank, Dubai - 223 Maximum balance held during the period Citibank NY, USA - 1,423 Citibank, Dubai 223 223 (c) Other current assets Interest accrued on : -Bank deposits 70,810 22,215 -Bonds 1,274 1,208 -Loan to subsidiary 3,812 1,818 75,896 25,241
June 30, 2004 March 31, 2004 (d) Loans and advances (unsecured, considered good unless otherwise stated) Advances recoverable in cash or in kind or for value to be received: Loan to ESPS Trust (Refer Note 6(a) of Schedule 16) 181,925 189,425 Loans to employees (secured) 3,637 7,694 Loan to subsidiary (Refer Note 5 of Schedule 16) 460,620 439,200 Premises and other deposits 395,593 402,495 Prepaid expenses 131,356 79,701 Advance tax, net of provision for taxes 19,606 65,662 Other advances - Considered good 92,869 82,164 - Considered doubtful - - 1,285,606 1,266,341 SCHEDULE 7: CURRENT LIABILITIES AND PROVISIONS (a) Current liabilities Amount due to subsidiaries 1,508,811 1,120,061 Accrued expenses 609,837 473,237 Deferred revenues 409,087 435,680 Accounts payable 91,913 86,698 Advances from customers 15,874 9,118 Finance lease obligations 19,538 17,189 Investor Education and Protection Fund to be credited by unclaimed dividends* 2,177 2,242 Advance against equity shares to be issued under the ESOP scheme 1,219 - Deferred forward exchange contracts 9,447 5,316 Other current liabilities 43,384 28,205 2,711,287 2,177,746 Amounts due to Small Scale Industrial undertakings - - * There is no amount due and outstanding as at balance sheet date to be credited to the Investor Education and Protection Fund. (b) Provisions Proposed dividend 261,644 261,644 Corporate dividend tax 33,523 33,523 Provision for leave encashment 46,111 26,856 341,278 322,023
SCHEDULE 8: REVENUES Period ended Period ended June 30, 2004 June 30, 2003 Product licenses and related activities 1,076,127 1,092,207 IT solutions and consulting services 730,825 530,782 1,806,952 1,622,989 SCHEDULE 9: COST OF REVENUES Employee costs 707,553 434,456 Travel related expenses (net of recoveries) 199,874 225,585 Application software 43,883 42,825 Professional fees 42,923 24,590 Contract acquistion cost - 2,282 994,233 729,738 SCHEDULE 10: SELLING AND MARKETING EXPENSES Travelling expenses 25,459 44,863 Employee costs 42,162 32,202 Professional fees 32,325 31,149 Advertising expenses 8,089 18,402 Communication expenses 2,039 1,565 Miscellaneous expenses 7,571 9,524 117,645 137,705 SCHEDULE 11: GENERAL AND ADMINISTRATIVE EXPENSES Employee costs 85,912 67,890 Rent 21,109 23,776 Communication expenses 21,617 24,415 Professional fees 17,634 28,750 Provision for doubtful advance - 41,844 Power 16,236 10,945 Travelling expenses 10,213 6,176 Miscellaneous expenses 51,294 33,590 224,015 237,386 SCHEDULE 12: INTEREST INCOME Interest on: -Bank deposits 61,159 51,025 [includes tax deducted at source of Rs 2,575 (June 30, 2003 - Rs. 912)] -Bonds 1,215 820 [includes tax deducted at source of Rs.Nil (June 30, 2003 - Rs. Nil)] -Loans to employees 143 294 -Loan to subsidiaries 1,885 131 -Income tax refunds - 5,060 64,402 57,330
SCHEDULE 13: OTHER INCOME/(EXPENSE) Period ended Period ended June 30, 2004 June 30, 2003 Foreign exchange profit/(loss), net 15,782 (84,494) Loss on retirement/sale of fixed assets, net - (106) Reversal for dimunition in value of investment, net - 16,712 Profit/(loss) on sale/conversion of investment 16,804 (16,877) Miscelleneous income 189-32,775 (84,765) SCHEDULE 14: PROVISION FOR TAXATION Current Taxes - Domestic taxes 115,000 42,426 - Foreign taxes 8,645 28,321 Deferred tax 1,651 (2,537) 125,296 68,210 Under the Indian Income-tax Act 1961, for the period ended June 30, 2004 the Company is, under Section 10A of the Income Tax Act, 1961, eligible to claim benefits with respect to 100% during the period, of the profits earned from export revenues from six of its eight units registered under the Software Technology Park ('STP'). The benefit as per the current tax laws is restricted to ten consecutive assessment years, beginning with the assessment year relevant to the previous year in which the Company commences operations from each unit. Foreign taxes represents income taxes payable overseas by the company in the United States of America, Malaysia, United Kingdom,Kuwait and Singapore. SCHEDULE 15: RECONCILIATION OF BASIC AND DILUTED SHARES USED IN COMPUTING EARNINGS PER SHARE No. of shares June 30, 2004 June 30, 2003 Basic weighted average shares outstanding 74,746,270 73,065,868 Add: Effect of dilutive stock options 2,386,741 1,361,986 Weighted average shares outstanding 77,133,011 74,427,854 (THIS SPACE IS INTENTIONALLY LEFT BLANK)
