final usgaap accoutnsformatedjune 2003 · june 2003 june 2003 june 2002 march 2003 (unaudited) us...

June 2003 June 2003 March 2003

US DollarsSee note 2.2(b)

ASSETSCurrent assets

Cash and cash equivalents 53,497 2,481,709 2,849,362 Bank deposits 71,919 3,336,341 2,910,000 Marketable securities, available for sale - - 33,288 Trade receivable from related parties, net 14,040 651,326 651,110 Trade receivables - others, net 23,991 1,112,951 798,017 Employee receivables 719 33,348 28,986 Prepaid expenses 3,140 145,664 85,551 Other current assets 6,438 298,668 244,770 Total current assets 173,744 8,060,007 7,601,084

Property and equipment, net 12,920 599,347 517,220 Other investments 7,667 355,660 322,537 Investment in equity investee 130 6,036 7,738 Employee receivables 211 9,794 11,721 Rental deposits 4,921 228,296 217,542 Deferred income taxes, net 674 31,288 29,703 Other assets 374 17,368 15,509

TOTAL ASSETS 200,641 9,307,796 8,723,054

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilitiesAccounts payable 1,306 60,608 20,218 Accrued employee costs 8,611 399,467 340,003 Accrued referral fees/commission 2,009 93,209 78,301 Accrued rates and taxes 1,271 58,973 45,087 Deferred revenue 5,825 270,237 241,123 Income taxes payable 1,841 85,396 105,077 Other current liabilities 5,163 239,515 191,003 Current portion of capital lease obligations 93 4,300 4,786 Total current liabilities 26,119 1,211,705 1,025,598

- Deferred revenue 694 32,191 25,941 Capital lease obligations 125 5,815 6,761 Total liabilities 26,938 1,249,711 1,058,300

Stockholders' equity

Common stock, Rs 5/- par value;100,000,000 equity shares authorised 37,320,700 (March 2003 - 37,315,400) shares outstanding as of June 2003 4,022 186,604 186,577 Additional paid-in capital 49,004 2,273,317 2,270,534 Accumulated other comprehensive loss (750) (34,798) (36,135) Loan to Employees Stock Purchase Scheme (ESPS) Trust (5,722) (265,459) (267,926) Retained earnings 127,149 5,898,421 5,511,704 Total stockholders' equity 173,703 8,058,085 7,664,754

200,641 9,307,796 8,723,054

The accompanying notes are an integral part of these financial statements.

CONSOLIDATED BALANCE SHEETS AS AT JUNE 30, 2003 AND MARCH 31, 2003

i-flex Solutions Limited and subsidiaries

Indian Rupees

(Amounts in thousands, except for share data or as otherwise stated)

June 2003 June 2003 June 2002 March 2003(Unaudited)


REVENUES 40,199 1,864,821 1,308,944 6,408,889

Cost of Revenues (17,066) (791,710) (573,543) (2,743,071)

Gross profit 23,133 1,073,111 735,401 3,665,818

Selling and marketing expenses (6,577) (305,087) (192,131) (872,270)General and administrative expenses (5,707) (264,728) (212,602) (731,607)Depreciation and amortisation (610) (28,280) (30,602) (142,327)INCOME FROM OPERATIONS 10,239 475,016 300,066 1,919,614

Loss on equity investments (48) (2,215) (8,390) (17,924) Interest income 1,238 57,416 30,211 208,637 Other income/(expense) (1,578) (73,196) 20,085 (86,928) INCOME BEFORE PROVISION FOR INCOME TAXES

9,851 457,021 341,972 2,023,399

Provision for income taxes (1,515) (70,304) (60,404) (252,729)

NET INCOME 8,336 386,717 281,568 1,770,670

Basic earnings per share 0.23 10.66 8.73 49.87 Diluted earnings per share 0.22 10.24 8.42 48.10

Basic 36,276,804 36,276,804 32,253,405 35,505,072 Diluted 37,771,834 37,771,834 33,431,910 36,807,149

The accompanying notes are an integral part of these financial statements.

Number of shares used in computing earnings per share


CONSOLIDATED STATEMENT OF PROFIT AND LOSS FOR THE THREE MONTH PERIOD ENDEDJUNE 30, 2003 AND JUNE 30, 2002 (UNAUDITED) AND YEAR ENDED MARCH 31, 2003


Indian Rupees

June 2003 June 2003 June 2002 March 2003(Unaudited)


CASH FLOWS FROM OPERATING ACTIVITIES

Net Income 8,336 386,717 281,568 1,770,670

Adjustments to reconcile net income to net cashprovided by operating activities

Depreciation and amortization 610 28,280 30,602 142,327 (Profit)/loss on retirement/sale of property and equipment, net 2 105 (386) (458) (Profit)/loss on sale/conversion of investment 0 12 - (35) Loss from equity investments 48 2,215 8,390 17,924 Provision for doubtful debts, net 1,158 53,726 764 (18,755) Provision for doubtful advances - - - 7,253 Deferred tax benefit, net (34) (1,585) (2,877) (5,045)

10,120 469,470 318,061 1,913,881 Change in assets and liabilities

Trade receivables (7,521) (348,922) 39,831 443,065 Other assets (3,032) (140,654) (41,080) (134,280) Current liabilities and other liabilities 4,560 211,544 127,453 261,562

Net cash provided by operating activities 4,127 191,438 444,265 2,484,228

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of property and equipment including capital advances (2,422) (112,290) (59,989) (366,883) Sale of property and equipment 1 28 545 893 Increase in bank deposits (9,190) (426,341) - (1,760,000) Purchase of investments - - (131) (257,481) Share capital refund from equity investee - - - 9,038 Sale of investment - - - 2,504

