inancials - Oraclesignificant influence over their operations. You should read the following...

Y inancialsi-flex solutions ltd and Subsidiaries

Financial statements for the year ended

March 31, 2003 prepared in accordance with

United States Generally Accepted

Accounting Principles (US GAAP).

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i - f l e x a n n u a l r e p o r t 2 0 0 2 - 0 3 123

The following discussion is based on our audited consolidatedfinancial statements, which have been prepared in accordance withUS GAAP.

The financial statements are consolidated for i-flex (The Group)that includes i-flex solutions limited and its wholly-ownedsubsidiaries, i-flex solutions b.v., i-flex solutions pte ltd, and i-flexsolutions inc. Investment in joint venture companies, DotEx andFlexcel are accounted for using the equity method since we exertsignificant influence over their operations.

You should read the following discussion of our financial conditionand results of operations together with the detailed consolidatedUS GAAP financial statements and the notes to those statements.Our fiscal year ends on March 31 of each year.

Overview

i-flex is in the business of providing comprehensive InformationTechnology solutions to the financial services industry world-wide.The Group has a comprehensive range of solutions which includepackaged applications for the financial services industry(encompassing consumer banking, commercial banking, investorservicing and asset management for mutual funds, Internet deliveryof financial services, as well as business intelligence and analyticalapplications); custom application software development,deployment, maintenance and support services (both onsite andoffshore) for financial institutions; and business and IT consultingservices in the financial services domain. As of March 31, 2003,the Group had serviced 404 customers in 93 countries through itsportfolio of products and services. The Group’s de-risked revenuemodel continues to deliver consistent results despite changingglobal economic conditions. The Group is not overly dependent onany one country or geographical region and has a diversified revenuestreams from a widespread geographic base.

We are organized geographically and by business segments. Wehave two primary business segments-the Products Business(comprising product licensing, customization, implementation andsupport); and the Services Business (providing customized softwareand consulting services). These are described in greater detailbelow:

Products

Our flagship product offering is the FLEXCUBE suite, whichcomprises a comprehensive range of packaged solutions addressingthe transaction processing, accounting and Internet delivery needsof a wide range of financial institutions, including corporate banks,retail banks, universal banks, capital market intermediaries,investment banks and other specialized financial institutions.

Reveleus is i-flex’s latest offering that addresses the BusinessIntelligence and Analytics market.

Services

i-flex offers financial institutions customized IT solutions –PrimeSourcing – through its domain and technology Centersof Excellence, which encompass areas such as CapitalMarkets, Business Intelligence and Data Warehousing, CRM,

Management’s discussion and analysisof financial condition and results of operations

Development & Integration Services, e-solutions and PaymentSystems. PrimeSourcing offerings include Business and TechnologyConsulting, Application Development, Application Reengineering,Maintenance and Support, Technology Deployment & Management,System Integration and Quality Management services through acost-effective combination of onsite, offsite/near-shore and offshoredelivery models across a wide array of technology, banking andfinance domain areas.

Business metrics

Our total revenues in fiscal 2003 were Rs 6,357.36 million,representing an increase of 46% from Rs 4,357.18 million in fiscal2002 and a CAGR of 43% since fiscal 2000. The net income infiscal 2003 was Rs 1,770.67 million, representing an increase of71% from Rs 1,036.01 million in fiscal 2002 and a CAGR of 31%since fiscal 2000. Our net income margins have been 28% and24% for the fiscal years 2003 and 2002 respectively. We definenet income margins for a particular period as the ratio of net incometo total revenues during such period.

Products business

Millions of Indian Rupees

Year ended March 31 2003 2002

Product revenues 4,040.36 2,614.39Cost of product revenues (1,150.23) (836.94)Sales and marketing expenses (775.20) (559.93)General and administrative expenses (243.54) (173.06)Depreciation and amortization (53.65) (49.30)Income from operations 1,817.74 995.16Product revenue growth rate overprior period 55% 51%Operating margin* 45% 38%

* Operating margin is defined as income from operations from theProducts Business (excluding corporate expenses) as a percentageof total products revenue.

Products revenues

Our products revenues represented 64% and 60% of our totalrevenues in fiscal 2003 and 2002 respectively. Products revenuesincreased by 55% to Rs 4,040.36 million from Rs 2,614.39 millionas compared to 51% in fiscal 2002.

Our products revenues comprise license fees, professional fees forimplementation and enhancement services and annual maintenancecontract (post contract support) fees for our products.

License fee

Our standard licensing arrangements typically do not requiresignificant modification or enhancement of software. The standardend-user license agreement for our products provides the user aperpetual right to use the product for a pre-defined number of usersand sites upon the payment of a license fee. The license fee is afunction of a variety of quantitative and qualitative factors includingthe number of copies sold, the number of concurrent userssupported, the number and combination of the modules sold, and

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the number of sites and geographical locations. The licenses arenon-exclusive, personal, non-transferable and royalty free.

We recognize license fee revenues when persuasive evidence of anarrangement exists, delivery has occurred, the license fee is fixedand determinable and the collection of the fee is probable. Weallocate a portion of our license fees to the annual maintenancecontract provided free of charge to the customer for the specifiedperiod provided under the licensing arrangement. The amountsare allocated based upon Vendor Specific Objective Evidence, orVSOE, of the fair value of those services or products.

If software product components are used in a software developmentand consulting services agreement where the services aredetermined to be essential to the functionality of the licensedsoftware, both the license and consulting fees are recognized underthe proportional efforts method of contract accounting.

Implementation fee

After products are licensed to customers, we provide services relatedto the implementation of the products at the customer sites,integration with other customer systems and enhancement of theproducts to address the specific requirements of the customers.The customer is typically charged a service fee either on a fixedprice basis or a time and material basis. The implementation andenhancement services comprise functional enhancements, interfacebuilding, implementation planning, data conversion, training andproduct walkthrough and are provided to customers who enter intolicensing arrangements with us.

Revenues from the implementation and enhancement services arerecognized upon the proportionate efforts method to the extentcertified by the customer for fixed price contracts and as the servicesare provided in respect of time and material contracts.

Annual maintenance contracts fees

We also earn fees in respect of the provision of annual maintenancecontracts after the implementation of a product and following theexpiry of the warranty period. Under these agreements, we providetechnical support, maintenance, problem solving and upgrades ofthe licensed products. These support agreements are typicallyentered for a period of 12 months.

Revenues from annual maintenance contracts are typically apercentage of the license fee and are charged on an annual basis.These are recognized rateably over the term of the contract on astraight-line basis.

While the revenues from license fees and implementation andenhancement services rendered by us depend on the number ofnew customers we obtain, the annual maintenance contractsgenerate steady revenues that are therefore easier to predict. Thepercentage of our revenues from these streams is as follows:



License Fees 44% 35%Implementation and Enhancement Fees 39% 50%Annual Maintenance Contracts 17% 15%Total 100% 100%

We also receive reimbursement for out-of-pocket expenses incurredfrom our customers. These expenses primarily include travelexpenses, accommodation and travel allowances given to theemployees. We are the primary obligor and have the credit risk forthe expenses incurred. Pursuant to the guidance set forth inEmerging Issues Task Force Topic 103-D, the Group reports thesereimbursements of out-of-pocket expenses as revenues.

For revenue recognition norms please refer note 2.5 of the accounts.

Cost of products revenues and operating expenses

The cost of our product revenues consists of costs attributable tothe implementation, enhancement, maintenance and continueddevelopment, including research and development efforts, of ourcore product, the FLEXCUBE suite of products, Reveleus and ourother products. These costs primarily consist of compensationexpenses for all of our IT professionals working in the ProductsBusiness, project-related travel expenses, professional fees paidto software vendors and cost of application software.

The research and development costs are expensed as incurred.Software development costs are expensed as incurred untiltechnological feasibility is established. Software productdevelopment cost incurred subsequent to the achievement of thetechnological feasibility are not material and are expensedas incurred.

Our operating expenses include selling and marketing expenses,general and administrative expenses that consist of commissionspayable to our partners, product advertising, marketing expensesand allocated overhead expenses associated with human resources,facilities and infrastructure expenses, quality assurance andfinance. Our sales and marketing expenses have increased morerapidly than our other operating expenses and we expect this trendto continue as we aim to increase our presence in our target markets.

Services business



Service revenues 2,316.99 1,742.78Cost of services revenues (1,592.84) (1,072.48)Sales and marketing expenses (97.07) (43.23)General and administrative expenses (206.42) (147.42)Depreciation and amortization (74.52) (78.06)Income from operations 346.14 401.60Services revenues growth rateover prior year 33% 15%Operating margin* 15% 23%

* Operating margin is defined as income from operations of theServices Business (excluding corporate expenses) as a percentageof total services revenue.

Services revenues

Our services revenues represented 36% and 40% of our totalrevenues in fiscal 2003 and fiscal 2002 respectively. Servicesrevenues increased by 33% to Rs 2,316.99 million in fiscal 2003from Rs 1,742.78 million in fiscal 2002, as compared to 15%increase in fiscal 2002.

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The contracts relating to our Services Business are either time andmaterial contracts or fixed price contracts. During fiscal 2003, therewas an increase in the revenues contributed from time and materialcontracts. Time and material contracts contributed 67% of our totalservices revenues, as compared to 57% of fiscal 2002 with theremainder attributable to fixed price contracts.

We provide our services through offshore centers located in Indiaand through onsite teams operating at our customers’ premises aswell as our overseas development centers. Offshore servicesrevenues consist of revenues from work conducted at ourdevelopment centers in India on behalf of foreign customers andonsite revenue comprises work conducted at customers’ premisesoutside India. The following table illustrates the percentagebreakdown of our services revenues in fiscal 2003 and 2002;


Onsite 63% 58%Offshore 37% 42%

Total Services revenues 100% 100%

Revenues from services provided on a time and material basis arerecognized in the period that the services are provided and costsincurred. Revenue from fixed price projects are recognized usingthe proportionate effort method. While no provisions have been

made to date, the percentage of completion provision is subject toperiodic revisions and the cumulative impact of any revision in theestimates of the percentage of completion is reflected in the periodin which the changes become known.

Our services revenues and margins are also affected by the rate atwhich our software professionals are utilized. The utilization rateis calculated as the percentage billed for our personnel in aparticular period to the average number of staff that is consideredbillable in that same period. Utilization rates for services were 72%and 79% for fiscal 2002 and 2003 respectively.

For revenue recognition norms please refer note 2.5 of accounts.

Cost of services revenues and operating expenses

The cost of revenues for services consists primarily of compensationexpenses for our software professionals, cost of application software,travel expenses and professional fees paid to software vendors. Werecognize these costs as incurred. Our operating expenses includeselling, general and administrative expenses and allocated overheadexpenses associated with human resources, corporate marketing,information management systems, quality assurance and finance.