SCHEDULE 16: NOTES TO ACCOUNTS 1. BACKGROUND AND NATURE OF OPERATIONS i-flex Solutions Limited ('i-flex' or 'the Company'), a listed company, was incorporated in India with limited liability on September 27, 1989. The Company s principal shareholder is OrbiTech Limited ( Orbitech ). Orbitech is a subsidiary of Citicorp Technology Holdings Inc., USA. The Company has unilateral/joint control in the following entities: 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; Flexcel International Private Limited ( Flexcel ), a 40 per cent owned joint venture company incorporated in March 2001 under Indian laws. i-flex America inc., ( i-flex America ), a 100 per cent owned subsidiary company incorporated in December 2003 under the laws of the United States of America. SuperSolutions Corporation.,( SuperSolutions ), a 100 per cent owned subsidiary of i-flex America inc. i-flex Solutions inc., ( i-flex inc. ), a 100 per cent owned subsidiary company of i-flex America inc. The Company is principally engaged in the business of providing information technology solutions to the financial services industry worldwide. i-flex has a suite of products, which caters to the needs of corporate, retail and investment banking as well as treasury operations and data warehousing. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of presentation The financial statements are prepared under the historical cost convention, on the accrual basis of accounting, in conformity with accounting principles generally accepted in India and in accordance with the accounting standards referred to in section 211(3C) of the Companies Act, 1956 ('the Act'). The accounting policies have been consistently applied by the Company and are consistent with those used in the previous years. The significant accounting policies adopted by the Company, in respect of the financial statements are set out below. (b) 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 liabilities at the date of the financial statements and the results of operations during the reporting period/year end. Although these estimates are based upon management s best knowledge of current events and actions, actual results could differ from these estimates.
(c) Fixed assets and depreciation Fixed assets including assets under finance lease arrangements are stated at cost less accumulated depreciation. The Company capitalises all direct costs relating to the acquisition and installation of fixed assets. Depreciation is provided on the straight-line method, at the rates specified in Schedule XIV to the Act or based on the estimated useful life of assets, whichever is higher. Vehicles under finance lease are amortised over the useful life or lease term, which ever is lower (four to five years). The estimated useful life considered for depreciation of fixed assets are as follows: Estimated useful life (years) Improvement to leasehold premises 7 Buildings 20 Computer equipment 3 Electrical and office equipment 7 Furniture and fixtures 7 The Company purchases certain specific use application software, which is in ready to use condition, for internal use. It is estimated that such software has a relatively short useful life, usually less than one year. The Company, therefore, charges to income the cost of acquiring such software. Enterprise wide resource software purchased by the Company and which will be implemented by the Company over a period of time is capitalized and depreciated, from its date put to use, over its estimated useful life. Advances paid towards the acquisition of fixed assets outstanding at each balance sheet date and the cost of fixed assets not ready to use before such date are disclosed under Capital work-in-progress and advances. (d) Investments Trade investments refer to the investments made with the aim of enhancing the Company s business interests in providing information technology solutions to the financial services industry worldwide. Long term investments are stated at cost less provision for diminution on account of other than temporary decline in the value of the investment. Current investments are stated at lower of cost and fair value determined on an individual investment basis. (e) Revenue recognition Revenues are recognized as follows: (i) Product licenses and related revenues: - License fees are recognized, on delivery and subsequent milestone schedule as per the terms of the contract with the end user. - Implementation/Enhancement services are recognized as services are provided when arrangements are on a time and material basis. Revenues for fixed price contracts are recognized using the Proportionate Completion method to the extent of achievement of customer certified milestones. - Product maintenance revenues are recognized, over the period of the maintenance contract.