Net cash (used in) investing activities (11,611) (538,603) (59,575) (2,371,929)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from Initial Public Offering ('IPO') - - 1,780,800 1,780,800 IPO expenses - - (55,216) (103,073) Proceeds from issuance of shares 53 2,464 - - Advance against equity shares to be issued under ESOP Scheme 23 1,087 - 345

Repayment of loan from Employee Stock Purchase Scheme (ESPS) Trust 53 2,467 5,650 23,723 Capital lease payments (30) (1,432) (986) (6,237) Dividend paid - - - (46,644)

Net cash provided by financing activities 99 4,586 1,730,248 1,648,914

Net (decrease)/increase in cash and cash equivalents during the period/year (7,385) (342,579) 2,114,938 1,761,213

Effect of exchange profit/(loss) on cash and cash equivalents (541) (25,074) 9,798 (34,197) Cash and cash equivalents at the beginning of the period/year 61,422 2,849,362 1,122,346 1,122,346 Cash and cash equivalents at the end of the period/year 53,497 2,481,709 3,247,082 2,849,362

Supplementary informationCashTaxes paid

Domestic taxes 1,508 69,961 18,450 173,905 Foreign taxes 1,007 46,712 - 76,071 Refund of previous assessment year (544) (25,236) - -

1,971 91,437 18,450 249,976 Non CashAssets acquired under capital leases - - - 2,447

The accompanying notes are an integral part of these financial statements


Indian rupees

CONSOLIDATED STATEMENT OF CASH FLOW FOR THE THREE MONTH PERIOD ENDED JUNE 30, 2003 AND JUNE 30, 2002 (UNAUDITED) AND YEAR ENDED MARCH 31, 2003


No. of Shares Par ValueAdditional paid-in

capitalComprehensive

incomeAccumulated other comprehensive loss Loan to Trust

Retained earnings

Total stockholders' equity

Balance as of March 31, 2003 37,315,400 186,577 2,270,534 (36,135) (267,926) 5,511,704 7,664,754

Cash dividend declared - - - - - - - - Shares allotted under ESOP 5,300 27 2,783 - - - - 2,810 Gain on dilution of investment in equity investee (refer Note 10) - - - - Repayment of loan by ESPS Trust - - - - - 2,467 - 2,467 Net income for the year - - - 386,717 - - 386,717 386,717 Translation loss - - - 1,514 1,514 - - 1,514 Reversal of unrealised gain on securities available for sale - - - (177) (177) - - (177) Comprehensive income 388,054

Balance as of June 30, 2003 37,320,700 186,604 2,273,317 (34,798) (265,459) 5,898,421 8,058,085

US Dollars See note 2.2(b)

Balance as of June 30, 2003 37,315,400 4,022 49,004 (750) (5,722) 127,149 173,703

The accompanying notes are an integral part of the financial statements


CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE STATEMENT FOR THE THREE MONTH PERIOD ENDED JUNE 30, 2003

Common Stock Indian Rupees



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED JUNE 30, 2003 AND YEAR ENDED MARCH 31, 2003

(In thousands of Indian Rupees, except share data or as otherwise stated)

1. BACKGROUND i-flex Solutions Limited ('i-flex' or 'the Company'), a public limited company, was incorporated in India with limited liability on September 27, 1989. The Company’s principal shareholder is OrbiTech Limited (‘OrbiTech’) with shareholding of 43.19 per cent. OrbiTech is a 100 per cent subsidiary of Citicorp Technology Holdings Inc, USA. 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, which is recorded as part of other current liabilities.

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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 period ended June 30, 2003 have

been translated into United States Dollars (‘US$’) using the telex transfer average rate as prescribed by Citibank NA as at June 30, 2003 which was 1 US$ = Rs 46.39. 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-for-one 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 37,320,700 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.

(e) Certain reclassifications have been made to confirm prior period data to the current presentations.

These reclassifications had no effect on reported earnings. 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 period/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 Indian Rupees, the reporting currency, at the average rates of exchange during the period/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.

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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 are 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 rateably 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 are 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.

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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’) 01-14 “Income Statement Characterization of Reimbursement received for ‘Out of Pocket’ expenses incurred”. Accordingly out-of-pocket expenses amounting to Rs 35,185 and Rs 58,003 and Rs 198,134 for the period ended June 30, 2003, June 30, 2002 and year ended March 31, 2003 respectively 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’. 2.10 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 long-lived 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.

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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. 2.12 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. 2.13 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 period/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. 2.14 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 period/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 LIC. Gratuity benefit cost for the period/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 period/year-end. 2.15 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.

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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 period/year. Diluted earnings per share is computed using the weighted average of common and dilutive common equivalent shares outstanding during the period/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 anti-dilutive. 2.17 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 period/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. 123. 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:

June 2003 March 2003

US Dollars

Indian Rupees

(in thousands except per share data)

Net income As reported 8,336 386,717 1,770,670 Pro forma 7,020 325,655 1,440,909 Basic earning per share As reported 0.23 10.66 49.87 Pro forma 0.19 8.98 40.58

