i-flex annual report 2002-2003

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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 - 2 0 0 3www.iflexsolutions.com

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empowering financialinstitutions globally

Our Annual Report continues to receive awards for excellence in design and production. For the

2001-02 report, we won the following awards:

• The League of American Communication Professionals – Silver Award.

• The 9th Dalton Pen Awards, USA – Award of Merit.

• The South African Pulp & Paper Industries (SAPPI) Trading Printer of the Year Silver Award, for

the third consecutive year.

• The Society for Technical Communication – Australia Chapter award, for the second consecutive year.

• The Association of Business Communicators of India – Certificate of Merit, for the second

consecutive year.

• SPARKS – the annual advertising club awards – Chennai, India – Silver Award.

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Introduction 3

Targeting success 5

Providing rich solutions 15

Excelling in partnership 23

Fostering leadership 27

i-flex global presence 32

Key management personnel 34

Directors’ report 41

Corporate governance report 46

Financials

Indian GAAP

Unconsolidated 59

Consolidated 97

US GAAP 121

i-flex solutions b.v. 153

i-flex solutions pte ltd 165

i-flex solutions inc. 181

Vontents


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The feather. Seemingly simple and fragile. But with

hidden qualities – strength, flexibility, resilience.

And in its element, the simple feather can create the

magic and wonder of flight.

The metaphor of flight is particularly suited to narrate the

story of i-flex over the past year.

A year during which we first took wing as a listed company,

with a successful IPO as our launching pad.

A year in which we conquered the stormy winds of an

adverse business environment to soar to greater heights

than ever before.

With more than 400 customers serviced across 93 countries,

our flight to global success continues. The following pages

are designed to provide you a bird’s-eye view of the

progress that i-flex has made in the past year.

\ntroduction


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Accolades

• i-flex was rated the “Best Newly Listed

Indian Company” in the 2002 Asiamoney

poll. Asiamoney ’s best-managed

companies poll is conducted among

fund managers and chief investment

officers in FIs and brokerage houses

across the Asia-Pacific region.

gargeting success


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• i-flex ranked among the top five “most respected Indian IT

companies” (Source: Business World - January 27, 2003).

• i-flex ranked the No. 1 web-based cash management solution

provider in Europe in an independent study conducted by Celent

Communications.

• The Tower Group, in a report released in March 2003 on outsourcing,

rated i-flex the highest on domain expertise among other Indian

software services providers.

• i-flex ranked 36 among the top 500 companies in India, according

to market capitalization, by leading financial daily Economic Times.

Ranked among the top five Information Technology companies

in India in terms of market capitalization.

(Source: Economic Times - April 2002.)

• i-flex ranked among the top 20 companies from India “that have

succeeded globally or have the potential to succeed”.

(Source: Business Today - January 7, 2003.)

• The fourth Business Today-Stern Stewart study on wealth

creation by Indian businesses has ranked i-flex as the 14th largest

wealth creator in India. i-flex stands fifth in the Information

Technology segment.

• Deloitte Touche Tohmatsu Asia-Pacific Technology Fast 500 report

ranked i-flex among the Top 250 fastest growing and the most

dynamic technology companies in Asia.

Rajesh Hukku, Chairman & Managing Director, i-flex solutions, is selected asone among 25 ‘Stars of Asia’ by BusinessWeek International (June 9, 2003)

i-flex featured in a cover story in Business World, one ofIndia’s leading business magazines. March 2003


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• Ranked 36 among India’s most valuable companies

by Business Today - October 2002.

• The Electronics and Computer Software Export Promotion

Council (ESC) honored i-flex by conferring an award for

excellence in exports for the year 2001- 2002.

• Bharat Gaurav Puraskar (Pride of India) award given

to i-flex for championing the “Made in India” effort.

This award was instituted by Center for Bharatiya

Marketing (Bharatiya Jagran Manch), an organization

dedicated to propagating Indian brands.

• Rajesh Hukku selected as one of 25 “Stars of Asia”

in an annual BusinessWeek International feature (June

9, 2003) that profiled leaders at the forefront of change

in Asia.

• Rajesh Hukku won the Ernst & Young Entrepreneur

of the Year award for 2002 in the IT, Communications

and Entertainment category.

Initial public offerWhen our Chairman and Managing Director, Rajesh Hukku,

rang the bell at the listing ceremony at 9.55 am on

June 28, 2002 at The Stock Exchange, Mumbai, i-flex had

entered a new era in its corporate history.

i-flex shares now trade on The Stock Exchange, Mumbai,

and The National Stock Exchange of India.

The i-flex initial public offer was oversubscribed

2.7 times, a noteworthy achievement considering the

adverse market conditions prevailing at the time.

Rajesh Hukku, Chairman & Managing Director, i-flex solutionsrings the bell at The Stock Exchange, Mumbai, to signify thebeginning of trading of the i-flex stock. Deepak Ghaisas,CEO - India Operations and CFO, looks on

Joseph John, Head - Banking Products Division, i-flex solutions, receivedthe ESC Export Award from Dr. Sanjay Paswan, Minister of State forCommunication and Information Technology, Government of India

V. Shankar, Head - PrimeSourcing, i-flex solutions, received the ESCAward for Excellence in Exports from Arun Shourie, Union Minister ofCommunications and Information Technology, Government of India

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Highlights of the year 2002-2003

• FLEXCUBE ranked the No.1 selling banking solution in the world for 2002, by International Banking Systems

(sales league table), UK.

• Completed successful IPO and got listed on The Stock Exchange, Mumbai and National Stock Exchange.

Issue oversubscribed 2.7 times in adverse market conditions.

• Added 59 new customers this financial year. The total number of cumulative customers serviced crossed the 400 mark

across 93 countries.

• Launched Reveleus – a new division headquartered in the US – focusing on the Business Intelligence

and Analytics market.

• Completed a successful SAS 70 audit – a standard instituted by the American Institute of Certified Public Accountants

(AICPA). Perhaps the first Indian software company to achieve this distinction.

• Inaugurated Development, Support, Demonstration and Contingency centers in New York and Singapore. Opened

regional marketing offices in Dubai and Tokyo. Work on the i-flex Park project at Bangalore progressing on schedule.

• Recorded a 45% growth in revenue on a 14% increase in employee strength to 2,327.

• Penetrated the German market with new wins. Augmented sales and marketing operations with the opening

of an office in Frankfurt, Germany as part of the European expansion plans.

• Opened up the Egyptian market with large client wins.

1998 - 99 1999 - 00 2000 - 01 2001 - 02* 2002 - 03*

Total Revenue 1,444.31 2,062.69 3,211.21 4,295.27 6,239.14Total Expenses 909.53 1,312.30 2,016.85 2,991.95 4,277.53EBT 534.78 750.39 1,194.36 1,303.32 1,961.61Tax 30.44 57.66 94.15 150.33 252.73EAT 504.33 692.73 1,100.21 1,152.99 1,708.88EPS 13.52 18.56 29.48 30.90 45.80Book Value 34.78 56.83 85.09 126.28 214.29

Notes:All EPS and Book Value are computed based on the current equity capital base of 37,315,400 shares

EVA 264.03 328.33 548.39 472.33 669.33

i-flex financials at a glanceAll figures in Rs Million except EPS & Book Value

*As per Indian GAAP Consolidated Results


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Key performance indicators – 2002-03*

Operating revenue


Regionwise revenue

40%USA

23%India, Middle East

& Africa

18%Asia Pacific

18%Europe

1%Latin America& Caribbean

09i - f l e x a n n u a l r e p o r t 2 0 0 2 - 0 3 9i - f l e x a n n u a l r e p o r t 2 0 0 2 - 0 3

Services Revenue37%

63%Products Revenue


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Operating revenuesRs

Mill

ion

0

1000

2000

3000

4000

5000

6000

7000

6098.54

2002-03*

4194.77

2001-02*

3085.88

2000-01

1971.24

1999-00

1390.18

1998-99

Net income

Rs M

illio

n

0

200

400

600

800

1000

1200

1400

1600

1800 1708.88

2002-03*

1152.99

2001-02*

1100.21

2000-01

692.73

1999-00

504.33

1998-99


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Rupe

es

13.52

1998-99

18.56

1999-00

29.48

2000-01

30.90

2001-02*

45.80

2002-03*

Earnings per share is computed on the equity capital base on 37,315,400 as on March 31, 2003


Earnings per share

Economic value added

Rs M

illio

n

669.33

472.33

548.39

328.33

264.03

1998-99 1999-00 2000-01 2001-02* 2002-03*

0

5

10

15

20

25

30

35

40

45

50

0

100

200

300

400

500

600

700



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0

500

1000

1500

2000

25002327

2032

1590

1017

790

1998-99 1999-00 2000-01 2001-02 2002-03


Number of employees

Book value

Rupe

es

1998-99 1999-00 2000-01 2001-02* 2002-03*0

50

100

150

200

250

214.29

126.28

85.09

56.83

34.78

Book value is computed on the equity capital base of 37,315,400 shares as on March 31, 2003


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Customers serviced . . .

. . . across countries

206

238

281

345

404

1998-99 1999-00 2000-01 2001-02 2002-030

50

100

150

200

250

300

350

400

450

93

84

74

66

55

1998-99 1999-00 2000-01 2001-02 2002-030

10

20

30

40

50

60

70

80

90

100



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Technology continues to play a critical role

even as banks and financial institutions

remain under intense pressure to reduce

costs, enhance customer service levels and

respond to rapidly changing market

requirements.

i-flex helps financial institutions meet these

challenges by providing comprehensive and

effective IT solutions that arm them with

competitive advantage.

c rovidingrich solutions


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FLEXCUBEIn a challenging business environment, FLEXCUBE surged ahead

to become the No.1 selling banking solution in the world in 2002*.

A remarkable achievement for a product that was launched

in November 1997 against well-entrenched, global competition.

During the year, i-flex acquired 29 new customers for FLEXCUBE

taking the overall FLEXCUBE customer count to 140 financial

institutions across 65 countries.

i-flex continued to make significant investments in enhancing

product capabilities to address the demands of new markets and the

growing needs of existing customers.

FLEXCUBE, our flagship product, was enriched by adding functionality

in the areas of derivatives, payments, collections and structured finance.

Derivatives support now covers interest rate options, swaptions, currency

options and exotics. Payments and Collections functionality has been

enhanced by parameterizing the processing of local payments so that

diverse regional requirements can be addressed. Straight Through

Processing (STP) capabilities were significantly enhanced, with

customizable rule definition. Support for syndicated loans was augmented

to enable the processing of the most complex structured finance deals.

*Source: International Banking Systems, UK - Sales League Table

“Having i-flex solutions as our partner is an

assurance to all North Carolina state agencies

that we will continue to increase efficiencies

and reduce costs of banking throughout

the state.”

Bill Golden, CIO and Deputy State Treasurer,

NCDST – USA

“Rabobank International has chosen FLEXCUBE as the centralized

banking system for the European region. Our Paris branch went live

recently with a total implementation time of less than three months.”

Eelco Kaan, Program Manager,

Rabobank International – France

“FLEXCUBE gives us the technology platform

to help us increase operating profitability

in our core business across our global enterprise

and better meet the specific customer needs

in our various regions of operations.”

Reiner Zorbach, Head of Group Shared Services,

HVB Group – Germany

“In FLEXCUBE we found a proven, scalable

and future-proof solution, which will be the

perfect fit for our operations.”

Uday Kotak, Executive Vice Chairman and

Managing Director, Kotak Bank – India

The customer quotes are extracted from press announcements made during the year


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The product now supports the offshore processing model,

enabling multinational financial institutions, having multiple

subsidiary legal vehicles, to centralize their operations

seamlessly thereby reducing their Total Cost of Ownership.

Also, several new features like back dating, flexible loan

schedules, tiering of interest rates, multiple maturity and

paying instructions in Deposits modules were added to the

retail banking modules to cater to newer requirements

of customers.

The FLEXCUBE @ Internet banking solution has been

enriched to include alerts on pre-defined events and the

facility for handling transactions in bulk for corporate

clients. Support has been extended to cover Loans, Deposits,

Trade Finance and Mutual Fund transactions.

Masamoto Yashiro, Chairman & President, Shinsei Bank, Japan lightsa lamp during his visit to the i-flex development center in Bangalore

“We found FLEXCUBE to be the perfect application for

us as it did not need any customization in our environment

and its short implementation time would help us maximize

our ROI.”

Stephen Turner, Co-President, NikkoCiti Trust and

Banking Corporation – Japan

“i-flex and FLEXCUBE have proved to be a good choice

for UBS Warburg; i-flex’s customer and results driven

approach combined with FLEXCUBE’s capabilities have

contributed to smooth and timely delivery of one of the

large change programs within our organization. The robust

CLAS infrastructure will ensure that we are able to service

the anticipated rapid volume growths while also making

available a platform for catalyzing global standardization.”

Philip Freeborn, Deputy CIO,

UBS Warburg – UK



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Our localization efforts saw Arabic and Spanish language support being

added to the FLEXCUBE repertoire.

Perhaps the most complex deployment of a core banking solution ever

in the history of banking is the global implementation of FLEXCUBE

in Citibank. Today, as the deployment progresses rapidly, Citibank has

already converted to FLEXCUBE across 30 countries. The success

of this large implementation testifies to our ability to undertake mission-

critical applications across time zones and language differences.

ReveleusOne of the highlights of the year was the launch of Reveleus – a new

business division, headquartered in the USA – to address the emerging

growth areas of Business Intelligence and Analytics. Reveleus, since

its launch in September 2002, has already acquired its first few

customers across 4 countries. “The Internal Rating System had, from the

very beginning, been a very challenging

project. The challenges were multifaceted.

The application was a complex one, and the

time lines were extremely aggressive. Despite

all obstacles, they delivered the final

application, on the agreed date, fully meeting

our expectations.”

Helma Gsanger - Executive to CEO

Dr. Carsten Muller, Bank Verlag Köln – Germany

Analytical Applications Suite

Enhancing Customer RelationshipsCRM AnalyticsChannel AnalyticsCustomer Profitability

Risk ManagementCorporate Credit Risk AnalyticsRetail Credit Risk AnalyticsAsset Liability ManagementBasel II Solutions Framework

Performance MeasurementInvestment Performance MeasurementEnterprise Financial PerformanceFunds Transfer Pricing

Line of Business AnalyticsStock Exchange AnalyticsMortgage AnalyticsCredit Cards Analytics


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Reveleus has demonstrated its versatility in the analytics

space by announcing its Basel II Solutions Framework,

which will help banks jumpstart compliance initiatives for

enterprise risk and capital adequacy computation.

PrimeSourcing™

Our unique solutions development and delivery framework,

PrimeSourcing™, which distinguishes itself with its sharp

focus on financial services, strong domain expertise and

global delivery execution, found increasing acceptance

from customers worldwide.

Leading American analyst, Tower Group, rated i-flex highest

on domain expertise in a report on IT outsourcing from

India that was released in March 2003.

“I commend the entire team on their professionalism

in dealing with the ever changing business requirements

as well as the “11th hour” coding skills in helping us meet

some very difficult deadlines. The design and development

of this application, utilizing .NET opened the door for

many new projects to further our business.”

Vincent F. La Padula, Senior Project Manager MIS,

Citifinancial, Baltimore – USA



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During the year, the IT Services Division launched a new practice

in the area of Systems Integration (SI). The SI team provides

a comprehensive range of services around the FLEXCUBE suite,

including integration with existing systems as well as third-party

packages, to enable i-flex customers fully leverage their existing

technology investments and IT infrastructure.

In line with our philosophy of adopting a partnership approach with

our customers we encouraged the deployment of Promotr – a Client

Portal that provides a seamless information window for customers

to get a transparent view on outsourced projects.

Promotr has been rated as a “unique, differentiating factor” by industry

analyst Giga Information Group.

“We have chosen i-flex for its experience

in providing consulting services to large

software and financial organizations with

projects of diverse sizes, complexities and

requirements across continents.”

Shin-Ho Son, Director Trading Systems,

Kosdaq Stock Market – Korea

Shin-Ho Son, Director Trading Systems, Kosdaq Stock Market speaking at a joint press conferenceto announce the successful completion of the i-flex project


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*Statement on Auditing Standards (SAS) 70, Service Organizations, is an internationally recognized auditing standard developed by the AmericanInstitute of Certified Public Accountants (AICPA). A SAS 70 audit or examination represents that a service organization has been through an in-depthaudit of their control activities, which generally include controls over information technology and related processes.

i-flex consultingOur consulting business, founded on the proposition

of “consulting from practitioners” gained significant

momentum in the year. Practice lines such as Business

Process Redesign, Risk Management, and Process and

Quality Management saw increased business even

as financial institutions grappled with an increasingly

competitive environment.

i-flex consulting served 18 new customers last year and

specifically ramped up its capability to address Basel II

compliance requirements for financial institutions

in response to market needs.

Process and QualityAt the heart of software development at i-flex is a strong

commitment to quality.

In the year under review, we successfully underwent

an intensive and rigorous assessment for SAS 70*

compliance by an independent auditor (Ernst & Young).

i-flex is one of the early adopters of the SAS 70 standard

in India.



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We continued to build on our alliance and

partner model, and strengthened our

relationships with strategic partners across

the world.

X xcelling inpartnership


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At the last banking and financial institutions industry meet Sibos –

held in Geneva – i-flex and Hewlett Packard (HP) signed a global

alliance for joint marketing.

Technology Partner EventsIn collaboration with our partners we participated in many events

through the year. Some of them are outlined here:

June 2002 – IBM Solutions FairA thought-leadership program organized by IBM across five cities

in India. i-flex showcased its core banking solution, FLEXCUBE, and

its internet banking solution, FLEXCUBE @.

June 2002 – Technology and Banking ForumCompaq (now merged with HP), Intel and i-flex jointly organized the

“New Technology and Banking Service Excellence Forum”

in New York – a conference of senior bankers and industry leaders.

September 2002 – Zimbabwe Bankers SummitHP and i-flex in collaboration with Fintech, our corporate business

partner, co-hosted an event for Chairpersons and CXOs of financial

institutions of Zimbabwe and neighboring countries.

October 2002 – CSI National Convention 2002The Computer Society of India hosted its national convention

in Bangalore, where i-flex participated.

October 2002 – IBM CRM & BI Seminar“Maximizing Your Financial Institution’s Investments in Customer

Relationship Management” – an event hosted by IBM in Mumbai and

Bangalore. i-flex and IBM presented a roadmap for harnessing Business

Intelligence to a select set of bankers.

March 2003 – Oracle Joint FSI Event in Malaysiai-flex and Oracle jointly hosted an FSI event in Malaysia wherein

i-flex made a presentation on “Financial Services at the Crossroads”.

Vijay Sharma, Head - i-flex consulting, speakson Core Banking at the IBM Solutions Fair


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Industry EventsSibos: Switzerland, September 30 - October 4, 2002i-flex made a strong impact at Sibos where our entire range

of solutions were showcased. Our Business Intelligence

and Analytics solution, Reveleus, was launched in Europe

at Sibos.

EBTF: Germany, October 28 - 31, 2002i-flex participated and showcased FLEXCUBE at the

European Banking Technology Fair (EBTF), a prominent

trade event in Frankfurt, Germany. The event drew over

7,000 visitors and 2,000 delegates representing banks and

financial services.

NASSCOM: India, February 11 - 14, 2003i-flex continued to reinforce its growing stature as a thought

leader in the BFSI space by sponsoring and supporting

the NASSCOM’s annual technology meet. This year’s

conference theme was “Leveraging Knowledge Capital for

Enabling Growth”.

CeBIT 2003: Germany, March 12 - 19, 2003i-flex participated jointly with Bank Verlag Köln and

showcased FLEXCUBE and Reveleus at CeBIT Hannover.

CeBIT is one of the world’s largest and influential

information and communications technology trade fairs.

CeBIT, an annual event, received over 8,000 exhibitors,

700,000 visitors and approximately 11,000 journalists.

NASSCOM India – Leadership seminar with

Joseph P. Kennedy II. September 5, 2002i-flex hosted a leadership seminar in collaboration with

NASSCOM that was attended by senior bankers, technology

partners, customers, prospects and well-wishers from

the banking fraternity.

FINANCE IT, Nigeria, September 10 - 11, 2002A banking technology meet organized by AITEC, Nigeria,

provided i-flex an opportunity to consolidate its presence

in the region. “Advancing the e-Readiness of West Africa’s

Banking and Financial Services Sector” was the theme

of the event.

Bank Administration Institute’s Retail Delivery,

USA: November 2002i-flex and Reveleus each had the opportunity to address

the trade show attendees about the strategic business

advantages of their individual solutions.

IT.COM, India, November 11, 2002i-flex solutions was the Platinum sponsor of the Banking

and Finance Summit at IT.COM, a five day event on the

future of technology.

XXXVI Asamblea Anual FELABAN 2002,

Dominican Republic, November 24 - 26, 2002Reveleus presented its solutions for financial institutions

at FELABAN 2002, organized by the Latin American

Banking Federation.

i-flex at the BAI Retail Delivery event, Atlanta, USA

i-flex had significant presence at Sibos, Geneva



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We have always envisioned our people

as key business enablers. Last year our

employee strength grew by 14% to 2,327

professionals, while our revenue in the same

year grew by 45%.

Y ostering leadership


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We take great pride in the growing number of i-flexers whose long

association with the company provides the necessary stability and

continuity to our business as we deal with the challenges of rapid

growth. Despite being a young company, the i-flex family already has

235 employees who have completed over five years with us and

62 individuals who have completed 10 years or more.

Internal CommunicationsWe continue to believe that open and proactive communication

is critical to motivating our people and aligning their efforts with

corporate goals. As we grow increasingly global, we rely on a wide

range of communication mechanisms to talk to our employees as well

as listen to their concerns and aspirations.

The corporate intranet with its real-time interactivity and currency

of information has become the hub of action for employees across

all locations.

“Softrek”, our bi-monthly employee magazine, won an award from the

League of American Communication Professionals, and Society for

Technical Communications, Australia and was ranked among the

top-50 employee publications in the world.

Our Open House Annual (OHA) is an eagerly awaited event.

OHA provides a forum where employees across the organization hear

directly from the top management the strategic direction and business

goals of the company and the challenges that lie ahead, as well as get

their questions answered and concerns addressed. This event gives

employees a chance to interact with the management and showcase

their creativity through entertainment programs.

Softrek was ranked among the top-50 employee publications in theworld by the League of American Communication Professionals


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The i-flex Cultural Ensemble (iCE) – a club of i-flexers,

by i-flexers, for i-flexers – flourishes across the company,

encouraging informal interaction across different levels,

units and locations of the company.

iCE organized sporting and cultural activities through the

year as also business quizzes and panel discussions

on topical issues.

Community InitiativesAs part of its commitment to being a good corporate citizen,

i-flex launched a program called “i-flex for Children” on

the Indian Republic Day (January 26, 2003). This program

is aimed at supporting underprivileged children and helping

them realize their full potential.

With the active participation of i-flexers, i-flex for Children

has gathered rapid momentum. Some of the key projects

underway are:

• Freedom Trust, Chennai: Initiated a programme

to provide vocational, arts and music training to disabled

children.

• HOPE Foundation, Bangalore: Started a programme

to support the infrastructure for a school for economically

backward children.

• Shristi Special Academy, Bangalore: Financing the

construction of a facility to house a physiotherapy,

autism and respite center for children with mental

retardation.

• Special Olympics Bharat: Sponsored physically and

mentally challenged children to the International Special

Olympics.

• Vatsalya Trust, Mumbai: Funded basic amenities

at this orphanage and adoption agency.

Children at HOPE Foundation, Bangalore



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i-flex Park at Bangalore. Present and future

Indian classical music and performing artsi-flex continued to promote Indian classical music and arts. Last year

too, i-flex supported the 12th Sureshbabu Hirabai Sangeet Samaroh

in suburban Mumbai. This annual cultural extravaganza had acclaimed

artistes like Dr. L. Subramaniam, Pandit Bhimsen Joshi, Ustad Zakir

Hussain, Pandit Hariprasad Chaurasia, Dr. Rajam, and Dr. Prabha

Atre performing and enthralling an audience of more than 15,000.

InfrastructureWe have always taken pride in providing our people with a work

environment and support infrastructure of the highest standards. This

year, we embarked on our largest infrastructure project to date – the

construction of “i-flex Park” in Bangalore.

Work on this facility, located in the picturesque garden city of Bangalore,

is progressing well. With a built up area of 1,40,000 sq.ft. and a seating

capacity for 1,400 professionals, this facility is set to become a landmark

building in the “Silicon Valley of India”.

All our offices are well connected by a high-bandwidth network with

built in redundancy lines. Our Wide Area Network connects over 200

servers, 2,500 desktops and 400 laptops.

We have an exhaustive Continuity of Business plan in place to minimize

disruptions due to contingencies.

Deepak Ghaisas, CEO – India Operations & CFO, felicitatesPandit Hariprasad Chaurasia at the 12th SureshbabuHirabai Sangeet Samaroh


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Rajesh Hukku, Chairman & Managing Director, i-flex solutions declares the Dubaioffice open in the presence of Mahesh Rao, Vice President, Middle East Sales andNRK Raman, Senior Vice President, Global Sales

Overseas officesTo provide our North American customers with speedy

response and first level of support, i-flex opened

a Development, Support and Demonstration Center

in Manhattan, New York City in March 2003.

In Singapore, Ko Kheng Hwa, Managing Director, Economic

Development Board, Singapore inaugurated i-flex’s new

development center. The Center, which forms an integral

part of i-flex’s continuity of business plan and near-shore

strategy, will employ about 100 software development

professionals.

Together, both these centers enable i-flex to strengthen its

global solutions delivery, and support infrastructure for its

growing global customer base.

In order to identify and address business opportunities in

the Middle East, i-flex set up a marketing office in Dubai.

This office located at Dubai Internet City will serve

as a strategic hub.

An auspicious start to our development center in Singapore with the liondance. Ko Kheng Hwa, Managing Director, Economic Development Board,Singapore, Kishore Kapoor, CEO - i-flex solutions pte ltd and RajeshHukku, Chairman & Managing Director, i-flex solutions look on

R. Ravisankar, CEO - International Operations and Technology, i-flexsolutions, E Jeffrey Berg, Program Director, Citibank and Cafó Boga,Chief Operating Officer, i-flex solutions inc. cut the ribbon to mark theopening of the New York Development, Support and Demonstration Center



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i-flex Global Presence

ChinaGhanaHungaryIcelandIndiaJamaicaKenyaKuwaitMalaysiaMauritiusNetherlandsNigeriaSouth AfricaSri LankaUKZambiaZimbabwe

Asia PacificChinaIndonesiaMalaysiaS.KoreaThailand

Latin AmericaAntiguaArgentinaBahamasBoliviaBrazilChileColumbiaEcuadorMexico

ParaguayPeruTrinidad and TobagoUruguayVenezuela

EuropeBalticsFinlandHungaryPolandRomaniaRussiaScandinavia

Middle East & IndiaBahrain

BangladeshIndiaKuwaitNepalOmanQatarSri LankaUAE

AfricaAngolaBotswanaEthiopiaEritreaEgyptGhanaKenya

MalawiMauritiusMoroccoMozambiqueNamibiaNigeriaSouth AfricaSeychellesSwazilandTanzaniaUgandaZambiaZimbabwe

North AmericaCanada

Distributors

i-flex Offices

Support Centers

BangaloreChennaiMumbaiNew YorkPuneSingapore

Development CentersAmsterdamBangaloreChennaiDubaiFrankfurtLondonMumbaiNew JerseyNew YorkPuneSingaporeTokyo


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Customer Presence

AlbaniaAntiguaArgentinaAustraliaAustriaBahrainBangladeshBelgiumBenin RepublicBhutanBotswanaBrazilBruneiBulgariaCanadaChile

ChinaColumbiaCyprusCzech RepublicDenmarkDominican RepublicEgyptEthiopiaFinlandFranceGeorgiaGermanyGhanaGreeceHong KongHungary

IcelandIndiaIndonesiaIrelandIsraelJamaicaJapanJordanKenyaKosovoKuwaitLebanonLuxembourgMacauMadagascarMalawi

MalaysiaMaltaMauritiusMexicoMozambiqueNepalNetherlandsNew ZealandNigeriaNorth KoreaNorwayOmanPakistanParaguayPhilippinesPoland

PortugalPuerto RicoRussiaRwandaSamoaSaudi ArabiaSeychellesSingaporeSloveniaSouth AfricaSouth KoreaSpainSri LankaSwedenSwitzerlandTaiwan

TanzaniaThailandTurkeyUAEUgandaUKUSAVanuatuVenezuelaVietnamYemenZambiaZimbabwe


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^ey management personnel

Rajesh Hukku

Chairman and Managing Director

CEO - International Operations and Technology

R. Ravisankar

Deepak Ghaisas

CEO - India Operations and CFO

Chief of Staff and Corporate Communications

Makarand Padalkar


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fenior management team

Global Sales and Marketing

A SrinivasanAfrica, LATAM andCaribbean Sales

Dennis RomanJapan and AmericasMarketing

NRK RamanHead, Global Sales

Rakesh KhannaFLEXCUBE ProductMarketing

Dilip KulkarniSouth Asia Sales

Anand PhanseCitigroup RelationshipManager, North America

Kishore KapoorAsia-Pacific Sales,CEO, i-flex solutions pte. ltd.