(ii) 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 are recognized using the Proportionate Completion method to the extent of achievement of customer certified milestones. Proportionate Completion is measured based upon the efforts incurred to date in relation to the total estimated efforts to complete the contract. If the Proportionate Completion efforts are higher than the related contractual milestone requiring customer acceptance, revenue is recognized only to the extent customer acceptance has been received. The Company monitors estimates of total contract revenues and cost on a routine basis throughout the delivery period. The cumulative impact of any change in estimates of the contract revenues or costs is reflected in the period in which the changes become known. In the event that a loss is anticipated on a particular contract, provision is made for the estimated loss. Reimbursable expenses for projects are invoiced separately to customers and although reflected as sundry debtors to the extent outstanding as at period/year-end, are not included as revenues or expenses. (f) Foreign currency transactions Foreign currency transactions during the period are recorded at the exchange rates prevailing on the date of the transaction. Foreign currency denominated monetary item are translated into rupees at the closing rates of exchange prevailing at the date of the balance sheet except for sundry debtors covered under forward exchange contracts, which are translated at forward rates. Non-monetary items, which are carried in terms of historical cost denominated in a foreign currency, are reported using the exchange rate at the date of the transaction. In respect of forward exchange contracts entered into by the Company, which are not intended for trading or speculation purposes, the difference between the forward rate and the exchange rate at the inception of a forward exchange contract, is recognized as an income or expense on a straight-line basis over the life of the contract. All exchange differences are dealt with in the statement of profit and loss, except for those relating to the acquisition of fixed assets, which are adjusted, if material, in the cost of the fixed assets. (g) Research and development expenses for software 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 are expensed as incurred. (h) Retirement benefits Retirement benefits to employees comprise payments to gratuity, superannuation and provident funds as per the approved schemes of the Company. The Company has schemes of retirement benefits of provident fund, superannuation fund and gratuity fund in respect of which the Company s contribution to the funds are charged to the statement of profit and loss. The gratuity fund and superannuation fund benefits of the Company are administered by a trust formed for this purpose through the Group Schemes of the Life Insurance Corporation of India ('LIC'). In respect of gratuity, the adequacy of the accumulated funds available with the LIC has been confirmed on the basis of an actuarial valuation made at the period/year-end and provision has been made for the shortfall if any.
(i) Leave encashment Accrual for leave encashment is estimated on the basis of an actuarial valuation for the unavailed leave balance standing to the credit of the employees at the period/year-end. (j) Operating leases Leases of assets under which all the risks and rewards of ownership are effectively retained by the lessor are classified as operating leases. Lease payments under operating leases are recognized as an expense on a straight-line basis over the lease term. (k) Income-tax Provision for current income tax is made on the assessable income at the tax rate applicable to the relevant assessment year. Deferred income taxes are recognized for the future tax consequences attributable to timing differences between the financial statement determination of income and their recognition for tax purposes. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax assets are recognized and carried forward only to the extent that there is a reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised. Unrecognized deferred tax assets of earlier years are re-assessed and recognized to the extent that it has become reasonably certain that future taxable income will be available against which deferred tax assets can be realised. (l) Earning per share The earnings considered in ascertaining the Company s earnings per share comprise the net profit after tax. The number of shares used in computing basic earnings per share is the weighted average number of shares outstanding during the period. The number of shares used in computing diluted earnings per share comprises the weighted average number of shares considered for deriving basic earnings per share, and also the weighted average number of shares, if any which would have been issued on the conversion of all dilutive potential equity shares. The number of shares and potentially dilutive equity shares are adjusted for the bonus shares and sub-division of shares. (THIS SPACE IS INTENTIONALLY LEFT BLANK)