Diluted earning per share As reported 0.22 10.24 48.10 Pro forma 0.19 8.62 39.84

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 0.16 per cent

Expected volatility 65 per cent

Risk-free interest rates 8.5 per cent

Expected life 6 years

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2.18 Derivative instruments and hedging activities During the current period the Group entered into forward foreign exchange contracts where the counter party is a bank. The Group purchases forward foreign exchange contracts to mitigate the risks of change in foreign exchange rate on accounts receivable denominated in certain foreign currencies. Although these contracts are effective as hedges from an economic perspective, they do not qualify for hedges accounting under SFAS 133 as amended. As per SFAS 133 derivatives that is either not designated hedge or is so designated but ineffective in marked to market and recognised to income statement immediately. Further 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. 133. 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 period/year end and corresponding asset/liability is recorded in the balance sheet under other current assets or other current liabilities. 2.19 Recent accounting pronouncements In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables applicable for fiscal periods beginning after June 2003. This Issue addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting, where the deliverable (the revenue generating activities) are sufficiently separable and have standalone value to the customer. It is also necessary that there exists sufficient evidence of fair value to separately account for some or all of the deliverables. The Group believes that the adoption of the consensus will not have a material impact on the Group’s revenue recognition policies as the accounting from the revenue from a significant portion of the Group’s service offerings is governed by higher level GAAP literature. In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others. The adoption of the Interpretation did not have a material impact on the Group’s accounting or disclosure policies. In January 2003, The FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin (ARB) 51, that applies to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. The Group has assessed the implication of this interpretation and believes that there will be no material impact on the financial statements. In April 2003, The FASB issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, applicable for contracts entered into after June 30, 2003, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. The Company has assessed the implication of this statement and believes that this will not have a material impact on the accounting for derivative instruments and hedging activities. In May 2003, The FASB issued Statement No. 150, Accounting for Certain Financial Instruments with characteristics of both Liabilities and Equity, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The Company has assessed the implication of this statement and believe it will not have a material impact on the Company’s accounts or disclosure practices.

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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:


US Dollars Indian Rupees

(in thousands)

Cash on hand 11 515 832

Funds in transit — — 7,091

Bank balances

Current accounts 50,183 2,327,999 2,445,422

Time deposits 3,303 153,195 396,017

53,497 2,481,709 2,849,362 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. 4. TRADE RECEIVABLES, NET Trade receivable from related parties as of June 30, 2003 and March 31, 2003, net of provision for doubtful accounts of Rs Nil and Rs Nil, respectively amounted to Rs 651,326 and Rs 651,110, respectively. Trade receivables - others as of June 30, 2003 and March 31, 2003 net of provisions for doubtful accounts of Rs 92,568 and Rs 38,842, respectively amounted to Rs 1,112,951 and Rs 798,017, respectively. The movement in provision for doubtful accounts is given below:



(in thousands)

Provision for doubtful debts

Trade receivables from related parties

Opening balance — — 1,221

Additions — — —

Reversals related to changes in estimates — — (1,221)

Collections — — —

Closing balance — — —

Trade receivables – others

Opening balance 837 38,842 54,691

Additions 1,224 56,794 —

Reversals related to changes in estimates — — (8,498)

Collections (66) (3,068) (7,351)

Closing balance 1,995 92,568 38,842

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The Group reviews trade receivables for allowance, whenever an event or change in circumstances indicates that amount of such trade receivable may not be recoverable. Provision for trade receivables are made based on specific identification of amounts doubtful of recovery. 5. PROPERTY AND EQUIPMENT, NET Property and equipment consist of the following:



Estimated

useful life

(years) Rates(%) (in thousands)

Land 5,015 232,674 44,734

Improvement to leasehold premises 7 35

2,195 101,820 101,522

Building 20 15 434 20,116 20,116

Computer equipments 3 60 10,197 473,024 470,781

Electrical and office equipment 7 35

3,384 156,972 155,687

Furniture and fixtures 7 35 2,957 137,195 134,965

Vehicles on lease 4-5 25-20 519 24,062 24,631

Capital advances 2,834 131,485 221,383

27,535 1,277,348 1,173,819

Less: Accumulated depreciation and amortisation (14,615)

(678,001) (656,599)

Property and equipment, net 12,920 599,347 517,220 Depreciation is computed at the rates referred to above, applied to the written-down value of the assets over its estimated useful life. Property and equipment above include the following assets held under capital leases:



(in thousands)

Vehicles 519 24,062 24,631

Less: Accumulated amortisation (327) (15,181) (14,390)

192 8,881 10,241

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6. 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 9,794 and Rs 11,721 for the period ended June 30, 2003 and year ended March 31, 2003 respectively. 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 June 30, 2003 and March 31, 2003 at Rs 228,296 and Rs 217,542, respectively, determined using market rates of interest as at June 30, 2003 and March 31, 2003 is approximately Rs 174,787 and Rs 171,144, 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 non-performance by counter parties. The Group’s cash equivalents and bank deposits are invested with banks with high investment grade credit ratings. As at June 30, 2003, 51 per cent (March 31, 2003 – 50 per cent) and 31 per cent (March 31, 2003 – 32 per cent) of cash equivalents (primarily denominated in US $) were placed with Citibank and HDFC Bank, respectively. 57 per cent (March 31, 2003 – 58 per cent) and 36 per cent (March 31, 2003 –38 per cent) 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 June 30, 2003 and March 31, 2003, 98 per cent and 94 per cent of trade receivables from related parties was recoverable from various Citibank branches, 1 per cent and 5 per cent are recoverable from CITI. As at June 30, 2003 and March 31, 2003, 8 per cent and 13 per cent are recoverable from Customer 1 of non-related parties and 6 per cent and 10 per cent from Customer 2, respectively. In management’s opinion, as of June 30, 2003, there is no significant risk of loss in the event of non-performance 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 currency denominated sales contracts and contractual currency denominated forward contracts. As at June 30, 2003 the Company has committed to deliver US $ 9,688,911 (March 31, 2003 US$ 6,747,288) pursuant to such contracts, these contracts mature between 0 to 13 months. As a result, the group has accounted Rs 6,975 and Rs 8,861 as derivative loss for the periods ended June 30, 2003 and year ended March 31, 2003, respectively. Accordingly, the group has accounted for Rs 15,194 and Rs 8,219 as other current liabilities as at June 30, 2003 and March 31, 2003 respectively.

