Subex Limited
Annual Report 2005

Plain-text annual report

Annual report 2005-06 his-to-ry (n.): when time remembers your story w w w . s u b e x a z u r e . c o m Subex Azure Limited (formerly Subex Systems Limited) Challenging Rules There are places where definitions are really meant to be redefined. Where the accepted routes are rejected. Where the done thing is, well, just not done. Like Subex Azure. A place where words take on a new meaning. Where habit and prescription give way to initiative. And intuition helps achieve the unimaginable. spend a It's an environment where revolution is a process, not a goal to lifetime on. Where young minds are set free, to soar, to seek and solve what generations have struggled with. In an industry where software spelt services, Subex Azure chose to take the risky product route. Several more decisions that turned conventional wisdom on its head, paid off. 6 0 - 5 0 0 2 t r o p e R l a u n n A Today, we are global leaders in fraud and management revenue maximization; our brands empower 150 telcos across 66 countries. While software engineering often means mechanical coding, young Subexians keep breaking barriers and creating world-beating products. Inventive Spirit At Subex Azure, breaking the mould has been much more than just a way of doing things; it's been the guiding principle that has shaped our track record. A relentless questioning of every aspect of our work has helped us evolve our very own corporate ethos. Naturally, our ten-year track record of healthy financial growth has won many over to our way of thinking. It's a reassuring story that the numbers tell… speaking of sustained growth, and a dynamic future ahead. When many Indian software companies saw their ultimate goal in being bought out by an international giant, at Subex we saw merit in doing exactly the opposite. We sought out international giants. Subex’s $140 million acquisition of UK's No.1 revenue assurance company is just one such example of a vision and strategy that most industry watchers are still trying to understand. While an annual report often presents a one-dimensional picture of the past year, Subex Azure would like to redefine the very idea; taking stock of not just the numbers, but our intellectual capital also. The 500-strong team of young minds, whose inventive spirit has redefined the way an Indian company could conduct itself across the globe. 1 Milestone (n): a landmark achievement; a historic moment from the past year Subex Azure Limited (formerly Subex Systems Limited) Contents Chairman's Letter to the Shareholders .................................................. 05 About Subex Azure About Subex Azure About Subex Azure About Subex Azure About Subex Azure Operational Highlights ....................................................................... Financial Highlights ........................................................................... Offerings Overview............................................................................... Market Overview.................................................................................. People Overview ................................................................................. Driving Beliefs .................................................................................... Board of Directors ............................................................................... Executive Management Team .............................................................. General Review & Accountability General Review & Accountability General Review & Accountability General Review & Accountability General Review & Accountability Directors’ Report .................................................................................. Report on Corporate Governance ......................................................... Management's Discussion & Analysis .................................................. Financials Financials Financials Financials Financials Financial Review - Subex Azure Limited (Standalone)........................... Financial Review - Subex Technologies, Inc......................................... Financial Review - Subex Technologies Limited ................................... Financial Review - Subex Azure Limited (Consolidated)........................ 07 09 11 13 15 17 18 19 22 27 32 44 62 74 90 Shareholders’ Information ................................................................... 109 6 0 - 5 0 0 2 t r o p e R l a u n n A 3 Keynote (n): a vision or statement that sets the tone for the activities and initiatives to follow; a leader's insight that is shared Subex Azure Limited (formerly Subex Systems Limited) Subash Menon Founder Chairman, Managing Director & CEO Dear Shareholder, These past seven years, I have been reporting to you on the growth of your company in the software products business. I had once quoted Victor Hugo - “An invasion of armies can be resisted, but not an idea whose time has come”, while referring to the idea that your company had. That idea was to create a successful Indian software product company. An idea that was scoffed at by many. An idea that was “not bankable” for many funding agencies. Today, we have proved the skeptics wrong. We have not only created a vibrant software product company, but have also created history along the way. The time has now dawned upon us for me to tell you about certain path-breaking endeavors of your company. But first, let me take you through the key financial data. Our revenue grew by 55% to reach Rs. 1,812 million while Profit After Tax (PAT) grew by 54% to reach Rs. 391 million. In keeping with our long term plan, products contributed 65% of the revenue by growing at 87%. Products recorded a revenue of Rs. 1,166 million. Building a Global Company Your company has always endeavored to create a global organization. From the word go, seven years ago, the objective was not to build yet another software product company. It was to build one of the largest telecom software product companies in the world. Such a creation calls for several key elements to be present: a vision, an