3 COMMITMENTS (a) Capital commitments Contracts remaining to be executed on capital account and not provided for (net of advances) aggregates to Rs. 94,409 as at June 30, 2004 (March 31, 2004 - Rs 98,612) (b) Forward Contracts The Company enters into forward foreign exchange contracts where the counter party is a bank. The Company considers the risk of non-performance by the counter party as non-material. As at June 30, 2004 the Company held forward foreign exchange contracts of US$ 78.96 million. (Rs. 3,527 million) (March 31, 2004 -US$ 37 million (Rs. 1,684 million)) (c) Lease commitments (i) Finance leases The Company takes vehicles under finance leases of upto five years. Future minimum lease payments under finance leases as at June 30, 2004 and March 31, 2004 are as follows: As at June 30, 2004 Principal Interest Total Not later than one year 5,739 1,597 7,336 Later than one year and not later than five years 13,798 1,708 15,506 Total minimum payments 19,537 3,305 22,842 As at March 31, 2004 Principal Interest Total Not later than one year 5,514 1,550 7,064 Later than one year and not later than five years 11,675 1,371 13,046 Total minimum payments 17,189 2,921 20,110 (ii) Operating leases The Company has taken certain office premises and residential premises for employees under operating leases, which expire at various dates through year 2012. Gross rental expenses for the period ended June 30, 2004 aggregated to Rs 20,524 (June 30, 2003 - Rs 24,601). The minimum rental payments to be made in future in respect of these leases are as follows : June 30, 2004 March 31, 2004 Not later than one year 34,175 45,611 Later than one year and not later than five years 93,380 56,405 Later than five years 48,245 51,495
4 SEGMENT INFORMATION Business segments are defined as a distinguishable components of an enterprise that is engaged in providing a group of related products or services and that is subject to differing risks and returns and about which separate financial information is available. This information is reviewed and evaluated regularly by the management in deciding how to allocate resources and in assessing the performance. The Company is organised geographically and by business segment. For management purposes the Company is primarily organised on a worldwide basis into two business segments: a) Product licenses and related activities ('Products') and b) IT solutions and consulting services ('Services'). The business segments are the basis on which the Company reports its primary segment information to management.product licenses and related activities segment deals with banking software products like the FLEXCUBE suite of products, Reveleus and Microbanker which cater to needs of corporate, retail and investment banking as well as treasury operations and data warehousing requirements. The related activities include enhancements, implementation and maintenance activities. IT solutions and consulting services comprise of bespoke software development, provision of computer software solutions and related consulting services arising from such activities. This segment is further sub-divided in the following sub-segments i.e. Business intelligence, Customer relationship management, Brokerage, e-commerce, Internet services and IT and Business consulting. The Company does not track assets and liabilities geographically. Period ended June 30, 2004 Particulars Products Services Corporate Total Revenues 1,076,127 730,825-1,806,952 Cost of revenues (394,004) (600,229) - (994,233) Gross profit 682,123 130,596-812,719 Selling and marketing expenses (110,131) (7,514) - (117,645) General and administrative expenses (55,884) (50,307) (117,824) (224,015) Depreciation and amortisation (18,032) (24,302) (3,670) (46,004) Income from operations 498,076 48,473 (121,494) 425,055 Provision for dimunition in value of investment (20,680) Interest income 64,402 Other income/(expense) 32,775 Income before provision for income taxes 501,552 Provision for income taxes (125,296) Net profit 376,256 Other information Segment assets 2,760,500 3,096,130 7,241,707 13,098,337 Segment liabilities 692,221 246,787 2,113,557 3,052,565 Share capital and reserves and surplus - - 10,045,772 10,045,772 Capital expenditure by segment 21,534 120,614 1,665 143,813