10

The Group enters into forward foreign exchange contracts where the counter party is a bank. The Group considers the risk of non-performance by the counter party as non-material. As at June 30, 2003 the Group held forward foreign exchange contracts of US $ 12.75 million. The forward foreign exchange contract matures between 1 to 6 months. 7. STOCKHOLDERS' EQUITY 7.1 Common stock During the period, 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 approval. The Company paid cash dividends of Rs 46,644 during the year ended March 31, 2003. For the year ended March 31, 2003 the Company paid Rs Nil 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.

11

8. MARKETABLE SECURITIES, AVAILABLE FOR SALE

The fair values of the available for sale securities are as follows:



(in thousands)

Unit Trust of India –1964 Scheme – Carrying value/Cost 718 33,288 20,861

Less: Excess of cost over market value — — —

Add: Unrealised gain/(loss) during the period/year, net of tax (4) (177) 12,427

Less: Units converted into bonds during the period

(714) (33,123) —

Add: Realised gain on conversion of units in US-64 into bonds

— 12 —

— — 33,288 The Group held 3,311,258 units (and 278 fractions) of Rs 10/- each of Unit Trust of India - 1964 Scheme (‘US 64’). During the current period 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. On June 1, 2003, all the units in UTI US-64 were converted into US-64 6.75 % Tax-free 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. Unrealised loss of Rs 177 during the current period represents the reversal of the unrealised gain during the prior year, consequent to the conversion of the units in US-64 into bonds. 9. OTHER INVESTMENTS Other investments comprise:



(in thousands)

Unquoted equity Securities

EBZ Online Private Limited (‘EBZ’) 970 45,000 45,000

Eastern Software Systems Limited (‘ESSL’) 160 7,406 7,406

1,130 52,406 52,406

Held to maturity debt securities

12.75% KEONICS Mahithi Bonds Series –1 431 20,000 20,000

JM High Liquidity Fund - Serial Plan 2004 (Growth) 5,389 250,000 250,000

Unit Trust of India – US64 6.75% Tax free Bonds (Refer Note 8) 714 33,123 —

National Saving Certificates 3 131 131

7,667 355,660 322,537

12

The Company’s ownership interest in EBZ and ESSL is 19.5 percent and 6.62 per cent, 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 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 Fund - Serial Plan 4 which will mature on April 15, 2004. 10. 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. The Group records losses in excess of its proportionate investment in DotEx since it is committed to provide further financial support to DotEx. Accordingly, the Company has recorded Rs 1,182 (March 31, 2003 Rs 669) as part of ‘Other Current Liabilities’. 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.



(in thousands)

Original Cost

DotEx 1,215 56,350 56,350

Flexcel 446 20,680 20,680

Add: Advance against shares given to Flexcel — — —

Add: Gain on dilution of equity in Flexcel 61 2,847 2,847

Less: Group's share of accumulated losses in

DotEx (1,215) (56,350) (56,350)

Flexcel (377) (17,491) (15,789)

130 6,036 7,738

13

The analysis of the carrying amount of investments and the earnings of the investee included in net income is as follows:


US Dollars Indian Rupees (in thousands)

Share of net assets

DotEx — —

Flexcel 130 6,036 7,738

Advance against share capital paid to Flexcel in excess of committed share — — —

130 6,036 7,738

Carrying value

DotEx — — —

Flexcel 130 6,036 7,738

130 6,036 7,738

Share of (loss) of equity investee

DotEx (11) (513) (11,617)

Flexcel (37) (1,702) (6,307)

(48) (2,215) (17,924)

(Loss) included in net income

DotEx (11) (513) (11,617)

Flexcel (37) (1,702) (6,307)

(48) (2,215) (17,924) The summarised unaudited financial statements of DotEx are as follows:

June 2003 June 2003 March 2003 US Dollars Indian Rupees

(in thousands)

Balance sheet

Current assets 13 606 1,218

Fixed assets, (net) 54 2,520 2,961

Total assets 67 3,126 4,179

Current liabilities 49 2,279 2,284

Unsecured loans 70 3,267 3,267

Shareholder’s equity

Share Capital 2,479 115,000 115,000

Accumulated losses (2,531) (117,420) (116,372)

Total liabilities and stockholders’ equity 67 3,126 4,179

14

June 2003 June 2003 June 2002

(unaudited) March 2003


(in thousands)

Income statement

Revenues 4 196 1,016 5,427

Expenses (27) (1,244) (14,169) (29,140)

Loss from operations (23) (1,048) (13,153) (23,713)

Net loss (23) (1,048) (13,153) (23,713) The summarised unaudited financial statements of Flexcel are as follows:

June 2003 June 2003 March 2003 US Dollars Indian Rupees

(in thousands)

Balance sheet

Current assets 345 16,011 19,430

Fixed assets, (net) 262 12,169 12,940

Total assets 607 28,180 32,370

Current liabilities 177 8,195 7,895

Unsecured Loans 108 5,019 5,133

Shareholder’s equity

Share Capital 1,114 51,700 51,700

Share Premium 17 776 776

Advance against Share application — — —

Accumulated losses (809) (37,510) (33,134)

Total liabilities and stockholders’ equity 607 28,180 32,370

June 2003 June 2003 June 2002 (unaudited)

March 2002


(in thousands)

Income statement

Revenues 15 702 65 4,432

Expenses (109) (5,078) (3,979) (18,402)

