Flextronics Software Systems Limited (`the Company') was incorporated
in India on December 30, 1991 and commenced business on July 1, 1992.
The activities of the Company include development of package software,
providing software consulting services and other ancillary products and
services, primarily for use in the telecommunications industry. The
company also provides business process outsourcing services, primarily
in the areas of on-line customer care.
On September 1, 2006 Aricent Inc., a Cayman Island Company (formerly
Software Development Croup), an affiliate of Kohlberg Kravis Roberts &
Co acquired approximately 82.01% of the paid up share capital of the
company through Aricent Technologies (Holdings) Limited (formerly
Kappa Investments Limited), a wholly owned subsidiary of Aricent
Holdings Mauritius Ltd (formerly SDC Mauritius Ltd). The accompanying
financial statements reflect the results of the activities undertaken
by the Company during the nine month period ended March 31, 2007.
2. Commitments and Contingencies
a) Estimated amount of contracts remaining to be executed on capital
account and not provided for against which advance has not been paid is
Rs.18,354,200 (Previous period Rs. 41,467,900).
b) Outstanding forward contracts in respect of foreign currency as on
March 31, 2007 amount to US $ 45,000,000 equivalent to Rs.2,057,322,500
(Previous period US $ 32,500,000 equivalent to Rs.1,469,107,500).
c) Demand for income tax aggregating to Rs.6,326,605 (Previous period
Rs. 6,326,605) for the assessment year 2002-03 is disputed by the
company against which the company has filed an application for
rectification of the order under section 154 of the Income Tax Act,
1961 requesting for modification of taxes payable to Rs.2,254,159 and
has deposited Rs.2,254,159 under protest.
d) Demand for income tax aggregating to Rs.32,677,385 (Previous period
Rs.Nil) for the assessment year 2004-05 is disputed by the company
against which the company has filed an appeal under section 246A of the
Income Tax Act, 1961 requesting for refund of taxes paid aggregating to
Rs.36,970,546. The assessing officer has adjusted demands aggregating
to Rs.23,126,043 against refunds due to the company for the assessment
years 2001-02 and 2003-04.
Based on the interpretations of the provisions of the Income Tax Act,
1961, the Company has been legally advised that the demands in note
3(d)and 3(e) above, is likely to be either deleted or substantially
reduced and accordingly no provision has been made.
e) Demand for customs duty aggregating to Rs.4,414,735 (Previous period
Rs.4,414,735) received on February 28, 2006 from the Assistant
Commissioner of Customs disallowing duty free concession on certain
imports made by the company and the company has deposited Rs.4,414,735
under protest. Subsequently the company has received a show cause
notice with respect to the above demand to which the company has filed
its reply. The matter came up for personal hearing on June 27, 2007 and
is now reserved for order.
f) Demand of Rs.5,419,608 (Previous period Rs.5,419,608) from Haryana
Urban Development Authority with respect to FAR of increased area of
Plot no,31 at Gurgaon is disputed by the company and the company has
deposited Rs. 1,970,092 under protest.
g) The company had executed an agreement with RR Real Estates and
Constructions (`land owner') and Millennia Realtors Private Limited
(`Developer') for development, lease and eventually sale of the
Bangalore facility constructed over 6.20 acres of land. The company had
taken possession of the premises in November 2003 but no rent had been
paid as the lease agreement has not been executed due to a dispute
between the land owner and the developer. As at March 31, 2007 the
company has accrued rent and other expenses payable to the developer
and land owner aggregating to Rs.59,300,548. In July 2005 the
developer has filed a legal suit against the company for recovery of
rent, interest, damages etc aggregating to Rs.45,196,169 for wrongful
occupation of the premises and delivery of physical vacant possession
of the premises which is disputed by the company and in September 2005
the company has filed its reply to the petition.
In February 2006 the developer filed a new application with the City
Civil Court, Bangalore, Karnataka requesting for a partial decree for
recovery of Rs.20,500,000 towards rent of the premises for the period
upto January 31, 2006.
In October 2006, the company deposited Rs.16,448,600 with the City
Civil Court, Bangalore, Karnataka towards rent and security deposit due
to the developer for the period November 15, 2003 to January 31, 2006
and on January 8, 2007 the company deposited Rs.4,377,026 with the City
Civil Court, Bangalore, Karnataka towards rent due to the developer for
the period February 1, 2006 to December 31, 2006. In November 2006 the
company paid Rs.5,923,962 to the landowner towards rent and security
deposit for the period upto September 30, 2006.
The company also paid Rs. 1,062,640 on October 19, 2006 and
Rs.5,445,216 on November 2, 2006 respectively to the land owner and
developer in the ratio of 27:73 for enforcement of its right to
purchase the Bangalore facility in terms of the agreement.
In January 2007, the company paid Rs.467,814 to the land owner towards
rent for the period October 1, 2006 to December 31, 2006. In February
2007 the company deposited Rs.418,287 with the City Civil Court,
Bangalore, Karnataka towards rent due to the developer for January 2007
and has filed its reply to the petition of the developer for withdrawal
of rent. The petition is posted for hearing on July 17, 2007.
In February 2007 the company has filed a specific performance suit
against the developer and land owner directing them to execute the
registered sale deed of the Bangalore facility in favour of the company
on receipt of the sale consideration. The petition is posted for
hearing on October 8, 2007. Pending disposal of the suit, the amount
payable by the company is currently not ascertainable.
h) Anticipated Losses
A provision for anticipated loss is recognised where it is probable
that the estimated contract costs are likely to exceed the total
contract revenue. The activity in the provision for anticipated losses.
The company warrants that its software products and services will
perform in all material respects in accordance with the company's
standard specifications in effect at the time of delivery of the
software/licensed products or on completion of services for the
warranty period. Accordingly based on specific warranties, claims and
claim history the company provides for warranty claims. The movement
in the provision for warranty costs.