Period ended June 30, 2003 Particulars Products Services Corporate Total Revenues 1,092,207 530,782-1,622,989 Cost of revenues (292,432) (437,306) - (729,738) Gross profit 799,775 93,476-893,251 Selling and marketing expenses (128,251) (9,454) - (137,705) General and administrative expenses (101,723) (48,363) (87,300) (237,386) Depreciation and amortisation (9,528) (10,584) (9,034) (29,146) Income from operations 560,273 25,075 (96,334) 489,014 Interest income 57,330 Other income/(expense) (84,765) Income before provision for income taxes 461,579 Provision for income taxes (68,210) Net profit 393,369 Other information As at March 31, 2004 Segment assets 2,554,069 2,518,740 7,092,422 12,165,231 Segment liabilities 569,563 178,126 1,752,080 2,499,769 Share capital and reserves and surplus - - 9,665,462 9,665,462 Capital expenditure by segment 477,000 30,454 199,181 706,635 Segment revenue and expense: Revenue is generated through licensing of software products as well as by providing software solutions to the customers including consulting services. The expenses which are not directly attributable to a business segment are shown as corporate expenses. Segment assets and liabilities: Segment assets include all operating assets used by a segment and consist principally of debtors, deposits for premises and fixed assets, net of allowances. Segment liabilities primarily includes deferred revenues, finance lease obligation, advance from customer, accrued employee cost and other current liabilities. While most such assets and liabilities can be directly attributed to individual segments, the carrying amount of certain assets and liabilities used jointly by two or more segments is allocated to the segment on a reasonable basis. Assets and liabilities that cannot be allocated between the segments are shown as part of corporate assets. Geographical segments The following table shows the distribution of the Company's sales by geographical market : Regions Period ended Period ended June 30, 2004 June 30, 2003 Amount % Amount % United States of America 804,604 46% 670,095 41% Europe 359,814 20% 353,776 22% Asia Pacific 344,358 19% 272,023 17% Middle East and Africa 273,059 14% 289,009 18% Latin America and Carribean 25,117 1% 38,086 2% 1,806,952 100% 1,622,989 100%
5 RELATED PARTY TRANSACTIONS The related party transactions, other than disclosed elsewhere in the financial statements, are summarised in the table below: Relationship Promoter Company and its affiliates Subsidiaries Joint Venture ESPS Trust Key Managerial Personnel Total June 2004 June 2003 June 2004 June 2003 June 2004 June 2003 June 2004 June 2003 June 2004 June 2003 June 2004 June 2003 Revenues Banking product revenues 259,800 294,853 488,848 487,743 284 121 - - - - 748,932 782,717 IT solutions and consulting services revenues - 27,688 709,261 447,541 - - - - - - 709,261 475,229 Interest on loan - - 1,885 614 - - - - 27 40 1,912 654 Expenses Communication expenses 1,117 5,325 - - - - - - - - 1,117 5,325 Remuneration 1 - - - - - - - - 6,684 5,832 6,684 5,832 Finance charges on finance leases 11 296 - - - - - - - - 11 296 Bank charges 506 84 - - - - - - - - 506 84 Rent 3 - - - - - - - - 29 29 29 29 Promoter Company and its affiliates Subsidiaries Joint Venture ESPS Trust Key Managerial Personnel Total Relationship June 2004 March 2004 June 2004 March 2004 June 2004 March 2004 June 2004 March 2004 June 2004 March 2004 June 2004 March 2004 Assets Sundry debtors 332,665 309,636 3,682,694 2,973,860 10,279 10,636 - - - - 4,025,638 3,294,132 Loan outstanding 2 - - 460,620 439,200 - - 181,925 189,425-4,000 642,545 632,625 Repayment of loan - - - (23,595) - - (7,500) (78,501) (4,000) - (11,500) (102,096) Bank balances 397,173 671,461 - - - - - - 397,173 671,461 Interest accrued on fixed deposits 5,772 4,720 - - - - - - - - 5,772 4,720 Liabilities Accounts payable - - 1,508,811 1,120,061 - - - - - - 1,508,811 1,120,061 Finance lease obligation 1,751 3,046 - - - - - - - - 1,751 3,046 Deferred revenue 3,472 193 198,433 203,634 708 831 - - - - 202,613 204,658 Other transactions Provision of dividends - 40,295 - - - - - 7,549-880 - 48,724 Capital contribution - - - 139,829 - - - - - - - 139,829 1. Includes salary, bonus and perquisites 2. Loan given to subsidiaries represents loan to i-flex America inc amounting to Rs 460,620 as at June 30, 2004 with no fixed repayment terms. Maximum balance outstanding during the period were as follows: Jun-2004 Mar-2004 i-flex Solutions inc - 23,595 i-flex America inc 460,620 439,200 3. Pertains to rent paid on a flat taken on rent from a relative of a Key Managerial Person. 4. Remuneration to non-wholetime directors during the period ended June 30, 2004 amounts to Rs. 3093.