Loss from operations (94) (4,376) (3,914) (13,970)

Net loss (94) (4,376) (3,914) (13,970)

15

11. OTHER CURRENT LIABILITIES Other current liabilities primarily comprise of:



(in thousands)

Communication expenses 214 9,911 10,301

Travelling expenses 1,046 48,513 30,418

IPO related expenses — — — Professional fees 1,557 72,275 82,128

Embedded derivatives 328 15,194 8,219

Other liabilities 2,018 93,622 59,937

5,163 239,515 191,003

12. EMPLOYEE BENEFIT PLANS The Group’s cost related to defined contribution plans and compensated absences is as follows:

June 2003 June 2003

June 2002



(in thousands)

Provident Fund 208 9,635 7,830 37,849

Superannuation 73 3,401 2,608 14,412 Compensated absences 1,812 84,065 67,550 94,122 2,093 97,101 77,988 146,383 Based on the disclosure requirements of SFAS 132 the change in benefit obligation and funded status of the Gratuity Plan for the period ended June 30, 2003, 2002 and year ended March 31, 2003 is as follows:



(in thousands)

Change in benefit obligation Benefit obligation at beginning of year/period 726 33,676 19,959 Service cost 39 1,819 4,549 Interest cost 14 659 1,847 Benefits paid (17) (769) (500) Actuarial loss 32 1,503 7,821 Benefit obligation at end of year/period (A) 794 36,888 33,676

16



(in thousands)

Change in plan assets Fair value of plan assets at beginning of year 182 8,425 6,640 Return on plan assets 4 166 1,099 Actual contribution - - 1,186 Benefits paid (17) (769) (500)Fair value of plan assets at end of

period/year (B) 169 7,822 8,425

Funded status (A-B) 625 29,066 25,251 Unrecognised net transition obligation (5) (236) (314)Unrecognised net actuarial loss (304) (14,124) (12,745)Accrued benefit cost 316 14,706 12,192

Net gratuity cost for the period ended June 30, 2003, 2002 and year ended March 31, 2003 comprises of the following components:




(in thousands)

Components of net periodical/yearly benefit cost

Service cost 39 1,819 1,137 4,549 Interest cost 14 659 462 1,847 Expected return on plan assets (4) (184) (149) (596)Amortisation of Transition liabilities 2 78 78 314 Recognised net actuarial loss 3 143 56 223 Net periodical/yearly benefit cost 54 2,515 1,584 6,337

The assumptions used in accounting for the gratuity plan are set out below:


% % %

Discount rate 7.50 9.50 8.00

Expected return on plan assets 8.00 9.00 8.50

Rate of compensation increase 5.00 5.00 5.00

The Company evaluates these assumptions based on its long-term plans of growth and industry standards.

17

13. OTHER INCOME/(EXPENSE) Other income/(expense) comprises of the following:

June 2003 June 2003

June 2002 (unaudited) March 2003


(in thousands)

Foreign exchange gain/(loss), net (1,576) (73,112) 19,142 (88,283)

Profit/(Loss) on sale/conversion of investment — (12) — 35

Miscellaneous income (2) (72) 943 1,320

(1,578) (73,196) 20,085 (86,928)

14. INCOME TAXES Under the Indian Income-tax Act 1961, for the period ended June 30, 2003 the Company is, under Section 10A of the Income Tax Act, 1961, eligible to claim benefits with respect to 100% during the year, as against 90% for last year, of the profits earned from export revenues from its five 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 location. In respect of two of its units where the Section 10A benefits have expired beginning from April 1, 2003, the Company claims deductions under Section 80HHE. Section 80HHE provides for 30% deduction of the profits earned from export revenue for this fiscal year. Foreign taxes represents income taxes payable overseas in the United States of America, Malaysia, United Kingdom and Singapore.

The provision for income tax consists of the following:




(in thousands)

Current tax expense

Domestic Indian taxes 915 42,426 29,542 169,778

Subsidiaries 25 1,143 — 2,188

Foreign taxes 610 28,321 33,750 85,808

Deferred taxes (35) (1,586) (2,888) (5,045) 1,515 70,304 60,404 252,729

18

The components of the deferred tax asset are as follows: June 2003 June 2003 March 2003


(in thousands)

Loss on sale of investment 228 10,558 10,815

Other than temporary diminution in value of investments

75

3,462

3,546

Unrealised loss on marketable securities — — —

Share of loss in equity investees 325 15,066 14,968

Difference between book and tax depreciation

674

31,288

29,703

Other differences — — —

1,302 60,374 59,032

Less: Valuation allowance (628) (29,086) (29,329)

Total deferred tax asset 674 31,288 29,703

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.

19

The following is a reconciliation of the statutory tax rate under the Indian Income-tax Act, 1961 and the Group's effective tax rate:

June 2003 June 2003



(in thousands) Accounting profit 9,852 457,021 341,972 2,023,399

Enacted tax rate (%) 35.875% 35.875%

36.75% 36.75%

Computed tax expense 3,534 163,956 125,675 743,600

Tax effect on exempt profit/income (2,619) (121,497) (104,854) (594,137)

Difference in tax rate between Indian and Foreign taxes (4) (191)

2,432 (2,945)

Incremental taxes paid in foreign jurisdictions 610 28,321

28,159 85,808

Taxes on dividend paid — — __ —

Impact of change in tax rates (23) (1,066) 1,321 1,038

Tax effect on loss of subsidiaries 125 5,796 5,178 19,670

Double taxation relief — — __ (4,467)

Valuation allowance 40 1,859 2,493 4,182

Others — — __ (20)