understanding of the future and the right attitude to be able to think and execute globally. I am happy to report that we have now delivered on our promise of the past to create the global leader in revenue maximization. Let me now take you through that journey. In 2000, we launched our first product: Ranger™, a telecom fraud management system. It was tough going initially, but we persevered and signed on customers initially in India and then in other developing countries in Africa and Eastern Europe. Slowly but steadily, Ranger™ started gaining traction, was soon accepted as a reliable product and Subex came to be known as a fraud management company. It was then time for us to redefine our business. True to our pioneering spirit, we told the telco world that fraud management and revenue assurance have significant synergies and launched the next product, INcharge™, a revenue assurance system. That led to our business getting redefined as revenue maximization. At the same time, in keeping with our long term 6 0 - 5 0 0 2 t r o p e R l a u n n A objective to be the global leader in our area of operation, we set ourselves the twin objectives of attaining leadership in fraud management and revenue maximization. Thus began our quest for the chalice. INcharge™ started gaining momentum in the wake of Ranger™, exactly as we had planned. The telcos warmed up to the idea of a common platform for fraud management and revenue assurance; and RevMax™, the integrated offering, started gaining currency. This strategic move also differentiated us from several other vendors and was the first turning point in our successful march. With the launch of INcharge™ and its acceptance by our customers, we felt the need to evolve a long term strategy that was crucial to our success. A thorough gap analysis was conducted between where we were and where we intended to reach, and we identified several areas for improvement and change. Solutions were formulated to address each issue and that included overhauling Ranger™, beefing up the sales team, acquisitions etc. Given the extent of the work involved, the entire program was divided into three phases and it was obvious that we were in for a long haul. While work commenced on implementing the different solutions identified, the company designed a proactive approach to inorganic growth. We short-listed several potential targets, engaged an investment banker and went about implementing the process. In the first phase, the plan was to consummate one or two small acquisitions, thereby achieving leadership in fraud management. This phase was also positioned as the learning phase with regard to acquisitions. Hence the choice of small entities as targets to minimize the risk. The targets identified were met and the final short-list was arrived at over a period of 6 months. Another 6 months were invested in conducting due diligence and concluding the two acquisitions; the fraud management businesses of Alcatel in UK and Lightbridge in US. It is important to comprehend the rationale behind the final decision. Both these businesses were divisions within large companies and essentially were stranded assets without any specific plan for the future. Consequently, they were available at reasonable valuations and could be assimilated into Subex with minimal risk and within a short span of time. Further, the customer bases of these two companies had no overlap among themselves and with that of Subex at the time. This resulted in a wide base of Tier 1 customers 5 Subex Azure Limited (formerly Subex Systems Limited) in all the major geographies and could be used as an excellent strategy to enter the developed countries. Upon completion of the acquisitions, the company focused on integrating these businesses with the parent in as seamless a manner as possible to achieve synergies and cost efficiencies, and to leverage the strengths. Towards that end, the company invested heavily in new offices and manpower in the US and UK. The timely investment in these new facilities manned by experienced personnel with significant local knowledge and exposure turned out to be a very wise move resulting in a substantial contraction of the payback period (for the acquisitions) from an expected 3 years to 1.5 years. This successful transition of the acquired businesses into the parent was a morale booster and also enabled Subexians to gain valuable experience in integrating acquisitions on a global scale. We ended up handling over 30 new customers spread across 15 new countries where Subex was not present prior to the acquisitions. The entire integration went through smoothly without negatively impacting the level of customer satisfaction. That marked the end of phase 1 of our long term plan. It was now time to commence phase 2. Armed with the knowledge and experience garnered from phase 1, the decision was taken to explore the possibility of consummating a transformational transaction. As before, we had a set of key parameters to guide us in this phase. Let me explain those parameters in detail. The first parameter is a financial one. Subex does not believe in any acquisition that is dilutive to its earnings. In short, all acquisitions must be either accretive or neutral to earnings in the first full year after completion of the acquisition. The other parameters relate to the business. They are: the products of the acquired entity must be in our space of operation and hence synergistic; there should be minimal overlap in customer base; it should be possible to achieve cost optimization through synergies in operation; the payback period should be reasonable etc. Finally, the overriding consideration is that the acquisition should strengthen Subex in areas where we were seeking additional support and strength. The need for a transformational transaction was felt as we were endeavoring to pioneer and spearhead the introduction of a new concept, Revenue Operations Center (ROC), in the telco world. The strength that could be derived from such a transaction seemed crucial. The successful process employed for phase 1 was re-employed for this phase as