R RamamurthiMarketing Support andPre-sales Consulting

Sajal MukherjeeNorth America Sales

V Senthil KumarEurope Sales,CEO, i-flex solutions bv.



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FLEXCUBE/MicroBanker

Reveleus

Manmath KulkarniTechnology andArchitecture

R NarasimhanCustomer Fulfilment,Asia Pacific, Middle Eastand India

S SundararajanProduct Developmentand Support

Venkata SubramanianCustomer Fulfilment,Retail Banking

S RamakrishnanCEO, Reveleus Division

R MaheshReveleus Product Engineering

Joseph JohnHead,Banking Products Division

G NarasimhanCustomer Fulfilment,Europe, Africa

George ThomasCustomer Fulfilment andSolution Architecture,North America

Gratian PerezCorporate Accounts andMicroBanker ProductDevelopment/Support


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PrimeSourcing

R RamnarayananMarketing Support,PrimeSourcing

Nandkumar KulkarniPayment Systems Group andPune Operations

V ShankarHead,PrimeSourcing Division

Gayathri ParthasarathyDevelopment andIntegration ServicesCenter of Excellence

Vikram Guptae-solutionsCenter of Excellence

Vijay Sharmai-flex Consulting

Subrata DasguptaStrategic Accounts andCapital MarketsCenter of Excellence



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Support and Operations

S HariharanHead, Infrastructure andSupport Services

Dinesh ShettyAdministration

R VidyasagarHead, Human Resources

Vivek GovilkarHead, Process and QualityManagement and Training

Swati SrinivasanSoftware Quality Assurance

Atul GuptaASP and Corporate Initiatives

Cafó BogaCOO, i-flex solutions inc.

Thomas MathewKnowledge Management

V SrinivasanCorporate Initiatives and COO,DotEx International


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Ajay Relan(Alternate Director to Mr. William T. Comfort, Jr)

Uoard of directors

Nihar Mody

Joseph P. Kennedy II

William T. Comfort, Jr

Rajesh Hukku

Chairman and Managing Director

Y. M. Kale



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Company SecretaryDeepak Ghaisas

Compliance OfficerAvadhut (Vinay) Ketkar

SolicitorsRamesh P. Makhija & Co.

AuditorsS. R. Batliboi & Associates

Internal AuditorsMukund M. Chitale & Co.

BankersCitibank N.A.HDFC BankBank of India

Registrars and Transfer AgentsIntime Spectrum Registry LimitedC 13 Pannalal, Silk Mills CompoundL B S Marg, Bhandup (West)Mumbai 400 078

Registered Office10 -11 SDF 1 SEEPZAndheri (E), Mumbai 400 096

Branch Officesi-flex Center, 399 Subhash RoadVile Parle (E), Mumbai 400 057

Haria Center, 8 Subhash RoadVile Parle (E), Mumbai 400 057

i-flex Center, 146 Infantry RoadBangalore 560 001

i-flex Park, Embassy Business ParkC V Raman Nagar, Bangalore 560 075

4th floor Shankar Narayan Building25 M G Road, Bangalore 560 001

9th floor Raheja Towers26-27 M G Road, Bangalore 560 001

2nd floor Pride Silicon PlazaSenapati Bapat Road, Pune 411 053

143/1 Uttamar Gandhi Salai4th floor, NungambakkamChennai 600 034

Subsidiary Office – The Netherlandsi-flex solutions b.v.Strawinskylaan 12451077 AmsterdamThe Netherlands

Branchesi-flex solutions b.v.Niederlassung DeutschlandMainzer Landstraße 4960329 Frankfurt am MainGermany

i-flex solutions b.v.Unit 121 Meridian PlaceSouth Quay, DocklandsLondon E149FEUK

Subsidiary Office – Singaporei-flex solutions pte ltd27 International Business Park# 04-05 Primefield Landmark BuildingSingapore 609 924

Branchi-flex solutions pte ltd3C Otsuka Building1-5-4 Toranomon, Minato-kuTokyo 105 0001, Japan

Subsidiary Office – New Yorki-flex solutions inc.99 Park Avenue Suite 1530New York, NY 10016USA

Branchi-flex solutions inc.Development and Demo Center9 East 37th Street12th FloorNew York, NY 10016USA

Middle East Representative Officei-flex solutions ltd.Office Suite G15 Bldg No.9Dubai Internet CityDubaiUAE

Vorporate information

i-flex solutions ltd.

i - f l e x a n n u a l r e p o r t 2 0 0 2 - 0 3 41

Dear Members,

Your Directors take great pleasure in presenting their report on thebusiness and operations of the Company along with the AnnualReport and audited annual accounts for the Financial Year2002-03.

Financial highlights

(Thousands of Indian Rupees)

Year ended Year endedMarch 31, 2003 March 31, 2002

Total Income 5,804,998 4,252,707Gross Profit Before Depreciation 2,123,563 1,562,728Less: Depreciation 133,823 144,985Profit Before Taxes 1,989,740 1,417,743Less: Provision for Tax 245,995 150,135

Net Profit After Tax 1,743,745 1,267,608

Add: Balance Brought Forward 90,869 119,905Profit available for appropriation 1,834,614 1,387,513Transfer to General Reserve 1,500,000 1,250,000Proposed Dividend 93,289 46,644Corporate Dividend Tax 11,953 –Balance Carried Forward 229,372 90,869

Performance

Your Company has once again achieved healthy growth in bothrevenues and profits, despite a backdrop of global economicslowdown and recession. Total revenues grew to Rs 5,805 millionthis year from Rs 4,253 million last year, a growth of 37%. Earningsbefore taxes stood at Rs 1,990 million during the year fromRs 1,418 million last year, translating into a growth of 40%. TheCompany’s earnings after tax increased to Rs 1,744 million fromRs 1,268 million – a growth of 38%.

A detailed financial analysis of the accounts is reflected in theManagement Discussion and Analysis that forms part of theAnnual Report.

Dividend

Your Directors are pleased to recommend a dividend of Rs 2.50per share (50% on par value of Rs 5). The dividend, if approved atthe forthcoming Annual General Meeting, will be paid out of theprofits of the Company to those shareholders whose names appearon the Register of Members as on July 26, 2003, including theESOP holders whom equity shares have been issued by that dateon their exercise of the options.

The total amount of dividend payable is Rs 93 million this yearagainst Rs 47 million for the previous year. Under the currentprovisions of the Indian Income Tax Act, the receipt of dividend istax-free in the hands of the shareholders.

Directors’ reportFinancial year 2002-03

Public issue

In June 2002, your Company completed its Initial Public Offer(IPO) in India and listed its shares on the National Stock Exchangeof India Ltd. (NSE) and The Stock Exchange, Mumbai (BSE). TheIPO was made through a 100% book-building mechanism andconsisted of a fresh issue of 3,360,000 equity shares of Rs 5/- eachand an Offer for Sale of 601,700 shares offered by the existingshareholders.

Launch of Reveleus

Your Company also announced, this year, the formal launch of‘Reveleus’ – a new brand under the i-flex umbrella, targeted at theemerging growth market of Business Intelligence and Analytics.

Reveleus is a new division, headquartered in New Jersey, USAand will bring focus and energy to i-flex’s efforts to service theBusiness Intelligence and Analytics market worldwide. Apart fromaggressively selling through the existing i-flex sales and partnernetwork, Reveleus will further expand its partner and channelrelationships to ramp up global sales.

Overseas development centers

Asia-Pacific development center

i-flex’s Singapore subsidiary established the Asia-PacificDevelopment Center on December 17, 2002. This center, locatedat the International Business Park with state-of the artinfrastructure, has the capacity to house about 100 softwaredevelopers.

The Asia-Pacific Development Center is an integral part of i-flex’sglobal delivery model, providing responsive and cost-effectivesolutions to customers through a combination of near-shore andoff-shore development locations. This center further strengthensi-flex’s contingency arrangements for Continuity of Business,providing greater assurance to customers on resilience andreliability in case of exigencies.

US development center

The US Development, Support and Demonstration Center in NewYork was inaugurated on March 12, 2003 by i-flex solutions inc.The center has been designed to provide customers and partnerswith the infrastructure to evaluate i-flex’s products and servicescapabilities, and to support current and future deployments in theregion. In addition, the new facility will connect into i-flex’sdevelopment centers worldwide, providing 24x7 backup andsupport for North American customers. This new location will alsohost i-flex’s North American sales and support teams and willleverage the latest available technologies and systems todemonstrate its entire suite of products.

Business acquisition

Your Company on December 3, 2002, along with its subsidiaries,acquired two IT consulting service contracts and 51 employees

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working on these contracts from Silverline Technologies Limitedand its subsidiary, Silverline Technologies Inc. (“Silverline Group”)for a total consideration of Rs 35 million, which included a cashpayment made to/on behalf of the Silverline Group and theassumption of certain employee-related liabilities of theSilverline Group.

Awards, honors and recognition

• ‘FLEXCUBE’ – a global leaderWe are delighted to inform you that FLEXCUBE, the Company’sflagship product, has been ranked the No. 1 selling bankingsolution in the world for 2002 (Source – International BankingSystems – IBS – Sales League Table). IBS reports are globallyrecognized for their comprehensive coverage of the bankingsystems market, cutting through supplier hype, withinvestigative reporting and surveys.

FLEXCUBE is the only package that achieved this distinctionof reaching the top in just over five years of its launch. It hasbeen rated among the top-selling banking solutions for the lastfour years.

• Your Company won the “Best Newly Listed Indian Company”award announced by Asiamoney in 2002. Asiamoney’s best-managed companies poll is conducted among fund managersand chief investment officers in FIs in the ASPAC region.

• Your Company was ranked among the top five “most respectedIndian IT companies” (Source: Business World;January 27, 2003). It was also ranked among the top 20companies from India “that have succeeded globally or have thepotential to succeed” (Source: Business Today; January 7, 2003).

• Deloitte Touche Tohmatsu’s Asia Pacific Technology Fast 500report ranked i-flex amongst the Top 250 fastest growing andmost dynamic technology companies in Asia.

• Your Company was ranked 36th among the Economic Timestop 500 companies in India according to market capitalization.i-flex ranked among the top five Information Technologycompanies in India in terms of market capitalization.

• The Electronics and Computer Software Export PromotionCouncil of India (ESC) honored the Company by conferring anaward for the Best Emerging Company (SME category) forexcellence in exports for 2001-2002.

• The Tower Group, USA, in a report released in March 2003 onoutsourcing, ranked i-flex the highest on domain expertiseamong other Indian software services providers.

• Your Company was also ranked the No. 1 web-based cashmanagement solution provider in Europe in an independentstudy conducted by Celent Communications, USA.

Process improvements and quality control

SAS 70 audit

As a part of our commitment to improve our quality and processes,we underwent a comprehensive SAS 70 Review of our softwaredevelopment and maintenance processes, conducted byindependent external auditors Ernst & Young (India and the US).

SAS 70 – Statement on Auditing Standards 70 – is an audit standard,developed and maintained by the American Institute of CertifiedPublic Accountants (AICPA). This successful SAS 70 reviewprovides our customers an independent assurance on the adequacyof our system of internal controls related to software developmentand maintenance.

Investments

Fixed maturity plan

Your Company invested Rs 250 million in 24,965,796 (and 858fractions) units of Rs 10/- each in JM High Liquidity Fund – SerialFund 2004 (Growth Option), a Fixed Maturity Plan. As per theterms of the fund, the maturity of the investment is in April 2004.

Subsidiary

The Company has made an additional investment in 5,000 equityshares of EUR 100/- each, fully paid-up, in i-flex solutions b.v., its100% subsidiary in The Netherlands.

Joint ventures

As you are aware, your Company has joint ventures with NSE.ITLtd. and the HDFC Group. The joint venture between i-flex andNSE.IT Ltd., the wholly owned subsidiary of the National StockExchange, namely ‘DotEx International Limited’ – was incorporatedon June 21, 2000, with the objective of setting up a virtual mallenabling brokers and clients to transact in the securitiesmarket through the internet. It was commercially launched onNovember 29, 2000.

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The original revenue projections of DotEx have not been met dueto continued sluggishness in the Indian capital markets and thesubstantial reduction in the trading volumes. As per its unauditedfinancial statements as at March 31, 2003, DotEx has incurredaccumulated losses of Rs 96 million, which have substantiallyeroded its net worth. The i-flex management is of the view that thefair value of its investment in DotEx has declined as a result.Accordingly, the management has made a provision for diminutionin the value of Rs 56.3 million of the aggregate investment in DotEx.

Litigation

As of today, there is no pending legal suit against the Company inany court of law.

India

1) A suit was filed against us in the Court of MetropolitanMagistrate’s 39th court, Vile Parle by the Municipal Corporationof Greater Mumbai alleging that we had been operating a factoryout of our Vile Parle office in Mumbai without a valid permit.We had filed a Writ Petition in the High Court, Mumbai in thisconnection which was heard and was decided in our favor.The Court has dictated the judgment and we are awaiting acopy of the same.

2) One of our Indian customers, Saraswat Co-operative Bank, had,on the eve of our Initial Public Offer (IPO) in June 2002, soughtto take action against i-flex for the alleged delay of FLEXCUBEimplementation and the resultant loss of business to the bank.We had subsequently intimated, through our IPO prospectus,press advertisements and other forms of communication, allpotential stakeholders and investors about our stance and ourresponse to vigorously defend our case, should there be anylegal action filed.

Over the year, the parties have, in accordance with their mutualagreements, commenced the process for the resolution ofdispute through arbitration. Saraswat Co-operative Bank hasfiled the statement of claim and we are in the process ofpreparing our response to the same.

The Netherlands and UK

On March 26, 2003, some i-flex employees who were in TheNetherlands were questioned for alleged irregularities andsubsequently asked to leave the country within a week by the Dutchauthorities. The CEO of i-flex’s Dutch subsidiary, who is based inLondon, was detained by the UK authorities on an extraditionrequest from the Dutch authorities as part of the same investigation,and was subsequently released. On May 15, 2003, the court inLondon discharged the extradition proceedings against the CEO ofour Dutch subsidiary after the formal “Authority to proceed” wasnot issued.

We are deeply appreciative of the support received from our well-wishers including the Ministry of External Affairs, Ministry ofInformation Technology, Indian Consular officers, NASSCOM, ourcustomers, our shareholders, trade and industry colleagues andthe media.

Corporate governance

In line with the recommendations of the Securities and ExchangeBoard of India (SEBI) on Corporate Governance, three separatecommittees for Audit, Compensation and Protection of Shareholder’sinterest are constituted. Your Company has also taken steps tocomply with the requirements of Clause 49 of the listing agreementand Sec 292A of the Companies Act, 1956, regarding corporategovernance. A separate report on Corporate Governance along witha certificate of Statutory Auditors of the Company are annexedherewith.

A list of the committees of the Board and names of their membersis given below:

Audit committee

Mr. Y.M. KaleMr. Nihar ModyMr. William T. Comfort, Jr.

Compensation committee

Mr. William T. Comfort, Jr.Mr. Joseph P. Kennedy IIMr. Y.M. Kale

Shareholders’ grievances committee

Mr. Nihar ModyMr. Deepak Ghaisas

The scope of these committees are detailed separately in theCorporate Governance Report.

Allotment of ESOP shares

The shareholders of the Company had approved the EmployeesStock Option Scheme (ESOP) of the Company in its Annual GeneralMeeting of 2001. According to the said scheme, the Company hasgranted shares to eligible employees from time to time. The detailsfor the year 2002-03 are given below:

Total number of Options granted 2,314,460

Pricing formula At the fair market value ason the date of grant

Options Granted during 2002-03 40,000

Options vested 441,940

Options exercised Nil

Total number of shares arising as a

result of exercise of option Nil

Options lapsed 64,760

Variation of terms of options None

Money realized by exercise of options Nil

Total number of options in force; 2,249,700

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Employee/Directors wise details of options granted to:

i) DirectorsMr. Y.M. Kale 5,000Mr. Nihar Mody 5,000

Total 10,000

ii) Any other employee who receives grantin any one year of option amounting to5% or more of option granted duringthat year

Mr. S. Ramakrishnan 30,000

iii) Identified employees who were grantedoption, during any one year, equal to orexceeding 1% of the issued capital(excluding outstanding warrantsand conversions) of the Company at thetime of grant None

iv) Diluted Earnings Per Share (EPS)calculated in accordance withaccounting standard 20 ‘Earnings Per Share’issued by the Institute ofChartered Accountants of India Rs 46.86

Directors’ responsibility statement

As required under Section 217 of the Companies Act, the Directorshereby confirm that:

i) In preparation of the annual accounts, the applicable accountingstandards have been followed along with proper explanationrelating to material departures;

ii) The Directors have selected such accounting policies andapplied them consistently and made judgements and estimatesthat are reasonable and prudent so as to give a true and fairview of the state of affairs of the Company at the end of thefinancial year and of the profit of the Company for that period;

iii) The Directors have taken proper and sufficient care for themaintenance of adequate accounting records in accordance withthe provisions of this act for safeguarding the assets of theCompany and for preventing and detecting fraud and otherirregularities;

iv) The Directors have prepared the annual accounts on a ‘goingconcern’ basis.

Directors

Mr. William T. Comfort, Jr. and Mr. Y. M. Kale retire by rotation atthe ensuing Annual General Meeting, and being eligible, offerthemselves for re-appointment.

Auditors

M/s S. R. Batliboi & Associates, the present Statutory Auditors ofthe Company, retire at the ensuing Annual General Meeting andhave confirmed their eligibility and willingness to accept office, ifre-appointed.

Conservation of energy, technology absorption and foreignexchange earnings and outgo

The particulars as prescribed under sub-section (1)(e) of Section217 of the Companies Act, 1956 read with Companies (Disclosureof particulars in the Report of Board of Directors) Rules, 1988, therelevant data pertaining to conservation of energy, technologyabsorption on foreign exchange earnings and outgo are furnishedhereunder:

(A) Conservation of energy

The operations of the Company are not energy-intensive. Howevermeasures have been taken to reduce energy consumption by usingenergy efficient computers and by the purchase of energy efficientequipment with the latest technologies. The expense on power inrelation to income is nominal and under control.

(B) Technology absorption

Since businesses and technologies are changing constantly andcontinuously, investment in research and development activitiesis of paramount importance. Your Company continued its focus onquality upgradation of software development process and softwareproduct enhancements. It has helped to maintain margins despitechanges in technology.

(C) Foreign exchange earnings and outgo:

Millions of Indian Rupees

Foreign Exchange Earnings 5,478.34

Foreign Exchange Outgo 1,005.62

(Including capital goods & other expenditure)

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Prospects

Banking and Financial services, the vertical which we operate in,places increasing reliance on technology not only for survival butfor competitive edge. Today financial institutions are increasinglylooking for solutions that reduce the time to market, deliver moreservices to their customers and manage cost effectively.

The mission of your Company is to become an IT Partner of choiceto the global banking and financial services industry by leveragingits comprehensive solutions portfolio, domain expertise, globalnetwork, strategic partnership and alliances as well as cost effectivedelivery capability.

We are pleased to inform you that whether in the area of expandingand enhancing the FLEXCUBE suite of products or engaging withleading technology partners, your Company has made rapidprogress. Your company with its portfolio of products and services,the reach in the market through its presence – both directly andthrough partners – is well poised to meet market demands.

Employee particulars

Information pursuant to Section 217(2A) of the Companies Act,1956, read with the Companies (Particulars of Employees) Rules,1975 and under Section 217(1)(e) of the said Act, read with theCompanies (Disclosure of Particulars in the Report of Board ofDirectors) Rules, 1988 to the extent applicable are set out in theAnnexure hereto.

Acknowledgements

Your Directors take this opportunity to thank the Company’scustomers, shareholders, vendors and bankers for their continuedsupport during the year. Your Directors also wish to thank theGovernment of India and its various agencies, Department ofElectronics, the Software Technology Parks – Bangalore, Mumbai,Chennai and Pune, the Santacruz Export Processing Zone, theCustoms and Excise department, Ministry of Commerce, Ministryof Finance, Department of Telecommunication, the Reserve Bankof India, the state governments of Maharashtra, Karnataka and TamilNadu and other local government bodies for their support, and lookforward to their continued support in the future.

Your Directors’ also place on record their appreciation for theexcellent contribution made by all employees of i-flex through theircommitment, competence, co-operation and diligence to duty inachieving consistent growth.

for and on behalf of the Board,

Rajesh HukkuChairman and Managing Director

June 30, 2003

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Corporate governance report

The detailed report on Corporate Governance, for the financial yearApril 1, 2002 to March 31, 2003, as per the format prescribed bySEBI and incorporated in Clause 49 of the Listing Agreement, isset out below:

1 Company’s philosophy on code of governance

The Company believes in adopting and adhering to all the globallyrecognized corporate governance practices and continuouslybenchmarking itself against each such practice. The Companyunderstands and respects its fiduciary role and responsibility toshareholders and strives hard to meet their expectations.

2 Board of Directors:

2.1 Composition and category

The Company currently has five Directors including the Chairman.Of these, three Directors are independent Directors. The Chairmanof the Board is an Executive Chairman and is also the ManagingDirector of the Company. The Company also has one alternateDirector.

The current composition of the Board of the Company is given below:

Name Designation Category

Mr. Rajesh Hukku Chairman and Managing Director Executive, Non-Independent Director

Mr. William Twyman Comfort, Jr. Director Non-Executive, Non-Independent Director

Mr. Y.M. Kale Director Non-Executive, Independent Director

Mr. Joseph P. Kennedy II Director Non-Executive, Independent Director

Mr. Nihar Mody Director Non-Executive, Independent Director

Mr. Ajay Relan Alternate Director toMr. William Twyman Comfort, Jr. Non-Executive, Non-Independent Director

2.2 Attendance of each Director at the Board meetings, and thelast annual general meeting

The Company holds regular Board meetings. The detailed agendaalong with the explanatory notes is circulated in advance. TheDirectors can suggest inclusion of any item(s) in the agenda at theBoard meeting.

During the year 2002-2003, eight Board meetings were held onApril 26, 2002, May 03, 2002, June 25, 2002, July 30, 2002,September 05, 2002, November 13, 2002, January 30, 2003 andFebruary 18, 2003.

The attendance of the Directors at the Board meetings and AnnualGeneral Meeting held during the year 2002-03 was as follows:

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2.4 Details of membership of board committees

None of the Directors of the Company hold memberships of morethan ten Committees nor is any Director a chairman of more thanfive Committees of Boards of all the companies where he holdsDirectorships. For this purpose committees comprise AuditCommittee, Compensation Committee and Shareholders’Grievances Committee. The details of the memberships of theDirectors in all committees are given below:

Name of Director Number of board Number of board Last AGMmeetings held meetings attended Attended

In person On phone /video conference

Mr. Rajesh Hukku 8 3 5 YesMr. William Twyman Comfort, Jr. 8 3 2 YesMr. Y. M. Kale 8 8 – YesMr. Joseph P. Kennedy II 8 1 4 YesMr. Nihar Mody 8 8 – YesMr. Ajay Relan * 8 4 – N.A.

* Appointed with effect from September 9, 2002 as Alternate Director

2.3 The details of the directorships of the Company’s Directors in other companies are given below:

Name of Director Other directorships details

Mr. Rajesh Hukku i-flex solutions b.v.i-flex solutions inc.

Mr. William Twyman Comfort, Jr. –

Mr.Y.M.Kale Fascel LimitedIndusInd Telecom Network LimitedAshok Leyland LimitedAshok Leyland Finance LimitedEnnore FoundriesAasia Properties Development Limited

Mr. Joseph P. Kennedy II Citizens Energy CorporationKennedy Resources LLCProflowersSonic TelecommunicationsMastec TelecommunicationsFusion TelecomTeCoGenPeoples Genetics

Mr. Nihar Mody –

Mr. Ajay Relan Citicorp Finance (India) LimitedOrbiTech LimitedPolaris Software Lab LimitedOrbiTech Solutions LimitedDCM Technologies LimitedSystems America (India) LimitedNewgen Software Technologies LimitedGujarat Glass LimitedSecure Meters LimitedProgeon Limited

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Name of Director CommitteesMembership Chairmanship

Mr. Rajesh Hukku None NoneMr. William Twyman Comfort, Jr. 2 1Mr.Y.M. Kale 4 2Mr. Joseph P. Kennedy II 1 NoneMr. Nihar Mody 2 1Mr. Ajay Relan None None

2.5 Brief resume of Directors who will be retiring by rotation atthe ensuing Annual General Meeting of the Company

Mr. William Twyman Comfort, Jr. is the Chairman of CitigroupVenture Capital Limited, a subsidiary of Citibank involved inleveraged buyout transactions. Mr. Comfort joined Citigroup in 1973as Vice President in the Corporate Finance Department of FirstNational City Bank in New York and then moved to London in1976 to become the Executive Director of Citicorp InternationalBank Limited. In 1979, he returned to New York to assume hiscurrent position. He received his B.A. and LL.B. at the Universityof Oklahoma, and his LL.M. at New York University Law School.

Prior to joining Citigroup Venture Capital Limited, Mr. Comfortwas a partner at W.E. Hutton & Co. in New York. A Trustee of theNew York University Law Center Foundation and of the John A.Hartford Foundation, Inc., Mr. Comfort is also an adjunct professorat the Columbia Business School, Advisor to the Board of OldWestbury Gardens and a Member of the Advisory Committee forthe University of Oklahoma Law School.

Mr. Y. M. Kale, was president of the Institute of CharteredAccountants of India in the year 1995-96 and is also a Fellowmember of the Institute of Chartered Accountants of England andWales. He has contributed to various governmental bodies such ascommittees of Securities & Exchange Board of India includingCommittee of Offer Document, Committee of Takeovers andCommittee on Accounting for Corporates, and participated as amember of the Group for Introduction of Concurrent Audit of Banks,organized by the Reserve Bank of India. Mr. Kale was also a memberof the International Accounting Standards Board from 1995 to 1998.He is also a Director on the Board of various Indian companies asmentioned in section 2.3 above.

3 Audit committee:

3.1 Broad terms of reference

The terms of reference of the Audit Committee are as follows:

a. Oversight of the Company’s financial reporting process and thedisclosure of its financial information to ensure that the financialstatements are correct, sufficient and credible.

b. Reviewing with management the annual financial statementsbefore submission to the board, focusing primarily on;

• Any changes in accounting policies and practices.• Major accounting entries based on exercise of judgment

by management.• Qualifications in draft audit report.• Significant adjustments arising out of audit.• The going concern assumption.• Compliance with accounting standards.• Compliance with stock exchange and legal requirements

concerning financial statements.• Any related party transactions i.e. transactions of the

company of material nature, with promoters or themanagement, their subsidiaries or relatives etc. that mayhave potential conflict with the interests of the Companyat large.

c. To review and approve annual accounts of the Company andrecommend to the Board for adoption or otherwise.

d. To review the Company’s financial and risk managementpolicies.

e. To look into the reasons for substantial defaults in the paymentto the depositors, debenture holders, shareholders (in case ofnon payment of declared dividends) and creditors.

f. To have full access to information contained in the records ofthe Company.

g. To seek external professional advice and to seek informationfrom any employee, if necessary.

h. To recommend the appointment and removal of external auditor,fixing of audit fee and also approval for payment for any otherservices.

i. To review the adequacy of internal audit function and frequencyof internal audit.

j. To discuss with internal auditors any significant findings andfollow up there on.

3.2 Composition of committee

The Audit Committee of the Company currently consists of thefollowing three Non-Executive Directors.

1 Mr. Y.M. Kale Chairman, Non-Executive,Independent Director

2 Mr. Nihar Mody Member, Non-Executive,Independent Director

3 Mr. William Twyman Member, Non-Executive,Comfort, Jr. Non-Independent Director

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3.3 Meetings and attendance

The Audit Committee held five Meetings during the year 2002-03.

The member’s attendance at the Committee Meetings was as under:

Name of Director Number of meetings attended

in person on phone/videoconference

Mr. Y. M. Kale 5 –Mr. Nihar Mody 5 –Mr. William Twyman Comfort, Jr. – 2

3.4 Audit committee’s recommendations:

The Committee reviewed the financial results of the Companycomprising Indian GAAP, (including Consolidated results) and USGAAP as at June 30, 2002, September 30, 2002, December 31,2002 and March 31, 2003 and recommended the same to the Boardof Directors for adoption.