Geographic breakdown of revenues

Our business is organized geographically and the following tablerepresents the percentage breakdown of our revenues for ourProducts and Services Businesses by region:

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Customer concentration

Revenues from our top 10 customers for fiscal 2003 and 2002 were35% and 58% respectively. This contribution is furtherconcentrated in respect of our revenues from our Services Business.The top 10 customers in our Products Business contributed 48%of the total products revenues, while the top 10 customers in ourServices Business contributed 55% of the total Services revenuesduring fiscal 2003.

In the table below, the percentage of revenues derived from our topcustomer, top five customers and top ten customers and variousentities of Citigroup in respect of our Products and ServicesBusiness individually and in respect of our business taken as awhole, is provided. The various members of Citigroup are classifiedas separate customers and the last row sets forth the percentage oftotal revenues we earned from the various members of Citigroupin aggregate:

Year ended March 31, 2003 Year ended March 31, 2002Products Services Total Products Services Total

Revenues Revenues Revenues Revenues Revenues Revenues

USA 25% 61% 38% 9% 66% 32%Middle East and Africa 33% 7% 24% 37% 8% 25%Asia Pacific 20% 17% 19% 29% 11% 21%Europe 21% 15% 18% 24% 15% 21%Latin America and Caribbean 1% 0% 1% 1% 0% 1%

Total 100% 100% 100% 100% 100% 100%

Trade receivables

Trade receivables as of March 31, 2003 and 2002 were Rs 1,449.13million and Rs 1,891.09 million respectively, or 17% and 37%respectively of total assets as of such dates. Our days of salesoutstanding (which is the ratio of sundry debtors to total sales in aparticular year multiplied by 365) for fiscal 2003 and 2002 wereapproximately 83 and 158 respectively. The Group periodicallyreviews its accounts receivables outstanding as well as the aging,quality of the account receivable, the customer relationship, andhistory of the client. The following table presents the age profile ofour debtors:

Year ended March 31 2003 2002Period in days0-180 76% 93%More than 180 24% 7%Total 100% 100%

Year ended March 31, 2003 Year ended March 31, 2002Products Services Total Products Services Total

Revenues Revenues Revenues Revenues Revenues Revenues

Top Customer 9% 11% 6% 15% 40% 16%Top 5 Customers 32% 34% 23% 38% 76% 42%Top 10 Customers 48% 55% 35% 57% 90% 58%Citigroup and its entities 28% 61% 40% 22% 76% 44%

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Foreign currency and treasury operations

A substantial portion of our revenues is generated in foreigncurrencies while a majority of our expenses are incurred in IndianRupees and the balance is incurred in US Dollars and Europeancurrencies. Our functional currency for our operations is the IndianRupee. We expect a majority of our revenues to continue to begenerated in foreign currencies for the foreseeable future and asubstantial portion of our expenses, including personnel costs andcapital and operating expenditure to continue to be denominatedin Indian Rupees. Consequently, our results of operations will beaffected to the extent the Indian Rupee fluctuates against therespective foreign currencies.

We have a conservative philosophy of treasury operations and thepolicy is to invest funds substantially in time deposits with well-known, sound Indian and foreign banks. The Group has ensuredadequate controls over asset management including cashmanagement operations, credit management and debt collectionoperations.

The Group also balances funds in USD accounts or INR depositsbased on the comparative interest rates and currency requirements.The Group books forward covers at appropriate time intervals asand when necessary.

Income taxes

Currently, we benefit from a tax holiday given by the Governmentof India for the export of Information Technology services. As aresult of our tax incentives, our operations in India have beensubject to insignificant tax liabilities. These tax incentives currentlyinclude a 10-year tax holiday from the payment of Indian corporateincome taxes for the operations of our Indian facilities, comprisingfive units registered under the “Software Technology Parks” schemeand one unit forming part of the “Special Economic Zone”. Startingon April 1, 2004 these benefits will expire for some of our units.The Finance Act, 2000 has provided that this tax holiday will notbe available for the assessment year of fiscal 2003. The tax holidayunder Section 10A of the Income Tax Act was limited to 90 percentof the eligible profits instead of 100 percent of such profits.Accordingly, for fiscal 2003, 10 percent of the eligible profits ofthe Company will be taxable at the corporate tax rate of 36.75percent (including surcharge).

Foreign taxes are income taxes payable overseas in the countrieslike United States of America, Malaysia, United Kingdom,Singapore, Kuwait and Japan.

Employee Stock Purchase Scheme (ESPS)

On March 29, 1998 the Company adopted the ESPS to provideequity-based incentives to key employees of the Company (‘1998Scheme’). Subsequently on April 1, 1999, April 1, 2000 and April1, 2001, the Company adopted similar Stock based schemes (‘1999Scheme’, ‘2000 Scheme’ and ‘2001 Scheme’). These schemes, whichhave similar terms, are administered through a Trust (‘the Trust’).The Trust purchases shares of the Company using the proceeds ofloans obtained from the Company. Such shares are offered by theTrust to employees at an exercise price, which approximates thefair value on the date of the grant. The employees can purchase theshares in a phased manner over a period of five years based oncontinued employment, until which, the Trust holds the shares forthe benefit of the employees. The employees are will be entitled toreceive dividends, bonus etc. that may be declared by the Companyfrom time to time for the entire portion of shares held by the Truston behalf of the employees.

On the acceptance of the offer, the selected employee undertakesto pay within ten years from the date of acceptance of the offer thecost of the shares incurred by the Trust including repayment of theloan relatable thereto. The repayment of the loan by the Trust tothe Company would be dependent on the employee repaying theamount 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, thebalance shares are forfeited in favour of the Trust. The Trusteeshave the right of recourse against the employee for any amountsthat may remain unpaid on the shares accepted by the employee.The shares that an employee is eligible to exercise during the initialfive-year period merely go to determine the amount and schedulingof the loan to be repaid on exercise by the employee. The Trustrepays the loan obtained from the Company on receipt of paymentsfrom employees against shares exercised or otherwise. Accordingly,the scheme eliminates any price risk that the Company could bearand does not contain any option features.

The Company has elected to adopt Accounting Principles BoardOpinion No. 25, “Accounting for Stock issued to Employees” (‘APB25’), in accounting for stock, granted under its scheme. As perAPB 25, the Company did not recognize compensation expense onthe stock granted because the terms are fixed and the exerciseprice equals the fair value of the underlying stock on the grantdate. The shares issued to the Trust have been considered asoutstanding for basic EPS purposes, to the extent these shares havebeen allocated to employees pursuant to the above schemes andare eligible to be exercised by the employee. For diluted EPS

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purposes, the shares, which are not yet eligible for exercise, havealso been considered as outstanding to the extent these shares aredilutive using the treasury stock method. The loan granted to theTrust has been presented as a separate component of equity andrepayments of the loan, by way of exercise of the shares by theemployees has been applied toward this loan in the equity statement.Dividends paid in respect of allocated shares are charged toretained earnings.

Employee Stock Option Plan (ESOP)

At the Annual General Meeting of the shareholders of the Companyheld on August 14, 2001, the Company introduced an ESOP,pursuant to which equity shares not exceeding an additional7.5 per cent of the issued and paid-up equity share capital of theCompany have been earmarked for grant, at any given time topresent and future employees and Directors of the Company andits existing and future subsidiaries. Pursuant to the aboveresolution, the Board of Directors, at their meeting held on March4, 2002 approved the Employees Stock Option Scheme (‘theScheme’) for issue of 2,376,800 options to the employees andDirectors of the Company. According to the ESOP, the Companyhas granted 2,274,460 options to the eligible employees andDirectors of the Company and its subsidiaries at an exercise price,which will equate the issue price determined through the book-building procedure. During the year the Company also granted40,000 options to the eligible employees and Directors of theCompany at the exercise price at the fair market value on the dateof grant. 20 per cent of the total options granted under the Schemewill vest to the eligible employees and Directors on the completionof 12, 24, 36, 48 and 60 months and is subject to the continuedemployment of the employee or Director with the Company or itssubsidiaries. As per the terms of the Scheme, the exercise pricewould equate the price determined for the IPO through thebook-building process for the options granted prior to the IPO andat the fair market value on the date of grant for options grantedthereafter.

The Group applied APB Opinion 25 and related Interpretations inaccounting for this plan. In accordance with APB Opinion 25, nocompensation cost would need to be recognized for the EmployeeStock Option Plan as the exercise price would equal to the fairvalue of value of the shares on the date of the IPO. The Companycompleted its IPO in June 2002 and fixed its IPO price throughbook building scheme at Rs 530. As per the terms of the plan theIPO price would be the exercise price for the ESOP.

Analysis of the financial results

Comparison of fiscal 2003 with fiscal 2002

Revenues

Our revenues increased 46% from Rs 4,357.18 million in fiscal2002 to Rs 6,357.36 million in fiscal 2003. The increase in revenuewas attributable to a 55% increase in the revenues from our ProductsBusiness and a 33% increase in the revenues from our ServicesBusiness.

Products revenues

Products revenues increased 55% from Rs 2,614.39 million in fiscal2002 to Rs 4,040.36 million in fiscal 2003. The revenues fromlicense fees comprised 44% of the revenues, implementation feescomprised 39% and Annual Maintenance Contracts comprised 17%of the revenues for the fiscal 2003.

Services revenues

Services revenues increased 33% from Rs 1,742.78 million in fiscal2002 to Rs 2,316.99 million in fiscal 2003. Revenues from timeand material contracts comprised 67% of the revenues and fixedprice contracts comprised 33% for the fiscal 2003.

Interest and other income

Interest and other income increased 72% from Rs 100.85 millionin fiscal 2002 to Rs 173.24 million in fiscal 2003. The interestincome increased by 215% during this fiscal due to deployment offunds received from the public issue. The exchange loss ofRs 36.75 million during this fiscal was classified as other income,as a result the other income has shown a decrease of 202% duringthis fiscal.

Cost of revenues and operating expenses

Cost of revenues

Cost of revenues increased 44% from Rs 1,909.42 million in fiscal2002 to Rs 2,743.07 million in fiscal 2003. Cost of revenues as apercentage of total revenue was 43% in fiscal 2003 as compared to44% in fiscal 2002.

Cost of products revenues increased 37% from Rs 836.94 millionin fiscal 2002 to Rs 1,150.23 million in fiscal 2003. This increasewas primarily attributable to increased employee cost, travel cost,professional fees to software vendors and purchase of application

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software. Cost of product revenues as a percentage of productrevenues decreased from 32% in fiscal 2002 to 28% in fiscal 2003.