well. Thus, several targets were identified and contacted. As before, considerable time was invested in the 6 preliminary work of evaluating these targets and in conducting extensive due diligence of the couple who made it to the final short-list. This extensive process, that lasted about 15 months, resulted in the conclusion of the transaction with Azure Solutions Limited of UK. This company, a 3-year old spin-off from the BT stable, met all the criteria and was the global leader in revenue assurance with a wide customer base. The combination of Subex and Azure, named Subex Azure Limited, is a very powerful one. I believe that there are four key aspects to create and sustain a global company in our area of operation. These are: a strong product offering; a great brand image; a wide base of high quality customers and deep domain expertise. While Subex had a strong product offering in the form of ROC along with a wide customer base, Azure brought a great brand image coupled with excellent customer relationships and extensive domain knowledge. Needless to say, the combined entity will be a force to reckon with as the global leader in fraud management and revenue assurance. The journey that was started seven years ago to create a globally successful and dominant telecom software product company has now reached a key milestone. We have now created the largest organization in telecom revenue maximization with over 150 customers spread across 60 countries. We now serve 23 of the world's top 40 telcos. We are streets ahead of the nearest competitor and we have over 25% of a fragmented market. And, the journey continues towards the next milestone. The Future The Future The Future The Future The Future Subex has now achieved its initial objective set over 3 years ago to be the global leader in telecom revenue maximization. The immediate task is to fully integrate the new acquisition seamlessly and to position Subex Azure to take advantage of the opportunities that lie ahead. The telecom industry is facing unprecedented challenges with regard to protecting its revenues and growing them. This presents fabulous possibilities for the largest company in that space: Subex Azure. Once the integration is complete and we start benefitting from the strengths gained, your company will be ready for phase 3 of its long term plan. Let me sign off for now by thanking every one of you for the support and for the faith reposed in me and my colleagues. Dear shareholders, your company has never been stronger and the future never brighter, as now. Subash Menon Subex Azure Limited (formerly Subex Systems Limited) Operational Highlights (cid:1) Acquisition of UK-based Azure Solutions. The new, combined entity, Subex Azure, becomes the world’s No. 1 vendor for fraud management and revenue assurance solutions and the 2nd largest vendor for interconnect and inter party billing solutions. (cid:1) Acquisition of the telecom business assets of US-based Mantas, Inc. (cid:1) Launch of the Revenue Operations Center (ROC) concept. (cid:1) Launch of the 3rd product, ONtrack Subscriber Risk Management Solution. (cid:1) Announcement of the new campus on Outer Ring Road, Bangalore, to seat 1,000+ Subexians. (cid:1) Subex Azure was selected as part of Deloitte & Touche Tech Fast 50 (cid:1) Subex Azure was chosen as one of the 8 most innovative companies by NASSCOM. 6 0 - 5 0 0 2 t r o p e R l a u n n A 7 Flashpoint (n): a moment when insight, vision and daring explode into a series of achievements that light up the way ahead Subex Azure Limited (formerly Subex Systems Limited) Financial Highlights Year ended 31st March Particulars (Rs. in million) Total Revenue Export Revenue Gross Profit Operating Profit (EBITDA) Profit Before Tax Profit After Tax Shareholders’ Funds Equity Gross Fixed Assets Net Fixed Assets Total Assets (Basic) Earning Per Share Debt (including working capital) Equity Ratio EBITDA / Sales - % Net Profit Margin - % Return on year-end Net Worth - % Return on year-end Capital Employed - % 2006 1841 1787 762 539 422 391 1816 218 653 392 1827 18.23 0.01 29% 22% 22% 30% 2005 1172 1086 467 357 261 253 1233 101 555 368 1542 13.89 0.23 30% 22% 21% 23% Revenue UP55% FY 06 Rs. 1841m FY 05 Rs. 1172m Basic EPS UP31% FY 06 Rs. 18.23 FY 05 Rs. 13.89 Profit After Tax UP54% FY 06 Rs. 391m FY 05 Rs. 253m UP51%EBITDA FY 06 Rs. 539m FY 05 Rs. 357m Revenue Share Products 65% Services 35% 6 0 - 5 0 0 2 t r o p e R l a u n n A 9 Subex Azure Limited (formerly Subex Systems Limited) Global Customer Footprint 10 Subex Azure Limited (formerly Subex Systems Limited) Offerings Overview Telecom networks across the world are on a migration path to Ethernet. IP based services are expected to proliferate and current business largely on voice services, models, which depend are expected to change considerably. This will change the very nature of how operators do business and will impact on all areas of operations from customer acquisition to collection, and from product development to financial reporting. Fraud is a global malaise to telecom networks and has a very significant impact on the bottomlines of telecom operators. Surveys show that about 4% of the industry's revenue is lost to fraud. Fraudsters and their methods will continue to evolve to take advantage of the numerous security holes that will emerge in this new environment. The open architecture of a next-generation telecom network (like IMS) will make it easier for fraudsters to illegally gain access to services and defraud the operators. A highly focused approach is essential to combat these upcoming frauds and this forms the biggest driver for the evolution of Ranger. Ranger's core architecture is evolving to address fraud threats in the new environment using a combination of different techniques including artificial intelligence and statistical modeling. This has made Ranger the foremost fraud management system available today for next-gen services, outperforming others in the market by a large margin. Ranger is increasingly becoming the solution of choice for large Tier 1 operators globally as they prepare themselves for the upcoming