The committee also recommended to the Board of Directors theappointment of M/s S. R. Batliboi & Associates, CharteredAccountants, as statutory auditors of the Company from 2002Annual General Meeting to the forthcoming AnnualGeneral Meeting

4. Remuneration (compensation) committee

4.1 Brief description of terms of reference

Compensation Committee comprises Mr. William Twyman Comfort,Jr., Mr. Joseph P. Kennedy II and Mr. Y.M. Kale. The scope of thiscommittee is to determine the compensation of the Executive

Management Office (EMO) comprising Mr. Rajesh Hukku,Chairman and Managing Director, Mr. R. Ravisankar, ChiefExecutive Officer – International Operations and Technology andMr. Deepak Ghaisas, Chief Executive Officer – India Operations,CFO and Company Secretary. The EMO in turn, decides thecompensation of key managerial personnel and other employees.The Compensation Committee also approves, allocates andadministers the Employee Stock Option Plan 2002, reviewsperformance appraisal criteria and sets norms for ESOP allocation.

4.2 Composition of committee:

1 Mr. William Twyman Chairman, Non-Executive,Comfort, Jr. Non-Independent Director

2 Mr. Joseph P. Kennedy II Member, Non-Executive,Independent Director

3 Mr. Y.M. Kale Member, Non-Executive, Independent Director

4.3 Meeting & attendance

This Committee met once during the year and was attended byMr. William Twyman Comfort, Jr. and Mr. Y.M. Kale. Mr. Joseph P.Kennedy II attended the meeting through teleconference.

4.4 Remuneration policy

The Committee has the mandate to review and recommendcompensation payable to the Executive Directors and SeniorExecutives of the Company. It also sets norms for ESOP allocation.

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5. Shareholders’ grievances committee

5.1 Composition of committee

Mr. Nihar Mody Chairman, Non-Executive,Independent Director

Mr. Deepak Ghaisas Chief Executive Officer –India Operations & CFO

5.2 Scope of shareholders’ grievances committee’s activities

The scope of the Shareholders’ Grievances Committee is to reviewand address the grievances of the shareholders in respect of sharetransfers, transmission and other share related activities.

The Committee held four meetings during the year, which wereattended by both the members of the Committee.

5.3 Company secretary

Name of Company Secretary Mr. Deepak Ghaisas

Address i-flex solutions ltd.i-flex Center

399 Subhash RoadVile Parle (East)

Mumbai 400 057

Contact Telephone +91-22-5668 5000

Fax +91-22-2832 3374

4.5 Details of remuneration paid to all the Directors during the financial year 2002-03

Name of Director ESOPs granted Commission Salary (Rs) Contribution to Totalunder Employee to Non- PF (Rs) Amount

Stock Executive paid (Rs)*Option Plan Directors

(ESOP) (Rs)

Mr. Rajesh Hukku** – – 330,000 43,560 373,560Mr. William Twyman Comfort, Jr. – – – – –Mr. Y.M. Kale 5,000 1,000,000 – – 1,000,000Mr. Joseph Kennedy II – 11,942,805 – – 11,942,805Mr. Nihar Mody 5,000 600,000 – – 600,000Mr. Ajay Relan – – – – –(Alternate Director toMr. William Twyman Comfort, Jr.)TOTAL 10,000 13,542,805 330,000 43,560 13,916,365

* There were no fees and/or perquisites applicable and paid to the Directors during the financial year 2002-03 except as stated above.** In addition to the above, Mr. Rajesh Hukku received a gross remuneration of US$ 287,500 from i-flex solutions inc., USA for the duties performed for i-flex solutions inc.

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5.4 Compliance officer

Name of Compliance Officer Mr. Avadhut (Vinay) Ketkar

Address i-flex solutions ltd.i-flex Center

399 Subhash RoadVile Parle (East)

Mumbai 400 057

Contact Telephone +91-22-5668 5000

e-mail [email protected]

Fax +91-22-2832 3374

5.5 Details of shareholders’ complaints received, not solved andpending share transfers as on March 31, 2003

Nature of Complaints Received Cleared

Non-receipt of shares 29 29Non-receipt of dividend 30 30Non-receipt of share certificates inexchange after subdivision 9 9Rejected DRF cases 5 5

No. of pending share transfers – –

6. General body meetings

6.1 Location, date and time, where last three Annual GeneralMeetings were held

Financial Year Venue Date Time

2001-2002 ITC Grand Maratha Sheraton September 06, 2002 3.00 p.m.Near Sahar Airport, Andheri East

Mumbai 400 059

2000-2001 The Leela August 14, 2001 3.00 p.m.Near Sahar Airport, Andheri East

Mumbai 400 059

1999-2000 Ramada Hotel Palmgrove September 22, 2000 3.00 p.m.Juhu Beach, Mumbai 400 049

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7 Disclosures

a. All the relevant information in respect of materially significant related party transactions, i.e., transactions of the Company of materialnature with its Promoters, Directors or Management, or their relatives or subsidiaries of the Company, etc. having potential conflict withthe interest of the Company at large has been given in the Annual Report.

b. The Company has complied with statutory compliances and no penalty or stricture is imposed on the Company by the Stock Exchangesor SEBI or any other statutory authority on any matter related to the capital markets during the last three years.

8 Means of communication

a. Half yearly report was circulated to each shareholder.

b. The quarterly and half yearly results were published in English and Marathi Newspapers.

c. The Company’s Audited & Un-audited periodic financial results, Press Releases and transcripts of investor conference calls are postedon the Company’s website www.iflexsolutions.com

d. Detailed Management Discussion and Analysis Reports covering Indian GAAP and US GAAP financials have been included in thisAnnual Report.

e. The Company has also posted information relating to its financial results on Electronic Data Information Filing and Retrieval System(EDIFAR) at www.edifar.com as required by The Stock Exchange, Mumbai.

9 General shareholder information

a. Annual General Meeting :Date July 31, 2003Time 3.00 p.m.Venue The Leela

Near Sahar Airport, Andheri EastMumbai 400 059

b. Financial Year : April 1 to March 31

c. Date of Book Closure : July 26, 2003 to July 31, 2003 both days inclusive

d. Dividend Payment Date : August 4, 2003

e. Listing on Stock Exchanges at : The Stock Exchange, Mumbai (BSE)National Stock Exchange of India Ltd. (NSE)

f. Stock Code :The Stock Exchange, Mumbai 532466National Stock Exchange of India Ltd. I-FLEX

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9.7 Market price data:

The high/low of the shares of the Company from June 28, 2002 onwards is given below:

Month & BSE NSEYear High Low Volume of High Low Volume of

Rs Rs Shares Rs Rs Shares2002June * 560.30 495.05 413,048 550.00 495.00 723,610July 555.00 433.05 1,524,337 555.80 401.00 3,500,005August 554.80 463.55 300,912 552.00 461.15 805,352September 611.85 520.00 879,826 612.70 470.00 2,495,533October 629.00 553.55 551,735 628.90 523.55 1,287,721November 738.75 605.15 795,361 738.00 605.10 2,000,803December 914.00 685.15 803,797 914.70 685.00 2,271,284

2003January 938.00 775.00 2,221,983 938.40 775.15 5,901,992February 919.00 793.25 1,351,200 919.00 790.10 3,706,789March 965.00 809.00 3,386,341 1,000.00 808.00 8,467,648

* The Company’s equity shares were listed on the above mentioned stock exchanges with effect from June 28, 2002

The chart below gives the relative movement of the closing price of the Company’s shares and BSE Sensex relative to the closing price as ofJune 28, 2002, the listing date for the Company’s shares.

i-flex closing share price Rs BSE Sensex closing Rs

200.00

180.00

160.00

140.00

120.00

100.00

80.00

60.00

40.00

20.00

–

June

28

July

12

July

26

Aug

ust 9

Aug

ust 2

3

Sep

tem

ber

6

Sep

tem

ber

20

Oct

ober

4

Oct

ober

18

Nov

embe

r 1

Nov

embe

r 15

Nov

embe

r 29

Dec

embe

r 13

Dec

embe

r 27

Janu

ary

10

Janu

ary

24

Feb

ruar

y 7

Feb

ruar

y 21

Mar

ch 7

Mar

ch 2

1

2002 2003

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9.8 Registrars and transfer agents

Name Intime Spectrum Registry Limited

Address C-13 Pannalal Silk Mills CompoundL. B. S. Marg

Bhandup (West), Mumbai 400 078Telephone No. +91-22-2592 3837Fax +91-22-2567 2693e-mail [email protected]

Branch 203 Dawer House197/199 D.N. Road, Fort

Mumbai 400 001

Telephone No. +91-22-2269 4127

9.9 Share transfer system

The Registrars and Transfer Agents (“the Registrar”) on receipt of transfer deed with respective share certificate(s) scrutinizes the same andverifies signature(s) of transferor(s) on the transfer deed with specimen signature(s) registered with the Company. A list of such transfers isprepared and checked thoroughly and a transfer register is prepared. The transfer register is placed before the Transfer Committee Meetingfor approval. On approval by the Transfer Committee, the Register of Members is updated. The transfer endorsement stickers are printedthrough system and affixed on reverse of respective share certificates, which are signed by the officials of the Company.The certificates then are dispatched to transferees by registered post.

During last financial year 68,200 equity shares were transferred in physical mode.

9.10 Distribution of shareholding as on March 31, 2003

Distribution schedule as on March 31, 2003Equity shares of face value of Rs 5/- each

Shares of Nominal Value of Number of % Share Amount %Rs Rs Shareholders Rs

1 – 2,500 7,611 78.35 2,641,645 1.422,501 – 5,000 453 4.66 1,789,755 0.965,001 – 10,000 373 3.84 2,883,495 1.5510,001 – 20,000 408 4.20 6,392,225 3.4320,001 – 30,000 128 1.32 3,267,060 1.7530,001 – 40,000 260 2.68 8,904,325 4.7740,001 – 50,000 66 0.68 3,066,750 1.6450,001 – 1,00,000 261 2.69 20,078,590 10.761,00,001 & Above 154 1.59 137,553,155 73.72

Total 9,714 100.00 186,577,000 100.00

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9.11 Shareholding per category

As on March 31, 2003Category Number of Shares %

Promoters 16,118,000 43.19Mutual funds and UTI 1,166,758 3.13Banks, Financial Institutions, Insurance Companies 20,000 0.05Foreign Institutional Investors 1,702,549 4.56Private Corporate Bodies 375,910 1.01Indian Public 15,078,816 40.41Non-Resident Indians/Overseas Corporate Bodies 2,174,367 5.83Any other – Foreign Company 679,000 1.82Total 37,315,400 100.00

9.12 Dematerialization of shares and liquidity

Procedure for dematerialisation/rematerialisation of scrips

Shareholders are required to submit demat/remat request to the Depository Participants (DP) with whom they maintain a demat account.Depository Participants send requests for demat of shares along with the physical share certificates to Registrars and Transfer Agents (“theRegistrar”) of the Company. The Registrar liaisons with DP and National Securities Depository Ltd. (NSDL)/Central Depository Services(India) Ltd. (CDSL) within seven days from date of log in of the demat request in the system and acknowledges receipt of physical shares fordemat and verifies the genuineness of share certificates, creates transaction and generates edit list. After verification of edit list andeffecting corrections, if any, the Registrar updates the final Demat Register. The Registrar forwards confirmation report of the transaction toNSDL/CDSL or the rejection report, as the case may be. Daily reconciliation and confirmation of capital is done by the Registrar. TheRegistrar also corresponds with the DP and shareholder in case of rejection.

As on March 31, 2003, 39.11% of the shares of the Company were in electronic form.

9.13 Address for correspondence

Registered Office Corporate officeUnit 10-11, SDF-1 SEEPZ i-flex CenterAndheri (East) 399, Subhash RoadMumbai 400 096 Vile Parle (East) Mumbai 400 057

Telephone No. +91-22-2829 1020 Telephone No. +91-22-5668 5000

Fax No. +91-22-2829 2767 Fax No. +91-22-2832 3374

e-mail: [email protected]

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1 Raheja Towers9th Floor26-27 MG. RoadBangalore 560 001

2 i-flex Center146 Infantry RoadBangalore 560 001

3 4th FloorShankar Narayan Building25 MG. RoadBangalore 560 001

4 2nd Floor, Pride Silicon PlazaSenapati Bapat MargPune 411 053

5 # 143/1 Uttamar Gandhi Salai4th Floor, NungambakamChennai 600 034

6 Haria Center8 Subhash RoadVile Parle (East)Mumbai 400 057

7 i-flex ParkEmbassy Business ParkC.V. Raman NagarBangalore 560 075

Additionally the Company has branch offices in the States of Maharashtra, Karnataka and Tamil Nadu. The addresses are given below:

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ToThe members of i-flex Solutions Limited

We have examined the compliance of conditions of CorporateGovernance by i-flex Solutions Limited, for the year ended onMarch 31, 2003, as stipulated in clause 49 of the ListingAgreements of the said Company with The Stock Exchange, Mumbaiand the National Stock Exchange of India Limited.

The compliance of conditions of Corporate Governance is theresponsibility of the management. Our examination was limited toprocedures and implementation thereof, adopted by the Companyfor ensuring the compliance of the conditions of the CorporateGovernance. It is neither an audit nor an expression of opinion onthe financial statements of the Company.

In our opinion and to the best of our information and according tothe explanations given to us, we certify that the Company hascomplied with the conditions of Corporate Governance as stipulatedin the above mentioned Listing Agreements.

We state that, as at March 31, 2003, no investor grievance is pendingfor a period exceeding one month against the Company as per a

Auditors’ certificate

confirmation received from the Registrars and Transfer Agents ofthe Company and reviewed by the Shareholders’ GrievancesCommittee.

We further state that such compliance is neither an assurance as tothe future viability of the Company nor the efficiency oreffectiveness with which the management has conducted the affairsof the Company.

For S.R. Batliboi & AssociatesChartered Accountants

per Subramanian SureshPartnerMembership No.: 83673

ChennaiJune 30, 2003

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Y inancialsi-flex solutions ltd.

Financial statements for the year ended

March 31, 2003 prepared in accordance with

Indian Generally Accepted Accounting

Principles (Indian GAAP) (Unconsolidated).

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The following discussion is based on our audited unconsolidatedfinancial statements, which have been prepared in accordance withAccounting Standards referred to in section 211 (3C) of theCompanies Act 1956.

You should read the following discussion of our financial conditionand results of operations together with the detailed unconsolidatedIndian 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 Company 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 Company had serviced 404 customers in 93 countries throughits portfolio of products and services. The Company’s de-riskedrevenue model continues to deliver consistent results despitechanging global economic conditions. The Company is not overlydependent on any one country or geographical region and has adiversified revenue stream from a widespread geographic base.

We are organized geographically and by business segments. Wehave two primary business segments – the Products Business(comprising products 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 package 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 Centers ofExcellence, which encompass areas such as Capital Markets,Business Intelligence and Data Warehousing, CRM, Development& Integration Services, e-solutions and Payment Systems.PrimeSourcing offerings include Business and Technology

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

Consulting, 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 off-shoredelivery models, across a wide array of technology and bankingand finance domain areas.

Business metrics

Our total revenues in fiscal 2003 were Rs 5,638.31 million,representing an increase of 36% from Rs 4,150.26 million in fiscal2002. The net income in fiscal 2003 was Rs 1,743.75 million,representing an increase of 38% from Rs 1,267.61 million in fiscal2002. Our net income margins have remained at 31% for both thefiscal years 2003 and 2002. We define net income margins for aparticular period as the ratio of net income to total revenues duringsuch period.

Products business


Year ended March 312003 2002

Product revenues 3,621.81 2,484.45Cost of product revenues (989.57) (625.38)Sales and marketing expenses (419.28) (455.80)General and administrative expenses (242.04) (192.85)Depreciation and amortization (45.28) (50.64)Income from operations 1,925.64 1,159.78Operating margin* 53% 47%

* 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 fiscal 2002, respectively. Productsrevenues increased by 46% from Rs 2,484.45 million in fiscal 2002to Rs 3,621.81 million in fiscal 2003.

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.

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.

Out of products revenues, license fees comprise 47%,implementation and enhancement fees comprise 35% and annualmaintenance contracts comprise 18% of the revenues.

For the revenue recognition norms, please refer note 2 of theaccounts.

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 until

technological feasibility is established. Software productdevelopment cost incurred subsequent to the achievement of thetechnological feasibility are not material and are expensed asincurred.

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



Services revenues 2,016.50 1,665.81Cost of services revenues (1,493.81) (941.04)Sales and marketing expenses (26.95) (25.55)General and administrative expenses (205.59) (178.50)Depreciation and amortization (74.03) (82.12)Income from operations 216.12 438.60Operating margin* 11% 26%

* 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 21% to Rs 2,016.50 million in fiscal 2003from Rs 1,665.81 million in fiscal 2002.

The contracts relating to our Services Business are either time andmaterial contracts or fixed price contracts. During fiscal 2003, fixedprice contracts comprised 34% of the services revenues and thebalance 66% were derived from time and material related activitiesand contracts.

We provide our services through offshore centers located in Indiaand through onsite teams operating at our customers’ premises.Offshore services revenues consist of revenues from work conductedat our development centers in India on behalf of foreign customersand onsite revenue comprises work conducted at customer’spremises outside India. Our India revenue represents work donefor Indian customers at their locations and at our developmentcenters in India. The composition of our onsite and offshore revenueis determined by the project life cycle. Typically, the work involvingthe design of new systems or that relate to a system rollout wouldbe conducted onsite, while the core software development,maintenance and support activity may be conducted offshore. Outof the Services revenues 62% were derived from onsite relatedactivities and 38% were derived from offshore-related activities.

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

Revenues Revenues Revenues Revenues Revenues Revenues

USA 26% 57% 37% 9% 67% 32%Middle East and Africa 36% 9% 26% 39% 8% 26%Asia Pacific 17% 19% 18% 27% 11% 21%Europe 20% 15% 18% 24% 14% 20%Latin America and Caribbean 1% 0% 1% 1% 0% 1%

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

Customer concentration

Revenues from our top 10 customers for fiscal 2003 and fiscal2002 were 34% and 58% respectively. This contribution was furtherconcentrated in respect of our revenues from our Services Business.The top 10 customers in our Services Business contributed 52% ofthe total services revenues, while the top 10 customers in ourProducts Business contributed 44% of the total products revenuesduring fiscal 2003.

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.

For revenue recognition norms please refer note 2 of the 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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Trade receivables

Trade receivables as of March 31, 2003 and fiscal 2002 wereRs 2,499.08 million and Rs 1,955.79 million respectively. Our daysof sales outstanding (which is the ratio of sundry debtors to totalsales in a particular year multiplied by 365) for fiscal 2003 andfiscal 2002 were approximately 162 and 172 respectively. TheCompany periodically reviews its accounts receivables outstandingas well as the aging, quality of the account receivable, the customerrelationship and history of the client. We have high receivablesoutstanding from our subsidiaries but they are controllable. Thefollowing table presents the age profile of our debtors:

Period in days 2003 20020-180 73% 94%More than 180 27% 6%Total 100% 100%

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. The 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.



Top Customer 8% 11% 5% 12% 41% 16%

Top 5 Customers 27% 33% 20% 38% 75% 42%

Top 10 Customers 44% 52% 34% 57% 90% 58%

Citigroup and its entities 28% 15% 23% 25% 75% 45%

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:

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

The Company also balances funds in USD accounts or INR depositsbased on the comparative interest rates and currency requirements.The Company books forward covers at appropriate time intervalsas and 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 countries likethe United States of America, Malaysia, United Kingdom, Singaporeand Kuwait.

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 schemeswhich have similar terms, are administered through a Trust (‘theTrust’). The Trust purchases shares of the Company using theproceeds of loans obtained from the Company. Such shares areoffered by the Trust to employees at an exercise price, which

approximates the fair value on the date of the grant. The employeescan purchase the shares in a phased manner over a period of fiveyears based on continued employment, until which, the Trust holdsthe shares for the benefit of the employee. The employees areentitled to receive dividends, bonus etc. that may be declared bythe Company from time to time for the entire portion of shares heldby the Trust on behalf of the employees.

On acceptance of the offer, the selected employee undertakes topay 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 employee repaying the amountto the Trust. In case the employee resigns from employment, therights relating to shares, which are eligible for exercise, may bepurchased by payment of the exercise price whereas, the balanceshares are forfeited in favour of the Trust. The Trustees have theright of recourse against the employee for any amounts that mayremain unpaid on the shares accepted by the employee. The sharesthat an employee is eligible to exercise during the initial five-yearperiod merely go to determine the amount and scheduling of theloan to be repaid on exercise by the employee. The Trust repaysthe loan obtained from the Company on receipt of payments fromemployees against shares exercised or otherwise.

The Securities and Exchange Board of India (‘SEBI’) has issuedthe Employee Stock Option Scheme and Stock Purchase Guidelines,1999 (‘SEBI guidelines’), which are applicable to stock optionschemes for employees of all listed Companies. In accordance withthese guidelines, the excess of market price of the underlying equityshares on the date of grant of the stock options over the exerciseprice of the options is to be recognised in the books of account andamortized over the vesting period. However, in case of the Companyno compensation cost would need to be recorded as the schemeterms are fixed and the exercise price equals the market price ofthe underlying stock on the grant date.

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 additional 7.5%of the issued and paid-up equity share capital of the Companyhave been earmarked for grant, at any given time to present andfuture employees and Directors of the Company and its existingand future subsidiaries. Pursuant to the above resolution, the Board

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Interest and other income

Interest and other income increased 63% from Rs 102.45 millionin fiscal 2002 to Rs 166.69 million in fiscal 2003. The interestincome increased by 214% during this fiscal due to deployment offunds received from the public issue. The exchange loss (otherthan on sales) of Rs 43.38 million during this fiscal was classifiedas other income; as a result the other income has shown a decreaseof 217% during this fiscal.

Cost of revenues and operating expenses

Cost of revenues

Cost of revenues increased 59% from Rs 1,566.42 million in fiscal2002 to Rs 2,483.38 million in fiscal 2003. Cost of revenues as apercentage of total revenue was 38% in fiscal 2002 and 44% infiscal 2003 respectively.

Cost of products revenues increased 58% from Rs 625.38 millionin fiscal 2002 to Rs 989.57 million in fiscal 2003. This increasewas primarily attributable to increased employee cost, travel cost,professional fees to software vendors and purchase of applicationsoftware. Cost of product revenues as a percentage of productrevenues increased from 25% in fiscal 2002 to 27% in fiscal 2003.

Cost of services revenues increased 59% from Rs 941.04 millionin fiscal 2002 to Rs 1,493.81 million in fiscal 2003. The primaryreasons for the increase were employee cost, travel cost, applicationsoftware costs, contract acquisition costs and professional fees. Costof services revenues as a percentage of services revenues increasedfrom 56% in fiscal 2002 to 74% in fiscal 2003.

Sales and marketing expenses

Sales and marketing expenses decreased 7% from Rs 481.35million in fiscal 2002 to Rs 446.23 million in fiscal 2003.The decrease in the sales and marketing expenses was due toincreased sales and marketing expenses by the subsidiaries in themarkets of US, Singapore and Netherlands which were accountedat subsidiaries and are reflected in our consolidated accounts. Thisfiscal we had two more branches established in Japan and Germanyby our subsidiaries i-flex solutions pte ltd and i-flex solutions b.v.respectively to increase our market presence. Sales and marketingexpenses as a percentage of total revenues decreased from 12% infiscal 2002 to 8% in fiscal 2003.

of Directors, at their meeting held on March 4, 2002 approved theEmployees Stock Option Scheme (‘the Scheme’) for issue of2,376,800 options to the employees and Directors of the Company.According to the ESOP the Company has granted 2,274,460 optionsto the eligible employees and Directors of the Company and itssubsidiaries at an exercise price, which equates the issue pricedetermined through the book-building procedure. 20% of the totaloptions granted under the Scheme will vest to the eligible employeesand Directors only on the completion of 12, 24, 36, 48 and 60months respectively and is subject to the continued employment ofthe employee or Director with the Company or its subsidiaries.

As per the terms of ‘the Scheme’, the exercise price equates theprice determined for the IPO through book building process forthe option granted prior to the IPO and the fair market value on thedate of grant for option granted thereafter. Accordingly nocompensation cost would need to be recorded as the grant pricewould equal the fair value of the shares on the grant date.

Analysis of the financial results

Comparison of fiscal 2003 with fiscal 2002

Revenues

Our total revenues increased 36% from Rs 4,150.26 million infiscal 2002 to Rs 5,638.31 million in fiscal 2003. The increase inrevenue was attributable to a 46% increase in the revenues fromour Products Business and a 21% increase in the revenues fromour Services Business.

Products revenues

Products revenues increased 46% from Rs 2,484.45 million in fiscal2002 to Rs 3,621.81 million in fiscal 2003. The revenues fromlicense fees comprised 47% of the revenues, implementation feescomprised 35% and Annual Maintenance Contracts comprised 18%of the revenues for the fiscal 2003.

Services revenues

Services revenues increased 21% from Rs 1,665.81 million in fiscal2002 to Rs 2,016.50 million in fiscal 2003. Revenues from timeand material contracts comprised 66% of the revenues and fixedprice contracts comprised 34% for the fiscal 2003.

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Sales and marketing expenses for our Products Business decreased8% from Rs 455.80 million in fiscal 2002 to Rs 419.28 million infiscal 2003. These expenses, as a percentage of products revenues,decreased from 18% in fiscal 2002 to 12% in fiscal 2003.

Sales and marketing expenses for our Services Business increased5% from Rs 25.55 million in fiscal 2002 to Rs 26.95 million infiscal 2003. These expenses as a percentage of services revenuedecreased from 2% as in fiscal 2002 to 1% in fiscal 2003.

General and administrative expenses

General and administrative expenses increased 15% fromRs 614.90 million in fiscal 2002 to Rs 707.94 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 15% in fiscal 2002 to 13% in fiscal 2003.

General and administrative expenses for our Products Businessincreased 26% from Rs 192.85 million in fiscal 2002 to Rs 242.04million in fiscal 2003. General and administrative expenses as apercentage of products revenue were 8% in fiscal 2002 and 7% infiscal 2003.

General and administrative expenses for our Services Businessincreased 15% from Rs 178.50 million in fiscal 2002 to Rs 205.59million in fiscal 2003. However as a percentage of services revenue,general and administrative expenses decreased from 11% in fiscal2002 to 10% in 2003.

Income taxes

Provision for income taxes increased 64% from Rs 150.14 millionin fiscal 2002 to Rs 246.00 million in fiscal 2003. Our effectivetax rate increased from 10.58% in fiscal 2002 to 12.36% infiscal 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.

Income from operations and net income

As a result of the foregoing factors, income from operationsincreased 39% from Rs 1,342.62 million in fiscal 2002 toRs 1,866.94 million in fiscal 2003, and net income increased 38%from Rs 1,267.61 million in fiscal 2002 to Rs 1,743.75 million infiscal 2003. As a result, our net margins remained constant at 31%in fiscal 2002 and 2003. We define net income margins for aparticular period as the ratio of net income to total revenues duringsuch 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 2002 and 2003 we generatedcash from operations of Rs 589.78 million and Rs 1,878.97 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.

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.

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As of March 31, 2003, we had invested Rs 52.41 million in unquotedequity where we had less than 20% voting interest and Rs 270.13million in debt securities. These investments are recorded at coston our balance sheet and any decline in fair value below the originalcost are recorded in the income statement when they are consideredto be other than temporary.

A substantial portion of our revenues are generated in foreigncurrencies while a majority of our expenses are incurred in Indian

Rupees 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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Reconciliation Statement of the Net Profit as per Indian GAAP unconsolidated and Indian GAAP consolidated with US GAAP

Thousands of Indian Rupees


Net profit as per Indian GAAP Unconsolidated 1,743,745 1,267,608

Add: Revenue of subsidiaries, neti-flex solutions b.v. 106,372 45,786i-flex solutions pte 56,901 1,788i-flex solutions inc. 296,640 87

459,913 47,661Other income from subsidiaries, net (112) (2,306)

459,801 45,355Less: Expenses of susidiaries, net

i-flex solutions b.v. (176,900) (106,961)i-flex solutions pte (43,710) (1,215)i-flex solutions inc. (312,483) (11,749)

(73,292) (74,570)

Profit after consolidating subsidiaries 1,670,453 1,193,038

Add: Revenue of joint ventures, net 322 (3,146)Other income from joint ventures, net 1,351 355

1,673 (2,791)

Less: Expenses of joint ventures, net (charge of Dotex write off 56,350) 36,752 (37,256)

Net profit as per Indian GAAP Consolidated 1,708,878 1,152,991

Add/(Less):Deferred revenue for post-contract support and significant discounts 74,676 (87,686)Difference in depreciation 3,246 5,872Translation effect – Adjusted in stockholders equity in US GAAP 29,448 4,542Accounting for embedded derivatives (8,862) 643Provision for vacation pay (15,074) (55,775)Temporary diminution in marketable securities, available for sale (12,427) 8,940Gratuity provision in US GAAP (9,215) 6,483

Net profit as per US GAAP 1,770,670 1,036,010

041_192.pmd 30/06/2003, 8:10 PM69

ToThe Members of i-flex Solutions Limited

1 We have audited the attached balance sheet of i-flex SolutionsLimited (‘the Company’) as at March 31, 2003 and also theprofit and loss account and the cash flow statement for the yearended on that date annexed thereto. These financial statementsare the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financialstatements based on our audit.