Names of Related Parties and description of relationship: Promoter Company and its affiliates Subsidiaries Joint Ventures OrbiTech Limited OrbiTech Solution Limited Citigroup Inc. Citicorp Technology Holdings Inc, USA Citibank branches Citicorp Information Technology, Inc e-serve International Limited i-flex b.v, The Netherlands i-flex Pte, Singapore i-flex inc., USA i-flex America inc., USA SuperSolutions Corporation,USA Flexcel International Private Limited Other entities where company has significant influence i-flex Employee Stock Purchase Scheme Trust Key Managerial Personnel ('KMP') Rajesh Hukku - Chairman and Managing Director R Ravisankar - Chief Executive Officer - International Operations and Technology Deepak Ghaisas - Chief Executive Officer - India Operations and Chief Financial Officer Makarand Padalkar - Chief of Staff and Investor Relations Joseph John - Head - Banking Products Division V Shankar - Head - Information Technology Services Division N R K Raman - Head - Marketing & Global Sales Atul Gupta- Head - Process and Quality Management Group S Hariharan - Head - Infrastructure and Support Services Group Vivek Govilkar - Head - Human Resources Division
6 STOCK BASED COMPENSATION SCHEME a) Employee stock purchase scheme ('ESPS') On March 29, 1998 the Company adopted the ESPS to provide equity based incentives to key employees of the Company ('1998 Scheme'). Subsequently on April 1, 1999, April 1, 2000 and April 1, 2001, the Company adopted other Stock based schemes ('1999 Scheme', 2000 Scheme and '2001 Scheme'). These schemes which have similar terms, are administered through a Trust ('the Trust'). The Trust purchases shares of the Company using the proceeds of loans obtained from the Company. Such shares are offered by the Trust to employees at an exercise price, which approximates the fair value on the date of the grant. The employees can purchase the shares in a phased manner over a period of five years based on continued employment, until which, the Trust holds the shares for the benefit of the employee. The employee will be entitled to receive dividends, bonus, etc., that may be declared by the Company from time to time for the entire portion of shares held by the Trust on behalf of the employees. On the acceptance of the offer, the selected employee shall undertake to pay within ten years from the date of acceptance of the offer the cost of the shares incurred by the Trust including repayment of the loan relatable thereto. The repayment of the loan by the Trust to the Company would be dependent on employee repaying the amount to the Trust. In case the employee resigns from employment, the rights relating to shares, which are eligible for exercise, may be purchased by payment of the exercise price whereas, the balance shares shall be forfeited in favour of the Trust. The Trustees have the right of recourse against the employee for any amounts that may remain unpaid on the shares accepted by the employee. The shares that an employee is eligible to exercise during the initial five-year period merely go to determine the amount and scheduling of the loan to be repaid on exercise by the employee. The Trust shall repay the loan obtained from the Company on receipt of payments from employees against shares exercised or otherwise. The Securities and Exchange Board of India ( SEBI ) has issued the Employee Stock Option Scheme and Stock Purchase Guidelines, 1999 ( SEBI guidelines ), which are applicable to stock option schemes for employees of all listed Companies. In accordance with these guidelines, the excess of market price of the underlying equity shares on the date of grant of the stock options over the exercise price of the options is to be recognised in the books of account and amortised over the vesting period. However, no compensation cost would need to be recorded as the scheme terms are fixed and the exercise price equals the market price of the underlying stock on the grant date. The shares issued to the Trust have been considered as outstanding for basic EPS purposes, to the extent the shares have been allocated to the employees pursuant to the above schemes and are eligible to be exercised by the employee. For diluted EPS purpose, the share, which are not yet eligible for exercise, have also been considered as outstanding to the extent these shares are dilutive. b) Employee Stock Option Plan ( ESOP ) At the Annual General Meeting of the shareholders of the Company held on August 14, 2001, the Company introduced an additional ESOP, pursuant to which