Previous year write back (148) (6,874) __ —

Income tax expense, net 1,515 70,304 60,404 252,729

The total deferred tax asset has been presented in the balance sheet as follows:



(in thousands)

Current deferred tax asset — — —

Non current deferred tax asset 674 31,288 29,703 674 31,288 29,703

20

15. LEASES The Group takes vehicles under capital lease upto five years Future minimum lease payments under capital leases as at June 30, 2003 are as follows:

June 30 US Dollars Indian Rupees

(in thousands)

2004 122 5,663

2005 85 3,960

2006 43 1,996

2007 16 742

Total minimum payments 266 12,361

Less: Amount representing future interest (48) (2,246)

Present value of minimum payments 218 10,115

Less: Current portion of capital lease obligation (93) (4,300)

Long term capital lease obligation 125 5,815 The Group has taken certain office premises, residential premises and vehicles for employees under operating lease, which expire at various dates through to 2012. Gross rental expense for the period ended June 30, 2003, 2002 and year ended March 31, 2003 was Rs 32,898 Rs 26,826 and Rs 120,794, respectively. The minimum rental payments to be made in future in respect of these leases:

June 30 US Dollars Indian Rupees

(in thousands)

2004 1,933 89,686

2005 999 46,347

2006 594 27,543

2007 585 27,156

2008 437 20,290

Thereafter till 2012 1,467 68,033

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:

21

16.1 Revenues Banking product revenues:

June 2003 June 2003



(in thousands)

Citibank branches 6,352 294,684 180,984 1,133,255

CITI — — 11,798 11,798

e-Serve 5 213 42 42

Flexcel 3 121 17 2,107

Total 6,360 295,018 192,841 1,147,202 IT solutions and consulting services revenues:

June 2003 June 2003



(in thousands)

Citibank branches 9,621 446,311 394,572 1,405,495

DotEx — — 1,390 2,864

9,621 446,311 395,962 1,408,359 16.2 Expenses

June 2003 June 2003 June 2002 (unaudited)

March 2003


(in thousands)

Communication expenses paid to Citibank branches

115 5,325 — 43,811

Finance lease payments to e-Serve (Interest) 6 296 234 1,532

Professional fees paid to OrbiTech Solutions Limited for software development — — — 1,696

Professional fees paid to Flexcel — — — 1,619

Provision for doubtful debts for Citibank branches — — — (1,221)

Bank charges paid to Citibank branches 13 597 — 2,729

134 6,218 234 50,166

22

16.3 Assets Trade receivables



(in thousands)

Citibank branches

net of provision for doubtful debts Rs Nil

(June 2002 – Rs 2,173, March 2003 – Rs Nil)

13,762 638,435 613,088

CITI 174 8,071 32,919

DotEx 34 1,574 1,574

Flexcel 62 2,865 3,529

e-Serve 8 381 —

14,040 651,326 651,110

Loans outstanding



(in thousands)

i-flex ESPS Trust 5,722 265,459 267,926

Key managerial personnel 86 4,000 4,000

5,808 269,459 271,926

Repayment of loan during the period/year



(in thousands)

i-flex ESPS Trust 53 2,467 23,723

Key managerial personnel — — 844

53 2,467 24,567

Bank balance with Citibank branches



(in thousands)

Current accounts 25,498 1,182,865 1,232,622

Time deposits 5,390 250,029 144,877

30,888 1,432,894 1,377,499

23

Interest accrued on fixed deposits



(in thousands) Citibank branches 15 691 454

16.4 Liabilities Amount due to related parties



(in thousands)

e-Serve towards lease obligations repayable (Principal and interest) 138 6,415 7,727

OrbiTech Solutions Limited towards professional fees — — —

138 6,415 7,727

Payment of lease obligations



(in thousands)

e-Serve (Principal) 24 1,115 4,963

24 1,115 4,963 Deferred revenue from related parties



(in thousands)

Citibank branches 27 1,233 1,869

e-Serve 4 169 —

Flexcel 27 1,235 —

58 2,637 1,869

24

17. SEGMENTAL INFORMATION The Group has adopted SFAS No. 131, “Disclosures about Segments of an Enterprises and Related Information”, which requires reporting information about operating segments in annual financial statements. It has also established standards for related disclosures about products and services, and geographic areas. Operating segments are defined as components of an enterprise 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 Group is organised geographically and by business segment. For the management purpose the Group is primarily organised on a worldwide basis into two business segments: • Product licenses and related activities; and • IT solutions and consulting services The segments are the basis on which the Group reports its primary segment information to the management. The Product license segment has banking products like FLEXCUBE suite of products 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, 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. Revenue is generated through licensing of software products as well as by providing software solutions to the customers including consultancy. The expenses, which are not attributable to a business segment, are shown as unallocated expenses. Cost of revenues comprise of all direct cost towards employee cost, travel cost of software professionals, Professional fees to software vendors and application software cost used for internal use. These costs are direct costs for each segment. The group allocates expenditure incurred on selling and marketing expenses in the ratio of the revenues between products and services, or in the ratio of the efforts spent in marketing products and services, as it is rational and appropriate. General and administrative costs are costs, which primarily comprise of rent, power, communication, repairs and maintenance for a particular segment. Additionally employee costs, rent, power and communication costs for support groups are allocated in the ratio of revenues between the two segments. All other segment revenue and expense are directly attributable to the segments. Segment assets include all operating assets used by a segment and consist principally of receivables, deposits for premises and property and equipment, net of allowances and provisions. Segment liabilities primarily include deferred revenues, capital lease obligation, advances from customers, accrued employee cost and other current liabilities. While most such assets and liabilities can be directly attributed to individual business segments, the carrying amount of certain assets and liabilities used jointly by both 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.