3. Scheme of Amalgamation
The board of directors of the company in their meeting held on December
8, 2006 approved the amalgamation of the company and Future Software
Limited, a subsidiary with Aricent Technologies (Holdings) Limited
(formerly Kappa Investments Limited) under section 394 of the Companies
Pursuant to the scheme of amalgamation of the company and Future
Software Limited with Aricent Technologies (Holdings) Limited (formerly
Kappa Investments Limited) as approved by the shareholders and
creditors of the company in the court convened meeting held on January
30, 2007 and subsequently sanctioned by the Hon'ble High Court of Delhi
on May 16, 2007, the assets and liabilities of the company and Future
Software Limited will be transferred to and vested with Aricent
Technologies (Holdings) Limited (formerly Kappa Investments Limited) on
April 1, 2007 being the appointed date and effective date of
amalgamation for accounting purposes.
4. Managerial Remuneration
In the annual general meeting held for the year ended March 31, 2004
the shareholders of the company had approved the payment of commission
not exceeding one percent of the net profits to the non-whole time
directors for a period of five years commencing from April 1, 2004.
Computation of net profits in accordance with Section 309(5) read with
Section 349 of the Companies Act, 1956 and computation of commission
payable to the non-whole time directors.
5. Buy Back of Shares
During the period the company bought back 486,035 equity shares from
Aricent Holdings Mauritius India Limited (formerly Flextronics Sales &
Marketing (L-A) Limited, Mauritius) and 27,068 equity shares from other
shareholders at a consideration of Rs.725 per share and transferred a
sum equivalent to the nominal value of such shares aggregating to
Rs.2,565,515 to the capital redemption reserve account as referred to
in Schedule B. The premium paid on such buy back aggregating to
Rs.369,434,160 has been adjusted against prior year reserves in
Schedule B. These shares were extinguished and physically destroyed on
November 25, 2006.
In terms of a share purchase agreement executed on May 29, 2006 the
company acquired 33,210,000 fully paid up equity shares of the face
value of Rs.5 each of Future Software Limited from Frog Design
Mauritius (formerly Flextronics (Technologies) Mauritius Limited) fora
cash consideration of Rs. 1,981,508,173. During the period, the company
further acquired 10,846,160 fully paid up equity shares of the face
value of Rs.5 each from Frog Design Mauritius (formerly Flextronics
(Technologies) Mauritius Limited) for a cash consideration of
Rs.512,211,575 and transferred six shares to the employees of Future
Software Limited at a consideration of Rs.291. The acquired shares have
been accounted as a long term investment in Schedule E.
7. Reimbursement by Flextronics International Limited
During the period the company received a remittance of Rs.69,780,870
from Flextronics International Limited, Singapore for payment of
incentives to some of the employees of the company which has been
disbursed to the employees. The incentive has not been recognised as an
expenditure as it does not represent an obligation of the company and
has no impact on the financial statements of the company.
8. Research & Development
Costs incurred on Research and Development that were expensed during
the periods ended March 31, 2007 and June 30, 2006 was Rs.305,372,553
and Rs.402,302,417 respectively.
9. Segment Reporting
The company develops software products and provides software consulting
services for use in the telecommunications industry and also sells
telecommunication equipment and provides services on business process
outsourcing. These services are distinguishable and are not subject to
the same risks and returns.
As the Company also exports its products and services, the secondary
segment for the Company is based on the location of its customers.
Net income has not been measured and reported segment wise, as certain
cost components have not been allocated to reportable segments. Some of
the assets are not realistically allocable and identifiable as these
assets are used interchangeably between reportable segments.
Other income has not been measured and reported segment wise as these
components are not realistically allocable and identifiable.
Unallocated corporate expenses includes interest on loans.
Unallocated assets include cash and bank balances, interest accrued on
deposits, tax assets and net forward receivables.
Unallocated liabilities include tax provisions, deferred premium on
forward cover, net forward payable, investor education and protection
fund, proposed dividend, unsecured loan and shareholders funds.
Provision for gratuity has been allocated on the basis of actuarial
Capital expenditure pertains to additions made to fixed assets during
the period including capital advance, capital work in progress and
assets acquired on amalgamation.
Information on operating income, net income, assets and liabilities has
not been provided by location of customers as such information is not
realistically allocable and identifiable.
The company has leased a part of its premises to a third party under a
lease agreement that qualifies as an operating lease. The
non-cancelable term of such lease is less than one year. Rental income
for operating leases for the periods ended March 31, 2007 and June 30,
2006 was Rs.2,430,603 and Rs.4,051,005 respectively.
The company is a lessee under various operating leases. Rental expense
for operating leases for the periods ended March 31, 2007 and June 30,
2006 was Rs.175,117,284 and Rs.188,009,653 respectively. Expected
future minimum commitments for non-cancelable leases are as follows:
11. Defined Benefit Obligation
Effective April 1, 2005, the company adopted the revised accounting
standard 15 on employee benefits with respect to gratuity payable to
employees of the company. In terms of the standard there are no
transitional obligations as the value of such obligations in the prior
years have been determined by the projected unit credit method.
The status of the gratuity plan including reconciliation of the opening
and closing balance of the present value of defined benefit obligations
and the fair value of plan assets.
The estimates of future salary increases, considered in actuarial
valuation, take account of inflation, seniority, promotion and other
relevant factors such as supply and demand factors in the employment
Previous period's figures have been regrouped and/or re-arranged
wherever necessary to conform to the current period's groupings and
classifications and the figures in brackets are those in respect of the
previous period. These accounts are for a period of nine months as
against fifteen months in the previous period and consequently the
current period figures in the Profit & Loss Account are strictly not
comparable with those in the previous period.