2 We conducted our audit in accordance with auditing standardsgenerally accepted in India. Those Standards require that weplan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in thefinancial statements. An audit also includes assessing theaccounting principles used and significant estimates made bymanagement, as well as evaluating the overall financialstatement presentation. We believe that our audit provides areasonable basis for our opinion.

3 As required by the Manufacturing and Other Companies(Auditor’s Report) Order, 1988 (‘the Order’) issued by theCentral Government of India in terms of sub-section (4A) ofSection 227 of the Companies Act, 1956 (‘the Act’), we enclosein the Annexure a statement on the matters specified inparagraphs 4 and 5 of the said Order.

4 Further to our comments in the Annexure referred to above,we report that:

i. We have obtained all the information and explanations, whichto the best of our knowledge and belief were necessary for thepurposes of our audit;

ii. In our opinion, proper books of account as required by lawhave been kept by the Company so far as appears from ourexamination of those books;

iii. The balance sheet, profit and loss account and cash flowstatement dealt with by this report are in agreement with thebooks of account;

iv. In our opinion, the balance sheet, profit and loss account andcash flow statement dealt with by this report comply with theaccounting standards referred to in sub-section (3C) of section211 of the Act.

v. On the basis of the written representations received from theDirectors, as on March 31, 2003, and taken on record by theBoard of Directors, we report that none of the Directors isdisqualified as on March 31, 2003 from being appointed as aDirector in terms of clause (g) of sub-section (1) of section 274of the Act.

vi. In our opinion and to the best of our information and accordingto the explanations given to us, the said accounts give theinformation required by the Act in the manner so required andgive a true and fair view in conformity with the accountingprinciples generally accepted in India;

a) in the case of the balance sheet, of the state of affairs of theCompany as at March 31, 2003;

b) in the case of the profit and loss account, of the profit forthe year ended on that date; and

c) in the case of cash flow statement, of the cash flows for theyear ended on that date.



ChennaiMay 16, 2003

Auditors’ report

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Annexure to auditors’ reportMarch 31, 2003

1 The Company has maintained proper records showing fullparticulars, including quantitative details and situation of itsfixed assets. A major portion of the fixed assets has beenphysically verified by the management during the year and nomaterial discrepancies were noted on the fixed assets verifiedduring the year. In our opinion, the frequency of physicalverification is reasonable.

2 The fixed assets of the Company have not been revalued duringthe year.

3 Due to the nature of its business, clauses (iii) to (vi) and (xii) ofthe Order, relating to physical verification and valuation ofstock, are not applicable to the Company.

4 The Company has not taken/granted any loans, secured orunsecured from/to companies, firms or other parties listed inthe register maintained under Section 301 of the Act and/orcompanies under the same management as defined underSection 370(1B) of the Act.

5 The parties to whom loans or advances in the nature of loanshave been given by the Company are repaying the principalamounts as stipulated and are also regular in the payment ofinterest where applicable.

6 The internal control procedures of the Company relating to thepurchase of equipment, components and other assets areadequate and commensurate with its size and nature of itsbusiness. Due to the nature of its business, the Company doesnot purchase any stores, raw materials and plant and machineryand there are no sales of goods.

7 In our opinion, and according to the information andexplanations given to us, there are no transactions of sale ofservices made in pursuance of contracts or arrangementsentered in the register maintained under Section 301 of theAct, and aggregating during the year to Rs 50,000 or more inrespect of each party. Due to the nature of its business, theCompany does not purchase or sell any goods or materials otherthan software products.

8 The Company has not accepted any deposits from the public towhich the provisions of Section 58A of the Act and the rulesframed thereunder apply.

9 The Company’s activities do not generate any by-products orscrap.

10 In our opinion, the Company has an internal audit system, whichis commensurate with its size and the nature of its business.

11 The Central Government has not prescribed the maintenanceof cost records by the Company under Section 209(1)(d) of theAct.

12 The Company has been regular in depositing Provident Fundand Employees’ State Insurance dues with the appropriateauthorities.

13 According to the records of the Company, and as per theinformation and explanations given to us, there were no amountsoutstanding at March 31, 2003 in respect of undisputed income-tax, wealth-tax, sales-tax, customs duty and excise duty whichwere outstanding for a period of more than six months from thedate they became payable.

14 According to the information and explanations given to us, nopersonal expenses of employees or Directors have been chargedto revenue account, other than those payable under contractualobligations or in accordance with generally accepted businesspractice.

15 The Company is not an industrial undertaking within themeaning of the Sick Industrial Companies (Special Provisions)Act, 1985.

In respect of service activities—

16 Due to the nature of services rendered by the Company, theclause in respect of recording receipts, issues and consumptionof materials and stores and allocating materials consumed torelative jobs are not applicable.

17 The Company has a reasonable system of allocating manhoursutilised to relative jobs commensurate with the size and natureof its business. There is a reasonable system of authorisationat proper levels and an adequate system of internal controlscommensurate with the size of the Company and the nature ofits business on allocation of labour to jobs.



ChennaiMay 16, 2003

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Balance sheetas at March 31

(All amounts in thousands of Indian Rupees)

Note 2003 2002Sources of fundsShareholders’ fundsShare capital 3 186,577 169,777Reserves and surplus 4 7,985,628 4,686,198

8,172,205 4,855,975

Application of fundsFixed assets 2(c) & 5Cost 886,752 816,031Less: Accumulated depreciation 638,412 511,898Net book value 248,340 304,133Capital work-in-progress and advances 221,383 2,412

469,723 306,545

Investments 2(d) & 6 456,919 200,868

Deferred tax assets 7 31,446 24,860

Current assets, loans and advances 8Sundry debtors 2,499,083 1,955,786Cash and bank balances 5,340,531 2,214,842Other current assets 32,018 11,274Loans and advances 793,721 792,856

8,665,353 4,974,758Less: Current liabilities and provisions 9Current liabilities 1,254,826 528,689Provisions 196,410 122,367

1,451,236 651,056Net current assets 7,214,117 4,323,702

8,172,205 4,855,975

The accompanying notes 1 to 25 are an integral part of the balance sheet.

S.R. Batliboi & Associates Rajesh Hukku Y.M. Kale Nihar Mody Deepak GhaisasChartered Accountants Chairman & Director Director Company Secretary

Managing Director

Subramanian SureshPartner

Chennai MumbaiMay 16, 2003 May 16, 2003

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Note 2003 2002

Revenues 2(e) & 10 5,638,308 4,150,257

Cost of revenues 11 (2,483,373) (1,566,410)

Gross profit 3,154,935 2,583,847

Selling and marketing expenses 12 (446,230) (481,343)General and administrative expenses 13 (707,944) (614,898)Depreciation and amortisation 2(c) & 5 (133,823) (144,985)Income from operations 1,866,938 1,342,621

(Provision)/Reversal for dimunition in value of investment, net (43,923) 24,172Profit/(Loss) on sale of investment 35 (51,500)Interest income 14 208,819 66,415Other income/(expense) 15 (42,129) 36,035Income before provision for income taxes 1,989,740 1,417,743

Provision for income taxes 2(k) & 16 (245,995) (150,135)

Net income 1,743,745 1,267,608Profit and loss account, beginning of the year 90,869 119,905Amount available for appropriation 1,834,614 1,387,513

Transfer to general reserve (1,500,000) (1,250,000)Proposed dividend (93,289) (46,644)Corporate dividend tax (11,953) –Profit and loss account, end of the year 229,372 90,869

Weighted average earnings per share ofRs 5/- each (in Rs) 2(l) & 21Basic 47.73 38.03Diluted 46.86 38.03Number of shares used in computing earnings per shareBasic 36,532,934 33,328,488Diluted 37,213,927 33,328,488

The accompanying notes 1 to 25 are an integral part of the statement of profit and loss.


Managing Director



Statement of profit and lossfor the year ended March 31


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2003 2002

Cash flows from operating activitiesIncome before provision for income taxes 1,989,740 1,417,743

Adjustments to reconcile income before provision forincome taxes to cash provided by operating activities:Depreciation and amortisation 133,823 144,985(Profit)/loss on retirement/sale of fixed assets, net (424) 343(Profit)/loss on sale of investment (35) 51,500Provision for diminution in the value of investments, net 43,923 (24,172)Interest income (208,819) (66,415)Dividend income – (3,311)Effect of exchange difference on cash and bank balances 12,781 (26,280)Finance charge on leased assets 2,155 2,577Provision for doubtful advance 7,253 –Provision for doubtful debts, net (18,755) (28,098) 43,276 122,503

1,961,642 1,540,246

Changes in assets and liabilitiesIncrease in sundry debtors (524,541) (808,599)Increase in loans and advances (66,786) (46,554)Increase in current liabilities and provisions 758,630 167,303 49,938 (805,215)Cash from operating activities 2,128,945 735,031Payment of domestic and foreign income taxes (249,976) (145,248)Net cash from operating activities 1,878,969 589,783

Cash flows from investing activitiesAdditions to fixed assets including capital work in progress (311,574) (230,530)Proceeds from sale of fixed assets 893 207Increase in bank fixed deposits having maturityof more than 90 days (1,760,000) (1,150,000)Investment in subsidiaries (24,380) (55,295)Purchase of investments (250,131) (45,000)Proceeds from sale of investment 2,504 48,500Investment in Joint ventures (7,350) (24,598)Refund of share application money from joint venture 9,038 –Payment of share capital application moneyfor investment in joint venture – (29,620)Interest received 193,401 61,880Dividends received – 3,311Net cash (used in) investing activities (2,147,599) (1,421,145)

Cash flows from financing activitiesProceeds from Initial Public Offering (‘IPO’) 1,780,800 –Payment of IPO related expenses (103,073) –Proceeds from private placement of shares – 441,350Advance against equity shares to be issued 345 –Repayment of loan from Employee StockPurchase Scheme (‘ESPS’) Trust 23,723 8,549Payment of dividend (46,644) (41,596)Payment of corporate dividend tax – (4,243)Payment for lease obligations (8,393) (7,683)Net cash provided by financing activities 1,646,758 396,377

Effect on exchange difference on cash and bank balances (12,781) 26,280

Net increase/(decrease) in cash and cash equivalents 1,365,347 (408,705)Cash and cash equivalents at beginning of the year 1,062,893 1,471,598Cash and cash equivalents at end of the year 2,428,240 1,062,893

Statement of cash flowfor the year ended March 31


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2003 2002

Note:The reconciliation to the cash and bank balances as given in Note 8(b) is as follows:

Cash and bank balances, per Note 8(b) 5,340,531 2,214,842Less:Bank deposits having maturity of more than 90 days (2,910,000) (1,150,000)Unclaimed dividend account (2,291) (1,949)

2,428,240 1,062,893

The accompanying notes 1 to 25 are an integral part of this statement


Managing Director



Statement of cash flow (continued)for the year ended March 31


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

Notes to the financial statementsfor the year ended March 31, 2003

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 has unilateral/joint control in the following entities:

• 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 jointventure company incorporated in June 2000 under the Indianlaws; and

• Flexcel International Private Limited (‘Flexcel’), a 40 per centowned joint venture company incorporated in March 2001under Indian laws.

The Company is principally engaged in the business of providinginformation technology solutions to the financial services industryworldwide. i-flex has a suite of banking products, which caters tothe needs of corporate, retail and investment banking as well astreasury operations. The Company also provides consulting servicesand develops bespoke software for its customers from the financialservices industry. The Company derives a substantial portion of itsrevenues from the overseas markets.

2. Summary of significant accounting policies

(a) Basis of presentation

The financial statements are prepared under the historical costconvention, on the accrual basis of accounting, in conformity withaccounting principles generally accepted in India and in accordancewith the accounting standards referred to in section 211(3C) of theCompanies Act, 1956 (‘the Act’).

The significant accounting policies adopted by the Company, inrespect of the financial statements are set out below.

(b) 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 liabilities at the date ofthe financial statements and the results of operations during the

reporting year end. Although these estimates are based uponmanagement’s best knowledge of current events and actions, actualresults could differ from these estimates.

(c) Fixed assets and depreciation

Fixed assets including assets under finance lease arrangementsare stated at cost less accumulated depreciation. The Companycapitalises all direct costs relating to the acquisition and installationof fixed assets. Depreciation is provided pro-rata to the period ofuse, on the written down value method, at the rates specified inSchedule XIV to the Act or based on the estimated useful life ofassets, whichever is higher. Vehicles under finance leases areamortised over the useful life or lease term, as appropriate (four tofive years). The rates at which fixed assets are depreciated are asfollows:

%

Improvement to leasehold premises 35

Buildings 15

Computer equipment 60

Electrical and office equipment 35

Furniture and fixtures 35

The Company purchases certain application software for internaluse. It is estimated that such software has a relatively short usefullife, usually less than one year. The Company, therefore, charges toincome the cost of acquiring such software.

Advances paid towards the acquisition of fixed assets outstandingat each balance sheet date and the cost of fixed assets not put touse before such date are disclosed under ‘Capital work-in-progress’.

(d) Investments

Trade investments refer to the investments made with the aim ofenhancing the Company’s business interests in providinginformation technology solutions to the financial services industryworldwide. Long term investments are stated at cost less provisionfor diminution on account of other than temporary decline in thevalue of the investment.

Current investments are stated at lower of cost and fair value.

(e) Revenue recognition

Revenues are recognised as follows:

(i) Product licenses and related revenues:

• License fees, on delivery and subsequent milestoneschedule as per the terms of the contract with the end user.

• Product maintenance revenues, over the period of themaintenance contract

• Implementation/Enhancement services are recognisedupon the percentage of completion method based on theproportion of efforts spent to total efforts to complete or onthe basis of contractually determined milestones as certifiedby the customer and as the services are provided for timeand material contracts. Provisions for estimated losses, ifany, on uncompleted contracts are recorded in the periodin which such losses become probable based on currentcontract estimates.

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(ii) Software development services are recognised upon thepercentage of completion method based on the proportion ofefforts spent to total efforts to complete or on the basis ofcontractually determined milestones as certified by thecustomer and as the services are provided for time and materialcontracts. Provisions for estimated losses, if any, onuncompleted contracts are recorded in the period in which suchlosses become probable based on current contract estimates.Reimbursable expenses for projects are invoiced separately tocustomers and although reflected as sundry debtors to the extentoutstanding as at year-end, are not included as revenues orexpenses.

(f) Foreign currency transactions

Foreign currency transactions during the year are recorded at theexchange rates prevailing on the date of the transaction. Foreigncurrency denominated assets and liabilities are translated intorupees at the rates of exchange prevailing at the date of the balancesheet. All exchange differences are dealt with in the statement ofprofit and loss, except for those relating to the acquisition of fixedassets, which are adjusted, if material, in the cost of the fixed assets.

(g) Research and development expenses for software products

Research and development costs are expensed as incurred. 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 are expensed asincurred.

(h) Retirement benefits

Retirement benefits to employees comprise payments to gratuity,superannuation and provident funds as per the approved schemesof the Company.

The Company has schemes of retirement benefits of provident fund,superannuation fund and gratuity fund in respect of which theCompany’s contribution to the funds are charged to the statementof profit and loss. The gratuity fund and superannuation fundbenefits of the Company are administered by a trust formed for thispurpose through the Group Schemes of the Life InsuranceCorporation of India (‘LIC’). In respect of gratuity, the adequacy ofthe accumulated funds available with the LIC has been confirmedon the basis of an actuarial valuation made at the year-end andprovision has been made for the shortfall if any.

(i) Leave encashment

Accrual for leave encashment is estimated on the basis of anactuarial valuation for the unavailed leave balance standing to thecredit of the employees at the year-end.

(j) Operating leases

Leases of assets under which all the risks and rewards of ownershipare effectively retained by the lessor are classified as operatingleases. Lease payments under operating leases are recognised asan expense on a straight-line basis over the lease term.

(k) Income-tax

Provision for current income tax is made on the assessable incomeat the tax rate applicable to the relevant assessment year. Deferredincome taxes are recognized for the future tax consequencesattributable to timing differences between the financial statementdetermination of income and their recognition for tax purposes.The effect on deferred tax assets and liabilities of a change in taxrates is recognized as income using the tax rates and tax laws thathave been enacted or substantively enacted by the balance sheetdate. Deferred tax assets are recognized and carried forward onlyto the extent that there is a reasonable certainty that sufficientfuture taxable income will be available against which such deferredtax assets can be realised.

During the prior year ended March 31, 2002, the Company hadadopted accounting standard no 22 ‘Accounting for taxes’ (AS 22)issued by the Institute of Chartered Accountants of India.Accordingly the Company had recorded a deferred tax credit ofRs 6,291 for the year ended March 31, 2002. In accordance withthe transitional provisions of AS 22, the deferred tax asset pertainingto the years prior to April 1, 2001 amounting to Rs 18,569 hadbeen adjusted against general reserve.

(l) Earning per share

The earnings considered in ascertaining the Company’s earningsper share comprise the net profit after tax. The number of sharesused in computing basic earnings per share is the weighted averagenumber of shares outstanding during the year. The number of sharesused in computing diluted earnings per share comprises theweighted average share considered for deriving basic earnings pershare, and also the weighted average number of shares, if any whichwould have been issued on the conversion of all dilutive potentialequity shares. The number of shares and potentially dilutive equityshares are adjusted for the bonus shares and sub-division of shares.

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As at As atMarch 31, 2003 March 31, 2002

3 Share capital

Authorised100,000,000 equity shares of Rs 5/- each(March 2002 – 100,000,000 equity shares) 500,000 500,000

Issued, subscribed and paid-up37,315,400 equity shares of Rs 5/- each, fully paid up(March 2002 – 33,955,400 equity shares) 186,577 169,777

(a) Of the above, 24,784,300 equity shares of Rs 5/- each (March 2002 – 24,784,300 equity shares) have been issued as fully paid upbonus shares by capitalising the share premium account.

(b) In June 2002 the Company made an IPO of 3,360,000 fresh equity shares of Rs 5/- each at a price of Rs 530 per share.

(c) Refer Note 20(b) for option granted for unissued equity shares.

4 Reserves and surplus

General reserveBalance, beginning of year 3,988,569 2,720,000Opening deferred tax credit (Refer Note 2(k)) – 18,569Transferred from profit and loss account 1,500,000 1,250,000Balance, end of year 5,488,569 3,988,569

Share premiumBalance, beginning of year 606,760 168,805Received during the year 1,764,000 437,955Utilised towards share issue expenses (103,073) –Balance, end of year 2,267,687 606,760

Profit and loss account 229,372 90,869

7,985,628 4,686,198

041_192.pmd 30/06/2003, 8:11 PM78


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041_192.pmd 30/06/2003, 8:11 PM79


6 Investments

a) Long term investments (unquoted)

(i) Trade investmentsDotEx International Limited (Note a) 56,350 49,0005,635,000 equity shares of Rs 10/- each, fully paid-up(March 2002 – 4,900,000)

Less: Provision for diminuiton in value of investment (56,350) –– 49,000

EBZ Online Private Limited (Note b) 45,000 45,000242,260 equity shares of Rs 10/- each, fully paid-up(March 2002 – 242,260)

Flexcel International Private Limited (Note c) 20,680 982,068,000 equity shares of Rs 10/- each, fully paid-up(March 2002 – 9,800)

(ii) Non-trade investmentsEastern Software Systems Limited (Note b) 7,406 9,875268,283 equity shares of Rs 10/- each, fully paid-up(March 2002 – 357,711)

12.75% KEONICS Mahithi Bonds Series-1 (Note d) 20,000 20,000400 Bonds of Rs 50,000/- each fully paid(March 2002 – 400)

National Savings Certificate-VIII issue 131 –

JM High Liquidity Fund – Serial Plan 2004 (Growth) (Note e)24,965,796 (and 858 fractions) units of Rs 10/- each (March 2002 – Nil) 250,000 –

(iii) In subsidiaries

i-flex solutions b.v. (Note f) 25,119 739a wholly owned subsidiary company incorporated in The Netherlands5,185 equity shares of Euros 100/- each, fully paid-up(March 2002 – 185)

i-flex solutions pte limited (Note g) 6,626 6,626a wholly owned subsidiary company incorporated in Singapore250,000 equity shares of Singapore $ 1/- each fully paid up(March 2002 – 250,000)

i-flex solutions inc. (Note h) 48,669 48,669a wholly owned subsidiary company incorporated in theUnited States of America100 equity shares of USD 0.01 cent each fully paid up(March 2002 – 100)

423,631 180,007

b) Current investments (non-trade, quoted)

Unit Trust of India – 1964 Scheme (US-64) (Note i) 50,000 50,0003,311,258 units (and 278 fractions) of Rs 10/- each(March 2002 – 3,311,258 units (and 278 fractions)

041_192.pmd 30/06/2003, 8:11 PM80



Less: Excess of cost over market value (16,712) (29,139)33,288 20,861

456,919 200,868

Aggregate cost of quoted investments 50,000 50,000Aggregate market value of quoted investments 33,288 20,861Aggregate amount of unquoted investments 423,631 180,007

Note a) DotEx is a 51:49 joint venture between NSE.IT Limited, awholly owned subsidiary of The National Stock Exchange of IndiaLimited (‘NSE’) and i-flex. DotEx has set up a broker’s plaza whichenables NSE brokers and their clients to transact in stock marketthrough the internet. The original revenue model of DotEx has notbeen met due to continued sluggishness in the Indian capitalmarkets and the substantial reduction in the trading volumes. Asper the unaudited financial statements as at March 31, 2003, DotExhas incurred accumulated losses of Rs 96 million which havesubstantially eroded its net worth. Management is of the view thatfair value of its investment in DotEx has declined as a result.Accordingly considering the uncertainty about the futureprofitability of DotEx, management has made a provision fordiminution in the value of Rs 56.3 million of its aggregateinvestment in DotEx.

Note b) The Company’s ownership interest in Eastern SoftwareSystems Limited (‘ESSL’) is 6.62%. During the year endedMarch 31, 2003, the Company accepted the buyback offer fromESSL for 89,428 shares. As a result the ownership interest hasreduced from 6.65% to 6.62%. The Company also holds 19.5%shares in EBZ Online Private Limited (‘EBZ’). EBZ is a strategicpartnership between Brihans Technologies Private Limited (‘BTPL’)and i-flex to integrate the selected and adapted software providedunder i-flex’s products with BTPL’s products for Co-operativebanking sector in India. ESSL is primarily engaged in catering tothe needs of small businesses through its flagship product,‘ebizframe’. Both companies are unlisted companies. TheCompany’s rights are limited to protecting its investments in ESSLand EBZ and it does not exert significant influence on the operationsof these companies by way of representation on the Board ofDirectors, participation in policy making processes, material inter-company personnel or technological dependency. Accordingly,these investments are stated at cost less any decline in fair valuebelow original cost when considered to be other than temporary.Management does not believe that currently there is any other thantemporary decline in the value of these investments.

Note c) Flexcel is a 40:40:20 joint venture between i-flex, HDFCBank Limited and its group companies and Lord Krishna Bank,which provides the capability of Flexcube through an ApplicationService Provider (‘ASP’) model to various banks and financialinstitutions in India who may not wish to invest in creating andmaintaining their own internal IT infrastructure. As per theunaudited financial statements as at March 31, 2003, Flexcel hadincurred accumulated losses of Rs 24 million, which managementconsiders to be in the nature of start-up losses. Accordingly,

management does not consider that there is any diminution in thevalue of its investment in Flexcel and the aggregate investment ofRs 20.68 million is stated at cost.

Note d) Investments in debt securities of 12.75% KEONICS MahithiBonds Series-1 allotted on February 1, 2001 are redeemable at parat the end of seven years from the date of allotment and have a putand call option at the end of five years from the date of allotment.

Note e) Investment in JM High Liquidity Fund – Serial Plan 2004(Growth) is investment in debt instrument funds. As per the termof the funds, the maturity of the funds is in April 2004.

Note f) i-flex b.v. was incorporated as a 100% subsidiary in TheNetherlands to undertake marketing of the Company’s softwareproducts and provide software and related services to clients inEurope as well as work on the business development efforts in theregion. Management believes that the accumulated losses as perthe audited financial statements as at March 31, 2003 of Euro 2.87million (approximately Rs 145 million) are in the nature of start uplosses and that i-flex b.v. is expected to earn profits in the nearfuture. Accordingly, management does not consider that there isany dimunition in the value of its investment in i-flex b.v. and isstated at cost.

Note g) i-flex pte was incorporated as a 100% subsidiary inSingapore to undertake marketing of the Company’s softwareproducts and provide software and related services to clients inAsia Pacific region as well as work on the business developmentefforts in the region. The Company has net profit of S$ 0.48 million(Rs 12.56 million) for the year ended March 31, 2003 and anaccumulated profit of S$ 0.50 million (Rs 13.20 million) and isstated at cost.

Note h) i-flex inc. was incorporated as a 100% subsidiary in theUnited States of America to undertake marketing of the Company’ssoftware products and provide software and related services toclients in American region as well as work on the businessdevelopment efforts in the region. Management believes that theaccumulated losses as per the audited financial statements as atMarch 31, 2003 of USD 0.60 million (approximately Rs 28.94million) are in the nature of start up losses and that i-flex inc. isexpected to earn profits in the near future. Accordingly, managementdoes not believe that there is any dimunition in the value of itsinvestment in i-flex inc. and is stated at cost.

Note i) Units in US-64 are valued at the closing market price onthe National Stock Exchange as at March 31, 2003.

041_192.pmd 30/06/2003, 8:11 PM81


7 Deferred tax assets

Difference between book and tax depreciation 31,446 24,826Preliminary expenses written off in books – 34

31,446 24,860

8 Current assets, loans and advances

(a) Sundry debtors (unsecured)Debts outstanding for a period exceeding six months:– Considered good 654,910 122,944– Considered doubtful 28,780 47,536

683,690 170,480Other debts – considered good(includes Unbilled revenues of Rs 14,508(March 2002 – Rs 9,363)) 1,844,173 1,832,842

2,527,863 2,003,322Less: Provision for doubtful debts (28,780) (47,536)

2,499,083 1,955,786

Amount due from subsidiaries 1,876,577 190,945

(b) Cash and bank balancesCash in hand 392 458Balances with scheduled banks:– Current accounts in foreign currency 1,978,890 763,335– Deposit accounts 1,947,000 1,389,189– Deposit amount of unutilised IPO funds 1,359,017 –– Other current accounts 51,518 33,346– Unclaimed dividend amount 2,291 1,949Balances with non scheduled banks:– Current accounts in foreign currency 1,423 26,565

5,340,531 2,214,842

Balances with non scheduled banks– in current accounts in foreign currencyCitibank NY Rep office, USA – 14,344Citibank NY, USA 1,423 9,613Citibank, Singapore (USD account) – 370Citibank, Singapore (Singapore$ account) – 354Citibank, Argentina – 1,884

1,423 26,565Maximum balance held during the year:– in current accounts in foreign currencyCitibank NY Rep office, USA 14,166 16,688Citibank NY, USA 10,791 15,327Citibank, Singapore (USD account) 352 2,859Citibank, Singapore (Singapore$ account) 323 1,341Citibank, Argentina 1,860 1,884

(c) Other current assetsInterest accrued on:– Bank deposits 25,848 10,430– Bonds 454 454

041_192.pmd 30/06/2003, 8:11 PM82



– Loan to subsidiary 390 390Contract acquisition cost (Refer Note 22) 5,326 –

32,018 11,274(d) Loans and advances

(unsecured, considered good unless otherwise stated)Advances recoverable in cash or in kind or forvalue to be received:Loan to ESPS Trust [Note 20(a)] 267,926 291,649Loan to employees (secured) 9,068 17,687Loan to subsidiary 23,595 3,115Deposits 353,751 326,234Prepaid expenses 82,645 92,627Share application money paid to Flexcel – 29,620Amount due from subsidiary – 1,431

Other advances– Considered good 56,736 30,493– Considered doubtful 7,253 –

800,974 792,856Less: Provision for doubtful advance (7,253) –

793,721 792,856

9 Current liabilities and provisions

(a) Current liabilitiesAccrued expenses 444,151 261,464Amount due to subsidiaries 539,972 4,608Deferred revenues 166,979 165,523Advances from customers 41,808 5,428Finance lease obligations 11,547 16,053Accounts payable 5,071 40,448Investor Education and Protection Fund to becredited by Unclaimed dividends * 2,291 1,949Advance against equity shares to be issued 345 –Other current liabilities 42,662 33,216

1,254,826 528,689

* There is no amount due and outstanding as at balance sheet date to be credited to the Investor Education and Protection Fund.