Cost of services revenues increased 49% from Rs 1,072.48 millionin fiscal 2002 to Rs 1,592.84 million in fiscal 2003. The primaryreasons for the increase were employee cost, travel cost, applicationsoftware costs, contract acquisitions cost and professional fees. Costof services revenues as a percentage of services revenues increasedfrom 62% in fiscal 2002 to 69% in fiscal 2003.

Sales and marketing expenses

Sales and marketing expenses increased 45% from Rs 603.16million in fiscal 2002 to Rs 872.27 million in fiscal 2003. Thetotal increase in sales and marketing expense of Rs 269.11 millionwas principally attributable to the focused marketing and corporatebrand image-building program launched by our subsidiaries in therespective areas of US, Europe and Asia Pacific. This fiscal wehad two more branches established in Japan and Germany toincrease our market presence. Sales and marketing expenses as apercentage of total revenues remained constant at 14% in fiscal2003 and 2002.

Sales and marketing expenses for our Products Business increased38% from Rs 559.93 million in fiscal 2002 to Rs 775.20 million infiscal 2003. These expenses, as a percentage of products revenues,decreased from 21% in fiscal 2002 to 19% in fiscal 2003.

Sales and marketing expenses for our Services Business increased125% from Rs 43.23 million in fiscal 2002 to Rs 97.07 million infiscal 2003. These expenses as a percentage of services revenueincreased to 4% in fiscal 2003 from 2% as in fiscal 2002.

General and administrative expenses

General and administrative expenses increased 30% fromRs 564.05 million in fiscal 2002 to Rs 731.61 million in fiscal2003. The major reasons for the increase in general andadministrative expenses were increases in the power cost,communication, rent, professional fees, repairs and maintenance.As a percentage of total revenues, general and administrativeexpenses decreased from 13% in fiscal 2002 to 12% in fiscal 2003.

General and administrative expenses for our Products Businessincreased 41% from Rs 173.06 million in fiscal 2002 to Rs 243.54million in fiscal 2003. General and administrative expenses as apercentage of products revenue were 7% in fiscal 2002 and 6% infiscal 2003.

General and administrative expenses for our Services Businessincreased 40% from Rs 147.42 million in fiscal 2002 to Rs 206.42million in fiscal 2003. However, as a percentage of services revenue,general and administrative expenses increased from 8% in fiscal2002 to 9% in 2003.

Income taxes

Provision for income taxes increased 71% from Rs 148.00 millionin fiscal 2002 to Rs 252.73 million in fiscal 2003. Our effectivetax rate remained constant at 12.50% in fiscal 2002 andfiscal 2003.

The increase in tax provision is on account of 10% of export profitsbeing taxed in India for fiscal year 2003 and increase in InterestIncome, which is offered entirely for tax. There was an increase inForeign taxes as well.

Income from operations and net income

As a result of the foregoing factors, income from operationsincreased 64% from Rs 1,140.09 million in fiscal 2002 toRs 1,868.08 million in fiscal 2003, and net income increased 71%from Rs 1,036.01 million in fiscal 2002 to Rs 1,770.67 million infiscal 2003. As a result, our net margins increased from 24% infiscal 2002 to 28% in fiscal 2003. We define net income marginsfor a particular period as the ratio of net income to total revenuesduring such period.

Liquidity and capital resources

Our capital requirements relate primarily to financing the growthof our business. We have historically financed the majority of ourworking capital, capital expenditure and other requirements throughour operating cash flow. During fiscal 2003 and 2002 we generatedcash from operations of Rs 2,484.23 million and Rs 693.01 millionrespectively.

i-flex is a zero debt company. We expect that our primary financingrequirements in the future will be capital expenditure and workingcapital requirements in connection with the expansion of ourbusiness. We believe that cash generated from operations, alongwith the net proceeds of the Initial Public Offer, will be sufficientto satisfy our currently foreseeable capital expenditure and workingcapital requirements.

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Quantitative and qualitative disclosures about market risk

Our primary market risk exposures are on account of the following:

• fluctuations in interest rates;• fluctuations in the value of our investments; and• foreign exchange rate fluctuations, principally relating to the

fluctuation of the US Dollar to Indian Rupee exchange rate.

As of March 31, 2003, we held Rs 2,910 million in interest-bearingbank deposits. Consequently, we face a market risk exposure onaccount of fluctuation in interest rates. These funds were investedin the bank deposit of longer maturity (more than 90 days) to earninterest income at higher rate.

As of March 31, 2003, we had invested Rs 52.41 million inunquoted equity where we had less than 20% voting interest and

Rs 270.13 million in debt securities. These investments arerecorded at cost on our balance sheet and any decline in fair valuebelow the original cost are recorded in the income statement whenthey are considered to be other than temporary.

A substantial portion of our revenues are generated in foreigncurrencies while a majority of our expenses are incurred in IndianRupees and the balance in US Dollars and European currencies.Our functional currency for Indian operations is the Indian Rupee.We expect a majority of our revenues will continue to be generatedin foreign currencies for the foreseeable future and a significantportion of our expenses, including personnel costs and capital andoperating expenditure, to continue to be incurred in Indian Rupees.

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To the Board of Directors and Shareholders of:i-flex Solutions Limited

We have audited the accompanying consolidated balance sheet ofi-flex Solutions Limited, a Company incorporated in India, and itssubsidiaries (‘the Group’) as of March 31, 2003, and the relatedconsolidated statements of income, shareholders’ equity and cashflow for the year then ended. These financial statements are theresponsibility of the Group’s management. Our responsibility is toexpress an opinion on these financial statements based on our audit.The consolidated financial statements of the Group for the yearended March 31, 2002, were audited by other auditors who haveceased operations and whose report dated May 3, 2002, expressedan unqualified opinion on those financial statements.

We conducted our audit in accordance with auditing standardsgenerally accepted in the United States of America. Those standardsrequire that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis,

Report of independent auditors

evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accountingprinciples used and significant estimates made by management,as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for ouropinion.

In our opinion, the consolidated financial statement referred toabove present fairly, in all material respects, the financial positionof the Group as of March 31, 2003 and the results of its operationsand its cash flow for the year then ended in conformity withaccounting principles generally accepted in the United States ofAmerica.

S. R. Batliboi & Associates

Chennai, IndiaMay 16, 2003

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Thousands of Thousands of Thousands of

US dollars (Translated) Indian Rupees Indian Rupees

2003 2003 2002

AssetsCurrent assetsCash and cash equivalents 60,012 2,849,362 1,122,346Bank deposits 61,289 2,910,000 1,150,000Marketable securities, available for sale 701 33,288 20,861Trade receivable from related parties, net 13,713 651,110 902,980Trade receivables – others, net 16,807 798,017 988,106Employee receivables 610 28,986 8,219Prepaid expenses 1,803 85,551 98,999Deferred income taxes, net – – 2,533Other current assets 5,155 244,770 67,624Total current assets 160,090 7,601,084 4,361,668

Property and equipment, net 10,893 517,220 308,283Employee receivables 247 11,721 23,984Other investments 6,793 322,537 74,875Investment in equity investee 163 7,738 23,834Rental deposits 4,582 217,542 291,541Deferred income taxes, net 626 29,703 24,624Other assets 327 15,509 11,949Total assets 183,721 8,723,054 5,120,758

Liabilities and stockholders’ equityCurrent liabilitiesAccounts payable 426 20,218 55,180Accrued employee costs 7,161 340,003 136,962Accrued referral fees/commission 1,649 78,301 70,935Accrued rates and taxes 950 45,087 48,284Deferred revenue 5,078 241,123 258,232Income taxes payable 2,213 105,077 68,333Other current liabilities 4,023 191,003 111,585Current portion of capital lease obligations 101 4,786 6,035Total current liabilities 21,601 1,025,598 755,546

Deferred revenue 546 25,941 94,969Capital lease obligations 142 6,761 10,018Total liabilities 22,289 1,058,300 860,533

Stockholders’ equityCommon stock, Rs 5/- par value;100,000,000 equity shares authorised37,315,400 (2002 – 33,955,400) shares outstandingas of March 31, 2003 3,930 186,577 169,777Additional paid-in capital 47,821 2,270,534 606,760Accumulated other comprehensive loss (761) (36,135) (12,341)Loan to Employees Stock Purchase Scheme (ESPS) Trust (5,643) (267,926) (291,649)Retained earnings 116,085 5,511,704 3,787,678Total stockholders’ equity 161,432 7,664,754 4,260,225

183,721 8,723,054 5,120,758

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

Consolidated Balance sheetas at March 31, 2003 and 2002

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2003 2003 2002

Revenues 133,895 6,357,356 4,357,175Cost of Revenues (57,773) (2,743,071) (1,909,411)Gross profit 76,122 3,614,285 2,447,764

Selling and marketing expenses (18,371) (872,270) (603,159)General and administrative expenses (15,409) (731,607) (564,045)Depreciation and amortisation (2,998) (142,327) (140,468)Income from operations 39,344 1,868,081 1,140,092

Other than temporary dimunition in value of securitiesavailable for sale – – (16,887)Loss on equity investments (378) (17,924) (40,044)Interest income 4,395 208,637 66,244Other income/(expense) (745) (35,395) 34,607Income before provision for income taxes 42,616 2,023,399 1,184,012

Provision for income taxes (5,323) (252,729) (148,002)

Net income 37,293 1,770,670 1,036,010

Basic earnings per share (in US $, Rs) 1.05 49.87 32.98Diluted earnings per share (in US $, Rs) 1.01 48.10 31.64


Consolidated statement of profit and lossfor the year ended March 31, 2003 and 2002

041_192.pmd 30/06/2003, 8:13 PM133

Thousands of Thousands of Thousands ofUS dollars (Translated) Indian Rupees Indian Rupees

2003 2003 2002

Cash flows from operating activitiesNet Income 37,293 1,770,670 1,036,010

Adjustments to reconcile net income to net cashprovided by operating activitiesDepreciation and amortization 2,998 142,327 140,468(Profit)/loss on retirement/sale of property and equipment, net (10) (458) 334(Profit)/loss on sale of investment (1) (35) 1,500Other than temporary dimunition in value of securitiesavailable for sale – – 16,887Loss from equity investments 378 17,924 40,044Provision for doubtful debts, net (395) (18,755) 54,284Provision for doubtful advances 153 7,253 –Deferred tax benefit, net (106) (5,045) (12,667)

40,310 1,913,881 1,276,860

Change in assets and liabilitiesTrade receivables 9,332 443,065 (761,296)Other assets (2,828) (134,280) (73,848)Current liabilities and other liabilities 5,509 261,562 251,298Net cash provided by operating activities 52,323 2,484,228 693,014