25

Period ended June 30, 2003 Thousands of Indian Rupees

Particulars

Product license And related

activities

IT solutionsand consulting

services Corporate Total

Revenues 1,222,132 642,689 — 1,864,821 Cost of revenues (318,492) (473,218) — (791,710) Gross profit 903,640 169,471 — 1,073,111 Selling and marketing expenses (273,424) (31,663) — (305,087) General and administrative expenses (115,027) (48,130) (101,571) (264,728) Depreciation and amortisation (14,497) (10,961) (2,822) (28,280) Income from operations 500,692 78,717 (104,393) 475,016 Loss on equity investments (2,215) Interest income 57,416 Other income/(expense) (73,196) Income before provision for Income taxes 457,021 Provision for income taxes (70,304) Net Income 386,717 Other information Segment assets 1,133,737 1,139,126 7,034,933 9,307,796 Segment liabilities 619,706 216,036 413,969 1,249,711 Capital expenditure by segment 3,348 4,167 193,203 200,718

26

Period ended June 30, 2003 Thousands of US dollars

Particulars

Product license and related

activities



Revenues 26,345 13,854 — 40,199

Cost of revenues (6,866) (10,200) — (17,066)Gross profit 19,479 3,654 — 23,133

Selling and marketing expenses (5,894) (683) — (6,577) General and administrative expenses (2,480) (1,038) (2,189) (5,707) Depreciation and amortisation (313) (236) (61) (610) Income from operations 10,792 1,697 (2,250) 10,239

Loss on equity investments (48) Interest income 1,238 Other income/(expense) (1,578)

Income before provision for Income taxes 9,851Provision for income taxes (1,515)

Net income 8,336

Other information

Segment assets

Segment liabilities

Capital expenditure by segment

24,439

13,359

72

24,555

4,657

90

151,647

8,922

4,165

200,641

26,938

4,327

27

Period ended June 30, 2002 (unaudited) Thousands of Indian rupees

Particulars


activities

IT solutions and consulting

services Unallocated Total

Revenue 818,882 490,062 — 1,308,944 Cost of revenue (270,489) (303,054) — (573,543) Gross profit 548,393 187,008 — 735,401 Selling and marketing expenses (173,980) (18,151) — (192,131) General and administrative expenses (64,272) (48,579) (99,751) (212,602) Depreciation and amortisation (11,964) (14,581) (4,057) (30,602) Operating income of the segment 298,177 105,697 (103,808) 300,066 Share of associate companies loss (8,390) Interest income 30,211 Other income, net 20,085 Income before provision for taxes 341,972 Provision for income taxes (60,404) Net income 281,568 Other information Segment assets 1,320,429 1,049,913 4,883,596 7,253,938 Segment liabilities 558,639 127,358 368,681 1,054,678 Capital expenditure by segment 3,856 6,994 2,841 13,691

28

Year ended March 31, 2003 Thousands of Indian Rupees

Particulars


activities



Revenues 4,075,525 2,333,364 — 6,408,889 Cost of revenues (1,150,232) (1,592,839) — (2,743,071) Gross profit 2,925,293 740,525 — 3,665,818 Selling and marketing expenses (775,204) (97,066) — (872,270) General and administrative expenses (243,541) (206,421) (281,645) (731,607) Depreciation and amortisation (53,647) (74,524) (14,156) (142,327) Income from operations 1,852,901 362,514 (295,801) 1,919,614 Loss on equity investments (17,924) Interest income 208,637 Other income/(expense) (86,928) Income before provision for Income taxes 2,023,399 Provision for income taxes (252,729) Net Income 1,770,670 Other information Segment assets 924,480 1,016,520 6,782,054 8,723,054 Segment liabilities 537,429 179,466 341,405 1,058,300 Capital expenditure by segment 20,085 60,006 54,152 134,243

Geographical segments:

The following table shows the distribution of the Group’s consolidated sales by geographical market:

June 2003 June 2003



(in thousands)

United States of America 16,946 786,140 368,588 2,439,906

Middle East and Africa 6,349 294,491 338,061 1,518,847

Asia Pacific 6,786 314,790 337,325 1,207,515

Europe 9,409 436,505 247,026 1,195,345

Latin America and Caribbean 709 32,895 17,944 47,276

40,199 1,864,821 1,308,944 6,408,889

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Region June 2003 June 2002


Percentage

United States of America 42 28 38

Middle East and Africa 16 26 24

Asia Pacific 17 26 19

Europe 23 19 18

Latin America and Caribbean 2 1 1

100 100 100 The Group derives more than 10 per cent of its revenues from the following customer:

June 2003 June 2003



(in thousands) Customer 1, related party 15,973 740,995 587,354 2,550,548

18. COMMITMENTS AND CONTINGENCIES 18.1 Capital expenditure The Group had committed to spend as at June 30, 2003 and March 31, 2003 approximately Rs 436,078 and Rs 507,642, respectively under agreements to purchase property and equipment. 18.2 Guarantees The Group accounts for loss contingencies when the likelihood of the underlying adverse event occurring is probable and the loss can be reasonably estimated. Guarantees provided by banks on behalf of the Group amounted to Rs 129,264, and Rs 11,205 at June 30, 2003 and March 31, 2003, respectively. The guarantees were provided to various Indian Government agencies and a few customers and prospects. In the event of default the fair value of the guarantee will approximate the outstanding payments due under accrued rates and taxes and accrued expenses. The Group has concluded that the risk of the guarantee being called is remote, and accordingly, no provision has been made. 18.3 Other commitments i-flex’s operations are carried out from five units registered under the Software Technology Parks (‘STP’) scheme and one unit forming part of Special Economic Zone (‘SEZ’) in India. Under these schemes the registered units have export obligations, which are based on the formula provided by the notifications/circulars issued by the STP and SEZ authorities from time to time. The consequence of not meeting the above commitments would be a retroactive levy of import duty on items previously imported duty free for these units. Additionally the respective authorities have rights to levy penalties for any defaults on a case-by-case basis. Management believes that it would meet the required export obligations.