cycle of growth. Revenue leakage in a carrier's network can occur at any point in the billing chain. Errors and mismatches across switches, inventory, provisioning, mediation, rating and billing systems result in revenue losses from incorrect billing, unused assets and unbilled usage, among other things. In these new revenue models, telcos are fast emerging as sales channels and payment gateways for a variety of products like ring tones, music downloads, video downloads, utility payments etc. In these instances, the potential loss to the telcos who fail to recognize and collect revenues from their customers is considerably high as they will have to pay out to those who provide the content and services. INcharge is a market-leading revenue assurance solution that helps the operators to automate their revenue leakage detection and resolution process. It provides benefits to the revenue assurance analysts in the following ways: 6 0 - 5 0 0 2 t r o p e R l a u n n A (cid:1) Provides an end-to-end revenue assurance capability, allowing analysts to progressively extend revenue assurance to all areas of operation. (cid:1) Performs automatic processing and reconciliation of large data volumes, thus offering larger coverage. (cid:1) Includes powerful analysis tools that help revenue assurance analysts to quickly zero in on the root cause of a detected revenue leakage. (cid:1) Provides the workflow to help prioritize the most critical issues, which leads to structured resolution and tracking of issues. Subscriber delinquency and bad debt are serious problems faced by almost every operator in the world today. On an average, around 5% of an operator's revenue is written off as bad debt. Further, a subscriber entry qualification criterion is becoming less stringent than before as operators aggressively pursue subscriber growth. While uses of credit assessment and scoring methodologies have helped tackle the problem prior to activation, a significant portion of risk exists post activation. Operators need to monitor the liability and outstanding against each subscriber on a continuous and real-time basis, in order to detect delinquency risks early-on in the billing cycle to limit instances of bad debt. A successful risk management strategy would aim to close the gap through pre-emptive techniques such as seeking part payments from subscribers with unusually high usage or identify subscribers with whom the post invoice follow up needs to be done with greater urgency . ONtrack continuously monitors and tracks the possibility of a subscriber going delinquent in the network and thus enables operators to minimize their losses early-on and pre-empt a potential write-off. ONtrack uses a very flexible rule-driven risk modeling core that allows the system to profile, segment and define highly focused risk management strategies. Monitoring the build-up of unbilled amounts is one such strategy; another would be to detect subscriber behavior changes which suggest that the subscriber would not be able to pay his bills. ONtrack employs an integrated usage tracking and rating mechanism that enables the operator to use a subscriber's usage details to achieve near-real time risk assessment, thereby negating any delay imposed by conventional methods on revenue recovery. Further, ONtrack's flexible workflow helps the operator to better prioritize cases and even automate monotonous routine tasks like sending out reminders. Thus, ONtrack reduces the time taken to work on a case thereby allowing operators to work more actively in controlling their losses from bad debt. 11 Subex Azure Limited (formerly Subex Systems Limited) Marketing Events 1 2 3 4 5 6 7 8 9 Americas User Conference Telestratergies Revenue Assurance (RA) Fall TeleManagement Forum Dallas Teradata Partners Users’ Conference ITU Telecoms America Risk Management and Audit in Telecoms Revenue Management FIINA Plenary African Telecoms Billing & RA 2005 10 Revenue Assurance Summit 2005 11 Combating Telecom Fraud in Asia 12 APAC User Conference 12 13 TeleManagement Forum ASEAN Summit Market Overview The telecommunications business is a dynamic world of sophisticated markets, demanding customers and rapidly changing technology. Telecom operators worldwide, toil in an intensely competitive environment. They are under incessant pressure to show consistent growth in their Average Revenue per User (ARPU) and Average Margin per User (AMPU). As operators navigate through this demanding scenario, they grapple daily with the challenge of ensuring sustained, profitable growth. It is the growing maturity of the telecommunication business that is propelling the need for revenue maximization solutions. Subex Azure finds itself in the happy position of having built credibility and market share that it can leverage to achieve a compelling leadership position. Subex Azure estimates, as independently corroborated by industry analysts, that the FMS + RAS market will reach an annual size of USD 250M by 2007-08 and USD 400M by 2009-10. Given the relative maturity of the FMS segment vis-à-vis the RAS segment, we expect a higher rate of growth for the RAS market which in turn would reflect in higher percentage of Subex Azure’s total revenue earned from INcharge. Subex Azure has clearly established itself as the leader of the revenue maximization niche. It is our estimate that Subex Azure enjoys 25 - 30% market share in the FMS segment and 10 - 15% market share in the RAS segment. ROC: Crafting Strategic Business Value ROC: Crafting Strategic Business Value ROC: Crafting Strategic Business Value ROC: Crafting Strategic Business Value ROC: Crafting Strategic Business Value Operators realize that sustained growth cannot be guaranteed by mere addition of new subscribers. Equally important is the ability to offer new and exciting services. Unfortunately, operators have repeatedly seen their effort and investment in new services undermined by insidious revenue leakages. This has made capturing all accrued revenue from subscribers for the services they use, a top business objective. Subex Azure Limited (formerly Subex Systems Limited) In order to guarantee realization of all accrued revenues, operators are increasingly embracing the idea of revenue maximization. Revenue maximization is the business practice of continual optimization of the revenue chain to increase the revenue realized and to reduce the costs incurred. 