Cash flows from investing activitiesPurchase of property and equipment including capital advances (7,727) (366,883) (240,952)Sale of property and equipment 19 893 207Increase in bank deposits (37,068) (1,760,000) (1,150,000)Purchase of investments (5,423) (257,481) (69,598)Share capital advance for investment in equity investee – – (29,620)Share capital refund from equity investee 190 9,038 –Sale of investment 53 2,504 48,500Net cash (used in) investing activities (49,956) (2,371,929) (1,441,463)

Cash flows from financing activitiesProceeds from Initial Public Offering (‘IPO’) 37,506 1,780,800 –IPO expenses (2,171) (103,073) –Proceeds from private placement of shares – – 441,350Advance against equity shares to be issued 7 345 –Repayment of loan from Employee StockPurchase Scheme (ESPS) Trust 500 23,723 8,549Capital lease payment (131) (6,237) (5,106)Dividend paid (982) (46,644) (41,596)Net cash provided by financing activities 34,729 1,648,914 403,197

Net (decrease)/increase in cash and cash equivalentsduring the period/year 37,095 1,761,213 (345,252)Effect of exchange (loss) on cash and cash equivalents (721) (34,197) (6,792)Cash and cash equivalents at the beginning of the year 23,638 1,122,346 1,474,390

Cash and cash equivalents at the end of the year 60,012 2,849,362 1,122,346

Consolidated statement of cash flowfor the year ended March 31, 2003 and 2002

041_192.pmd 30/06/2003, 8:13 PM134




2003 2003 2002

Supplementary informationCashTaxes paidDomestic taxes 3,663 173,905 47,932Foreign taxes 1,602 76,071 97,316Dividend taxes – – 4,243

5,265 249,976 149,491

Non CashAssets acquired under capital leases 52 2,447 9,193


Consolidated statement of cash flow (continued)for the year ended March 31, 2003 and 2002

041_192.pmd 30/06/2003, 8:13 PM135

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041_192.pmd 30/06/2003, 8:13 PM136


1 Background

i-flex solutions limited (‘i-flex’ or ‘the Company’), a public limitedcompany, was incorporated in India with limited liability onSeptember 27, 1989. The Company’s principal shareholder isOrbiTech Limited (‘OrbiTech’) with shareholding of 43.19 per cent.OrbiTech is a 100 per cent subsidiary of Citicorp TechnologyHoldings Inc, USA.

In June 2002, the Company completed an Initial Public Offering(“IPO”) and issued 3,360,000 equity shares of Rs 5/- each at aprice of Rs 530/- per share. Concurrently, 601,700 equity sharesheld by existing shareholders were also offered for sale.Consequently, on June 28, 2002, the equity shares of the Companywere listed on the National Stock Exchange of India and The StockExchange, Mumbai.

The Company had a controlling/significant influence in thefollowing:

• i-flex solutions b.v. (‘i-flex b.v.’), a 100 per cent ownedsubsidiary company incorporated in May 2000 under the lawsof The Netherlands;

• i-flex solutions pte ltd (‘i-flex pte’), a 100 per cent ownedsubsidiary company incorporated in November 2001 under thelaws of Singapore;

• i-flex solutions inc. (‘i-flex inc.’), a 100 per cent ownedsubsidiary company incorporated in December 2001 under thelaws of the United States of America;

• DotEx International Limited (‘DotEx’), a 49 per cent ownedinvestee company incorporated in June 2000 under the Indianlaws; and

• Flexcel International Private Limited (‘Flexcel’), a 40 per centowned investee company incorporated in March 2001 underthe 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 principallyengaged in the business of providing information technologysolutions to the financial services industry worldwide. i-flex has asuite of banking products, which caters to the needs of corporate,retail and investment banking as well as treasury operations anddata warehousing. The Group also provides software developmentservices and develops bespoke software for its customers from thefinancial services industry. The Group derives a substantial portionof its revenues from the overseas markets.

2. Summary of significant accounting policies

2.1 Principles of consolidation

The accompanying consolidated financial statements of the Groupare prepared in conformity with generally accepted accountingprinciples in the United States of America (‘US GAAP’) to reflectthe financial position and the results of operations of the Group.

DotEx and Flexcel are accounted for using the equity method sincethe Group exerts significant influence on the operations of DotExand Flexcel. All material transactions and balances between the

Notes to the consolidated financial statementsfor the years ended March 31, 2003 and 2002

(All amounts in thousands of Indian Rupees,unless otherwise stated)

Group entities have been eliminated. The Group records losses inexcess of its proportionate investment in DotEx since it is committedto provide further financial support to DotEx.

2.2 Basis of presentation

(a) These financial statements are prepared under the historicalcost convention on the accrual basis of accounting inaccordance with the accounting and reporting requirements ofUS GAAP.

(b) For the convenience of readers, the financial statements forthe year ended March 31, 2003 have been translated into UnitedStates Dollars (‘US$’) using the telex transfer average rate asprescribed by Citibank NA as at March 31, 2003 which was1 US$ = Rs 47.48. The convenience translation should not beconstrued as a representation that the Indian Rupee amountsor the US$ amounts referred to in these financial statementshave been, could have been, or could in the future be, convertedinto US$ or Rs, as the case may be, at this or at any other rateof 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 inform of a stock dividend. Further on October 31, 2000, therewas one-for-one stock split of the Group’s shares in form of astock dividend. Also, in accordance with the resolution passedin the shareholders’ and Board of Directors’ meetings held onAugust 14, 2001 and January 7, 2002, respectively, the equityshare of par value Rs 10/- each has been split into two equityshares of par value of Rs 5/- each. Subsequent to the sub-division, the authorised Common Stock is 100,000,000 equityshares and issued and outstanding common stock is 37,315,400equity shares. Accordingly, all share and per share amountshave been retroactively restated.

(d) The Group also separately presents its consolidated financialstatements for the same period prepared in accordance withgenerally accepted accounting principles in India. Thesignificant differences between the generally acceptedaccounting principles in India and those generally accepted inthe United States of America so far as concerns the financialstatements referred to above are primarily relating to thedeferral of revenues pertaining to post-contract support andsignificant discounts, compensated absences, employee benefitplans, marketable securities and derivatives.

2.3 Use of estimates

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and the results of operationsduring the reporting year. Although these estimates are based uponmanagement’s best knowledge of current events and actions, actualresults could differ from those estimates.

2.4 Foreign currency

The functional currency of each entity in the Group is its respectivelocal currency. Monetary assets and liabilities in foreign currenciesare remeasured into functional currency at the rates of exchange

041_192.pmd 30/06/2003, 8:13 PM137

prevailing at the balance sheet date. Transactions in foreigncurrencies are remeasured into functional currency at the rates ofexchange prevailing at the date of the transaction. All foreignexchange gains and losses are recorded in the accompanyingconsolidated income statements. The results of each entity in theGroup are translated into Indian Rupees, the reporting currency,at the average rates of exchange during the year and the balancesheet is translated at the rate in effect at the balance sheet date.Translation adjustments are included as a separate component ofstockholders’ equity.

2.5 Revenue recognition

The Group derives revenues from:

Product licensing and related services – The licensing of bankingsoftware products, normally sold as perpetual licenses, along withthe provision of related implementation services and post contractsupport (“PCS”); and

IT solutions and consulting services – Providing bespoke softwaredevelopment and other consulting services to certain customers,which comprise primarily banking and financial servicescompanies.

License revenues are recognised when persuasive evidence of anarrangement exists, delivery has occurred, the license fee is fixedand determinable and the collection of the fee is probable. Licenserevenues from arrangements, which contain extended paymentterms is not considered to be fixed and determinable at the outsetof the arrangement and revenue is therefore recognized as paymentsfrom customers become due (assuming all other conditions forrevenue recognition have been satisfied).

If a licensing arrangement provides a customer a right to asignificant incremental discount (with reference to VSOE of thefair value of that element) on a future purchase of any other softwareproduct or a service, a proportionate amount of that discount isapplied to each element covered by that arrangement based oneach element’s fair value. Licensing arrangements, which allow acustomer to purchase additional copies of products already licensedand delivered to the customer, do not result in the provision of asignificant discount to the customer. Revenues are recognised aseach additional copy is purchased by the customer based on theprice per copy stated in the agreement.

Implementation services essentially comprise, inter alia, minorfunctional enhancements, interface building, implementationplanning, data conversion, training and product walkthrough. Suchservices are not essential to the functionality of the software anddo not affect the realisability of the license fees. Accordingly,implementation services is treated as a separate element. Revenuerelated to implementation services are recognized as services areprovided when arrangements are on a time and material basis. Incase of fixed price arrangements, revenue related to implementationservices is recognized on a percentage of completion basis.

When an arrangement provides for significant modification orcustomisation of the product or if Implementation Services areessential to the functionality of the product, the revenue related toboth the License and Implementation Services is recognized on apercentage of completion basis.

The Group enters into support arrangements, which are generallyfor a period of 12 months and renewable thereafter, to providetechnical support, maintenance, query solving and upgrades (on awhen and if available basis) to its customers. PCS revenue isrecognized ratably over the period of the PCS. The Group allocatesa portion of its software revenues to PCS activities provided free ofcharge to the customer for a specified period as included under thelicensing arrangement, based on its Vendor Specific ObjectiveEvidence (“VSOE”) which is derived from the renewals of PCSarrangements.

Revenues from IT solutions and consulting services – are recognizedas services are provided when arrangements are on a time andmaterial basis. Revenues for fixed price contracts is recognized ona percentage of completion basis.

Percentage of completion is determined based on the proportion ofefforts spent to total efforts to complete or on the basis ofcontractually determined milestones as certified by the customer.Provisions for estimated losses, if any, on uncompleted contractsare recorded in the period in which such losses become probablebased on current contract estimates.

Reimbursement for out-of-pocket expenses – Reimbursements ofout-of-pocket expenses are included in revenue in accordance withEmerging Issues Task Force Consensus (“EITF”) 01-14 “IncomeStatement Characterization of Reimbursement received for ‘Out ofPocket’ expenses incurred”. Accordingly out-of-pocket expensesamounting to Rs 198,134 and Rs 246,308 for the years ended March31, 2003 and 2002 are included in revenues.

Deferred revenue – Deferred revenue primarily represents theunexpired amount of PCS.

2.6 Cost of revenues

Cost of revenues comprises of salaries and employee benefits,project related travel costs, application software costs andprofessional fees.

2.7 Research and development expenses for products

Research and development costs are expensed as incurred. Softwareproduct development costs are expensed as incurred untiltechnological feasibility is established. Software productdevelopment costs incurred subsequent to the achievement oftechnological feasibility are not material and have been expensed.

2.8 Cash and cash equivalents

Cash and cash equivalents include all highly liquid investmentswith an original maturity of ninety-one days or less.