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18.4 Contingencies The Dutch authorities have alleged violation of immigration and taxation rules by i-flex b.v. in the Netherlands. i-flex b.v. has not received any written communication from the authorities yet. If such communication is received, the Company shall defend itself vigorously. The determination of the liability, if any, is not possible at this point. 19. STOCK BASED COMPENSATION 19.1 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 another 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 employees. 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 the employee repaying the amount to the Trust. In case the employee resigns from employment, the rights relating to the 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. Accordingly, the scheme eliminates any price risk that the Company could bear and does not contain any option features. The Company has elected to adopt Accounting Principles Board Opinion No. 25, “Accounting for Stock issued to Employees” (‘APB 25’), in accounting for stock, granted under its scheme. As per APB 25, the Company did not recognise compensation expense on the stock granted because the terms are fixed and the exercise price equals the fair value 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 these shares have been allocated to employees pursuant to the above schemes and are eligible to be exercised by the employee. For diluted EPS purposes, the shares, which are not yet eligible for exercise, have also been considered as outstanding to the extent these shares are dilutive using the treasury stock method. The loan granted to the Trust has been presented as a separate component of equity and repayments of the loan, by way of exercise of the shares by the employees has been applied toward this loan in the equity statement. Dividends paid in respect of allocated shares are charged to retained earnings.

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A summary of the activity in the Company’s Stock schemes is as follows:

June 2003 June 2002

(unaudited ) March 2003

Opening balance of unallocated shares 127,329 78,876 78,876

Shares acquired by the Trust — — —

Shares allocated to employees — — —

Shares forfeited during the period/year 40,457 19,280 48,453

Closing balance of unallocated shares 167,786 98,156 127,329

Closing balance of allocated shares 3,514,614 3,584,244 3,555,071

Shares exercised till date (592,754) (546,838) (558,349)

Shares eligible for exercise (2,047,090) (1,212,029) (2,096,189)

Shares not eligible for exercise 874,770 1,825,377 900,533

Weighted average price of the Scheme:

June 2003 June 2002


Indian Rupees

Opening balance of allocated shares 145.33 141.54 141.54

Shares allocated to employees during the period/year — — —

Shares forfeited during the period/year 258.51 237.34 259.99

Closing balance of allocated shares 144.32 146.41 145.33

Shares exercised during the period/year 95.18 72.42 74.05

Shares eligible for exercise as at period/year end 104.26 100.38 105.58

Unexercised shares as at period/year end 237.93 176.99 237.85

Number of shares and weighted average price stated above has been computed after giving effect of split of shares as referred in Note 2.2(c). As the shares granted to the employees vest upon the employee accepting the offer, the fair value of the shares granted to the employee computed in accordance with SFAS 123 would not differ significantly from the intrinsic value of the shares as determined in accordance with APB 25. 19.2 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 per cent of the issued and paid-up equity share capital of the Company have 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 2,376,800 options to the employees and directors of the Company. According to the ESOP the Company has granted 2,274,460 options to the eligible employees and directors of the Company and its subsidiaries at an exercise price, which will equate the issue price determined through the book-building procedure. 20 per cent 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 and is subject to the continued employment of the employee or 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 book building process for the options granted prior to the IPO and at the fair market value on the date of grant for options granted thereafter.

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The Group applied APB Opinion 25 and related Interpretations in accounting for this plan. In accordance with APB Opinion 25, no compensation cost would need to be recognised for the Employee Stock Option Plan as the exercise price would equal to the fair value of value of the shares on the date of the IPO. The Company completed its IPO in June 2002 and fixed its IPO price through book building scheme at Rs 530. As per the terms of the plan the IPO price would be the exercise price for the ESOP. A summary of the activity in the Group’s ESOP is as follows:

No of options

Weighted average

price

No of options

Weighted average

price

No of options

Weighted average

price

Movement during the period/year June 2003 June 2002


Outstanding at beginning 2,249,700 536.02 2,274,460 530.00 2,274,460 530.00

Granted during the period/year — — — — 40,000 868.30

Exercised during the period/year (7,350) 530.00 — — — —

Forfeited during the period/year (16,790) 530.00 (6,250) 530.00 (64,760) 530.00

Outstanding at end of period/year 2,225,560 536.02 2,268,210 — 2,249,700 536.02

20. EARNINGS PER SHARE The following is a reconciliation of the weighted average number of equity shares used in the computation of basic and diluted earnings per equity share:

June 2003

June 2002 (unaudited )

March 2003

Weighted average number of common shares used for basic EPS purposes

36,276,804 32,253,405 35,505,072

Dilutive component of shares that are not eligible for exercise

1,495,030 1,178,505 1,302,077

Weighted average number of common shares used for diluted EPS purposes

37,771,834 33,431,910 36,807,149

Number of shares stated above has been computed after giving effect of split of shares as referred in Note 2.2(c). Basic EPS does not include shares considered by the Company as outstanding but held by the ESPS Trust. Shares that are not eligible for exercise are treated as dilutive.

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final usgaap accoutnsformatedjune 2003 · june 2003 june 2003 june 2002 march 2003 (unaudited) us...

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