6 0 - 5 0 0 2 t r o p e R l a u n n A What is ROC? (cid:1) Centralized & Integrated Operational Infrastructure (cid:1) Monitors, controls & ensures integrity of revenue chain (cid:1) Provides tools to ensure revenue chain optimization & error correction (cid:1) Delivers relevant data to upstream analytics & planning system Subex Azure’s key insight is the need for an enabling infrastructure that helps operators operationalize a successful revenue maximization practice. We call this the Revenue Operations Centre (ROC). Subex Azure envisions ROC as a centralized and integrated operational infrastructure to monitor, control and assure the integrity of the entire revenue chain. Subex Azure has presented its idea on the ROC in various industry events where it garnered rave reviews from industry analysts and the trade press. Dr. Jerry Lucas, one of the foremost thought-leaders in the telecommunications space, in his column in Billing World & OSS magazine, highlights ROC as being "Really on the mark", while a recent Frost & Sullivan report suggests it as “An innovative approach to this key problem being experienced by the telcos”. We believe that Subex Azure is uniquely positioned to emerge as the leading provider of software solutions that power the ROC. Subex Azure is best equipped to help operators implement a comprehensive revenue maximization practice by leveraging its: (cid:1) Deep domain knowledge (cid:1) Acquired through supporting over 80 customer installations in 40 countries (cid:1) World class support (cid:1) Ability to provide near-shore support through field support offices (cid:1) (cid:1) Integrated suite of best-of-class solutions, RevMaxTM INchargeTM - Revenue Assurance System RangerTM - Fraud Management System (cid:1) ONtrackTM - Risk Management System (cid:1) In the coming months, Subex Azure’s communication to the market will highlight this unique value proposition. 13 Subex pride award win- ners Pavankumar Kulkarni Rajkumar C Vijay Raghunathan Vivek Thakare Subex Azure Limited (formerly Subex Systems Limited) People Overview In a critical and exciting year for Subex Azure, our new mandate for Human Resources is to ensure that we have every Subexian committed to contributing towards the success of the organization. As we pull together for this journey, which we believe will be exhilarating as well as challenging, we will be Creating History in the Indian software space. We will also draw from the Subexian traits extensively to march together through the new challenges. By the end of March 2006, we had a total of 325 Subexians. Our talent pool of qualified professionals consists of 26% Subexians, who have been with the organization for more than 3 years. For a knowledge-intensive industry like ours, this is quite important and for that reason, a significant achievement. Creating History One of the major activities for us this year has been an initiative we termed 'Creating History'. The key message has been that each Subexian is Creating History by being a part of an organization that is a world leader in its area of focus. We have done this by developing fully home-grown products. Creating History also emphasizes the point that everyone in the organization has a chance to contribute innovative ideas and create Subexian History. This in turn,would mean better career opportunities for every Subexian. The Subexian Traits The Subexian Traits are the traits and characteristics that are encouraged and nurtured at Subex Azure. We believe that these traits - Strategic Thinking, Ethics and Professionalism, Quality, Leadership, Commitment, Perseverance and Customer Orientation - make a successful Subexian. The significance of these traits is communicated right from the induction process into the organization. These are further strengthened through our Subexian Traits Integration Camp, a mandatory outbound learning experience for every new Subexian. These traits form the foundation of our Performance Management System as well. Subexian Traits are further reinforced through our Subexian Pride Award - a recognition given by Subexians to fellow Subexians who manifest the Subexian Traits. You will find our winners of the past year in this report. Subex Azure Leadership Program The way we look at the Subex Azure Leadership Program, as with any process of building competencies in individuals, is through the following steps - create the right attitude for change in individuals, deliver the relevant knowledge, improve the skills/ knowledge, transfer the newly acquired competencies into their day-to-day activities and then help them get used to the new way of working. 6 0 - 5 0 0 2 t r o p e R l a u n n A We have met one of the major challenges - creating the right attitude for change - to a great extent from Phase 1 of the Program, through the Assessment Centre conducted last year. Subexians have been receptive to the individual feedback and thereby have the realization about the need for their change and growth. The next step would be to identify the right avenues for imparting some training initiatives - classroom, assignment-based, on-the-job, etc. A continuation of this would be application of the newly acquired competencies into their daily activities. Last year we completed Phase 1 of the Subex Azure Leadership Program. This year, the focus will be on Phase 2, the developmental phase. Recruitment Creating a talent pool of skilled Subexians, who possess the correct fit with the Subex Azure culture, is of utmost importance. We look at all avenues to hire Subexians - campus recruitment, referrals by Subexians, job portals and recruitment agencies. With the demand for talent growing exponentially, a lot of focus will be on developing future leadership from within. We have a very crucial time ahead of us. This year we will evaluate our core human resource strategies and also realign all our HR processes towards the new business plans. We are a well-knit team of Subexians, unique by our accessibility to each other and commitment to the organization. As we grow larger, the biggest asset we will have is this uniqueness! 