Amounts due to Small Scale Industrial undertakings – –

(b) ProvisionsProposed dividend 93,289 46,644Corporate dividend tax 11,953 –Provision for leave encashment 23,273 9,898Provision for taxation, net of advance paymentof taxes Rs 255,557 67,895 65,825(March 2002 – Rs 150,839)

196,410 122,367


10 Revenues

Product licenses and related activities 3,651,342 2,461,948IT solutions and consulting services 2,032,942 1,650,719Exchange (loss)/gain arising on sales, net (45,976) 37,590

5,638,308 4,150,257

041_192.pmd 30/06/2003, 8:11 PM83


11 Cost of revenues

Employee costs 1,255,614 819,059Travel related expenses (net of recoveries) 945,297 554,161Application software 157,171 88,305Professional fees 122,248 104,885Contract acquistion cost (Refer Note 22) 3,043 –

2,483,373 1,566,410

12 Selling and marketing expenses

Travelling expenses 158,519 163,649Professional fees 123,455 116,810Employee costs 80,655 108,664Advertising expenses 37,500 42,268Seminar expenses 11,783 9,660Communication expenses 5,496 1,186Rent 7,506 4,270Power 1,874 4,574Miscellaneous expenses 19,442 30,262

446,230 481,343

13 General and administrative expenses

Employee costs 289,136 181,171Communication expenses 118,747 73,189Rent 88,954 92,945Professional fees 48,408 23,966Power 35,361 26,433Travelling expenses 32,417 77,099Provision for doubtful advance 7,253 –Advertising expenses 6,961 2,274Finance charge on leased assets 2,155 2,577Loss on retirement/sale of fixed assets, net – 343Provision for doubtful debts, net (18,755) 43,276Miscellaneous expenses 97,307 91,625

707,944 614,898

14 Interest income

Interest– Bank deposits 203,479 60,717

(includes tax deducted at source of Rs 39,372(March 2002 – Rs 10,751))

– Bonds 2,550 2,550(includes tax deducted at source of Rs 536(March 2002 – Rs 512))

– Loan to employees 2,176 2,915– Loan to subsidiaries 614 233

208,819 66,415

15 Other income/(expense)

Exchange gain/(loss) other than on sales, net (43,381) 32,710Profit on retirement/sale of fixed assets, net 424 –Dividend on current investments – 3,311Miscellaneous income 828 14

(42,129) 36,035

16 Provision for taxation

Domestic taxes 169,778 49,307Foreign taxes 82,803 107,119Deferred tax (6,586) (6,291)

245,995 150,135

041_192.pmd 30/06/2003, 8:11 PM84


Under the Indian Income-tax Act 1961, for the year endedMarch 31, 2003 the Company is eligible to claim benefits withrespect to 90% as against 100% till last year of the profits earnedfrom export revenues from its five units registered under theSoftware Technology Park (‘STP’) and one unit forming part of aSpecial Economic Zone (‘SEZ’). The benefit as per the current taxlaws is restricted to ten consecutive assessment years, beginningwith the assessment year relevant to the previous year in which the

Company commences operations from each location. These benefitswill expire for certain of the Company’s units beginning fromApril 1, 2004.

Foreign taxes represents income taxes payable overseas in theUnited States of America, Malaysia, United Kingdom, Kuwait andSingapore.

17 Commitments

(a) Capital commitmentsContracts remaining to be executed on capital account and not provided for (net of advances) aggregates to Rs 507,341 as at March31, 2003 (March 2002 – 139,594)

(b) Lease commitments(i) Finance leasesThe Company takes vehicles under finance leases of upto five years. Future minimum lease payments under finance leases as ofMarch 31, 2003 and March 31, 2002 are as follows:

As at March 31, 2003 Principal Interest Total

Not later than one year 4,786 1,463 6,249

Later than one year and not later than five years 6,761 1,218 7,979

Total minimum payments 11,547 2,681 14,228

As at March 31, 2002 Principal Interest Total

Not later than one year 6,035 2,035 8,070

Later than one year and not later than five years 10,018 1,928 11,946

Total minimum payments 16,053 3,963 20,016

(ii) Operating leasesThe Company has taken certain office premises and residential premises for employees under operating leases, which expire atvarious dates through to 2011. Gross rental expenses for the year ended March 31, 2003 aggregated to Rs 92,108 (March 2002 –Rs 94,354). The minimum rental payments to be made in future in respect of these leases are as follows:

As at As at

March 31, 2003 March 31, 2002

Not later than one year 70,368 73,762

Later than one year and not later than five years 76,913 111,976

Later than five years 55,811 69,460

18 Segment Information

Business segments are defined as components of an enterprise aboutwhich separate financial information is available. This informationis reviewed and evaluated regularly by the management, in decidinghow to allocate resources and in assessing the performance.

The Company is organised geographically and by business segment.For management purposes the Company is primarily organised ona worldwide basis into two business segments:a) Product licenses and related activities andb) IT solutions and consulting services.

The segments are the basis on which the Company reports itsprimary segment information to Management. Product licenses and

related activities segment deals with banking software productslike the FLEXCUBE suite of products and Microbanker which caterto needs of corporate, retail and investment banking as well astreasury operations and datawarehousing requirements. The relatedactivities include enhancements, implementation and maintenanceactivities.

IT solutions and consulting services comprise of bespoke softwaredevelopment, provision of computer software solutions and relatedconsulting services arising from such activities. This segment isfurther sub-divided in the following subsegments i.e. Businessintelligence, Customer relationship management, Brokerage,e-commerce, Internet services and IT and Business consulting.

041_192.pmd 30/06/2003, 8:11 PM85

Year endedMarch 31, 2002

Product license IT solutionsParticulars and related and consulting Corporate Total

activities services

Revenues 2,461,948 1,650,719 – 4,112,667Net exchange gain arising on sales 22,502 15,088 – 37,590Total revenue 2,484,450 1,665,807 – 4,150,257Cost of revenues (625,375) (941,035) – (1,566,410)Gross profit 1,859,075 724,772 – 2,583,847Selling and marketing expenses (455,797) (25,546) – (481,343)General and administrative expenses (192,846) (178,501) (243,551) (614,898)Depreciation and amortisation (50,638) (82,122) (12,225) (144,985)Income from operations 1,159,794 438,603 (255,776) 1,342,621Reversal of provision for dimunition in value of investment 24,172Loss on sale on investment (51,500)Interest income 66,415Other income 36,035Income before provision for Income taxes 1,417,743Provision for income taxes (150,135)Net income 1,267,608

Other informationSegment assets 1,398,193 1,180,209 2,928,629 5,507,031Segment liabilities 307,136 94,675 249,245 651,056Share capital and reserves and surplus – – 4,855,975 4,855,975Depreciation 50,638 82,122 12,225 144,985Capital expenditure by segment 51,465 122,269 56,311 230,045


Product license IT solutionsParticulars and related and consulting Corporate Total

activities services

Revenues 3,651,342 2,032,942 – 5,684,284Net exchange loss arising on sales (29,533) (16,443) – (45,976)Total revenue 3,621,809 2,016,499 – 5,638,308Cost of revenues (989,565) (1,493,808) – (2,483,373)Gross profit 2,632,244 522,691 – 3,154,935Selling and marketing expenses (419,278) (26,952) – (446,230)General and administrative expenses (242,041) (205,585) (260,318) (707,944)Depreciation and amortisation (45,285) (74,034) (14,504) (133,823)Income from operations 1,925,640 216,120 (274,822) 1,866,938Provision for dimunition in value of investment (43,923)Profit on sale of investment 35Interest income 208,819Other income/(expense) (42,129)Income before provision for income taxes 1,989,740Provision for income taxes (245,995)Net income 1,743,745

Other informationSegment assets 1,294,890 1,700,328 6,628,223 9,623,441Segment liabilities 438,087 145,683 867,466 1,451,236Share capital and reserves and surplus – – 8,172,205 8,172,205Depreciation 45,285 74,034 14,504 133,823Capital expenditure by segment 20,085 60,007 – 80,092

041_192.pmd 30/06/2003, 8:11 PM86


Segment revenue and expense:

Revenue is generated through licensing of software products as well as by providing software solutions to the customers including consultingservices. The expenses which are not directly attributable to a business segment are shown as corporate expenses.

Segment assets and liabilities:

Segment assets include all operating assets used by a segment and consist principally of debtors, deposits for premises and fixed assets, netof allowances and provisions. Segment liabilities primarily includes deferred revenues, finance lease obligation, advance from customer,accrued employee cost and other current liabilities. While most such assets and liabilities can be directly attributed to individual segments,the carrying amount of certain assets and liabilities used jointly by two or more segments is allocated to the segment on a reasonable basis.Assets and liabilities that cannot be allocated between the segments are shown as part of corporate assets.

Geographical segments

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

Year ended Year endedRegions March 31, 2003 % March 31, 2002 %

United States of America 2,127,531 37 1,333,498 32Middle East and Africa 1,464,169 26 1,087,459 26Asia Pacific 1,013,830 18 850,848 21Europe 1,033,635 18 815,885 20Latin America and Caribbean 45,119 1 24,977 1

5,684,284 100 4,112,667 100

19 Related party transactions

Promoter Company and its affiliates OrbiTech LimitedOrbiTech Solution Limited (‘OSL’)Citicorp Technology Holdings Inc, USACitibank branchesCiticorp Information Technology, Inc (‘CITI’)Citigroupe-Serve International Limited (‘e-Serve’)

Subsidiaries i-flex b.v., The Netherlandsi-flex pte, Singaporei-flex inc., USA

Joint Ventures DotEx International LimitedFlexcel International Private Limited

Other entities where Company has significant influence i-flex Employee Stock Option Trust

Key Managerial personnel Rajesh Hukku – Chairman and Managing DirectorR Ravisankar – Chief Executive Officer –

International Operations and TechnologyDeepak Ghaisas – Chief Executive Officer –

India Operations, Chief Financial Officer andCompany Secretary

Makarand Padalkar – Chief of StaffJoseph John – Head – Banking Products DivisionV Shankar – Head – Information Technology Services DivisionN R K Raman – Head – Marketing & Global SalesVivek Govilkar – Head – Process and Quality Management GroupS Hariharan – Head – Infrastructure and Support Services GroupR Vidyasagar – Head – Human Resources Division

041_192.pmd 30/06/2003, 8:11 PM87

The related party transactions, other than disclosed elsewhere in the financial statements, have been summarised below:


a) RevenuesBanking product revenuesThe Company supplied banking products and earned revenues from the following related parties:

Citibank branches 1,018,600 609,669i-flex b.v. 452,720 282,999i-flex inc. 292,851 –i-flex pte 327,430 2,444CITI 11,798 3,300e-Serve 42 169Flexcel 2,107 358DotEx – 100

2,105,548 899,039

IT solutions and consulting services revenuesThe Company has provided IT solutions and consulting services and earned revenues from the following related parties:

i-flex inc. 1,109,530 759Citibank branches 303,855 565,125i-flex pte 234,058 13,701i-flex b.v. 66,016 14,941DotEx 2,864 9,560CITI – 673,370e-Serve – 21

1,716,323 1,277,477

Interest on loans received from key managerial personnel 127 295

b) ExpenseCommunication expenses paid to Citibank branches 43,811 –Remuneration to key managerial personnel(Comprises of salary, bonus and perquisites) 34,932 27,912Finance charge paid on finance leases to e-Serve 1,532 2,630Fees for professional services paid to OrbiTech for software development 1,696 25,155Provision for doubtful debts for Citibank branches (1,221) 1,221Bank charges paid to Citibank branches 1,004 1,852Diminuition in value of investment made in DotEx 56,350 –Rent paid for flat taken on lease from relative of key managerial personnel 116 298

138,220 59,068


c) AssetsSundry debtorsi-flex inc. 1,190,207 751i-flex pte 332,532 15,987i-flex b.v. 353,838 174,207Citibank branches 144,160 603,922(net of provision for doubtful debts of Rs Nil (March 2002 – Rs 1,221))CITI 32,919 276,761DotEx 1,574 6,999Flexcel 3,529 385

2,058,759 1,079,012

041_192.pmd 30/06/2003, 8:11 PM88



Loans outstandingi-flex ESPS Trust 267,926 291,649i-flex inc. 23,595 –Key managerial personnel 4,000 4,844i-flex b.v. – 3,115

295,521 299,608Repayment of loani-flex ESPS Trust 23,723 8,549Key managerial personnel 844 1,703

24,567 10,252

Bank balances with Citibank branchesCurrrent accounts 819,471 377,881Deposits 144,877 139,800

964,348 517,681Interest accrued on fixed depositsCitibank branches, India 454 361

Maximum loan outstanding from subsidiariesi-flex inc. 23,965 –i-flex b.v. 3,770 3,186

d) LiabilitiesAmounts due to related partiese-Serve towards lease obligations repayable (Principal and interest) 7,727 14,896i-flex pte on account of expenses 44,558 –i-flex inc. on account of expenses 489,284 4,608i-flex b.v. on account of expenses 6,130 –OrbiTech towards professional services – 1,427

547,699 20,931

Deferred revenue from related partiesi-flex pte 4,891 –i-flex inc. 20,195 –i-flex b.v. 4,442 2,824Citibank branches 1,869 7,896e-Serve – 42Flexcel 1,287 23

32,684 10,785

Repayment of lease obligations to e-Serve (Principal) 4,963 4,506

e) Other transactionsPayment of dividendsOrbitech 20,148 20,148Key managerial personnel 377 218Relatives of key managerial personnel 8 8i-flex ESPS Trust 3,921 4,505

24,454 24,879

Grant of Employee Stock Option Plan Number of Options

Key managerial personnel – 650,200Non-wholetime Directors 10,000 330,000

10,000 980,200

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20 Stock Based Compensation Scheme

a) Employee stock purchase scheme (‘ESPS’)

On March 29, 1998 the Company adopted the ESPS to provide equity based incentives to key employees of the Company (‘1998 Scheme’).Subsequently on April 1, 1999, April 1, 2000 and April 1, 2001, the Company adopted other Stock based schemes (‘1999 Scheme’, ‘2000Scheme’ and ‘2001 Scheme’). These schemes which have similar terms, are administered through a Trust (‘the Trust’). The Trust purchasesshares of the Company using the proceeds of loans obtained from the Company. Such shares are offered by the Trust to employees at anexercise price, which approximates the fair value on the date of the grant. The employees can purchase the shares in a phased manner overa period of five years based on continued employment, until which, the Trust holds the shares for the benefit of the employee. The employeewill be entitled to receive dividends, bonus, etc. that may be declared by the Company from time to time for the entire portion of shares heldby the Trust on behalf of the employees.

On the acceptance of the offer, the selected employee shall undertake to pay within ten years from the date of acceptance of the offer the costof the shares incurred by the Trust including repayment of the loan relatable thereto. The repayment of the loan by the Trust to the Companywould be dependent on employee repaying the amount to the Trust. In case the employee resigns from employment, the rights relating toshares, which are eligible for exercise, may be purchased by payment of the exercise price whereas, the balance shares shall be forfeited infavour of the Trust. The Trustees have the right of recourse against the employee for any amounts that may remain unpaid on the sharesaccepted by the employee. The shares that an employee is eligible to exercise during the initial five-year period merely go to determine theamount and scheduling of the loan to be repaid on exercise by the employee. The Trust shall repay the loan obtained from the Company onreceipt of payments from employees against shares exercised or otherwise.

The Securities and Exchange Board of India (‘SEBI’) has issued the Employee Stock Option Scheme and Stock Purchase Guidelines, 1999(‘SEBI guidelines’), which are applicable to stock option schemes for employees of all listed Companies. In accordance with these guidelines,the excess of market price of the underlying equity shares on the date of grant of the stock options over the exercise price of the options isto be recognised in the books of account and amortised over the vesting period. However, no compensation cost would need to be recordedas the scheme terms are fixed and the exercise price equals the market price of the underlying stock on the grant date.

b) Employee Stock Option Plan (‘ESOP’)

At the Annual General Meeting of the shareholders of the Company held on August 14, 2001, the Company introduced an additional ESOP,pursuant to which equity shares not exceeding an additional 7.5% of the issued and paid-up equity share capital of the Company have beenearmarked for grant, at any given time to present and future employees and Directors of the Company and its existing and future subsidiaries.Pursuant to the above resolution, the Board of Directors, at their meeting held on March 4, 2002 approved the Employees Stock OptionScheme (‘the Scheme’) for issue of 2,376,800 options to the employees and Directors of the Company. According to the ESOP the Companyhas granted 2,274,460 options to the eligible employees and Directors of the Company and its subsidiaries at an exercise price, which willequate the issue price determined through the book-building procedure. 20% of the total options granted under the Scheme will vest to theeligible employees and Directors on the completion of 12, 24, 36, 48 and 60 months respectively and is subject to the continued employmentof the employee or Director with the Company or its subsidiaries.

As per the terms of ‘the Scheme’, the exercise price would equate the price determined for the IPO through book building process for theoption granted prior to the IPO and the fair market value on the date of grant for option granted thereafter. Accordingly no compensation costwould need to be recorded as the exercise price would equal to the fair value of the shares.

The summary of the activity in the Company’s ESOP is as follows:


Outstanding at the beginning of the year 2,274,460 –Granted during the year 40,000 2,274,460Exercised during the year – –Forfeited during the year (64,760) –Outstanding at the end of the year 2,249,700 2,274,460

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21 Reconciliation of basic and diluted shares used in computing earning per share


Number of shares considered as basic weighted average shares outstanding 36,532,934 33,328,488Add: Effect of dilutive stock options 680,993 –Number of shares considered as weighted average shares outstanding andpotential shares outstanding 37,213,927 33,328,488

22 On December 3, 2002 the Company alongwith its subsidiaries acquired two IT consulting service contracts and 51 employees workingon these contracts from Silverline Technologies Limited and its subsidiary, Silverline Technologies Inc. (“Silverline Group”) for a totalconsideration of Rs 35,176, which includes a cash payment made to/behalf of the Silverline Group and the assumption of certainemployee related liabilities of the Silverline Group. The purchase consideration of Rs 8,369 is fully allocated to the contracts andaccordingly, there is no goodwill resulting from the transaction. The consideration allocated to the contracts is charged to Cost ofRevenues on a straight line basis over the remaining contract term of 11 months. Accordingly, Rs 3,043 has been charged to incomestatement as part of Cost of Revenues and balance of Rs 5,326 is carried as deferred contract acquisition cost as part of other currentassets.

23 Aggregate expenses

Following are the aggregate amounts incurred on certain specific expenses that are required to be disclosed under Schedule VI to theCompanies act, 1956


Salaries and bonus 1,517,875 1,016,129Staff welfare expenses 44,222 44,818Contribution to provident and other funds 63,308 47,947Travel related expenses (net of recoveries) 1,136,233 794,909Professional fees 294,111 245,661Communication expenses 124,243 74,375Application software 157,171 88,305Rent 96,460 97,215Advertising expenses 44,461 44,541Power 37,235 31,007Insurance 9,764 5,889Repairs and maintenance:– Leasehold premises 1,199 526– Computer equipments 11,650 11,041– Others 9,878 9,298Rates and taxes 8,473 2,746Finance charge on leased assets 2,155 2,577Loss on retirement/sale of fixed assets, net – 343Provision for doubtful debts, net (18,755) 43,276Provision for doubtful advance 7,253 –Donation 1,017 1,793Contract acquisition cost 3,043 –Other expenses 86,551 100,256

3,637,547 2,662,652

24 Supplementary profit and loss data

(a) Managerial remunerationSalary and incentives to Managing Director 330 330Contribution to provident and other funds 44 –Commission to non-wholetime Directors 13,543 –

13,917 330

In addition to the above, the Managing Director of the Company has also been provided remuneration aggregating Rs 13,567 for theyear ended March 31, 2003 (March 2002 – Rs 1,760) from i-flex inc., a subsidiary of the Company.

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Computation of net profit for calculating commission payable to non-whole time Directors in accordance with Section 198 of the Act


Net profit after tax 1,743,745

Add: Managerial remuneration 374Commission to non-wholetime Directors 13,543Provision for bad and doubtful debts (18,755)Provision for doubtful advance 7,253Depreciation and amortisation 133,823Provision for income taxes 245,995

2,125,978Less:Profit/(Loss) on sale of investment 35

Profit on retirement/sale of fixed assets, net 424Depreciation and amortisation as per Section 350 of the Act (Note 1) 133,823Net profit on which commission is payable 1,991,696Maximum allowed as per the Act (1 percent) 19,917Maximum approved by the shareholders (1 percent) 19,917Commission approved by the board of Directors 13,543

Note 1: The Company depreciates fixed assets based on estimated useful lives that are lower than those implicit in Schedule XIV of the Act.Accordingly, the rates of depreciation used by the Company are higher than the minimum rates prescribed by Schedule XIV.

Note 2: Commission as per Section 198 has not been computed for year ended March 31, 2002 since the Company has not paid anycommission to non-wholetime Director for the year ended March 31, 2002.


(b) Payments to auditorsStatutory audit fees 1,300 1,300Tax Audit 500 500Special reports 2,000 3,200Certification work 200 –Reimbursement of out-of-pocket expenses 203 103

4,203 5,103

(c) Earnings in foreign currencyProduct licenses and related revenues 3,474,533 2,280,916IT solutions and consulting services 2,003,806 1,625,600Reimbursement of travelling expenses 198,134 246,308

5,676,473 4,152,824

(d) Expenditure in foreign currencyTravelling (net of recoveries) 734,176 641,606Professional fees 63,344 84,184Application software 51,502 15,396Foreign taxes 30,258 94,808Advertising 7,276 13,471Salaries and bonus 26,237 43,605Representative office expenses 1,415 17,663Seminar expenses 10,307 11,745Staff training expenses 2,640 2,404Others 25,074 7,202

952,229 932,084

Exchange gain/(loss) on sales (45,976) 37,590Exchange gain/(loss) other than on sales (43,381) 32,710

(89,357) 70,300

(e) Value of imports on CIF basis – capital goods 53,389 38,866

25 Prior year comparatives

Prior year amounts have been audited by a firm of chartered accountants other than M/s S. R. Batliboi & Associates and have beenreclassified and regrouped, where necessary to conform with current year’s presentation.

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Balance sheet abstract and company’s general business profile

I. Registration details

Registration number 5 3 6 6 6 State Code 1 1

Balance Sheet date 3 1 0 3 2 0 0 3

Date Month Year

II. Capital raised during the year (amount in Rs thousands)

1 6 8 0 0 N I L

N I L N I L

III. Position of mobilisation and deployment of funds (amount in Rs thousands)

Sources of funds

9 6 2 3 4 4 1 9 6 2 3 4 4 1

1 8 6 5 7 7 7 9 8 5 6 2 8

N I L N I L

Application of funds

4 6 9 7 2 3 4 5 6 9 1 9

7 2 1 4 1 1 7 N I L

N I L

IV. Performance of Company (amount in Rs thousands)

5 7 6 1 1 1 0 3 7 7 1 3 7 0

+ 1 9 8 9 7 4 0 + 1 7 4 3 7 4 5

(Please tick appropriate box + for profit, - for loss)

4 7 . 7 3 5 0

V. Generic names of three principal products/services of company

(as per monetary terms)

Item Code number

(ITC code) N . A .

Product description

S O F T W A R E D E V E L O P M E N T S E R V I C E S

S O F T W A R E P R O J E C T A S S I G N M E N T S

S O F T W A R E P R O D U C T M A N A G E M E N T

Total expenditureTurnover

Miscellaneous expenditure

Public issue Rights issue

Bonus issue Private placement

Total assets

Paid-up capital Reserves and surplus

Secured loans Unsecured loans

Net fixed assets Investments

Net current assets

Accumulated losses

Profit/loss before tax Profit/loss after tax+/- +/-

Basic earnings per share in Rs Dividend rate %

Total liabilities

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1 Name of the Subsidiary i-flex solutions b.v.

2 The Financial Year of the Subsidiary Company ended on March 31, 2003

3 Holding Company i-flex solutions ltd

4 Holding Company’s interest 100%

5 Shares held by the Holding Company in the Subsidiary 5,185 equity sharesof Euro 100/- each fully

paid up

6 Net aggregate amount of Profits/(Losses) of the Subsidiary so far as it concerns the Members of the

Holding Company and is not dealt with in the Accounts of the Holding Company

a. for the financial year ended on March 31, 2003 (Rs 34,298)

b. for the previous financial years of the Subsidiary since it became a Subsidiary (Rs 91,389)


Holding Company dealt with or provided for in the Accounts of the Holding Company

a. for the financial year ended on March 31, 2003 N.A.

b. for the previous financial years of the Subsidiary since it became a Subsidiary N.A.

Rajesh Hukku Y.M. Kale Nihar Mody Deepak GhaisasChairman & Director Director Company SecretaryManaging Director

MumbaiMay 16, 2003

Statement pursuant to Section 212 of the Companies Act, 1956relating to Subsidiary Companies

(Amount in thousands of Indian Rupees)

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1 Name of the Subsidiary i-flex solutions pte ltd




5 Shares held by the Holding Company in the Subsidiary 250,000 shares ofSingapore $ 1

each fully paid up



a. for the financial year ended on March 31, 2003 Rs 13,235

b. for the previous financial years of the Subsidiary since it became a Subsidiary Rs 531






MumbaiMay 16, 2003



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1 Name of the Subsidiary i-flex solutions inc.




5 Shares held by the Holding Company in the Subsidiary 100 shares of

USD 0.01 cent

each fully paid up



a. for the financial year ended on March 31, 2003 Rs (17,377)

b. for the previous financial years of the Subsidiary since it became a Subsidiary Rs (11,610)






MumbaiMay 16, 2003



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Y inancialsi-flex solutions ltd. and Subsidiaries



Indian Generally Accepted Accounting

Principles (Indian GAAP) (Consolidated).

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To the Board of Directors ofi-flex Solution Limited:

1 We have examined the attached consolidated balance sheet ofi-flex Solutions Limited and its subsidiaries and joint ventures(together referred to as ‘the Group’ as described in Note 2 (a))as at March 31, 2003, the Consolidated Profit and Loss Accountand Consolidated Cash Flow Statement for the year then endedprepared in accordance with accounting principles generallyaccepted in India.

2 These financial statements are the responsibility of the Group’smanagement. Our responsibility is to express an opinion onthese financial statements based on our audit. We conductedour audit in accordance with generally accepted auditingstandards in India. These Standards require that we plan andperform the audit to obtain reasonable assurance whether thefinancial statements are free of material misstatements. An auditincludes, examining on a test basis, evidence supporting theamounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used andsignificant estimates made by management, as well asevaluating the overall financial statements. We believe thatour audit provides a reasonable basis for our opinion.

3 We report that the consolidated financial statements have beenprepared by the Company in accordance with the requirementsof Accounting Standard (AS) 21, Consolidated Financial

Statements, issued by the Institute of Chartered Accountantsof India and on the basis of the separate financial statementsof i-flex solutions limited and its subsidiaries and joint venturesincluded in the consolidated financial statements.

4 On the basis of the information and explanations given to us,we are of the opinion that in conformity with the accountingprinciples generally accepted in India:

a. the Consolidated Balance Sheet gives a true and fair viewof the consolidated state of affairs of Group as at March31, 2003;

b. the Consolidated Profit and Loss Account gives a true andfair view of the consolidated results of Group for the yearthen ended; and

c. the Consolidated Cash Flow Statement gives a true andfair view of the consolidated cash flows of Group for theyear then ended.

S.R. Batliboi & AssociatesChartered Accountants

Chennai Subramanian SureshMay 16, 2003 Partner

Auditors’ report

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Consolidated Balance sheetas at March 31


Note 2003 2002

Sources of fundsShareholders’ fundsShare capital 3 186,577 169,777Reserves and surplus 4 7,809,725 4,542,316

7,996,302 4,712,093

Application of fundsFixed Assets 2(c) & 5Cost 972,389 852,562Less: Accumulated depreciation 664,920 526,449Net book value 307,469 326,113Capital work-in-progress and advances 221,383 4,876

528,852 330,989

Investments 2(d) & 6 355,825 95,736

Deferred tax assets 7 29,703 24,658

Current Assets, Loans and Advances 8Sundry debtors 1,446,960 1,887,483Cash and bank balances 5,768,059 2,280,983Other current assets 48,851 10,886Loans and advances 822,812 809,928

8,086,682 4,989,280Less: Current Liabilities and Provisions 9Current liabilities 771,156 606,182Provisions 233,604 122,388

1,004,760 728,570Net Current Assets 7,081,922 4,260,710

7,996,302 4,712,093

The accompanying notes 1 to 25 are an integral part of these financials statements.