equity shares not exceeding an additional 7.5% of the issued and paid-up equity share capital of the Company had been earmarked for grant, at any given time to present and future employees and directors of the Company and its existing and future subsidiaries. Pursuant to the above resolution, the Board of Directors, at their meeting held on March 4, 2002 approved the Employees Stock Option Scheme ( the Scheme ) for issue of 4,753,600 options (inclusive of the 1:1 bonus declared on September 11, 2003) to the employees and directors of the Company and its subsidiaries. According to the Scheme, the Company has granted 4,548,920 options (inclusive of the 1:1 bonus declared on September 11, 2003) to the eligible employees and directors of the Company and its subsidiaries prior to the IPO, and 116,000 options thereafter. 20% of the total options granted under the Scheme will vest to the eligible employees and directors on the completion of 12, 24, 36, 48 and 60 months from the date of grant and is subject to the continued employment of the employee or the director with the Company or its subsidiaries. As per the terms of the Scheme, the exercise price would equate the price determined for the IPO through the book building process for the options granted prior to the IPO and the fair market value on the date of grant for options granted thereafter. Accordingly, no compensation cost would need to be recorded as the exercise price would equal to the fair value of the shares on the date of grant. The summary of the activity in the Company's ESOP is as follows: June 30, 2004 March 31, 2004 No. of shares Outstanding at the beginning of the period/year 4,313,550 4,499,400 Granted during the period/year - 36,000 Exercised during the period/year (15,300) (109,350) Forfeited during the period/year (46,100) (112,500) Outstanding at the end of the period/year 4,252,150 4,313,550
7. SUMMARY OF ASSETS AND LIABILITIES IN JOINT VENTURE The summary of proportionate assets and liabilities of Flexcel, a 40% joint venture company were as follows : Flexcel (unaudited) June 30, 2004 March 31, 2004 Reserve and surplus Capital reserve 719 2,537 Share premium 310 310 Profit and loss account (16,549) (16,284) NET RESERVE AND SURPLUS (15,520) (13,437) Fixed assets Cost 9,827 10,640 Less: Accumulated depreciation 5,261 4,670 Net book value 4,566 5,970 Capital advances 870-5,436 5,970 Current assets, loan and advances Sundry debtors 35 2,113 Cash and bank balances 3,843 2,327 Loans and advances 694 1,339 4,572 5,779 Less: Current liabilities and provisions Current liabilities 4,807 6,324 4,807 6,324 Net current assets (235) (545) NET ASSETS 5,201 5,425 Flexcel (unaudited) Period ended Period ended June 30, 2004 June 30, 2003 REVENUES Sales 1,350 259 Other income 51 22 1,401 281 EXPENDITURE General and administrative expenses 636 1,483 Depreciation 990 548 1,626 2,031 Loss before tax (225) (1,750)
8 EVENTS AFTER BALANCE SHEET DATE Effective July 1, 2004, i-flex solutions limited and its subsidiaries ("i-flex group") acquired an IT consulting services contract of a large investment bank from Trigyn Technologies Limited and its subsidiaries for a total consideration not exceeding US$ 4.8 million payable in tranches based on the actual revenue generated under the contract. The transaction involves transfer of all on-going work orders under the contracts as also resources working on these projects to the i-flex group. 9 OTHER DISCLOSURE AS REQUIRED BY SCHEDULE VI TO THE COMPANIES ACT, 1956 (a) Following are the aggregate amounts incurred on certain specific expenses that are required to be disclosed under Schedule VI to the Companies Act 1956: Period ended Period ended June 30, 2004 June 30, 2003 Salaries and bonus 802,597 496,724 Staff welfare expenses 23,587 19,644 Contribution to provident and other funds 9,442 17,126 Travel related expenses (net of recoveries) 235,547 276,624 Professional fees 92,882 85,542 Application software 43,883 42,825 Communication expenses 23,656 25,980 Rent 22,032 25,806 Advertising expenses 8,848 19,073 Power 16,789 11,446 Insurance 977 686 Repairs and maintenance: - Leasehold premises 1,247 1,653 - Computer equipments 6,251 6,466 - Others 2,068 2,757 Rates and taxes 1,573 4,095 Finance charge on leased assets 159 462 Provision for doubtful debts, net - 41,844 Contract acquisition cost - 2,282 Other expenses 44,355 23,794 1,335,893 1,104,829 10 Prior period/year comparatives Prior period/year amounts have been reclassified, where necessary to confirm with current period's presentation.