2.9 Property and equipment

Property and equipment including assets under capital leaseagreements are stated at cost, less accumulated depreciation andamortisation. Depreciation is computed using the written-downvalue method, which is an accelerated method of depreciation andis charged to income over the estimated useful life of the assets.Assets under capital leases are amortised over the shorter of theuseful life or lease term.

041_192.pmd 30/06/2003, 8:13 PM138


Costs of normal repairs and maintenance are charged to income asincurred. Major replacements or betterment of property andequipment are capitalised. When assets are sold or otherwisedisposed off, the cost and related accumulated depreciation areremoved from the accounts and any resulting gain or loss is includedin the profit and loss statement.

Advances paid towards the acquisition of property and equipmentoutstanding at each balance sheet date and the cost of propertyand 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 anevent or changes in circumstances indicate that the carrying amountof such assets may not be recoverable. The carrying values of long-lived assets are assessed for recoverability by reference to theestimated future undiscounted cash flows associated with them.Where this assessment indicates a deficit, the assets are writtendown to market value. For assets, which do not have a readilydeterminable market value, the assets are written down to theirestimated market value, calculated by reference to the estimatedfuture discounted cash flows. Assets to be disposed are reported atthe lower of the written down value or the fair value, less the cost tosell.

2.11 Marketable securities

Investments in marketable securities are classified as availablefor sale and are accounted for at fair value, which is determined byreference to prevailing market prices. Changes in fair value arerecorded, net of taxes as comprehensive income (loss) and reportedas a separate component of stockholders’ equity. Declines in fairvalue below original cost are recorded in the income statementwhen they are considered to be other than temporary.

2.12 Other investments

Investments where the Group controls between 20 percent and 50percent of the voting interest are accounted for using the equitymethod. Investments in unquoted equity and debt securities heldto maturity, where the Group controls less than 20 percent votinginterest are accounted for at cost. Decline in fair value below originalcost is recorded in the income statement when they are consideredto be other than temporary.

2.13 Income taxes

The current charge for income taxes is calculated in accordancewith the relevant tax regulations applicable to the Group. Deferredincome taxes are recognised for the future tax consequencesattributable to temporary differences between the financialstatement carrying amounts of existing assets and liabilities andtheir respective tax bases. The effect on deferred tax assets andliabilities of a change in tax rates is recognised in income statementin the year the change is enacted. Deferred tax assets are recognisedin full, subject to a valuation allowance to reduce the amountrecognised 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 inIndia, are entitled to receive benefits under the Provident Fund, adefined contribution plan in which both the employee and the

Company, contribute monthly at a determined rate (currently12 per cent of the employee’s base salary). These contributions aremade to the Government Provident Fund.

The Superannuation Plan is a defined contribution pension planfor a certain category of employees of the Company in India. TheCompany contributes to employees’ superannuation fund at 5 to10 per cent of the employee’s base salary. The superannuation fundis administered by a trust formed for this purpose through the GroupScheme of the Life Insurance Corporation of India (‘LIC’). TheCompany has no further obligation under the Provident Fund orSuperannuation Plan, beyond its contributions. Contributions todefined contribution plans are charged to income in the year inwhich they accrue.

In accordance with Indian law, the Company provides for gratuity,a defined benefit retirement plan (‘the Gratuity Plan’) covering allits employees in India. The Gratuity Plan provides a lump sumpayment to vested employees on retirement or on termination ofemployment of an amount based on the respective employees’ salaryand the years of employment with the Company. The gratuity planfund benefits of the Company are administered by a trust formedfor this purpose through the Group Schemes of Life InsuranceCorporation of India (‘LIC’). Gratuity benefit cost for the year iscalculated on an actuarial basis.

The Company’s liability towards compensated absences isdetermined on an actuarial basis for the entire unavailed vacationbalance standing to the credit of each employee as at year-end.

2.15 Operating leases

Leases of assets under which the lessor effectively retains all therisks and rewards of ownership are classified as operating leases.Lease payments under an operating lease are recognised as anexpense on a straight-line basis over the lease term.

2.16 Earnings per share

Basic earnings per share is computed by dividing the net incomeby the weighted average number of common shares outstandingduring the year. Diluted earnings per share is computed using theweighted average of common and dilutive common equivalentshares outstanding during the year, using the treasury stock methodfor shares which have been granted to employees pursuant to theEmployees Stock Purchase Scheme (‘the Scheme’) adopted by theGroup, except where the result would be anti-dilutive.

2.17 Stock-based compensation

The Group accounts for stock-based compensation using theintrinsic value method prescribed in APB No. 25, “Accounting forStock Issued to Employees”. Compensation cost for stock optionsis measured as the excess of the fair value of the Company’s stockon the measurement date over the amount an employee must payto acquire the stock and is recognised over the vesting period. Theintrinsic value of the options is measured on the basis of the fairvalue of the Company’s stock at the end of each year.

SFAS No. 123, “Accounting for Stock-Based Compensation,”established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employeecompensation plans. The Company has elected its current methodof accounting as described above, and has adopted the disclosure

041_192.pmd 30/06/2003, 8:13 PM139

requirements of SFAS No. 148, “Accounting for Stock-BasedCompensation – Transition and Disclosure”, an amendment of SFASNo. 123.

Had compensation cost for the Group’s ESOP been determinedbased on the fair value at the grant dates for awards under thoseplans consistent with the method of FASB Statement 123, theCompany’s net income and earnings per share would have beenreduced to the pro forma amounts indicated below:

2003US Dollars Indian Rupees

(in thousands) (in thousands)(except per share data)

Net incomeAs reported 37,293 1,770,670Pro forma 30,348 1,440,909

Basic earning per shareAs reported (in US$, Rs) 1.05 49.87Pro forma (in US$, Rs) 0.84 40.58

Diluted earning per shareAs reported (in US$, Rs) 1.01 48.10Pro forma (in US$, Rs) 0.84 39.84

Compensation cost recognized for the fair value of the ESOP as perthe requirement of SFAS 123 is based on the Black-Scholes modelwith 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

2.18 Derivative instruments and hedging activities

The Group does not use derivative financial instruments and doesnot engage in any hedging activities. However, some of the licensearrangements entered into by the Group with its customers aredenominated in a currency which is neither the functional currencyof the Group or the customer, and thus qualify as embeddedderivative instruments as per SFAS No. 133. Accordingly, gains orlosses on such embedded derivative instruments are recognised inthe Group’s consolidated income statements based on the marketvalue of the embedded derivative contracts at each year end andcorresponding asset/liability is recorded in the balance sheet underother current assets or other current liabilities.

3. Cash and cash equivalents

Cash and cash equivalents consist of physical cash, cheques onhand and balances available in current accounts and time deposits

with banks. Time deposits are interest-bearing deposits for periodsranging from 30 to 91 days. The details of cash and cash equivalentsare as follows:

2003 2003 2002US Dollars Indian Rupees Indian Rupees

(in thousands) (in thousands) (in thousands)

Cash on hand 18 832 506Funds in transit 149 7,091 –Bank balances– Current accounts 51,504 2,445,422 882,651– Time deposits 8,341 396,017 239,189

60,012 2,849,362 1,122,346

Cash and cash equivalents of the Company are subject to localexchange control restrictions and can be remitted overseas onlywith prior approval from the relevant regulatory authorities.

4 Trade receivables, net

Trade receivable from related parties as of March 31, 2003 andMarch 31, 2002, net of provision for doubtful accounts of Rs Niland Rs 1,221, respectively amounted to Rs 651,110 andRs 902,980, respectively. Trade receivable – others as ofMarch 31, 2003 and March 31, 2002 net of provisions for doubtfulaccounts of Rs 38,842 and Rs 54,691, respectively amounted toRs 798,017 and Rs 988,106, respectively. The movement inprovision for doubtful accounts is given below:



Provision for doubtful debtsTrade receivables fromrelated partiesOpening balance 26 1,221 –Additions – – 1,221Reversals related tochanges in estimates (26) (1,221) –Collections – – –Closing balance – – 1,221

Trade receivables – othersOpening balance 1,152 54,691 4,233Additions – – 52,198Reversals related tochanges in estimates (179) (8,498) –Collections (155) (7,351) (1,740)Closing balance 818 38,842 54,691

041_192.pmd 30/06/2003, 8:13 PM140


5 Property and equipment, net

Property and equipment consist of the following:

2003 2003 2002Estimated Rates(%) US Dollars Indian Rupees Indian Rupeesuseful life (in thousands) (in thousands) (in thousands)

(years)

Land 942 44,734 44,734Improvement to leasehold premises 7 35 2,138 101,522 83,479Building 20 15 424 20,116 7,116Computer equipments 3 60 9,915 470,781 401,650Electrical and office equipment 7 35 3,279 155,687 143,349Furniture and fixtures 7 35 2,842 134,965 120,228Vehicles on lease 4-5 25-20 519 24,631 26,890Capital advances 4,663 221,383 2,412

24,722 1,173,819 829,858Less: Accumulated depreciation and amortisation (13,829) (656,599) (521,575)Property and equipment, net 10,893 517,220 308,283

Depreciation is computed at the rates referred to above, applied to the written-down value of the assets over its useful life estimated.

Property and equipment above include the following assets heldunder capital leases:



Vehicles 519 24,631 26,890Less: Accumulated

amortisation (303) (14,390) (12,370)216 10,241 14,520

6 Financial instruments

6.1 Fair value of financial instruments

The fair values of the Group’s current assets and current liabilitiesapproximate their carrying values because of their short maturity.Such financial instruments are classified as current and areexpected to be liquidated within the next twelve months.

Long term employee receivables are loans given to employees toacquire assets such as property and cars. Such loans are repayableover fixed periods ranging from three to ten years. The Grouprecovers interest on such loans at rates, which closely approximatethe market rates. Hence, the fair value of the long-term employeereceivables closely approximates the carrying value in the financialstatements at Rs 11,721 and Rs 23,984 for the years ended March31, 2003 and 2002 respectively.

Long-term rental deposits comprise of interest free depositsmaintained for office and residential premises taken on lease. Suchdeposits are repayable on termination of such lease agreements.The fair value of the long-term rental deposits carried in the

financial statements as at March 31, 2003 and 2002 at Rs 217,542and Rs 291,541, respectively, determined using market rates ofinterest as at March 31, 2003 and March 31, 2002 is approximatelyRs 171,144 and Rs 206,814, respectively.

6.2 Concentration of credit risk

Financial instrument that potentially subject the Group toconcentrations of credit risk consist principally of cash equivalents,trade receivables from related parties, trade receivables from othersand bank deposits. By their nature, all such financial instrumentsinvolve risk including the credit risk of non-performance by counterparties.