Managing Director



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Note 2003 2002

Revenues 2(e) & 10 6,098,543 4,194,772

Cost of Revenues 11 (2,524,284) (1,566,410)

Gross profit 3,574,259 2,628,362

Selling and marketing expenses 12 (870,969) (599,726)General and administrative expenses 13 (743,448) (642,057)Depreciation and amortisation 2(c) & 5 (151,298) (156,422)Income from operations 1,808,544 1,230,157

Reversal for diminution in value of investments, net 12,427 24,172Profit/(Loss) on sale of investment 35 (51,500)Interest income 14 209,042 66,672Other income/(expenses) 15 (68,441) 33,827Income before provision for income taxes 1,961,607 1,303,328

Provision for income taxes 2(k) & 16 (252,729) (150,337)

Net income 1,708,878 1,152,991

Weighted average earnings per share of Rs 5/- each (in Rs) 2(l) & 21Basic 46.78 34.59Diluted 45.92 34.59

Number of shares used in computing earnings per shareBasic 36,532,934 33,328,488Diluted 37,213,927 33,328,488

The accompanying notes 1 to 25 are an integral part of these financials statements.


Managing Director



Consolidated statement of profit and lossfor the year ended March 31


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2003 2002

Cash flows from operating activitiesIncome before provision for income taxes 1,961,607 1,303,328

Adjustments to reconcile income before provision forincome taxes to cash provided by operating activities:Depreciation and amortisation 151,298 156,422(Profit)/loss on retirement/sale of fixed assets, net (665) 343Profit/(loss) on sale of investment (35) 51,500Reversal of diminution in the value of investments (12,427) (24,172)Interest income (209,042) (66,672)Dividend income – (3,311)Effect of exchange difference on cash and bank balances 12,781 (26,280)Finance charge on leased assets 2,155 2,577Provision for doubtful advance 7,253 –Provision for doubtful debts, net (18,755) (67,437) 51,652 142,059

1,894,170 1,445,387Changes in assets and liabilities(Increase)/decrease in sundry debtors 457,595 (757,524)(Increase) in loans and advances (66,248) (90,730)Increase in current liabilities and provisions 197,456 588,803 107,091 (741,163)Cash from operating activities 2,482,973 704,224Payment of domestic and foreign taxes (218,486) (145,248)Net cash from operating activities 2,264,487 558,976

Cash flows from investing activitiesAdditions to fixed assets including capital work in progress (363,459) (247,879)Proceeds from sale of fixed assets 1,444 207Increase in bank fixed deposits having maturityof more than 90 days (1,760,000) (1,150,000)Purchase of investments (250,131) (45,000)Proceeds from sale of investment 2,504 48,500Interest received 193,465 62,525Dividends received – 3,311Net cash (used in) investing activities (2,176,177) (1,328,336)

Cash flows from financing activitiesProceeds from Initial Public Offering (‘IPO’) 1,780,800 –Payment of IPO related expenses (103,073) –Proceeds from private placement of shares 4,446 441,350Advance against equity shares to be issued 345 –Repayment of loan from EmployeeStock Purchase Scheme (‘ESPS’) Trust 23,723 8,549Payment of dividend (46,644) (41,596)Payment of corporate dividend tax – (4,243)Payment for lease obligations (8,392) (7,683)Net cash provided by financing activities 1,651,205 396,377

Effect on exchange difference on cash and bank balances (12,781) 26,280

Net increase/(decrease) in cash and cash equivalents 1,726,734 (346,703)Cash and cash equivalents at beginning of the year 1,129,034 1,475,737Cash and cash equivalents at end of the year 2,855,768 1,129,034

Consolidated statement of cash flowfor the year ended March 31


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2003 2002

Note:The reconciliation to the cash and bank balances as given in Note 8(b) is as follows:

Cash and bank balances, per Note 8(b) 5,768,059 2,280,983Less:Bank deposits having maturity of more than 90 days (2,910,000) (1,150,000)Unclaimed dividend account (2,291) (1,949)

2,855,768 1,129,034

The accompanying notes 1 to 25 are an integral part of this statement.


Managing Director



Consolidated statement of cash flow (continued)for the year ended March 31


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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.


The Company has unilateral/joint control in the following entities:


• 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 ownedjoint venture company incorporated in June 2000 under thelaws of India; and

• Flexcel International Private Limited (‘Flexcel’), a 40 per centowned joint venture company incorporated in March 2001under the laws of India.

The Company together with its wholly owned subsidiaries, i-flexb.v., i-flex pte and i-flex inc., is principally engaged in the businessof providing information technology solutions to the financialservices industry worldwide. i-flex has a suite of banking products,which caters to the needs of corporate, retail and investment bankingas well as treasury operations. The Company also providesconsulting services and develops bespoke software for its customersfrom the financial services industry. The Company derives asubstantial portion of its revenues from the overseas markets. DotExis a 51:49 joint venture between NSE.IT Limited, a wholly ownedsubsidiary of NSE and i-flex. DotEx has set up a broker’s plazawhich enables brokers and their clients to transact in stock/securities markets through the internet.

Flexcel is a 40:40:20 joint venture between i-flex, HDFC BankLimited and its group companies and Lord Krishna Bank Limited,which provides the capability of Flexcube through an ApplicationService Provider (‘ASP’) model to various banks and financialinstitutions in India who may not wish to invest in creating andmaintaining their own internal IT infrastructure.

Notes to the consolidated financial statementsfor the year ended March 31, 2003

2 Summary of significant accounting policies

(a) Basis of presentation and consolidation

The accompanying consolidated financial statements are preparedunder the historical cost convention, on the accrual basis ofaccounting, in conformity with accounting principles generallyaccepted in India, to reflect the financial position and the resultsof operations of the Company together with its wholly ownedsubsidiary companies i.e. i-flex b.v., i-flex pte and i-flex inc. andjoint venture companies i.e. DotEx and Flexcel (hereinaftercollectively referred to as ‘the Group’). In respect of the joint venturecompanies, the Group applies the proportionate consolidationmethod. All material inter-company transactions and balancesbetween the entities included in the consolidated financialstatements have been eliminated.

The significant accounting policies adopted by the Group, in respectof the consolidated financial statements are set out below.

(b) 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 liabilities at the date ofthe financial statements and the results of operations during thereporting year. Although these estimates are based uponmanagement’s best knowledge of current events and actions, actualresults could differ from these estimates.

(c) Fixed assets and depreciation

Fixed assets including assets under finance lease arrangementsare stated at cost less accumulated depreciation. The Groupcapitalises all direct costs relating to the acquisition and installationof fixed assets. Depreciation is provided pro-rata to the period ofuse, on the written down value method, at the rates specified inSchedule XIV to the Act or based on the estimated useful life ofassets, whichever is higher. Vehicles under finance leases areamortised over the useful life or lease term, as appropriate (four tofive years). The rates at which fixed assets are depreciated are asfollows:

%

Improvement to leasehold premises 35

Buildings 15

Computer equipment 60

Electrical and office equipment 35

Furniture and fixtures 35

The Group purchases certain application software for internal use.It is estimated that such software has a relatively short useful life,usually less than one year. The Group, therefore, charges to incomethe cost of acquiring such software.

Advances paid towards the acquisition of fixed assets outstandingat each balance sheet date and the cost of fixed assets not put touse before such date are disclosed under ‘Capital work-in-progress’.

(All amounts in thousands of Indian Rupeesunless otherwise stated)

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(d) Investments

Trade investments refer to the investments made with the aim ofenhancing the Group’s business interests in providing informationtechnology solutions to the financial services industry worldwide.Long term investments are stated at cost less provision fordiminution on account of other than temporary decline in the valueof the investment.

Current investments are stated at lower of cost and fair value.

(e) Revenue recognition

Revenues are recognised as follows:

(i) Product licenses and related revenues:

• License fees, on delivery and subsequent milestone scheduleas per the terms of the contract with the end user.

• Product maintenance revenues, over the period of themaintenance contract.

• Implementation/Enhancement services are recognised uponthe percentage of completion method based on the proportionof efforts spent to total efforts to complete or on the basis ofcontractually determined milestones as certified by thecustomer and as the services are provided for time and materialcontracts. Provisions for estimated losses, if any, onuncompleted contracts are recorded in the period in whichsuch losses become probable based on current contractestimates.

(ii) Software development services are recognised upon thepercentage of completion method based on the proportion ofefforts spent to total efforts to complete or on the basis ofcontractually determined milestones as certified by thecustomer and as the services are provided for time and materialcontracts.

Provisions for estimated losses, if any, on uncompletedcontracts are recorded in the period in which such lossesbecome probable based on current contract estimates.

Reimbursable expenses for projects are invoiced separatelyto customers and although reflected as sundry debtors to theextent outstanding as at year-end, are not included as revenuesor expenses.

(f) Foreign currency transactions

Foreign currency transactions during the year are recorded at theexchange rates prevailing on the date of the transaction. Foreigncurrency denominated assets and liabilities are revalued into rupeesat the rates of exchange prevailing at the date of the balance sheet.The results of each entity in the Group are translated into IndianRupees, the reporting currency, at the average rates of exchangeduring the year and the balance sheet is translated at the rate ineffect at the balance sheet date. All exchange differences are dealtwith in the statement of profit and loss, except for those relating tothe acquisition of fixed assets, which are adjusted, if material, inthe cost of the fixed assets.

(g) Research and development expenses for software 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 are expensed asincurred.

(h) Retirement benefits

Retirement benefits to employees comprise payments to gratuity,superannuation and provident funds as per the approved schemesof the Group.

In India, the Group has schemes of retirement benefits of providentfund, superannuation fund and gratuity fund in respect of whichthe Group’s contribution to the funds are charged to the statementof profit and loss. The gratuity fund and superannuation fundbenefits of the Company are administered by a trust formed for thispurpose through the Group Schemes of the Life InsuranceCorporation of India (‘LIC’). In respect of gratuity, the adequacy ofthe accumulated funds available with the LIC has been confirmedon the basis of an actuarial valuation made at the year-end andprovision has been made for the shortfall, if any.

(i) Leave encashment

Accrual for leave encashment is estimated on the basis of anactuarial valuation for the unavailed leave balance standing to thecredit of the employees at the year-end.

(j) Operating leases

Leases of assets under which all the risks and rewards of ownershipare effectively retained by the lessor are classified as operatingleases. Lease payments under operating leases are recognised asan expense on a straight-line basis over the lease term.

(k) Income-tax

Provision for current income-tax is made on the assessable incomeat the tax rate applicable to the relevant assessment year. Deferredincome taxes are recognised for the future tax consequencesattributable to timing differences between the financial statementdetermination of income and their recognition for tax purposes.The effect on deferred tax assets and liabilities of a change in taxrates is recognised in income using the tax rates and tax laws thathave been enacted or substantively enacted by the balance sheetdate. Deferred tax assets are recognised and carried forward onlyto the extent that there is reasonable certainty that sufficient futuretaxable income will be available against which such deferred taxassets can be realised.

During the year ended March 31, 2002, the Company had adoptedAccounting Standard 22, ‘Accounting for taxes’ (AS 22) issued bythe Institute of Chartered Accountants of India. Accordingly, theCompany had recorded a deferred tax credit of Rs 6,089 for theyear ended March 31, 2002. In accordance with the transitionalprovisions of AS 22, the deferred tax asset pertaining to the yearsprior to April 1, 2001 amounting to Rs 18,569 had been adjustedagainst general reserve.

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(l) Earnings per share

The earnings considered in ascertaining the Group’s earnings per share comprise the net profit after tax. The number of shares used incomputing basic earnings per share is the weighted average number of equity shares outstanding during the year. The number of sharesused in computing diluted earnings per share comprises the weighted average share considered for deriving basic earnings per share, andalso the weighted average number of equity shares, if any, which would have been issued on the conversion of all dilutive potential equityshares. The number of shares and potentially dilutive equity shares are adjusted for the bonus shares and sub-division of shares.


3 Share capital

Authorised100,000,000 equity shares of Rs 5/- each 500,000 500,000(March 31, 2002 – 100,000,000 equity shares)

Issued, subscribed and paid-up37,315,400 equity shares of Rs 5/- each, fully paid up 186,577 169,777(March 31, 2002 – 33,955,400 equity shares)

(a) Of the above, 24,784,300 equity shares of Rs 5/- each (March 31, 2002 – 24,784,300 equity shares) have been issued as fullypaid-up bonus shares by capitalising the share premium account.

(b) In June 2002, the Company made an IPO of 3,360,000 fresh equity shares of Rs 5/- each at a price of Rs 530/- per share.

(c) Refer Note 20(b) for option granted for unissued equity shares.

4 Reserves and surplus

General reserveBalance, beginning of year 3,988,569 2,720,000Opening deferred tax credit (Refer Note 2(k)) – 18,569Transferred from profit and loss account 1,500,000 1,250,000Balance, end of year 5,488,569 3,988,569

Share premiumBalance, beginning of year 606,760 168,805Received during the year 1,764,000 437,955Share of Share premium received by joint venture 310 –Utilised towards share issue expenses (103,073) –Balance, end of year 2,267,997 606,760

Gain on dilution of equity investment in joint venture (Refer Note 23) 2,536 –

Profit and loss accountBalance, beginning of year (53,013) 90,640Net profit for the year 1,708,878 1,152,991Transfer to general reserve (1,500,000) (1,250,000)Proposed dividend (93,289) (46,644)Corporate dividend tax (11,953) –Balance, end of year 50,623 (53,013)

7,809,725 4,542,316

041_192.pmd 30/06/2003, 8:12 PM106


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6 Investments

a) Long term investments (unquoted)(i) Trade investments

EBZ Online Private Limited (Note a) 45,000 45,000242,260 (March 31, 2002 – 242,260) equity shares ofRs 10/- each, fully paid-up

(ii) Non-trade investmentsEastern Software Systems Limited (Note a) 7,406 9,875268,283 (March 31, 2002 – 357,711) equity shares of Rs 10/- each, fully paid-up

12.75% KEONICS Mahithi Bonds Series-1 (Note b) 20,000 20,000400 (March 31, 2002 – 400) Bonds of Rs 50,000/- each

National Savings Certificate-VIII issue 131 –

JM High Liquidity Fund – Serial Plan 2004 (Growth) (Note c) 250,000 –24,965,796 (and 858 fractions) units of Rs 10/- each (March 31, 2002 – Nil)

322,537 74,875

b) Current investments (non-trade, quoted)Unit Trust of India – 1964 Scheme (US-64) (Note d) 50,000 50,0003,311,258 units (and 278 fractions) of Rs 10/- each(March 31, 2002 – 3,311,258 units and 278 fractions)Less: Excess of cost over market value (16,712) (29,139)

33,288 20,861

355,825 95,736

Aggregate cost of quoted investments 50,000 50,000Aggregate market value of quoted investments 33,288 20,861Aggregate amount of unquoted investments 322,537 74,875

Note a) The Company’s ownership interest in Eastern SoftwareSystems Limited (‘ESSL’) is 6.62%. During the year ended March31, 2003, the Company accepted the buyback offer from ESSL for89,428 shares. As a result the ownership interest has reduced from6.65% to 6.62%. The Company also holds 19.5% shares in EBZOnline Private Limited (‘EBZ’). EBZ is a strategic partnershipbetween Brihans Technologies Private Limited (‘BTPL’) and theGroup to integrate the selected and adapted software provided underthe Group’s products with BTPL’s products for Co-operative bankingsector in India. ESSL is primarily engaged in catering to the needsof small businesses through its flagship product, ‘ebizframe’. Bothcompanies are unlisted companies. The Company’s rights arelimited to protecting its investments in ESSL and EBZ and it doesnot exert significant influence on the operations of these companiesby way of representation on the Board of Directors, participation inpolicy making processes, material inter-company personnel ortechnological dependency. Accordingly, these investments are

stated at cost less any decline in fair value below original costwhen considered to be other than temporary. Management doesnot believe that currently there is any other than temporary declinein the value of these investments.

Note b) Investments in debt securities of 12.75% KEONICS MahithiBonds Series-1 allotted on February 1, 2001 are redeemable at parat the end of seven years from the date of allotment and have a putand call option at the end of five years from the date of allotment.

Note c) Investment in JM High Liquidity Fund – Serial Plan 2004(Growth) is investment in debt instrument funds. As per the termof the funds, the maturity of the funds is in April 2004.

Note d) Units in US-64 are valued at the closing market price onthe NSE as at March 31, 2003.

041_192.pmd 30/06/2003, 8:12 PM108



7 Deferred tax assets

Difference between book and tax depreciation 29,703 24,624Preliminary expenses written off in books – 34

29,703 24,658

8 Current assets, loans and advances

(a) Sundry debtors (unsecured)Debts outstanding for a period exceeding six months:– Considered good 365,868 129,800– Considered doubtful 38,840 55,296

404,708 185,096

Other debts:– Considered good 1,081,092 1,757,683

(includes Unbilled revenue of Rs 14,508 (March 31, 2002 – Rs 9,363)– Considered doubtful – 616

1,485,800 1,943,395Less: Provision for doubtful debts (38,840) (55,912)

1,446,960 1,887,483(b) Cash and bank balances

Cash in hand 832 509Remittance in transit 7,091 –

Balances with scheduled banks:– Current accounts in foreign currency 1,978,890 763,335– Deposit accounts 1,953,253 1,393,404– Deposit amount of unutilised IPO funds 1,359,017 –– Other current accounts 51,671 35,816– Unclaimed dividend account 2,291 1,949

Balances with non-scheduled banks:– Current accounts in foreign currency 1,423 26,565– Current accounts of foreign subsidiaries 413,591 59,405

5,768,059 2,280,983

(c) Other current assetsInterest accrued on:– Bank Deposits 26,009 10,432– Bonds 454 454Contract acquisition Cost (Refer Note 22) 22,388 –

48,851 10,886

(d) Loans and advances (unsecured, considered good unless otherwise stated)Advances recoverable in cash or in kind or for value to be received:Loan to ESPS Trust (Note 20 (a)) 267,926 291,649Loan to employees (secured) 10,267 19,284Deposits 379,628 342,648Prepaid expenses 94,151 110,273Share application money – 14,961Other advances– Considered good 70,840 31,113– Considered doubtful 7,253 –

830,065 809,928Less: Provision for doubtful advance (7,253) –

822,812 809,928

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9 Current liabilities and provisions

(a) Current liabilitiesAccrued expenses 471,156 269,109Deferred revenues 172,269 167,694Advances from customers 14,495 5,428Finance lease obligations 11,547 16,053Accounts payable 22,770 58,417Investor Education and Protection Fund to becredited by Unclaimed dividends * 2,291 1,949Advance against equity shares to be issued 345 –Other current liabilities 76,283 87,532

771,156 606,182

* There is no amount due and outstanding as at balance sheet date to be credited to the Investor Education and Protection Fund

(b) ProvisionsProposed dividend 93,289 46,644Corporate dividend tax 11,953 –Provision for leave encashment 23,285 9,919Provision for taxation, net of advance payment oftaxes Rs 255,557 105,077 65,825(March 31, 2002 – Rs 150,839) 233,604 122,388


10 Revenues

Product licenses and related activities 3,853,455 2,506,119IT solutions and consulting services 2,285,188 1,649,299Exchange (loss)/gain arising on sales, net (42,670) 37,590Share of sales of joint venture companies 2,570 1,764

6,098,543 4,194,772

11 Cost of revenues

Employee costs 1,286,780 819,059Travel related expenses (net of recoveries) 945,297 554,161Application software 157,171 88,305Professional fees 122,248 104,885Contract acquisition cost (Refer Note 22) 12,788 –

2,524,284 1,566,410

12 Selling and marketing expenses

Employee costs 285,210 135,351Travelling expenses 186,964 164,236Professional fees 163,750 116,810Advertising expenses 65,650 59,683Rent 50,426 24,579Communication expenses 29,273 4,723Seminar expenses 11,783 9,660Power 2,180 1,189Miscellaneous expenses 75,733 83,495

870,969 599,726

13 General and administrative expenses

Employee costs 314,553 191,073Communication expenses 120,260 72,507Rent 89,379 93,530Professional fees 50,572 23,966Travelling expenses 32,674 77,516

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Power 35,810 30,342Advertising expenses 6,961 2,274Finance charge on leased assets 2,155 2,577Loss on retirement/sale of fixed assets, net – 343Provision for doubtful debts, net (18,755) 43,276Provision for doubtful advance 7,253 –Miscellaneous expenses 102,586 104,653

743,448 642,057

14 Interest income

Interest– Bank Deposits 204,278 61,170(Includes tax deducted at source of Rs 39,672 (March 31, 2002 – Rs 10,751)– Bonds 2,550 2,550(Includes tax deducted at source of Rs 536 (March 31, 2002 – Rs 512)– Loan to employees 2,214 2,952

209,042 66,672

15 Other income/(expenses)

Exchange gain/(loss) other than on sales, net (70,950) 30,502Profit on retirement/sale of fixed assets, net 665 –Dividend on current investments – 3,311Miscellaneous income 957 14Share of other income of joint venture companies 886 –

(68,441) 33,827

16 Provision for taxation

Domestic Indian taxes 169,778 49,307Subsidaries 2,188 –Foreign taxes 85,808 107,119Deferred taxes (5,045) (6,089)

252,729 150,337

Under the Indian Income-tax Act, 1961, for the year ended March 31, 2003, the Company is eligible to claim benefits with respect to 90%as against 100% till last year of the profits earned from export revenues from its five units registered under the Software Technology Parks(‘STP’) and one unit forming part of a Special Economic Zone (‘SEZ’) in India. The benefit as per the current tax laws is restricted to tenconsecutive assessment years, beginning with the assessment year relevant to the previous year in which the Company commences operationsfrom each location. These benefits will expire for certain of the Company’s units beginning from April 1, 2004.

Foreign taxes represents income taxes payable overseas in the United States of America, Malaysia, United Kingdom, Singapore, Japan andKuwait.

17 Commitments and contingencies

(a) Capital commitments

Contracts remaining to be executed on capital account and not provided for (net of advances) aggregate Rs 507,642 as at March 31, 2003(March 31, 2002 Rs 139,594).

(b) Contingencies

The Dutch authorities have alleged violation of immigration and taxation rules by i-flex b.v. in the Netherlands. i-flex b.v. has not receivedany written communication from the authorities yet. If such communication is received, the Company shall defend itself vigorously. Thedetermination of the liability, if any, is not possible at this point.

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(c) Lease commitments

(i) Finance leasesThe Group takes vehicles under finance leases of upto five years. Future minimum lease payments under finance leases as ofMarch 31, 2003 and March 31, 2002 are as follows:

As at March 31, 2003 Principal Interest TotalNot later than one year 4,786 1,463 6,249Later than one year and not later than five years 6,761 1,218 7,979Total minimum payments 11,547 2,681 14,228

As at March 31, 2002Not later than one year 6,035 2,035 8,070Later than one year and not later than five years 10,018 1,928 11,946Total minimum payments 16,053 3,963 20,016

(ii) Operating leasesThe Group has taken certain office premises and residential premises for employees under operating leases, whichexpire at various dates through to 2011. Gross rental expenses for the year ended March 31, 2003 aggregated to Rs 120,974(March 31, 2002 – Rs 100,381)

The minimum rental payments to be made in future in respect of these leases are as follows:

As at March 31, 2003 Amount

Not later than one year 95,811Later than one year and not later than five years 129,985Later than five years 55,811

Share of joint venture included in above is as follows:Not later than one year –Later than one year and not later than five years –Later than five years –

As at March 31, 2002

Not later than one year 88,770Later than one year and not later than five years 160,447Later than five years 69,460

Share of joint venture included in above is as follows:Not later than one year 1,124Later than one year and not later than five years 387Later than five years –

18 Segment information

Business segments are defined as components of an enterprise about which separate financial information is available. This information isreviewed and evaluated regularly by the management, in deciding how to allocate resources and in assessing the performance.

The Group is organised geographically and by business segment. For management purposes the Group is primarily organised on a worldwidebasis into two business segments:

a) Product licenses and related activities andb) IT solutions and consulting services.

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The segments are the basis on which the Group reports its primary operational information to management. Product licenses and relatedactivities segment deals with banking software products like the FLEXCUBE suite of products and Microbanker which cater to needs ofcorporate, retail and investment 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 software development, provision of computer software solutions and relatedconsulting services arising from such activities. This segment is further sub-divided in the following subsegments i.e. Business intelligence,Customer relationship management, Brokerage, e-commerce, Internet services and IT and Business consulting.

The activities of the joint ventures are separately monitored and disclosed as a separate segment.

Segmental Information


Product license IT solutionsParticulars and related and consulting Joint ventures Corporate Eliminations Total

activities services

RevenuesExternal revenue 3,854,294 2,284,349 2,570 – – 6,141,213Inter-segment revenue 845 1,403 – – (2,248) –Net exchange gain arising on sales (26,787) (15,883) – – – (42,670)Total revenue 3,828,352 2,269,869 2,570 – (2,248) 6,098,543Cost of Revenues (989,565) (1,534,719) – – – (2,524,284)Gross profit 2,838,787 735,150 2,570 – (2,248) 3,574,259Selling and marketing expenses (773,902) (97,067) – – – (870,969)General and administrative expenses (242,041) (205,585) (14,797) (281,025) – (743,448)Depreciation and amortisation (54,734) (76,301) (5,760) (14,503) – (151,298)Inter-segment expense – – (2,248) – 2,248 –Income from operations 1,768,110 356,197 (20,235) (295,528) – 1,808,544

Reversal in diminution in value of investment 12,427Profit on sale of investment 35Interest income 209,042Other income/(expenses) (68,441)Income before provision for income taxes 1,961,607Provision for income taxes (252,729)Net income 1,708,878

Other informationSegment assets 926,174 1,019,288 14,993 7,040,608 – 9,001,063Segment liabilities 419,047 145,683 5,749 434,282 – 1,004,761Share capital and reserves and surplus – – – 7,996,302 – 7,996,302Depreciation 54,734 76,301 5,760 14,503 – 151,298Capital expenditure by segment 20,085 60,006 2,456 54,153 – 136,700

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Product license IT solutionsParticulars and related and consulting Joint ventures Corporate Eliminations Total

activities services

RevenuesExternal revenue 2,506,119 1,649,299 1,764 – – 4,157,182Inter-segment revenue 226 4,684 – – (4,910) –Net exchange gain arising on sales 22,502 15,088 – – – 37,590Total revenue 2,528,847 1,669,071 1,764 – (4,910) 4,194,772Cost of Revenues (625,375) (941,035) – – – (1,566,410)Gross profit 1,903,472 728,036 1,764 – – 2,628,362Selling and marketing expenses (556,500) (43,226) – – – (599,726)General and administrative expenses (199,104) (221,232) (27,222) (194,499) – (642,057)Depreciation and amortisation (50,638) (82,122) (10,018) (13,644) – (156,422)Inter-segment expense – – (4,910) – 4,910 –Income from operations 1,097,230 381,456 (40,386) (208,143) 4,910 1,230,157

Reversal in diminution in value of investment 24,172Loss on sale of investment (51,500)Interest income 66,672Other income/(expenses) 33,827Provision for income taxes (150,337)Net profit 1,152,991

Other informationSegment assets 1,328,485 1,181,596 35,558 2,895,024 – 5,440,663Segment liabilities 309,695 94,676 18,172 306,027 – 728,570Share capital and reserves and surplus – – – 4,712,093 – 4,712,093Depreciation 50,638 82,122 10,018 13,644 – 156,422Capital expenditure by segment 51,465 122,269 10,883 66,362 – 250,979

Segment revenue and expense:

Revenue is generated through licensing of software products as well as by providing software solutions to the customers including consultingservices. The expenses which are not directly attributable to a business segment are shown as corporate expenses.

Segment assets and liabilities:

Segment assets include all operating assets used by a segment and consist principally of debtors, deposits for premises and fixed assets, netof allowances and provisions. Segment liabilities primarily includes deferred revenues, finance lease obligation, advance from customer,accrued employee cost and other current liabilities. While most such assets and liabilities can be directly attributed to individual segments,the carrying amount of certain assets and liabilities used jointly by two or more segments is allocated to the segment on a reasonable basis.Assets and liabilities that can not be allocated between the segments are shown as part of corporate assets.