15 Milestone (n): a high point; an event or achievement that highlights an organization’s forward journey Subex Azure Limited (formerly Subex Systems Limited) Driving Beliefs Mission Statement To ensure creation of value by providing a differentiating edge to the activities of our customers, investors, vendors and Subexians through technnovative solutions while fulfilling our social obligations and maintaining high professional and ethical standards. Vision Statement To be the leader in our areas of business through: Total Customer Satisfaction, Commitment to Excellence and Determination to Succeed. Quality Statement "Subexians are committed to achieve total customer satisfaction by delivering high quality products that meet the needs and expectations of our customers. We commit ourselves to adhere to quality management system requirements and to continually improve the same” 6 0 - 5 0 0 2 t r o p e R l a u n n A 17 Subex Azure Limited (formerly Subex Systems Limited) Board Of Directors 11111 1. Subash Menon 1. Subash Menon 1. Subash Menon 1. Subash Menon 1. Subash Menon Founder Chairman, Managing Director & CEO ezhuvath ezhuvath 2. Sudeesh Y 2. Sudeesh Y 2. Sudeesh Yezhuvath ezhuvath ezhuvath 2. Sudeesh Y 2. Sudeesh Y Executive President 3. V3. V3. V3. V3. V. Balaji Bhat . Balaji Bhat . Balaji Bhat . Balaji Bhat . Balaji Bhat Non - Executive Director 4. K. Bala Chandran 4. K. Bala Chandran 4. K. Bala Chandran 4. K. Bala Chandran 4. K. Bala Chandran Non - Executive Director 5. Vinod R. Sethi 5. Vinod R. Sethi 5. Vinod R. Sethi 5. Vinod R. Sethi 5. Vinod R. Sethi Non - Executive Director 6. Andrew Garman 6. Andrew Garman 6. Andrew Garman 6. Andrew Garman 6. Andrew Garman Non - Executive Director 7. S. N. Rajesh 7. S. N. Rajesh 7. S. N. Rajesh 7. S. N. Rajesh 7. S. N. Rajesh Non - Executive Director abhu abhu . Pr 8. P8. P8. P8. P8. P. P. P. P. P. P. Pr . Pr abhu . Prabhu . Pr abhu Non - Executive Director 9. Harry Berry 9. Harry Berry 9. Harry Berry 9. Harry Berry 9. Harry Berry Non - Executive Director 55555 33333 77777 44444 22222 66666 18 88888 99999 Subex Azure Limited (formerly Subex Systems Limited) Executive Management Team 6 0 - 5 0 0 2 t r o p e R l a u n n A 77777 99999 22222 11111 1. Subash Menon 1. Subash Menon 1. Subash Menon 1. Subash Menon 1. Subash Menon Founder Chairman, Managing Director & CEO 2. Anuradha 2. Anuradha 2. Anuradha 2. Anuradha 2. Anuradha Senior Vice President - Engineering 3. Dean Smith 3. Dean Smith 3. Dean Smith 3. Dean Smith 3. Dean Smith President - APAC 4. Greg LeNeveu 4. Greg LeNeveu 4. Greg LeNeveu 4. Greg LeNeveu 4. Greg LeNeveu Senior Vice President - Americas 5. Paul Skillen 5. Paul Skillen 5. Paul Skillen 5. Paul Skillen 5. Paul Skillen Vice President - Account Management, BT Account 33333 55555 6. Phil Osborne 6. Phil Osborne 6. Phil Osborne 6. Phil Osborne 6. Phil Osborne Vice President - Operations, BT Account 7. Rajkumar C 7. Rajkumar C 7. Rajkumar C 7. Rajkumar C 7. Rajkumar C Head - Legal & Company Secretary 8. Sanjay Paul Antony 8. Sanjay Paul Antony 8. Sanjay Paul Antony 8. Sanjay Paul Antony 8. Sanjay Paul Antony Vice President - Human Resources 9. Sanjeev Gadre 9. Sanjeev Gadre 9. Sanjeev Gadre 9. Sanjeev Gadre 9. Sanjeev Gadre Senior Director - Marketing 10. Saul Nurtman 10. Saul Nurtman 10. Saul Nurtman 10. Saul Nurtman 10. Saul Nurtman President - EMEA 11. Sekharan Y Menon 11. Sekharan Y Menon 11. Sekharan Y Menon 11. Sekharan Y Menon 11. Sekharan Y Menon Senior Vice President - Professional Services Organization 12. V R Suresh Rao 12. V R Suresh Rao 12. V R Suresh Rao 12. V R Suresh Rao 12. V R Suresh Rao Vice President - Finance & Accounts 13. Vinod Kumar P 13. Vinod Kumar P 13. Vinod Kumar P 13. Vinod Kumar P 13. Vinod Kumar P Senior Vice President - Sales ezhuvath ezhuvath 14. Sudeesh Y 14. Sudeesh Y 14. Sudeesh Yezhuvath ezhuvath ezhuvath 14. Sudeesh Y 14. Sudeesh Y Executive President 44444 66666 88888 1010101010 1111111111 1212121212 1313131313 1414141414 19 This page is intentionally left blank This page is intentionally left blank This page is intentionally left blank This page is intentionally left blank This page is intentionally left blank This page is intentionally left blank Subex Azure Limited (formerly Subex Systems Limited) Financial Review Financial Review Financial Review Financial Review Financial Review for the year ended 31st March, 2006 6 0 - 5 0 0 2 t r o p e R l a u n n A 21 Subex Azure Limited (formerly Subex Systems Limited) DIRECTORS’ REPORT TO THE MEMBERS OF SUBEX AZURE LIMITED DIRECTORS’ REPORT TO THE MEMBERS OF SUBEX AZURE LIMITED DIRECTORS’ REPORT TO THE MEMBERS OF SUBEX AZURE LIMITED DIRECTORS’ REPORT TO THE MEMBERS OF SUBEX AZURE LIMITED DIRECTORS’ REPORT TO THE MEMBERS OF SUBEX AZURE LIMITED Your directors have pleasure in presenting the twelfth Annual Report of the company on the business and operations together with the audited accounts for the year ended 31st March, 2006. FINANCIAL RESULTS Amount in Rs. million 2005-06 2005-06 2005-06 2004-05 2005-06 2005-06 Total revenue 1841.19 1172.35 539.44 356.74 Profit before interest, depreciation & amortization Interest, depreciation & amortization Profit before tax Provision for taxes Profit after tax Appropriations Appropriations Appropriations Appropriations Appropriations Interim dividend Preference dividend Dividend proposed on equity shares Provision for tax on dividends Transfer to general reserve 117.21 422.23 30.73 391.50 16.28 - 21.76 5.60 39.50 95.64 261.10 8.07 253.03 9.28 4.65 20.13 4.52 25.50 448.50 Surplus carried to balance sheet 756.30 RESULTS OF OPERATIONS Your company performed well during the financial year ended 31st March 2006. Our total revenue grew by 55% to reach Rs. 1841.19 million while Profit after Tax (PAT) grew by 54% to reach Rs. 391.50 million. Products division increased its’ contribution to revenue with a 