The Group’s cash equivalents and bank deposits are invested withbanks with high investment grade credit ratings. As at March 31,2003, 50 per cent (March 31, 2002 – 51 per cent) and 32 per cent(March 31, 2002 – 34 per cent) of cash equivalents (primarilydenominated in US $) were placed with Citibank and HDFC Bank,respectively. 58 per cent (March 31, 2002 – 100 per cent) and 38per cent (March 31, 2002 – nil) of bank deposits were placed withHDFC Bank and Bank of India, respectively. Trade receivables(primarily denominated in US $) are typically unsecured and arederived from revenues earned from customers in the financialservice industry worldwide. The Group monitors the creditworthiness of its customers to which it grants credit terms in thenormal course of the business. As at March 31, 2003 and March31, 2002, 94 per cent and 69 per cent of trade receivables fromrelated parties was recoverable from various Citibank branches,5 per cent and 30 per cent are recoverable from CITI. As at March31, 2003 and March 31, 2002, 13 per cent and Nil per cent arerecoverable from Customer 1 of non related parties and 10 percent and 5 per cent from Customer 2.

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In management’s opinion, as of March 31, 2003, there is nosignificant risk of loss in the event of non-performance of the counterparties to these financial instruments, other than the amountsalready provided for in the financial statements, if any.

6.3 Derivative financial instruments

Licence arrangement contract are bifurcated into functionalcurrency denominated sales contracts and contractual currencydenominated forward contracts. As at March 31, 2003 the Companyhas committed to deliver US $ 6,747,288 pursuant to such contracts,these contracts mature between 0 to 13 months. As a result, thegroup has accounted Rs 8,861 as derivative loss and Rs 643 asderivative gain for the year ended March 31, 2003 and 2002,respectively. Accordingly, the group has accounted for Rs 8,218 asother current liabilities and Rs 643 as other current assets as atMarch 31, 2003 and 2002.

7 Stockholders’ equity

7.1 Common stock

The Group has only one class of common stock referred to hereinas 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 payablewhen formally approved by the shareholders, who have the right todecrease but not increase the amount of the dividend recommendedby the Board of Directors. With respect to equity shares issued bythe Company during a particular fiscal year, cash dividendsdeclared and paid for such fiscal year generally will be proratedfrom the date of issuance to the end of such fiscal year. The Companyaccrues for dividend upon obtaining shareholders approval. TheCompany paid cash dividends of Rs 46,644 and Rs 41,596, duringthe years ended March 31, 2003 and 2002 respectively. For theyears ended March 31, 2003 and 2002 the Company paid Rs niland Rs 4,243, respectively, as dividend tax.

7.4 Liquidation

In the event of liquidation of the Company, the holders of equityshares shall be entitled to receive all of the remaining assets of theCompany, after distribution of all preferential amounts, if any. Suchamounts will be in proportion to the number of equity shares heldby the shareholders.

7.5 Initial public offering

In June 2002, the Company completed an IPO and issued 3,360,000equity shares of Rs 5/- each at a price of Rs 530/- per share.Concurrently, 601,700 equity shares held by existing shareholderswas also offered for sale. The proceeds from the fresh issue of shareswas Rs 1,677,727 net of underwriting commissions and other directoffering costs of Rs 103,073. The direct offering costs have beenrecorded in additional paid-in-capital. On June 28, 2002, the equityshares of the Company were listed on the National Stock Exchangeof India and The Stock Exchange, Mumbai.

8. Marketable securities, available for sale

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



Unit Trust of India –1964 Scheme –Carrying value/Cost 439 20,861 46,688

Less: Other thantemporary diminutionin value – – (16,887)

Add/(Less): Unrealisedgain/(loss) during the year,net of tax 262 12,427 (8,940)

701 33,288 20,861

The Group holds 3,311,258 units (and 278 fractions) of Rs 10/-each of Unit Trust of India – 1964 Scheme (‘US 64’). During March2003, Unit Trust of India (‘UTI’) announced an option of convertingthese units into Tax-free Bonds or to encash the units at declaredrates by UTI. The Tax-free bonds will be issued on June 1, 2003and will have a 5-year tenure with a coupon rate of 6.75% p.a.payable half-yearly. The Group has opted for the conversion of itsunits into the Tax-free bonds.

Unrealised gain of Rs 12,427 during the current year representsreversal of provisions of unrealised loss during the years endedMarch 31, 2002 and 2001.

9. Other investments

Other investments comprise:



UnquotedEquity SecuritiesEBZ Online PrivateLimited (‘EBZ’) 948 45,000 45,000

Eastern SoftwareSystems Limited (‘ESSL’) 156 7,406 9,875

1,104 52,406 54,875

Held to maturity debtsecurities12.75% KEONICSMahithi Bonds Series-1 421 20,000 20,000

JM High Liquidity Fund –Serial Plan 2004 (Growth) 5,265 250,000 –

National Saving Certificates 3 131 –6,793 322,537 74,875

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The Company’s ownership interest in EBZ and ESSL is 19.5 percentand 6.62 percent, respectively. The nature of business of each ofthese companies is as follows:• EBZ is a strategic partnership between Brihans Technologies

Private Limited (‘BTPL’) and the Company to integrate theselected and adapted software provided under Group’s productswith BTPL’s products for Co-operative banking sector in India.

• ESSL is primarily engaged in catering to the needs of smallbusinesses through its flagship product, ‘ebizframe’. Duringthe year ended March 31, 2003, the company accepted thebuy-back offer from ESSL for 89,428 shares. As a result theownership interest has reduced from 6.65 per cent to 6.62 percent. The Group made a profit of Rs 35 on the acceptance ofbuy-back offer which has been recognised as part of Otherincome.

The Group does not exert significant influence directly/indirectlyon the operations of EBZ and ESSL by way of representation onthe Board of Directors, participation in policy-making processes,material inter-company transactions, interchange of managerialpersonnel or technological dependency. Accordingly theseinvestments are valued at cost less any decline in fair value beloworiginal cost when considered to be other than temporary.

Investments in debt securities of 12.75% KEONICS Mahithi BondsSeries-1 allotted on February 1, 2001 are non-convertibleredeemable at par at the end of seven years from the date ofallotment. As per the terms of the securities, the Group has a putand call option at par at the end of five years from the date ofallotment.

During March 2003 the group has invested Rs 250 million in JMHigh Liquidity – 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 whollyowned subsidiary of The National Stock Exchange of India Limited(‘NSE’) and the Company for setting up a Broker Plaza enablingbrokers and their clients to transact in stock/securities marketsthrough the internet.

Flexcel is a 40:40:20 joint venture with the Company, HDFC BankLimited and Lord Krishna Bank Limited to provide the Group’sproducts through an Application Service Provider (‘ASP’) model tovarious banks and financial institutions in India.



Original Cost DotEx 1,187 56,350 49,000 Flexcel 436 20,680 98Add: Advance againstshares given to Flexcel – – 29,620Add: Gain on dilution ofequity in Flexcel 60 2,847 –Less: Group’s share ofaccumulated losses inDotEx (1,187) (56,350) (45,402)Flexcel (333) (15,789) (9,482)

163 7,738 23,834

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



Share of net assetsDotEx – – 3,598Flexcel 163 7,738 10,172Advance against sharecapital paid to Flexcelin excess ofcommitted share – – 10,064

163 7,738 23,834Carrying valueDotEx – – 3,598Flexcel 163 7,738 20,236

163 7,738 23,834Share of (loss) ofequity investeeDotEx (245) (11,617) (30,562)Flexcel (133) (6,307) (9,482)

(378) (17,924) (40,044)(Loss) included in net incomeDotEx (245) (11,617) (30,562)Flexcel (133) (6,307) (9,482)

(378) (17,924) (40,044)

The summarised unaudited financial statements of DotEx are asfollows:



Balance sheetCurrent assets 26 1,218 9,586Fixed assets, (net) 62 2,961 17,677Total assets 88 4,179 27,263

Current liabilities 48 2,284 15,438Unsecured loans 69 3,267 4,484

Shareholder’s equityShare Capital 2,422 115,000 100,000Accumulated losses (2,451) (1,16,372) (92,659)Total liabilities andstockholders’ equity 88 4,179 27,263

Income statementRevenues 114 5,427 3,778Expenses (614) (29,140) (66,149)Loss from operations (500) (23,713) (62,371)Net loss (500) (23,713) (62,371)

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The summarised unaudited financial statements of Flexcel are asfollows:



Balance sheetCurrent assets 409 19,430 33,318Fixed assets, (net) 273 12,940 11,551Total assets 682 32,370 44,869

Current liabilities 167 7,895 24,314Unsecured Loans 108 5,133 –

Shareholder’s equityShare Capital 1,089 51,700 198Share Premium 16 776 –Advance againstShare application – – 39,520Accumulated losses (698) (33,134) (19,163)Total liabilities andstockholders’ equity 682 32,370 44,869

Income statementRevenues 93 4,432 542Expenses (387) (18,402) (19,706)Loss from operations (294) (13,970) (19,164)Net loss (294) (13,970) (19,164)

11 Other current liabilities

Other current liabilities primarily comprise of:



Communication expenses 217 10,301 11,291Travelling expenses 641 30,418 47,394Professional fees 1,730 82,128 22,681Embedded derivatives 173 8,219 –Other liabilities 1,262 59,937 30,219

4,023 191,003 111,585

12 Employee benefit plans

The Group’s cost related to defined contribution plans andcompensated absences is as follows:



Provident Fund 797 37,849 28,048Superannuation 304 14,412 9,942Compensated absences 1,982 94,122 65,673

3,083 146,383 103,663

Based on the disclosure requirements of SFAS 132 the change inbenefit obligation and funded status of the Gratuity Plan for theyears ended March 31, 2003 and 2002 is as follows:



Change in benefitobligationBenefit obligationat beginning of year 420 19,959 10,955Service cost 96 4,549 2,480Interest cost 39 1,847 1,011Benefits paid (11) (500) (158)Actuarial loss 165 7,821 5,671Benefit obligationat end of year (A) 709 33,676 19,959

Change in plan assetsFair value of plan assetsat beginning of year 140 6,640 6,243Return on plan assets 23 1,099 555Actual contribution 25 1,186 –Benefits paid (11) (500) (158)Fair value of plan assetsat end of year (B) 177 8,425 6,640

Funded status (A-B) 532 25,251 13,319Unrecognised nettransition obligation (7) (314) (628)Unrecognised netactuarial loss (268) (12,745) (5,650)Accrued benefit cost 257 12,192 7,041

Net gratuity cost for the years ended March 31, 2003 and 2002comprises of the following components:



Components of netyearly benefit costService cost 96 4,549 2,480Interest cost 39 1,847 1,011Expected return onplan assets (13) (596) (534)Amortisation ofTransition liabilities 7 314 314Recognised net actuarial loss 4 223 –Net yearly benefit cost 133 6,337 3,271

The assumptions used in accounting for the gratuity plan for theyear ended March 31, 2003 are set out below:

2003 2002% %

Discount rate 8.00 9.50Expected return on plan assets 8.50 9.00Rate of compensation increase 5.00 5.00

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

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13 Other income/(expense)

Other income/(expense) comprises of the following:



Foreign exchangegain/(loss), net (774) (36,750) 32,782Dividend – – 3,311Profit/(Loss) onsale of investment 1 35 (1,500)Miscellaneous income 28 1,320 14

(745) (35,395) 34,607

14 Income taxes

Under the Indian Income-tax Act, 1961, for the year ended March31, 2003 the Company is eligible to claim benefits with respect to90 per cent as against 100 per cent till last year of the profits earnedfrom export revenues from its five units registered under the SoftwareTechnology Parks (‘STP’) and one unit forming part of a SpecialEconomic Zone (‘SEZ’). The benefit as per the current tax laws isrestricted to 10 consecutive assessment years, beginning with theassessment year relevant to the previous year in which the Companycommences operations from each location. These benefits will expirefor certain of the Company’s units beginning from April 1, 2004.Foreign taxes are towards income taxes payable in the United Statesof America, Malaysia, United Kingdom, Kuwait, Japan and Singapore.