Geographical segments

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

Year ended Year endedRegions March 31, 2003 % March 31, 2002 %

United States of America 2,428,189 40 1,333,577 32Middle East and Africa 1,464,490 24 1,084,322 26Asia Pacific 1,076,328 18 852,635 21Europe 1,127,086 18 861,672 21Latin America and Caribbean 45,120 1 24,976 1

6,141,213 100 4,157,182 100

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The list of related parties is as follows:

Promoter Company and its affiliates OrbiTech LimitedOrbiTech Solution Limited (OSL)Citicorp Technology Holdings Inc, USACitibank branchesCiticorp Information Technology, Inc (‘CITI’)Citigroupe-Serve International Limited (‘e-Serve’)

Other entities where Company has significant influence i-flex Employee Stock Option Trust

Key Managerial personnel Rajesh Hukku – Chairman and Managing DirectorR Ravisankar – Chief Executive Officer – International

Operations and TechnologyDeepak Ghaisas – Chief Executive Officer

India Operations, Chief Financial Officer andCompany Secretary

Makarand Padalkar – Chief of StaffJoseph John – Head – Banking Products DivisionV Shankar – Head – Information Technology Services DivisionN R K Raman – Head – Marketing & Global SalesVivek Govilkar – Head – Process and Quality Management GroupS Hariharan – Head – Infrastructure and Support Services GroupR Vidyasagar – Head – Human Resources Division

The related party transactions, other than disclosed elsewhere in the financial statements, have been summerised below:


a) RevenuesBanking product revenuesCitibank branches 1,018,600 609,669CITI 11,798 3,300e-Serve 42 169

1,030,440 613,138

IT solutions and consulting services revenuesCitibank branches 1,386,613 580,343CITI – 673,370e-Serve – 21

1,386,613 1,253,734

Interest on loans received from key managerial personnel 127 295

b) ExpensesCommunication expenses paid to Citibank branches 43,811 –Remuneration to key management personnel 34,932 27,912(Comprises of salary, bonus and perquisites)Finance charge paid for finance leases to e-Serve 1,532 7,136Professional fees paid to OSL for software development 1,696 2,630Provision for doubtful debts for Citibank branches (1,221) 1,221Bank charges paid to Citibank branches 2,729 1,852Rent paid for flat taken on lease from relative of key managerial personnel 116 298

83,595 41,049

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c) AssetsSundry debtorsCitibank branches 613,088 618,836(net of provision for doubtful debts of Rs Nil (March 31, 2002 – Rs 1,221)CITI 32,919 276,761

646,007 895,597Loans outstandingESPS Trust 267,926 291,649Key managerial personnel 4,000 4,884

271,926 296,533Repayment of loan during the yearESPS Trust 23,723 8,549Key managerial personnel 844 1,703

24,567 10,252Bank balances with Citibank branchesCurrrent accounts 1,232,622 437,286Deposits 144,877 139,800

1,377,499 577,086Interest accrued on fixed depositsCitibank, India 454 361

d) LiabilitiesAmounts due to related partiese-Serve towards lease obligations repayable (principal and interest) 7,727 14,896OSL towards professional services – 1,427

7,727 16,323Deferred revenue from related partiesCitibank branches 1,869 7,896e-Serve – 42

1,869 7,938

Repayment of lease obligations to e-Serve (Principal) 4,963 4,506

e) Other transactionsPayment of dividendsOrbitech 20,148 20,148Key managerial personnel 377 218Relatives of key managerial personnel 8 8ESPS Trust 3,921 4,505

24,454 24,879

Grant of Employee Stock Option PlanKey managerial personnel – 650,200Non – wholetime Directors 10,000 330,000

10,000 980,200

20 Stock based compensation scheme

a) Employee Stock Purchase Scheme (‘ESPS’)On March 29, 1998 the Company adopted the ESPS to provide equity based incentives to key employees of the Company (‘1998Scheme’). Subsequently on April 1, 1999, April 1, 2000 and April 1, 2001, the Company adopted other Stock based schemes (‘1999Scheme’, ‘2000 Scheme’ and ‘2001 Scheme’). These schemes which have similar terms, are administered through a Trust (‘the Trust’).The Trust purchases shares of the Company using the proceeds of loans obtained from the Company. Such shares are offered by theTrust to employees at an exercise price, which approximates the fair value on the date of the grant. The employees can purchase theshares in a phased manner over a period of five years based on continued employment, until which, the Trust holds the shares for thebenefit of the employee. The employee will be entitled to receive dividends, bonus etc. that may be declared by the Company fromtime to time for the entire portion of shares held by the Trust on behalf of the employees.

On acceptance of the offer, the selected employee shall undertake to pay within ten years from the date of acceptance of the offer thecost of the shares incurred by the Trust including repayment of the loan relatable thereto. The repayment of the loan by the Trust to theCompany would be dependent on employee repaying the amount to the Trust. In case the employee resigns from employment, the

041_192.pmd 30/06/2003, 8:12 PM116


rights relating to shares, which are eligible for exercise, may be purchased by payment of the exercise price whereas, the balanceshares shall be forfeited in favour of the Trust. The Trustees have the right of recourse against the employee for any amounts that mayremain unpaid on the shares accepted by the employee. The shares that an employee is eligible to exercise during the initial five-yearperiod merely go to determine the amount and scheduling of the loan to be repaid on exercise by the employee. The Trust shall repaythe loan obtained from the Company on receipt of payments from employees against shares exercised or otherwise.

The Securities and Exchange Board of India (‘SEBI’) has issued the Employee Stock Option Scheme and Stock Purchase Guidelines,1999 (‘SEBI guidelines’), which are applicable to stock option schemes for employees of all listed Companies. In accordance withthese guidelines, the excess of market price of the underlying equity shares on the date of grant of the stock options over the exerciseprice of the options is to be recognised in the books of account and amortised over the vesting period. However, no compensation costwould need to be recorded as the scheme terms are fixed and the exercise price equals the market price of the underlying stock on thegrant date.

b) Employee Stock Option Plan (‘ESOP’)At the Annual General Meeting of the shareholders of the Company held on August 14, 2001, the Company introduced an additionalESOP, pursuant to which equity shares not exceeding an additional 7.5% of the issued and paid-up equity share capital of theCompany have been earmarked for grant, at any given time to present and future employees and Directors of the Company and itsexisting 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’) for issue of 2,376,800 options to the employees and Directors of theCompany. According to the ESOP the Company has granted 2,274,460 options (inclusive of 650,200 options to key managerialpersonnel and 330,000 options to a Director) to the eligible employees and Directors of the Company and its subsidiaries at anexercise price, which equates the issue price determined through the book-building procedure. 20% of the total options granted underthe Scheme will vest to the eligible employees and Directors only on the completion of 12, 24, 36, 48 and 60 months respectively andis subject to the continued employment of the employee or Director with the Company or its subsidiaries.

As per the terms of ‘the Scheme’, the exercise price would equate the price determined for the IPO through book building process forthe option granted prior to the IPO and the fair market value on the date of grant for option granted thereafter. Accordingly nocompensation cost would need to be recorded as the exercise price would equal to the fair value of the shares.

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

As at As at

March 31, 2003 March 31, 2002

Outstanding at beginning of year 2,274,460 –

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

Exercised during the year – –

Forfeited during the year (64,760) –

Outstanding at end of year 2,249,700 2,274,460

21 Reconciliation of basic and diluted shares used in computing earning per share

Number of shares considered as basic weighted average shares outstanding 36,532,934 33,328,488

Add: Effect of dilutive stock options 680,993 –

Number of shares considered as weighted average shares outstanding and

potential shares outstanding 37,213,927 33,328,488

22 On December 3, 2002 the Group acquired two IT consulting service contracts and 51 employees working on these contracts fromSilverline Technologies Limited and its subsidiary, Silverline Technologies Inc. (“Silverline Group”) for a total consideration ofRs 35,176, which includes a cash payment made to/behalf of the Silverline Group and the assumption of certain employee relatedliabilities of the Silverline Group. The Group has accounted for the above transaction as a “purchase”. The purchase consideration ofRs 35,176 is fully allocated to the contracts and accordingly, there is no goodwill resulting from the transaction. The considerationallocated to the contracts is charged to Cost of Revenues on a straight line basis over the remaining contract term of 11 months.Accordingly, Rs 12,788 has been charged to income statement as part of Cost of Revenues and Rs 22,388 is carried as deferredcontract acquisition cost as part of other current assets.

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23 Summary of interest in joint ventures

The Company has two joint ventures, DotEx (49%) and Flexcel (40%). During the year, the Company has diluted its equity in Flexcel by9.49%. This dilution of equity holding in Flexcel has resulted in a capital appreciation of Rs 2,536 which has been included as a part ofreserves and surplus. As described in Note 2(a), the consolidated financial statements include proportionate amount of assets, liabilities,income and expenditure relating to the joint venture companies.

The summary of proportionate assets, liabilities, income and expenses after elimination of inter-company transactions consolidated withfinancial statements of the Company are as follows:

Proportionate assets and liabilities DotEx (unaudited) Flexcel (unaudited)March 31, 2003 March 31, 2002 March 31, 2003 March 31, 2002

Fixed assetsCost 11,402 17,431 8,551 7,568Less: Accumulated depreciation 9,952 11,233 3,376 1,853Net book value 1,450 6,198 5,175 5,715Capital work-in-progress and advances – 2,464 – –

1,450 8,662 5,175 5,715Current assets, loan and advancesSundry debtors 17 19 – –Cash and bank balances 210 2,501 6,196 4,186Other current assets 1 – 160 –Loans and advances 369 2,175 1,415 12,300

597 4,695 7,771 16,486Less: Current liabilities and provisionsCurrent liabilities 1,938 6,311 3,799 11,840Provisions 12 21 – –

1,950 6,332 3,799 11,840Net current assets (1,353) (1,637) 3,972 4,646Net Assets 97 7,025 9,147 10,361Proportionate income and expenses for the year endedRevenuesSales 2,570 1,764 – –Other income 330 87 1,262 268

2,900 1,851 1,262 268ExpenditureGeneral and administrative expenses 9,522 19,514 5,275 7,708Depreciation 3,591 8,166 2,169 1,852

13,113 27,680 7,444 9,560Net loss (10,213) (25,829) (6,182) (9,292)

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24 Aggregate expenses

Following are the aggregate amounts incurred on certain specific expenses that are required to be disclosed under Schedule VI to theAct, 1956

Year ended Year ended

March 31, 2003 March 31, 2002

Salaries and bonus 1,742,259 1,049,547

Staff welfare expenses 71,047 45,397

Contribution to provident and other funds 73,237 50,539

Travel related expenses (net of recoveries) 1,164,935 795,913

Professional fees 336,570 245,661

Communication expenses 149,533 77,229

Application software 161,233 92,991

Rent 139,805 118,109

Advertising expenses 72,611 61,959

Power 37,990 31,531

Insurance 10,271 5,950

Repairs and maintenance:– Leasehold premises 2,995 695

– Computer equipments 12,206 12,010

– Others 10,759 9,388

Rates and taxes 9,717 4,274

Finance charge on leased assets 2,155 2,577

Loss on retirement/sale of fixed assets, net – 343

Provision for doubtful debts, net (18,755) 51,652

Provision for doubtful advances 7,253 –

Donation 1,072 1,793

Contract acquisition cost 12,788 –

Other expenses 139,020 150,635

4,138,701 2,808,193

25 Prior year comparatives

Prior year amounts have been audited by a firm of chartered accountants other than M/s S. R. Batliboi & Associates and have beenreclassified, where necessary to conform with current year’s presentation.

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Y inancialsi-flex solutions ltd and Subsidiaries



United States Generally Accepted

Accounting Principles (US GAAP).

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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


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:



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%



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

041_192.pmd 30/06/2003, 8:13 PM131

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

041_192.pmd 30/06/2003, 8:13 PM132




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.


The Company had a controlling/significant influence in thefollowing:


• 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

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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


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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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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18.1 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




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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Y inancialsi-flex solutions b.v.


March 31, 2003.

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Corporate profile

i-flex solutions b.v. is a wholly owned subsidiary of i-flex solutionsltd. – a provider of solutions to the global financial services industry.The Company maintains a balanced portfolio of products andservices, offering a wide range of integrated software solutions forretail, corporate, Internet and investment banking, as well as onlinebrokerage and mutual funds.

i-flex solutions b.v. is headquartered in Amsterdam, TheNetherlands with Branch offices in London and Frankfurt and ismandated with sales and marketing of the company’s products andservices to the European market as well as supporting its customersin the region.

Business model

Right from inception, in early 2000, i-flex solutions b.v. has adopteda strong product focused revenue model thereby effectivelyleveraging emerging business opportunities. The impressiveservices portfolio also fuelled growth contributing 13% of totalrevenues in spite of the general recessionary trend in the marketand increased competitive pressures.

The Company has further consolidated its umbrella brandFLEXCUBE and grew substantially with the addition of severalnew customers including, Hebros Bank in Bulgaria, ACC Bank inIreland, and IC Bank in Hungary.

Today i-flex solutions b.v. has continued with plans to expand itssales in the central parts of the continent including France,Germany, Poland, CIS and Southern Europe.

The Frankfurt office is now operational in addition to the existingoffices at Amsterdam and London. These expansion plans wouldprovide both the width and the depth required to further penetratethe European market and help it in becoming the foremost name inthe European banking and financial services industry for itsproducts and services. The Management remains confident aboutits long-term prospects for success.

Banking products

Product revenues comprise license fees, charges for enhancementsand customization, implementation fees and product maintenance

Directors’ report

(Thousands of Euros)

charges. Product license fees are recognized on delivery andsubsequent milestone schedules as per the terms of the contract.Product maintenance revenues are spread over the period of themaintenance contract.

The Company’s products comprise the FLEXCUBE suite ofproducts, which address the needs of corporate, retail andinvestment banking as well as treasury. The offering for BusinessIntelligence and Data warehousing was launched at SIBOS’02 atGeneva.

IT Solutions and consulting services

IT solutions and consulting services comprise offshore and onsitesoftware development as well as business and technology consultingservices for the financial services industry.

Our services portfolio includes solutions for business intelligence,customer relationship management, brokerage, securities, paymentsystems, e-commerce, Internet services and IT and Businessconsulting.

Results from operations

The Company achieved total revenues of EUR 12,318 for thefinancial year ended March 31, 2003 – an increase of 49% overthe year ending March 31, 2002.

The net loss for the year ended March 31, 2003 stood at EUR 699as against EUR 1,553 for the year ended March 31, 2002.

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

Operating revenues

The Company’s operating revenues are derived from bankingsoftware products, IT solutions and consulting services. In the yearunder review, significant sales of the FLEXCUBE suite of productsfueled the growth of the company. During the year under reviewProducts contributed 87% of revenues (March 31, 2002 – 95%)while the service portfolio rose to 13% of the revenues(March 31, 2002 – 5%).

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The Company’s commitment to delivering quality solutions hascontributed to customer confidence. The Company explored newmarket opportunities in the Ireland, Germany, Austria, Spain,France, Turkey, Bulgaria, Hungary which further consolidated thecompany’s operations in these economies.

With past success of the products in the market and demand forback office systems, the management is fairly confident of turningaround a higher growth in the operating revenues for the company.

Expenses

The Company’s operating expenses increased to EUR 2,724 in the

current year 2002-03 from EUR 2,279 during the year endedMarch 31, 2002.

Expenses primarily constituted employee costs, traveling costs,infrastructure costs, sales and administrative expenses.

Employee costs constituted 7% and 6% of the total revenue for theyears ended March 31, 2003 and March 31, 2002 respectively.

London V. Senthil KumarMay 14, 2003 Statutory Director

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Introduction

We have audited the financial statements of i-flex solutions b.v.,Amsterdam for the year ended March 31, 2003. These financialstatements are the responsibility of the company’s management.Our responsibility is to express an opinion on these financialstatements based on our audit.

Scope

We conducted our audit in accordance with auditing standardsgenerally accepted in The Netherlands. Those standards requirethat we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accountingprinciples used and significant estimates made by management,

Auditors’ report

as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for ouropinion.

Opinion

In our opinion, the financial statements give a true and fair view ofthe financial position of the company as at March 31, 2003 and ofthe result for the year then ended, in accordance with accountingprinciples generally accepted in The Netherlands and comply withthe financial reporting requirements included in Part 9, Book 2 ofThe Netherlands Civil Code.

Amsterdam Ernst & Young AccountantsMay 14, 2003

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Balance sheetat March 31(Before allocation of net loss)

(Thousands of EUR)

2003 2002AssetsFixed assetsTangible fixed assets 90 87

Current assetsReceivablesAccounts receivable 3,016 2,562Prepaid expenses and other receivables 603 386

3,619 2,948Cash and cash equivalents 1,726 551Total assets 5,435 3,586

Shareholder’s equity and liabilitiesIssued share capital 519 19Accumulated deficit (2,171) (618)Net loss for the period (699) (1,553)Total equity (2,351) (2,152)

Long term loans – 74

Current liabilitiesAccounts payable 216 307Inter-company Payable 6,953 4,243Accrued expenses 47 97Advance billing 102 658Deferred revenue 367 286Taxes and social securities 101 73Total current liabilities 7,786 5,664

Total equity and liabilities 5,435 3,586

Ernst & Young Accountants V. Senthil KumarStatutory Director

Amsterdam LondonMay 14, 2003 May 14, 2003

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Statement of incomefor the year ended March 31

2003 2002

Sales 12,318 8,297Cost of sales 10,956 7,565Gross Profit on sales 1,362 732

Cost of revenuesSalaries, wages and employee benefits 709 424Social securities 49 13Pension Cost 50 59Depreciation expenses 71 26Rental expenses 565 444Marketing expenses 154 368General and administrative expenses 1,126 945Total operating expenses 2,724 2,279

Operating income/(loss) (1,362) (1,547)Interest income/(expenses) (4) (5)Currency exchange result 667 –Total 663 (5)

Income/(loss) before taxes (699) (1,552)Income taxes – –Net Loss (699) (1,552)

Ernst & Young Accountants V. Senthil KumarStatutory Director

Amsterdam LondonMay 14, 2003 May 14, 2003

(Thousands of EUR)

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1 General

a) General

i-flex solutions b.v. (“the company”), having its legal seat inAmsterdam, The Netherlands, is a leading software provider ofsolutions and services to the financial services industry acrossEurope. The company has been incorporated on May 19, 2000.

The company is a wholly owned subsidiary of i-flex solutions ltd.(“the parent company”), which has its registered office in Mumbai,India.

b) Related party transactions

All products and (consulting) services sold by the company to thirdparties are purchased from the parent company. For the year endedMarch 31, 2003 the company has purchased for an amount of 10,956(March 31, 2002 – 7,565) of the above-mentioned services fromthe parent company.

2 Going Concern

The Company has a negative working capital and a negative equityper March 31, 2003. The parent company has confirmed that it isaware of the current financial position of the company and that theparent company is committed to provide the necessary level ofoperational and financial support to ensure that the company meetsall its liabilities as they fall due, and continues as a going concernat least for a period up to September 2004. The parent companybelieves that it has the required financial resources to fulfill thatcommitment.

3 Accounting Principles

a) General

The accounting principles of the company are summarized below.These accounting principles have all been applied consistentlythroughout the year and the preceding period from April 1, 2001to March 31, 2002.

The financial statements have been prepared under the historicalcost convention and in conformity with the requirements of theNetherlands Civil Code. Assets and liabilities are stated at facevalue unless indicated otherwise.

Assets and liabilities denominated in foreign currencies aretranslated into euros at the rates of exchange prevailing at yearend.Transactions in foreign currencies are translated at the rates ofexchange prevailing at the date of the transaction. The exchangeresults are recorded under financial income and expense in thestatement of income.

Notes to financial statementsas at March 31, 2003

(Thousands of EUR)

b) Tangible fixed assets

Tangible fixed assets are stated at the acquisition cost, less writtendown value depreciation. During the year the company changedthe method of depreciation from Straight-line method to Writtendown method to bring it in line with the group policy. This resultedin additional depreciation of EUR 19. The depreciation is calculatedusing the written down value method and is charged to incomeover the estimated useful life of the assets. The estimated usefullives are:

Improvement to lease hold premises 7 years

Furniture and fixtures 7 years

Computers equipment 3 years

Electrical & office equipment 7 years

Tangible fixed assets are revalued in case of any permanentimpairment.

c) Accounts receivable

Accounts receivable are stated at face value, less an allowance forpossible uncollectable accounts.

d) Unearned revenue

Unearned revenue relates primarily to advance payments for post-implementation technical support, which will be recognized asincome ratably over the support period. Also included are advancedpayments for licenses for which the acceptance period has not yetexpired or for which the related shipment has not taken place yet.Advance payments for services not rendered yet have also beenincluded. Furthermore, the company allocates a portion of itssoftware revenues to post-contract support activities provided freeof charge to customer for a specified period as included under thelicensing arrangement. Amounts allocated are based upon standardprices charged for those services or products.

e) Other assets and liabilities

All other assets and liabilities are stated at the amounts at whichthey were acquired or incurred.

f) Income taxes and deferred taxes

The income taxes are calculated based upon the result for the year.Deferred taxes are recognized when considered recoverable.

g) Pension

The pensions of the employees of the company are based on adefined contribution scheme. The contributions for these pensionsare directly charged to the income statement.

041_192.pmd 30/06/2003, 8:14 PM160


h) Recognition of income

Software revenues consist of license fees, customization fees,implementation fees and maintenance fees and are recognized asfollows:

(i) License fees

Software license fee revenues are recognized whenpersuasive evidence of an arrangement exists, deliveryhas occurred, the license fee is fixed and determinableand the collection of the fee is probable. Further, therecognition of these revenues depends on certainmilestone schedules as per the terms of each contract,such as delivery of software and user acceptance;

(ii) Customization and implementation fees

Revenues for implementation and customization arerecognized upon the completion of these services(milestones) and customer’s acceptance;

(iii) Maintenance fees

Revenues from maintenance contracts relate to post-implementation support and are recognized ratably overthe term of the contract on a straight-line basis.

Other revenues and expenses are recorded in the periodin which they originate.

041_192.pmd 30/06/2003, 8:14 PM161

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5 Accounts receivable

Accounts receivable as presented under current assets maturewithin one year and are substantially denominated in USD. Aprovision for bad debt of EUR 199 is included as ofMarch 31, 2003 (March 31, 2002: EUR 199).

6 Shareholder’s equity

The movement in shareholder’s equity is as follows:

Balance March 31, 2002 (2,152)

Additional capital contribution 500

Net loss for the year (699)

Balance March 31, 2003 (2,351)

The authorized share capital consists of 20,000 authorized commonshares of which 5,185 shares are issued and outstanding atMarch 31, 2003. The shares have a par value of EUR 0.1 each.

7 Liabilities

Liabilities with a remaining period up to 1 year, including the short-term portion of long-term liabilities, are presented under short-term liabilities and are substantially denominated in USD.

The long-term inter-company loan of EUR 74 has been repaid tothe parent during the year.

8 Income taxes

No income taxes have been recorded as the company is in a netloss position. The Company has a loss carry-forward of EUR 2,870,which is available to reduce future tax liabilities.

9 Credit facilities

The Company has no credit facilities apart from the facilities grantedby the parent company.

10 Net sales

Net sales for the year ended March 31, 2003 amount to EUR 12,318(March 31, 2002 EUR 8,297).


Total commitments in connection with rental obligations andoperational lease agreements amount to approximately EUR 149.The short-term portion of these commitments amounts toapproximately 116. The amount due between 1 to 5 years is EUR33. The portion that is due after 5 years amounts to Nil.

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.

12 Personnel

The number of personnel for the year ended March 31, 2003 was16 (March 31, 2002 was 5), employed in the following functionalareas:

2003 2002

Sales 10 4Technical 3 –Administration 3 1

16 5

13 Remuneration of statutory directors

In accordance with Article 383, Book 2 of the Dutch Civil Code,the remuneration of the only statutory Director is not presented.The Company has no supervisory Directors.

May 14, 2003 V. Senthil KumarLondon Statutory Director

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1 Appropriation of income

The Articles of Association of the company provide that theappropriation of the net result for the year is decided upon at theAnnual General Meeting of Shareholders.

Awaiting the decision by the shareholder, the net loss for the yearended March 31, 2003 is separately included in the shareholder’sequity as net loss for the period.

Other information

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Y inancialsi-flex solutions pte ltd

(Incorporated in the Republic of Singapore)


March 31, 2003.

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The Directors present their report together with the audited financialstatements of the company for the financial year ended March 31,2003.

1 Directors of the Company

The Directors in office at the date of this report are:

Deepak Keshav Ghaisas

Soo Koon Liat

2 Principal activities

The principal activities of the company in the course of the financialyear are those relating to providing information technology solutions,consulting services and development of software to the financialservice industry.

There have been no significant changes in the nature of theseactivities during the financial year.

3 Acquisition or disposal of subsidiaries

There were no acquisition or disposal of subsidiaries during thefinancial year.

4 Results for the financial year

S$

Net profit for the year 483,928

Retained profits brought forward 20,024

Retained profits carried forward 503,952

5 Reserves or provisions

There were no material transfers to or from reserves or provisionsduring the financial year.

6 Issue of shares or debentures

No shares or debentures have been issued during the financialyear.

7 Arrangements for Directors to acquire shares or debentures

Neither at the end nor at any time during the financial year was thecompany a party to any arrangement whose object is to enable theDirectors of the company to acquire benefits through the acquisitionof shares in or debentures of the company or any other bodycorporate.

8 Directors’ interest in shares or debentures

The Directors holding office at the end of the financial year haveno interests in the shares of the company and related corporations

Directors’ report

as recorded in the register kept by the company for the purposes ofSection 164 of the Companies Act, Cap. 50.

9 Dividends

The Directors do not recommend payment of a dividend for thefinancial year under review.

No dividend has been paid since the end of the previous financialyear.

10 Bad and doubtful debts

Before the profit and loss account and the balance sheet of thecompany were made out, the Directors took reasonable steps toascertain that proper action had been taken in relation to the writingoff of bad debts and the making of provision for doubtful debts andhave satisfied themselves that no bad debts needs to be written offand that no provision for doubtful debt is necessary.

At the date of this report, the Directors are not aware of anycircumstances, which would render it necessary to write off anydebts or to make a provision for doubtful debt in respect of thefinancial statements.

11 Current assets

Before the profit and loss account and the balance sheet of thecompany were made out, the Directors took reasonable steps toascertain that any current assets which were unlikely to realisetheir book values in the ordinary course of business have beenwritten down to their estimated realisable values or had beenadequately provided for.

At the date of this report, the Directors are not aware of anycircumstances, which would render the values attributable tocurrent assets in the financial statements of the companymisleading.

12 Charges and contingent liabilities

At the date of this report:

(a) there does not exist any charge on the assets of the companywhich has arisen since the end of the financial year whichsecures the liability of any other person, and

(b) there does not exist any contingent liability of the company,which has arisen since the end of the financial year.

13 Contingent or other liabilities enforceable after year end

No contingent or other liability of the company has becomeenforceable or is likely to become enforceable within the period oftwelve months after the end of the financial year which, in theopinion of the Directors, will or may substantially affect the abilityof the company to meet its obligations as and when they fall due.

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14 Other circumstances

As at the date of this report, the Directors are not aware of anycircumstances not otherwise dealt with in this report or in thefinancial statements of the company, which would render anyamount stated in the financial statements of the companymisleading.

15 Unusual items

In the opinion of the Directors, the results of the operations of thecompany during the financial year have not been substantiallyaffected by any item, transaction, or event of a material and unusualnature.

16 Subsequent events

In the opinion of the Directors, no item, transaction or event of amaterial and unusual nature has arisen in the interval between theend of the financial year and the date of this report which wouldaffect substantially the results of the operations of the company forthe financial year in which this report is made.

17 Directors’ benefits

Since the end of the previous financial year, no Director has receivedor become entitled to receive a benefit which is required to bedisclosed by Section 201(8) of the Companies Act, Cap. 50 by reasonof a contract made by the company or a related corporation withthe Director or with a firm of which he is a member, or with a

company in which he has a substantial financial interest other thanthose, which have been disclosed in the financial statements.

18 Share options granted

No options were granted during the financial year to take upunissued shares of the company.

19 Share options exercised

During the financial year, no shares were issued by virtue of theexercise of options granted.

20 Unissued shares under option

There were no unissued shares under option at the end of thefinancial year.

21 Auditors

The auditors, Messrs. Rohan • Mah & Partners, Certified PublicAccountants, have expressed their willingness to accept re-appointment.

On behalf of the board

Deepak Keshav GhaisasDirector

Singapore Soo Koon LiatMay 14, 2003 Director

041_192.pmd 30/06/2003, 8:14 PM168


In the opinion of the Directors, the accompanying financialstatements drawn up so as to give a true and fair view of the state ofaffairs of the company as at March 31, 2003 and of the results ofthe business and the statement of changes in equity and cash flowstatement of the company for the year ended on that date, and atthe date of this statement there are reasonable grounds to believethat the company will be able to pay its debts as and when they falldue.

On behalf of the board

Deepak Keshav GhaisasDirector

Singapore Soo Koon LiatMay 14, 2003 Director

Statement by Directors

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To the members ofi-flex solutions pte ltd(incorporated in the Republic of Singapore)

We have audited the financial statements of i-flex solutions pte ltdfor the year ended 31 March 2003. These financial statements arethe responsibility of the Company’s Directors. Our responsibilityis to express an opinion on these financial statements based on ouraudit.