65% share. Products recorded revenue of Rs. 1166.82 million that translates to a growth of 87% as against 58% the year before. As is evidenced by the figures above, the products business is growing in line with our strategic plan and is set to further gain in relative terms in the years to come. Over the past 5 years, software products have increased their contribution in the overall revenue from a low figure of 7% in FY01 to 65% in FY06. Additionally, one of the key metrics that we track, namely the Average Revenue per Contract (ARPC) has increased to US$ 950,000 from US$ 875,000 in FY05. Our acquisitions in FY05 have yielded us very good returns during FY06 and the businesses have got well integrated into the overall activity. As against an expectation of a payback period of over 3 years, we have finished payback over an 18-month period. This excellent experience has boosted our confidence in our ability to handle and gain from acquisitions going forward. BUSINESS Your company operates in a niche market providing Revenue Maximization solution to communications service providers worldwide. These solutions improve the revenues and profits of the communications service providers through identification and 22 elimination of leakages in their revenue chain. Your company conceptualizes and develops software products at its facilities in Bangalore and is focused on the telecom business segment. Your company has sales and support offices in Canada, UK, China and United States. Your company’s vision is to be a global leader in its’ chosen area of operation namely revenue maximization for communications service providers. Your company aims to be the leader in revenue maximization solutions for communications service providers globally and has taken several strategic initiatives to fulfill its’ ambition. The company is focused on the products side of the business and is committed to grow this segment faster in the coming years. Carriers the world over are facing an increasing threat on the revenue maximization front. A significant reason for that is the morphing of their business model coupled with the increasing complexities and scale. While the conventional business model was to serve products voice, data etc. that were generated by their own networks, the new model is to offer products like ring tones, music downloads, video clippings, commercial products etc. from other providers thereby functioning as a channel. This brings with it an added element of risk if revenue leakage happens. For example, if a carrier misses out to bill for a music download, they will still need to pay the provider for that download while not collecting from their customer. This, in effect, is a “double whammy”. Thus, revenue maximization solutions are fast becoming key investments for all communications service providers leading to an unprecedented demand for these solutions. However, there are widely ranging estimates about the size of the market. While the loss due to revenue leakages has been established fairly accurately by Analysys of UK at about 13% of the revenue of a carrier, the size of the resultant market for tools to address this loss is yet to be ascertained precisely. Given to conservative estimates, we put the figure at US$ 250 million during the current year growing at about 15 to 20% annually and that gives us a market share of about 25%. As regards the market for interparty management and interconnect, while the market for the latter is growing only at about 5%, that for the former is growing at 39% although from a lower base. On the whole, there is tremendous opportunity for your company to grow in the future. The market for our products is growing quite well and we are now uniquely positioned to take advantage of that growing market. Our large customer base coupled with the deep domain knowledge within the organisation puts us in an enviable position to tap the market effectively and grow at a pace that is faster than that of the market itself thereby resulting in a increasing market share. ACQUISITIONS Your company has acquired the telecom fraud management business of Mantas, Inc., during the year which will enable it to further consolidate its position in the key North American market. On 25th April, 2006 Subex has announced its agreement to acquire Azure Solutions Limited which is indeed a significant moment in the history of your company. Subsequently your company has announced the completion of the deal on 23rd June, 2006. The combined entity can now boast 23 of the 40 Tier-1 telecommunications companies across the world. This landmark deal, valued at US$ 140 million, has been billed as the largest overseas acquisition by an Indian company in the IT space. The management is in the process of integrating businesses of both the companies. CHANGE OF NAME Consequent to the acquisition of Azure Solutions Limited, the name of your company has been changed from Subex Systems Limited to Subex Azure Limited with effect from 23rd June, 2006. DIVIDEND In October 2005, we paid an interim dividend of Rs. 1.50 per share (15% on par value of Rs.10). Your directors recommend a final dividend of Re.1 per share (10% on par value of Rs. 10) fortifying the company’s tradition of enabling shareholders to participate in its progressive performance, subject to the approval by the shareholders at the ensuing Annual General Meeting. After the approval of the shareholders at the ensuing Annual General Meeting, the dividend will be paid as per the applicable regulations. In terms of the provisions of the Investor Education and Protection Fund (Awareness and Protection of Investor) Rules, 2001, no amount is to be transferred during the year to the Investor Education and Protection Fund. The register of members and share transfer books will remain closed from 22nd August, 2006 to 28th August, 2006, both days inclusive. The Annual General Meeting of the company has been scheduled to be held on Monday, 28th August, 2006. CHANGES IN THE SHARE CAPITAL ESOP SHARES During the year, your company has allotted 65,408 shares under its ESOP 2000 scheme to the option holders on