The provision for income tax consists of the following:



Current tax expenseDomestic Indian taxes 3,576 169,778 53,550Subsidiaries 46 2,188 –Foreign taxes 1,807 85,808 107,119Deferred taxes (106) (5,045) (12,667)

5,323 252,729 148,002

The Components of the deferred tax asset are as follows:

2003 2002 Indian Rupees (in thousands)

Loss on sale of investment 10,815 10,506Other than temporary diminutionin value of investments 3,546 3,445Unrealised loss on marketable securities – 2,499Share of loss in equity investees 14,968 11,196Difference between book andtax depreciation 29,703 24,624Other differences – 34

59,032 52,304Less: Valuation allowance (29,329) (25,147)Total deferred tax asset 29,703 27,157

The Group has created a valuation allowance, for the deferred taxasset related to loss on sale of investment, provision for other thantemporary diminution in value of investments, unrealised loss onmarketable securities and share of losses in equity investees. Theabove items would be deductible for tax only when the investmentsare sold and if the Group has offsetting capital gains. No provisionfor deferred taxes have been made on the unremitted earnings whichare considered to be indefinitely invested in foreign subsidiaries.

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



Accounting profit 42,616 2,023,399 1,184,012Enacted tax rate % 36.75% 36.75% 35.70%Computed tax expense 15,661 743,600 422,692Tax effect on exemptprofit/income (12,513) (594,137) (455,820)Difference in tax ratebetween Indian andForeign taxes (62) (2,945) –Incremental taxes paidin foreign jurisdictions 1,807 85,808 107,119Taxes on dividend paid – – 4,243Impact of change in tax rates 22 1,038 10,578Tax effect on loss of subsidiaries 414 19,670 36,656Double taxation relief (94) (4,467) –Valuation allowance 88 4,182 22,795Others – (20) (261)Income tax expense, net 5,323 252,729 148,002

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



Current deferred tax asset – – 2,533Non current deferred tax asset 626 29,703 24,624

626 29,703 27,157

15 Leases

The Group takes vehicles under capital lease upto five years. Futureminimum lease payments under capital leases as at March 31, 2003are as follows:

March 31 US Dollars Indian Rupees(in thousands (in thousands)

2004 132 6,2492005 94 4,4672006 51 2,4192007 21 1,0252008 1 68Total minimum payments 299 14,228Less: Amount representing future interest (56) (2,681)Present value of minimum payments 243 11,547Less: Current portion of capitallease obligation (101) (4,786)Long term capital lease obligation 142 6,761

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The Group has taken certain office premises, residential premisesand vehicles for employees under operating lease, which expire atvarious dates through to 2011. Gross rental expense for the yearsended March 31, 2003 and year ended March 31, 2002 was Rs120,794 and Rs 99,393, respectively.

The minimum rental payments to be made in future in respect ofthese leases:

March 31 US Dollars Indian Rupees(in thousands) (in thousands

2004 2,018 95,8112005 1,154 54,7942006 560 26,5752007 557 26,4632008 467 22,153Thereafter till 2011 1,175 55,811

16 Related party transactions

The Group has entered into transactions with various Citibankbranches, Citicorp Information Technology, Inc (‘CITI’), e-ServeInternational Limited (‘e-Serve’) over which Citigroup and itsaffiliates have significant ownership interest, controlling interestor exercise significant influence. The Group utilised services ofprofessionals from OrbiTech Solutions Limited, a subsidiary ofOrbiTech towards software development. The Group has alsoentered into certain transactions with its investee companies DotExand Flexcel.

The related party transactions other than disclosed elsewhere inthe financial statements can be categorised as follows:

16.1 Revenues

Banking product revenues



Citibank branches 23,868 1,133,255 578,326CITI 249 11,798 3,646e-Serve 1 42 169DotEx – – 100Flexcel 44 2,107 358Total 24,162 1,147,202 582,599

IT solutions and consulting service revenues



Citibank branches 29,602 1,405,495 617,536CITI – – 693,396DotEx 60 2,864 9,560e-Serve – – 21

29,662 1,408,359 1,320,513

16.2 Expenses



Communication expensespaid to Citibank branches 923 43,811 –

Finance lease payments toe-Serve (Interest) 32 1,532 2,630

Professional fees paid toOrbiTech Solutions Limitedfor software development 36 1,696 25,155

Professional fees paymentsto Flexcel 34 1,619 –

Provision for doubtful debtsfor Citibank branches (26) (1,221) 1,221

Bank charges paid toCitibank branches 57 2,729 1,852

1,056 50,166 30,858

16.3 Assets

Trade receivables



Citibank branches net ofprovision for doubtful debtsRs Nil (March 2002 –1,221and March 2003 – Rs NIL) 12,913 613,088 618,835CITI 693 32,919 276,761DotEx 33 1,574 6,999Flexcel 74 3,529 385e-Serve – – –

13,713 651,110 902,980

Loans outstanding



i-flex ESPS Trust 5,643 267,926 291,649Key managerial personnel 84 4,000 4,844

5,727 271,926 296,493

Repayment of loan during the year



i-flex ESPS Trust 500 23,723 8,549Key managerial personnel 18 844 1,703

518 24,567 10,252

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Bank balance with Citibank branches



Current accounts 25,961 1,232,622 437,286Time deposits 3,051 144,877 139,800

29,012 1,377,499 577,086

Interest accrued on fixed deposits



Citibank branches 10 454 361

16.4 Liabilities

Amount due to related parties



e-Serve towards leaseobligations repayable(Principal and interest) 163 7,727 14,896

OrbiTech Solutions Limitedtowards professional fees – – 1,427

163 7,727 16,323

Payment of lease obligations



e-Serve (Principal) 105 4,963 4,506105 4,963 4,506

Deferred revenue from related parties



Citibank branches 39 1,869 88,145e-Serve – – 42

39 1,869 88,187

17 Segmental information

The Group has adopted SFAS No. 131, “Disclosures about Segmentsof an Enterprises and Related Information”, which requiresreporting information about operating segments in annual financialstatements. It has also established standards for related disclosuresabout products and services, and geographic areas. Operating

segments are defined as components of an enterprise about whichseparate financial information is available. This information isreviewed and evaluated regularly by the management, in decidinghow 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 ona 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 primarysegment information to the management. The Product licensesegment has banking products like FLEXCUBE suite of productsand Microbanker which cater to needs of corporate, retail andinvestment banking as well as treasury operations and datawarehousing requirements. The related activities includeenhancements, implementation and maintenance activities.

IT solutions and consulting services comprise of bespoke softwaredevelopment, computer software solutions and related consultingservices 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 aswell as by providing software solutions to the customers includingconsultancy. The expenses, which are not attributable to a businesssegment, are shown as unallocated expenses. Cost of revenuescomprise of all direct cost towards employee cost, travel cost ofsoftware professionals, Professional fees to software vendors andapplication software cost used for internal use. These costs aredirect costs for each segment.

The group allocates expenditure incurred on selling and marketingexpenses 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 costsare costs, which primarily comprise of rent, power, communication,repairs and maintenance for a particular segment. Additionallyemployee costs, rent, power and communication costs for supportgroups are allocated in the ratio of revenues between the twosegments. All other segment revenue and expense are directlyattributable to the segments.

Segment assets include all operating assets used by a segment andconsist principally of receivables, deposits for premises andproperty and equipment, net of allowances and provisions. Segmentliabilities primarily include deferred revenues, capital leaseobligation, advances from customers, accrued employee cost andother current liabilities. While most such assets and liabilities canbe directly attributed to individual business segments, the carryingamount of certain assets and liabilities used jointly by both segmentsis allocated to the segment on a reasonable basis. Assets andliabilities that cannot be allocated between the segments are shownas part of corporate assets.

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Thousands of Indian Rupees

Year endedMarch 31, 2003

Product license IT solutionsParticulars And related and consulting Corporate Total

activities services

Revenues 4,040,364 2,316,992 – 6,357,356Cost of revenues (1,150,232) (1,592,839) – (2,743,071)Gross profit 2,890,132 724,153 – 3,614,285Selling 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 1,817,740 346,142 (295,801) 1,868,081

Other than temporary diminution in value ofsecurities available for sale –Loss on equity investments (17,924)Interest income 208,637Other income/(expense) (35,395)Income before provision for Income taxes 2,023,399Provision for income taxes (252,729)Net Income 1,770,670

Other informationSegment assets 924,480 1,016,520 6,782,054 8,723,054Segment liabilities 537,429 179,466 341,405 1,058,300Capital expenditure by segment 20,085 60,006 54,152 134,243

Thousands of US Dollars



activities services

Revenues 85,096 48,799 – 133,895Cost of revenues (24,225) (33,548) – (57,773)Gross profit 60,871 15,251 – 76,122Selling and marketing expenses (16,327) (2,044) – (18,371)General and administrative expenses (5,129) (4,348) (5,932) (15,409)Depreciation and amortisation (1,130) (1,570) (298) (2,998)Income from operations 38,285 7,289 (6,230) 39,344

Other than temporary diminution in value ofsecurities available for sale –Loss on equity investments (378)Interest income 4,395Other income/(expense) (745)Income before provision for Income taxes 42,616Provision for income taxes (5,323)Net income 37,293

Other informationSegment assets 19,471 21,409 142,841 183,721Segment liabilities 11,319 3,780 7,190 22,289Capital expenditure by segment 423 1,264 1,141 2,828

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18 Commitments and contingencies

18.1 Capital expenditure

The Group had committed to spend as at March 31, 2003 and 2002approximately Rs 507,642 and Rs 140,186, respectively underagreements to purchase property and equipment.