We conducted our audit in accordance with Singapore Standardson Auditing. Those Standards require that we plan and performthe audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimatesmade by the Directors, as well as evaluating the overall financialstatement presentation. We believe that our audit provides areasonable basis for our opinion.In our opinion,

Auditors’ report

(a) the financial statements are properly drawn up in accordancewith the provisions of the Companies Act, Chapter 50 andSingapore Statements of Accounting Standard and so as togive a true and fair view of:

(i) the state of affairs of the company as at 31 March 2003and of the results and changes in equity and cash flows ofthe company for the year then ended on that date; and

(ii) the other matters required by Section 201 of the Act to bedealt with in the financial statements;

(b) the accounting and other records, and the registers requiredby the Act to be kept by the company have been properlykept in accordance with the provisions of the Act.

Singapore Rohan • Mah & PartnersMay 14, 2003 Certified Public Accountants

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Note 2003 2002S$ S$

Assets Less LiabilitiesNon-Current AssetsPlant and equipment 3 316,681 32,191

Current AssetsTrade and other receivables 4 12,822,383 680,986Cash and bank balances 3,863,588 252,727

16,685,971 933,713Current LiabilitiesTrade and other payables 5 15,994,700 688,080Provision for taxation 188,000 –

16,182,700 688,080

Net Current Assets 503,271 245,633Deferred taxation 6 66,000 7,800Net Assets 753,952 270,024

Equity share capital 7 250,000 250,000Retained profits 503,952 20,024Total Equity 753,952 270,024

Rohan • Mah & Partners Deepak Keshav Ghaisas Soo Koon LiatCertified Public Accountants Director Director

SingaporeMay 14, 2003


(Singapore Dollars)

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01.04.02 16.11.01to to

Note 31.03.03 31.03.02S$ S$

Revenue 8 22,078,492 676,961Other income 9 – 2,728

22,078,492 679,689

Costs and Expenses

Cost of sales 19,291,708 609,266Staff costs 10 390,540 25,982Depreciation 3 77,005 3,577Other operating expenses 11 954,684 13,040

20,713,937 651,865

Profit before taxation 1,364,555 27,824

Taxation 12 (880,627) (7,800)Net profit for the year 483,928 20,024



Statement of profit and lossfor the year ended March 31

(Singapore Dollars)

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Note 2003 2002S$ S$

Cash flows from operating activities:Profit before taxation 1,364,555 27,824

Adjustments for:Depreciation of plant and equipment 3 77,005 3,577Operating profit before working capital changes 1,441,560 31,401

Working capital changes, excluding changes related to cash:Trade and other receivables (8,707,990) (106,504)Trade and other payables 3,530,167 29,032Holding company 10,170,990 659,048Related party (1,827,944) (574,482)Cash generated in operations 4,606,783 38,495Foreign tax paid (634,427) –Net cash generated from operating activities 3,972,356 38,495

Cash flows from investing activities:Purchase of plant and equipment (361,495) (35,768)

3,610,861 2,727

Cash flows from financing activities:Issue of shares – 250,000

Net increase in cash and cash equivalents 3,610,861 252,727Cash and cash equivalents at beginning of financial year 252,727 –Cash and cash equivalents at end of 31 March 3,863,588 252,727




(Singapore Dollars)

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Share RetainedCapital Profits Total

S$ S$ S$

As at date of incorporation 2 – 2

Issue of shares 249,998 – 249,998

Net profit for the period – 20,024 20,024

As at 31 March 2002 250,000 20,024 270,024

Net profit for the year – 483,928 483,928

As at 31 March 2003 250,000 503,952 753,952



Statement of changes in equityfor the year ended March 31, 2003

(Singapore Dollars)

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These notes form an integral part of and should be read inconjunction with the accompanying balance sheet, profit and lossaccount and statement of changes in equity and cash flow statement.

1 Corporate information

i-flex solutions pte ltd is a limited liability company incorporatedin Singapore with its registered office and its principal place ofbusiness at 27 International Business Park #04-05, PrimefieldLandmark Building, Singapore 609924.

The principal activities of the company in the course of the financialyear are those relating to providing information technology solutions,consulting services and development of software to the financialservice industry.

The Company is a wholly-owned subsidiary of i-flex solutionslimited, a company incorporated in India, which is also thecompany’s ultimate holding company.

The financial statements of the Company for the year ended March31, 2003 were authorised for issue in accordance with a resolutionof the Directors on May 14, 2003.

The Company has 7 (2002: 2) employees at the end of the financialyear.

2 Summary of significant accounting policies

2.1 Statement of compliance

These financial statements have been prepared in accordance withthe Statements of Accounting Standard issued by the Institute ofCertified Public Accountants of Singapore and the disclosurerequirements of the Singapore Companies Act, Chapter 50.

2.2 Basis of financial statements preparation

The financial statements, expressed in Singapore dollars, areprepared on the historical cost basis.

2.3 Plant and equipment

2.3.1 Owned assetsItems of plant and equipment are stated at cost lessaccumulated depreciation. The Company capitalises alldirect costs relating to the acquisition and installationof plant and equipment.

2.3.2 DepreciationDepreciation is provided on the reducing balancemethod basis so as to write off the cost of plant andequipment over their estimated useful lives as follows:

%

Furniture and fittings 35

Computer 60

Office equipment 35

2.4 Revenue recognition

Provided it is probable that the economic benefits will flow to theCompany and the revenue and costs, if applicable, can be measuredreliably, software revenues are recognised in the profit and lossaccount as follows:

2.4.1 Product licensesRevenue is recognised when goods are delivered at thecustomers’ premises which is taken to be the point intime when the customer has accepted the goods and therelated risks and rewards of ownership and subsequentmilestone schedules as per the terms of the contract.Revenue excludes goods and services or other sales taxesand is after deduction of any trade discounts.

2.4.2 Product maintenanceRevenue is recognised over the period of maintenancecontract.

2.4.3 Product management, development and consultancyServiceRevenue is recognised as and when services arerendered.

2.5 Deferred taxation

Deferred tax is provided, using the liability method, on all temporarydifferences at the balance sheet date between the tax bases of assetsand liabilities and their carrying amounts for financial reportingpurposes. Deferred tax assets and liabilities are measured usingthe tax rates expected to apply to taxable income in the years inwhich those temporary differences are expected to be recovered orsettled based on tax rates enacted or substantively enacted at thebalance sheet date.

Deferred tax assets are recognised for all deductible temporarydifferences, carry forward of unused tax assets and unused taxlosses, to the extent that it is probable that taxable profit will beavailable against which the deductible temporary differences canbe utilised.

2.6 Foreign currency

2.6.1 Translation of foreign currenciesTransactions in foreign currencies are measured andrecorded in Singapore dollars using the exchange ratein effect at the date of the transaction. At each balancesheet date, recorded monetary balances that aredenominated in a foreign currency are adjusted to reflectthe rate at the balance sheet date. All exchangeadjustments are taken to the profit and loss account.

2.6.2 Financial statements of foreign operationsThe results of overseas branch are translated intoSingapore dollars at the average exchange rates for theyear; balance sheet items are retranslated at the rates ofexchange ruling at the balance sheet date. The exchangedifferences are dealt with in the profit and loss account.

Notes to the financial statementsas at March 31, 2003

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2.7 Operating leases

Rental payable under operating leases are accounted for in theprofit and loss account on a straight-line basis over the periods ofthe respective leases.

2.8 Related parties

For the purposes of these financial statements, parties areconsidered to be related to the company if the company has theability, directly or indirectly, to control the party or exercisesignificant influence over the party in making financial andoperating decisions, or vice versa, or where the company and theparty are subject to common control or common significantinfluence. Related parties may be individuals or other entities.

2.9 Impairment

The carrying amounts of the company assets, are reviewed at eachbalance sheet date to determine, whether there is any indication ofimpairment. If any such indication exists, the asset’s recoverableamount is estimated and impairment loss is recognised in the profitand loss account.

2.10 Reversals of impairment

An impairment loss is only reversed to the extent that the asset’scarrying amount does not exceed the carrying amount that would

have been determined, net of depreciation or amortisation, if noimpairment loss had been recognised.

2.11 Employee benefit plan

The Company’s contribution to defined pension plans are chargedto the profit and loss accounts in the period to which the contributionrelates.

2.12 Financial assets

Financial assets include cash and bank balances, trade and otherreceivables. Trade receivables are stated at original invoice amountless allowance for any uncollectable amounts. Other receivablesare stated at cost less allowances for any uncollectable amounts.

2.13 Financial liabilities

Financial liabilities are classified accordingly to the substance ofthe contractual arrangements entered into. Financial liabilitiesinclude trade and other payables. Trade and other payables arestated at nominal value.

041_192.pmd 30/06/2003, 8:14 PM176


3 Plant and equipment

Furniture Computer Office Totaland Fittings equipment

S$ S$ S$ S$

Cost

At 01.04.02 – 35,768 – 35,768Additions 56,396 302,397 2,702 361,495At 31.03.03 56,396 338,165 2,702 397,263

Accumulated Depreciation

At 01.04.02 – 3,577 – 3,577Depreciation for the year 7,454 69,355 196 77,005At 31.03.03 7,454 72,932 196 80,582

Depreciation for 2002 – 3,577 – 3,577

Net Book ValueAt 31.03.03 48,942 265,233 2,506 316,681At 31.03.02 – 32,191 – 32,191

4 Trade and other receivables

2003 2002S$ S$

Trade debtors 7,232,900 102,479Amount due from a related party – trade 2,402,426 574,482Amount due from holding company – non-trade 1,605,463 –Deposit 50,927 –Prepayments 35,405 4,025Other debtors 10,005 –Advance costs* 1,485,257 –

12,822,383 680,986* The advance cost relates to the cost rendered by the holding corporation for the projects which will be charged to the profit and loss account in the future periods.

5 Trade and other payables

2003 2002S$ S$

Trade creditors 456,012 –Deferred revenues 1,604,482 –Advance billings 93,464 –Amount due to holding company– trade 12,435,501 609,266– non-trade – 49,782Accrued operating expenses 177,443 29,032Advance from customers 7,085 –Other creditors 1,220,713 –

15,994,700 688,080

Amount due to holding company is unsecured, interest free and with no fixed terms of repayment.

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6 Deferred taxation

2003 2002S$ S$

At beginning of year/at date of incorporation 7,800 -Provided during the year (note 12) 58,200 7,800

Balance at end of year 66,000 7,800

The deferred taxation arises as a result of:Excess of net book value over tax written down value of plant and equipment 61,000 7,800Other temporary differences 6,000 -

66,000 7,800

7 Share capital

2003 2002No. of shares S$ No. of shares S$

Authorised:Ordinary shares of S$1 each 300,000 300,000 300,000 300,000

Issued and fully paid:At beginning of year/at date of incorporation 250,000 250,000 2 2Issue of shares – – 249,998 249,998At end of year 250,000 250,000 250,000 250,000

8 Revenue

Revenue represents the product maintenance and consultancy services rendered. Significant category of revenue during the year is asfollows:

1.04.02 16.11.01to to

31.03.03 31.03.02S$ S$

IT Solutions and Consultancy Services 20,800,322 102,479Product maintenance 1,278,170 574,482

22,078,492 676,961

9 Other income

Gain on exchange difference – 2,728

10 Staff costs

Salaries and related costs 381,586 25,382Defined contribution pension costs 8,954 600

390,540 25,982

11 Other operating expenses

Other operating expenses included the following for the year ended 31 March:

Auditors’ remuneration– current year 17,500 3,000– prior year 3,000 –Exchange loss 52,453 –Preliminary expenses written off – 5,300

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12 Taxation

Major components of income tax expense for the year 31 March were:

2003 2002S$ S$

Current:Singapore 80,000 -Foreign 742,427 -

Deferred:Singapore 58,200 7,800

880,627 7,800

A reconciliation between the tax expense and the product of accounting profit multiplied by the applicable tax rate for the year ended31 March was as follows:

Profit before tax 1,364,555 27,824

Tax expense on profit before tax at 22%Adjustments: 300,202 6,121

Expenses not deductible for tax purposes 13,616 565Foreign tax suffered 742,427 -Double taxation relief (163,334) -Tax impact on SME exemption (11,550) -Others (734) 1,114Tax expense 880,627 7,800

13 Significant parties transactions

Significant related parties transactions between the Company and its related parties are as follows:

Holding Company 19,291,708 609,266Cost of salesAdvanced cost (Note 4) 1,485,257 –Related Party Sales 8,282,287 574,482

14 Operating lease committment

Rental expenses were S$254,177 (2002: S$ Nil) for the year ended 31 March 2003.Future minimum rental under non-cancellable leases are as follows as of 31 March:

Payable within 1 year 335,317 –Payable within 2-5 years 136,304 –

471,621 –

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15 Financial risks

(i) Credit risk

Credit risk refers to the risk that counter parties may default ontheir contractual obligations resulting in a financial loss to thecompany. The Company’s customer portfolio mainly comprises offinancial institutions and exposure are monitored and provisionfor potential credit losses is adjusted when necessary.

(ii) Foreign currency risk

Foreign currency risk arises from change in foreign exchange ratesthat may have an adverse effect on the company in the currentreporting period and in the future years. The Company’s exposureto foreign currency risk is minimal as most transactions are dealtwith in foreign currency.

(iii) Interest rate risk

Interest rate risk arises from the potential adverse effect that changesin interest rates may have on the company’s results in the currentreporting period and in the future years. The Company does not

have such interest rate risks, as the Company has no significantinterest bearing assets or liabilities.

(iv) Liquidity risk

Liquidity risk refers to the risk that the company is unable to meetits obligations when fall due. The Company monitors its cash flowand collections on a regular basis as a means of managing liquidityrisk.

(v) Fair value of financial instruments

There are no material differences between the book value and thefair value of the company’s financial assets and liabilities. TheCompany does not engage in transactions involving financialderivatives.

16 Comparative figures

The comparative figures cover the period from 16 November 2001(date of incorporation) to 31 March 2002. Comparative figures havebeen reclassified to conform with the current year’s presentation.

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Y inancialsi-flex solutions inc.


March 31, 2003.

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The Directors present their report together with the audited financialstatements of the company for the financial year ended March 31,2003.

1 Directors of the Company

The Directors in office at the date of this report are:

Rajesh Hukku(Appointed on December 5, 2001, the date of incorporation)

R. Ravisankar(Appointed on December 5, 2001, the date of incorporation)

Deepak Ghaisas(Appointed on December 5, 2001, the date of incorporation)

Cafó Boga(Appointed on March 14, 2003)

2 Principal Activities

The principal activities of the company in the course of the financialyear are those relating to providing information technology solutions,consulting services and development of software to the financialservice industry in the United States of America, Canada and SouthAmerica.

3 Results for the financial year

Loss for the year, carried forward is US$ 360,891.

4 Current assets

Before the profit and loss account and the balance sheet of thecompany were made out, the Directors took reasonable steps toascertain that any current assets which were unlikely to realizetheir book values in the ordinary course of business have beenwritten down to their estimated realizable values or had beenadequately provided for.

5 Charges and contingent liabilities

At the date of this report:

(a) There does not exist any charge on the assets of the companywhich has arisen since the end of the financial year, whichsecures the liability of any other person and

Directors’ report

(b) There does not exist any contingent liability of the company,which has arisen since the end of the financial year.

6 Contingent or other liabilities enforceable after year-end

No contingent or other liability of the company has becomeenforceable or is likely to become enforceable within the period oftwelve months after the end of the financial year which, in theopinion of the Directors, will or may substantially affect the abilityof the company to meet its obligations as and when they fall due.

7 Other circumstances

As at the date of this report, the Directors are not aware of anycircumstances not otherwise dealt with in this report or in thefinancial statements of the company, which would render anyamount stated in the financial statements of the companymisleading.

8 Unusual items

In the opinion of the Directors, the results of the operation of thecompany during the financial year have not been substantiallyaffected by any item, transaction, or event of a material and unusualnature.

9 Subsequent events

In the opinion of the Directors, no item, transaction or event of amaterial and unusual nature has arisen in the interval between theend of the financial year and the date of this report, which wouldaffect substantially the results of the operations of the company forthe financial year in which this report is made.

On behalf of the Board,

Rajesh HukkuDirector

May 12, 2003

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Report of independent auditors

Board of Directors and Stockholderi-flex solutions inc.

We have audited the accompanying balance sheet of i-flex solutionsinc. (the “Company”) as of March 31, 2003, and the relatedstatements of operations, stockholder’s equity and cash flows forthe year then ended. These financial statements are theresponsibility of the Company’s management. Our responsibility isto express an opinion on these financial statements based on ouraudit.

We conducted our audit in accordance with auditing standardsgenerally accepted in the United States. Those standards requirethat we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial

statements. 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 financial statements referred to above presentfairly, in all material respects, the financial position of i-flexsolutions inc. at March 31, 2003, and the results of its operationsand its cash flows for the year then ended in conformity withaccounting principles generally accepted in the United States.

New York Ernst & Young LLPMay 12, 2003

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2003

AssetsCash and cash equivalents 4,759,322Accounts receivable 10,527,664Prepaid expenses and other current assets 400,953Contract rights 361,564

16,049,503

Fixed assets, net 856,972Other assets 418,427Total assets 17,324,902

Liabilities and stockholder’s equityLiabilities:Accounts payable 239,056Accrued expenses 56,653Employee benefits and bonuses payable 580,470Due to Parent, net 14,870,701Note payable to Parent, including accrued interest of USD 8,184 508,184Deferred revenue 672,207Total liabilities 16,927,271

Stockholder’s equity:Common stock (USD 0.01 par value), 3,000 shares authorized,100 shares issued and outstanding 1Additional paid-in capital 999,999Accumulated deficit (602,369)Total stockholder’s equity 397,631Total liabilities and stockholder’s equity 17,324,902

Ernst & Young LLP R. Ravisankar Cafó BogaDirector Chief Operating Officer

New YorkMay 12, 2003

(US Dollars)

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2003

Revenue 35,591,273Cost of revenue 30,249,585

5,341,688

General and administrative expenses 5,559,261Depreciation and amortization 138,645Operating loss (356,218)

Other expenses, net 4,673Net loss (360,891)



Statement of operationsfor the year ended March 31

(US Dollars)

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2003$

Operating activitiesNet loss (360,891)Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization 138,645Amortization of contract rights 247,323Changes in operating assets and liabilities:Accounts receivable (10,483,084)Prepaid expenses and other current assets (393,766)Accounts payable 94,126Accrued expenses 64,837Employee benefits and bonuses payable 580,470Due to Parent, net 14,489,928Deferred revenue 1,071,961Net cash provided by operating activities 5,449,549

Investing activitiesPurchases of fixed assets (876,220)Acquisition of contract rights (608,887)Other assets (319,773)Net cash used in investing activities (1,804,880)

Financing activitiesProceeds from issuance of note to Parent 500,000Net cash provided by financing activities 500,000

Net increase in cash and cash equivalents 4,144,669Cash and cash equivalents, beginning of year 614,653Cash and cash equivalents, end of year 4,759,322




(US Dollars)

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2003

Common Stock Additional Accumulated TotalShares Amount Paid-in Deficit Stockholder’s

Capital Equity

Balance at March 31, 2002 100 1 999,999 (241,478) 758,522

Net loss – – – (360,891) (360,891)

Balance at March 31, 2003 100 1 999,999 (602,369) 397,631



Statement of stockholder’s equityfor the year ended March 31

(US Dollars)

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1 Organization and significant accounting policies

Organization

i-flex solutions inc. (the “Company”) is a wholly owned subsidiaryof i-flex solutions ltd. (a publicly traded company in India, the“Parent”). The Company was incorporated on December 5, 2001in the State of Delaware. The Company is a reseller of the Parent’sproprietary banking software products and is principally engagedin the business of providing information technology solutions tothe financial services industry in the United States.

Revenue recognition

The Company derives revenues from the licensing of bankingsoftware products, along with providing related implementationservices and post contract support and providing softwaredevelopment and other consulting services, primarily to largefinancial institutions.

Software revenues are recognized upon the delivery of the softwareto the customer, provided that persuasive evidence of anarrangement exists, the license fee is fixed and determinable andcollection of the fee is considered probable in accordance with theAmerican Institute of Certified Public Accountants Statement ofPosition No. 97-2, Software Revenue Recognition. For the yearended March 31, 2003, software revenues approximated$7,215,000. Related maintenance, unspecified, when-and-ifavailable, product updates and customer support services arerecognized ratably over the term of the agreement.

Revenues from software development and consulting services,which comprise resource augmentation support and onsite and/oroffshore development activities, are generally recognized either asservices are rendered on a time and materials basis during theperiod in which the services are provided, or utilizing the percentageof completion method to the extent accepted by the customers. Thepercentage of completion method generally applies to revenues fromfixed fee contracts, which are recognized as a percentage of thecosts incurred to date to the estimated total costs for each contract.The cumulative impact of revisions in estimates of the percentageto complete is reflected in the period in which the revisions aremade. Provisions for estimated losses on uncompleted contractsare made on a contract-by-contract basis and are recognized in theperiod in which such losses are determined. For the year endedMarch 31, 2003, revenues from software development andconsulting services approximated $28,376,000.

Revenue earned in excess of billings is classified as unbilledrevenue under customer contracts. Billings in excess of earnedrevenues are classified as deferred revenue. Revenue includesreimbursable expenses.

In April 2002, the Company entered into a license and serviceagreement with the Parent under which the Company remits 85%of all related revenues to the Parent (the “License and ServiceAgreement”). The License and Service Agreement expires in 2004with automatic one-year renewals thereafter upon 90-day notice.The fees paid to the Parent are recorded as cost of revenue.

Cash equivalents

The Company considers all highly liquid instruments withmaturities of three months or less when purchased to be cashequivalents.

Fixed assets

Fixed assets are recorded at cost. Depreciation and amortizationare computed using accelerated methods over the estimated usefullives of the assets. Maintenance and repair costs are charged toexpense as incurred and expenditures that extend the useful livesof the assets are capitalized.

Income taxes

The Company provides for deferred income taxes pursuant toStatement of Financial Accounting Standards (“SFAS”) No. 109,Accounting for Income Taxes, which requires the recognition ofdeferred taxes utilizing the liability method whereby deferred itemsare determined based on differences between the financial reportingand tax bases of assets and liabilities, and are measured based ontax rates expected to be in effect when the differences reverse.Valuation allowances are established when necessary, to reducedeferred income tax assets to the amount expected to be realized.Deferred tax assets primarily result from net operating losscarryforwards.

Use of estimates

The preparation of financial statements in conformity withaccounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financialstatements and the reported amount of revenues and expensesduring the reporting period. Actual results could differ from thoseestimates.

Concentration of credit risk

Financial instruments that potentially subject the Company tosignificant concentration of credit risk consist principally of cashand cash equivalents and accounts receivable. The Companymaintains its cash balances in one financial institution. Thesebalances are insured by the Federal Deposit Insurance Corporationup to $100,000. The Company routinely assesses the financialstrength of its customers and does not require collateral or othersecurity to support customer receivables. Credit losses, if any, areprovided for in the financial statements in the form of an allowancefor doubtful accounts.

Advertising costs

Advertising costs are expensed as incurred. Advertising costs forthe year ended March 31, 2003 were approximately $207,000.

New accounting pronouncements

In July 2001, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 141, Business Combinations, and No. 142,

Notes to financial statementsMarch 31, 2003

041_192.pmd 30/06/2003, 8:15 PM189

Goodwill and Other Intangible Assets, effective for fiscal yearsbeginning after December 15, 2001. Under the new rules, goodwilland intangible assets deemed to have indefinite lives are no longeramortized, but are subject to annual impairment tests in accordancewith the statements. Other intangible assets continue to be amortizedover their estimated useful lives. The Company adopted the newrules on accounting for goodwill and other intangible assetsbeginning on April 1, 2002. SFAS No. 141 and No. 142 wereeffective for the Company beginning on April 1, 2002 and theiradoption did not have a material impact on the Company’s financialposition or results of operations for the year ended March 31, 2003.

In August 2001, the FASB issued SFAS No. 144, Accounting forthe Impairment or Disposal of Long-Lived Assets, effective for fiscalyears beginning after December 15, 2001. This Statementsuperseded SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, andprovided a single accounting model for long-lived assets to bedisposed of. The new Statement also superseded the provisions ofAPB Opinion No. 30 with regard to reporting the effects of a disposalof a segment of a business and required expected future operatinglosses from discontinued operations to be displayed in discontinuedoperations in the period(s) in which the losses are incurred. SFASNo. 144 was effective for the Company beginning on April 1, 2002and its adoption did not have a material impact on the Company’sfinancial position or results of operations for the year ended March31, 2003.

2 Fixed assets

Fixed assets consist of the following at March 31, 2003:

$

Furniture and fixtures 332,879

Software and equipment 298,508

Leasehold improvements 366,555

997,942

Less: accumulated depreciation and amortization (140,970)

Fixed assets, net 856,972

3 Acquisition of contract rights

In November 2002, the Company acquired certain contract rightsfrom an unrelated party for approximately $609,000. Considerationfor acquiring these contract rights consisted of cash payments ofapproximately (i) $250,000 to the seller, (ii) $284,000 for salaries,accrued vacations and unreimbursed expenses of terminated

employees of the seller subsequently hired by the Company in theUS and in India and (iii) $75,000 for related transaction fees.

The resulting assets are being amortized on a straight-line basisover 12 months. The amortization of such assets is recorded ascost of revenue. For the year ended March 31, 2003, the Companyamortized approximately $247,000 into cost of revenue.


Approximately $34,680,000 of revenues for the year ended March31, 2003 were generated in accordance with the License and ServiceAgreement. Approximately $23,232,000 of revenues were earnedfrom services rendered to a stockholder of the Parent. As of March31, 2003, approximately $7,237,000 of accounts receivable wasdue from this stockholder.

Balance due from and to the Parent as of March 31, 2003 is asfollows:

$

Amount due under License and Service Agreement 24,690,111

Other 241,675

Total due to Parent 24,931,786

Amount due from Parent 10,488,139

Net due to Parent 14,443,647

In June 2002, the Company borrowed $500,000 from the Parent,under a loan agreement under which up to $1,000,000 can beborrowed, in exchange for a note. The note bears interest at a rateof LIBOR plus 50 basis points (2.25% at March 31, 2003) asadjusted from time to time and payable annually.

5 Income taxes

There was no provision for federal and state income taxes for theyear ended March 31, 2003. The Company’s gross deferred taxassets of approximately $233,000 at March 31, 2003 result primarilyfrom net operating loss carryforwards. The Company has establisheda valuation allowance equal to the deferred tax assets as of March31, 2003 due to uncertainties about their realization. During theyear ended March 31, 2003, the valuation allowance increased byapproximately $136,000.

At March 31, 2003, the Company has net operating losscarryforwards of approximately $583,000 which expire through2023 for federal and state income tax purposes, respectively.

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6 Commitments

The Company leases office space under non-cancelable operatingleases expiring through 2013. The future minimum paymentsrequired under these leases are approximately as follows:

Amount

$

Year ending March 31:

2004 344,000

2005 347,000

2006 325,000

2007 311,000

2008 286,000

Thereafter 581,000

2,194,000

Rent expense pursuant to these operating leases for the year endedMarch 31, 2003 was approximately $267,000.

7 Major customers

For the year ended March 31, 2003, fees earned from one customeraccounted for approximately 65% of revenues (see Note 4).

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New York: 99 Park Avenue, Suite 1530, NYC, New York 10016, USATel: +1-212-430 5800 Fax: +1-212-430 58089 East 37th Street, 12th Floor, New York, NY 10016Tel: +1-212-430 1917 Fax: +1-212-430 1918

London: 121 Meridian Place, Off Marsh Wall, South Quay, Docklands, London E149FETel: +44-207-531 4400 Fax: +44-207-531 4401

Amsterdam: Strawinskylaan 1245, 1077 XX Amsterdam, The NetherlandsTel: +31-20-575 4200 Fax: +31-20-575 4201

Frankfurt: Mainzer Landstraße 49a, 60329 Frankfurt am Main, DeutschlandTel: +49-69-3085 5091 Fax: +49-69-3085 5104

Dubai: Office Suite G15 Bldg No. 9, Dubai Internet CityDubai, UAE

Singapore: 27 International Business Park, #04-05 Primefield Landmark Building, Singapore 609924Tel: +65-6238 1900 Fax: +65-6238 1282

Tokyo: 3C Otsuka Building, 1-5-4 Toranomon, Minato-kuTokyo 105 0001, Japan

Mumbai: i-flex Center, 399 Subhash Road, Vile Parle (East), Mumbai 400 057, IndiaTel: +91-22-2839 1909 Fax: +91-22-2836 3140

Bangalore: i-flex Center, 146 Infantry Road, Bangalore 560 001, IndiaTel: +91-80-228 4300 Fax: +91-80-228 4313

Marketing offices

All company or product names are trademarks or registered trademarks of their respective owners

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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 - 2 0 0 3www.iflexsolutions.com

i-flex annual report 2002-2003

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