18.2 Guarantees

The Group accounts for loss contingencies when the likelihood ofthe underlying adverse event occurring is probable and the losscan be reasonably estimated.

Guarantees provided by banks on behalf of the Group amounted toRs 11,205 and Rs 20,302 at March 31, 2003 and 2002, respectively.The guarantees were provided to various Indian Governmentagencies and a few customers and prospects. In the event of defaultthe fair value of the guarantee will approximate the outstandingpayments due under accrued rates and taxes and accrued expenses.The Group has concluded that the risk of the guarantee being calledis remote, and accordingly, no provision has been made.

18.3 Other commitments

i-flex’s operations are carried out from five units registered underthe Software Technology Parks (‘STP’) scheme and one unit formingpart of Special Economic Zone (‘SEZ’) in India. Under theseschemes the registered units have export obligations, which arebased on the formula provided by the notifications/circulars issuedby the STP and SEZ authorities from time to time.

Geographical segments:

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



United States of America 50,935 2,418,378 1,378,167Middle East and Africa 31,663 1,503,369 1,096,343Asia Pacific 25,056 1,189,671 959,710Europe 25,253 1,199,001 897,662Latin America and Caribbean 988 46,937 25,293

133,895 6,357,356 4,357,175

Region 2003 2002Percentage

United States of America 38 32Middle East and Africa 24 25Asia Pacific 19 21Europe 18 21Latin America and Caribbean 1 1

100 100

The Group derives more than 10 per cent of its revenues from thefollowing customer:



Customer 1, related party 53,718 2,550,548 1,892,904

Thousands of Indian Rupees



activities services

Revenues 2,614,393 1,742,782 – 4,357,175Cost of revenues (836,935) (1,072,476) – (1,909,411)Gross profit 1,777,458 670,306 – 2,447,764Selling and marketing expenses (559,932) (43,227) – (603,159)General and administrative expenses (173,064) (147,415) (243,566) (564,045)Depreciation and amortisation (49,296) (78,061) (13,111) (140,468)Income from operations 995,166 401,603 (256,677) 1,140,092

Other than temporary diminution in value ofsecurities available for sale (16,887)Loss on equity investments (40,044)Interest income 66,244Other income, net 34,607Income before provision for Income taxes 1,184,012Provision for income taxes (148,002)Net income 1,036,010

Other informationSegment assets 1,326,768 1,179,260 2,614,730 5,120,758Segment liabilities 477,119 117,356 266,058 860,533Capital expenditure by segment 51,465 122,269 66,287 240,021

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The consequence of not meeting the above commitments would bea retroactive levy of import duty on items previously imported dutyfree for these units. Additionally the respective authorities haverights to levy penalties for any defaults on a case-by-case basis.Management believes that it would meet the required exportobligations.

18.4 Contingencies

The Dutch authorities have alleged violation of immigration andtaxation rules by i-flex b.v. in the Netherlands. i-flex b.v. has notreceived any written communication from the authorities yet. Ifsuch communication is received, the Company shall defend itselfvigorously. The determination of the liability, if any, is not possibleat this point.

19 Stock based compensation

19.1 Employee Stock Purchase Scheme (‘ESPS’)

On March 29, 1998 the Company adopted the ESPS to provideequity-based incentives to key employees of the Company (‘1998Scheme’). Subsequently on April 1, 1999, April 1, 2000 and April1, 2001, the Company adopted another Stock based schemes (‘1999Scheme’, ‘2000 Scheme’ and ‘2001 Scheme’). These schemes, whichhave similar terms, are administered through a Trust (‘the Trust’).The Trust purchases shares of the Company using the proceeds ofloans obtained from the Company. Such shares are offered by theTrust to employees at an exercise price, which approximates thefair value on the date of the grant. The employees can purchase theshares in a phased manner over a period of five years based oncontinued employment, until which, the Trust holds the shares forthe benefit of the employees. The employee will be entitled toreceive dividends, bonus etc. that may be declared by the Companyfrom time to time for the entire portion of shares held by the Truston behalf of the employees.

On the acceptance of the offer, the selected employee shallundertake to pay within ten years from the date of acceptance ofthe offer the cost of the shares incurred by the Trust includingrepayment of the loan relatable thereto. The repayment of the loanby the Trust to the Company would be dependent on the employeerepaying the amount to the Trust. In case the employee resignsfrom employment, the rights relating to the shares, which are eligiblefor exercise, may be purchased by payment of the exercise pricewhereas, the balance shares shall be forfeited in favour of the Trust.The Trustees have the right of recourse against the employee forany amounts that may remain unpaid on the shares accepted bythe employee. The shares that an employee is eligible to exerciseduring the initial five-year period merely go to determine the amountand scheduling of the loan to be repaid on exercise by the employee.The Trust shall repay the loan obtained from the Company on receiptof payments from employees against shares exercised or otherwise.Accordingly, the scheme eliminates any price risk that the Companycould bear and does not contain any option features.

The Company has elected to adopt Accounting Principles BoardOpinion No. 25, “Accounting for Stock issued to Employees” (‘APB25’), in accounting for stock, granted under its scheme. As perAPB 25, the Company did not recognise compensation expense onthe stock granted because the terms are fixed and the exerciseprice equals the fair value of the underlying stock on the grantdate. The shares issued to the Trust have been considered asoutstanding for basic EPS purposes, to the extent these shares have

been allocated to employees pursuant to the above schemes andare eligible to be exercised by the employee. For diluted EPSpurposes, the shares, which are not yet eligible for exercise, havealso been considered as outstanding to the extent these shares aredilutive using the treasury stock method. The loan granted to theTrust has been presented as a separate component of equity andrepayments of the loan, by way of exercise of the shares by theemployees has been applied toward this loan in the equity statement.Dividends paid in respect of allocated shares are charged to retainedearnings.

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

2003 2002

Opening balance of unallocated shares 78,876 251,000Shares acquired by the Trust – –Shares allocated to employees – (240,250)Shares forfeited during the year 48,453 68,126Closing balance of unallocated shares 127,329 78,876Closing balance of allocated shares 3,555,071 3,603,524Shares exercised till date (558,349) (305,278)Shares eligible for exercise (2,096,189) (1,458,437)Shares not eligible for exercise 900,533 1,839,809

Weighted average price of the Scheme:

2003 2002Indian Rupees

Opening balance of allocated shares 141.54 124.03Shares allocated to employeesduring the year – 325.00Shares forfeited during the year 259.99 205.37Closing balance of allocated shares 145.33 141.54Shares exercised during the year 74.05 58.69Shares eligible for exercise as at year end 105.58 96.12Unexercised shares as at year end 237.85 177.55

Number of shares and weighted average price stated above hasbeen computed after giving effect of split of shares as referred inNote 2.2(c).

As the shares granted to the employees vest upon the employeeaccepting the offer, the fair value of the shares granted to theemployee computed in accordance with SFAS 123 would not differsignificantly from the intrinsic value of the shares as determinedin accordance with APB 25.

19.2 Employee Stock Option Plan (‘ESOP’)

At the Annual General Meeting of the shareholders of the Companyheld on August 14, 2001, the Company introduced an additionalESOP, pursuant to which equity shares not exceeding an additional7.5 per cent of the issued and paid-up equity share capital of theCompany have been earmarked for grant, at any given time topresent and future employees and Directors of the Company andits existing and future subsidiaries. Pursuant to the above resolution,the Board of Directors, at their meeting held on March 4, 2002approved the Employees Stock Option Scheme (‘the Scheme’) forissue of 2,376,800 options to the employees and Directors of the

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Company. According to the ESOP the Company has granted2,274,460 options to the eligible employees and Directors of theCompany and its subsidiaries at an exercise price, which will equatethe issue price determined through the book-building procedure.20 per cent of the total options granted under the Scheme will vestto the eligible employees and Directors on the completion of 12,24, 36, 48 and 60 months and is subject to the continuedemployment of the employee or Director with the Company or itssubsidiaries. As per the terms of the Scheme, the exercise pricewould equate the price determined for the IPO through bookbuilding process for the options granted prior to the IPO and at thefair market value on the date of grant for options granted thereafter.

The Group applied APB Opinion 25 and related Interpretations inaccounting for this plan. In accordance with APB Opinion 25, nocompensation cost would need to be recognised for the EmployeeStock Option Plan as the exercise price would equal to the fairvalue of value of the shares on the date of the IPO. The Companycompleted its IPO in June 2002 and fixed its IPO price throughbook building scheme at Rs 530. As per the terms of the plan theIPO price would be the exercise price for the ESOP.

A summary of the activity in the Group’s ESOP is as follows:

No of Weighted No ofoptions average options

price2003 2003 2002

Outstanding atbeginning of year 2,274,460 530.00 –

Granted during the year 40,000 868.30 2,274,460

Exercised during the year – – –

Forfeited during the year 64,760 530.00 –

Outstanding at theend of the year 2,249,700 536.02 2,274,460

The weighted average prices during the year ended March 31, 2002have not been given since the price of the options was determinedat the time of the completion of IPO in June 2002.

20 Earnings per share

The following is a reconciliation of the weighted average numberof equity shares used in the computation of basic and dilutedearnings per equity share:

2003 2002Weighted average number of commonshares used for basic EPS purposes 35,505,072 31,409,803

Dilutive component of shares that arenot eligible for exercise 1,302,077 1,337,260

Weighted average number of commonshares used for diluted EPS purposes 36,807,149 32,747,063

Number of shares stated above has been computed after givingeffect of split of shares as referred in Note 2.2(c). Basic EPS doesnot include shares considered by the Company as outstanding butheld by the ESPS Trust. Shares that are not eligible for exerciseare treated as dilutive.

21 Contract acquisition costs

On December 3, 2002 the Group acquired two IT consulting servicecontracts and 51 employees working on these contracts fromSilverline Technologies Limited and its subsidiary, SilverlineTechnologies Inc. (“Silverline Group”) for a total consideration ofRs 35,176, which includes a cash payment made to/behalf of theSilverline Group and the assumption of certain employee relatedliabilities of the Silverline Group. The contract acquisition costsare to be amortized into Cost of Revenues on a straight line basisover the remaining contract term of 11 months. Accordingly,Rs 12,788 was amortized and included in Cost of Revenues for theyear ended March 31, 2003 and the remaining Deferred contractacquisition costs of Rs 22,388 is included in other current assets.

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