their exercise of stock options. BONUS SHARES During the year under review, a sum of Rs. 108,787,840 standing to the credit of the Securities Premium Account was capitalized for the issue of 10,878,784 fully paid equity shares of Rs. 10 each, allotted as bonus shares in the ratio one equity share for every one equity share held. The record date for determining the entitlement of bonus shares was 6th January, 2006 and the bonus shares were allotted on 9th January, 2006. The Bonus shares will be eligible for the final dividend to be declared pursuant to the recommendation made by the board of directors. ISSUE OF GLOBAL DEPOSITORY RECEIPTS (GDRs) On 7th April, 2006, your company has raised funds by issuing Global Depositary Receipts (GDR) to the tune of US$ 10 million. Consequent to this, the company has issued 1,109,878 underlying equity shares. These shares were issued at a price of Rs. 400 (face value, Rs.10) each. 6 0 - 5 0 0 2 t r o p e R l a u n n A Subex Azure Limited (formerly Subex Systems Limited) SUBSIDIARIES SUBEX TECHNOLOGIES, INC For the year ended 31st March, 2006, Subex Technologies Inc (STI) earned an income of Rs. 596.59 million and a net profit of Rs. 2.54 million. STI provides manpower for the contracts of the company with its customers in US on a transfer pricing mechanism and as such the profits on the contracts are reflected in your company’s accounts. The consolidated accounts are separately appended to this report. The management has obtained an independent valuation of the subsidiary, according to which, there has been no impairment in the carrying cost of the investment. SUBEX TECHNOLOGIES LIMITED During the year 2004-05, Subex Technologies Limited (STL) had been formed as a wholly-owned subsidiary of the company. For the year ended 31st March, 2006, Subex Technologies Limited earned an income of Rs.12.26 million and incurred a net loss of Rs. 15.26 million The issued and paid up share capital of the company increased from Rs. 0.5 million to Rs. 10 million. EMPLOYEE STOCK OPTIONS SCHEMES Your company has introduced various stock option schemes for its employees. Details of these, including grants to directors and senior management issued during the year are given below. EMPLOYEES STOCK OPTION PLAN-1999 (ESOP – I) This scheme was instituted during 1999 and managed by Subex Foundation with a corpus of 1,20,000 equity shares initially. This scheme is not operational now. As on 31st March, 2006, 174,440 shares (which includes 87,220 bonus shares allotted on 6th January, 2006) are available with the trust. EMPLOYEES STOCK OPTION PLAN-2000 (ESOP- II) Under this scheme, a corpus of 500,000 options were created for grant to eligible employees. Each option is convertible into one fully paid-up equity share of Rs.10. This scheme has been formulated in accordance with the Securities and Exchange Board of India (Employee Stock Option Scheme and Stock purchase scheme) Guidelines, 1999. The corpus of the scheme was enhanced by another 387,125 options in order to accommodate the effect and benefit of the bonus issue made by the company during the financial year 2005-06. As per the scheme, a Compensation Committee was formed, which grants options to the eligible employees. The options are granted at a price, which is not less than 85% of the average of the closing price of the shares during the 15 trading days preceding the date of grant on the stock exchange where there is highest trading volume during this period. The options granted will be vested over a period of 1 to 4 years and can be exercised over a period of 3 years from the date of vesting. As on 31st March, 2006, 23,098 options were available in this scheme for further grants. EMPLOYEE STOCK OPTION PLAN-2005 (ESOP-III) The recent acquisition of Azure Solutions Limited was done through the issue of GDRs. Your company has allotted 11,728,728 GDRs, with every GDR having one underlying equity share, to the share holders of Azure Solutions Limited as consideration for acquiring the entire issued share capital of Azure Solutions Limited. The GDRs are listed on the Luxembourg Stock Exchange. Under this scheme a corpus of 500,000 options were created for grant to the eligible employees. Each option is convertible into one fully paid-up equity share of Rs.10. This scheme has been formulated in accordance with the Securities and Exchange Board of India (Employee Stock Option Scheme and Stock purchase scheme) Guidelines, 1999 and amendments thereto. 23 Subex Azure Limited (formerly Subex Systems Limited) As per the scheme, the Compensation Committee grants options to eligible employees. The options are granted at a price, which is not less than 85% of the average of the closing price of the shares during the 15 trading days preceding the date of grant on the stock exchange where there is highest trading volume during this period. The options granted will be vested over a period of 1 to 4 years and can be exercised over a period of 3 years from the date of vesting. S PER SEBI GUIDELINES S PER SEBI GUIDELINES TION A TION A ADDITIONAL INFORMA ADDITIONAL INFORMA S PER SEBI GUIDELINES TION AS PER SEBI GUIDELINES ADDITIONAL INFORMATION A S PER SEBI GUIDELINES TION A ADDITIONAL INFORMA ADDITIONAL INFORMA Sl.No Particulars 1 2 3 4 5 6 7 8 9 Options granted as on 31st March, 2006 Options granted during the year Pricing formula Options vested but not exercised as on 31st March, 2006 Options exercised as on 31st March, 2006 Options exercised during the year Money realized by exercise of options during the year The total number of shares arising as a result of exercise of options as on 31st March, 2006 Options lapsed as on 31st March, 2006 Options lapsed during the year Variation of terms of options No. of employees covered 10 Employee-wise details of options granted during the year under review to: (i) Senior managerial personnel Mr. Sanjay Paul Antony Ms. Anuradha Mr. V R Suresh Rao Mr. Vinod Kumar P Mr. Sekharan Y Menon Mr. Rajkumar C (ii) Other employees who receive a grant in any one year of option amounting to 5% or more of option granted during that year (iii) Identified employees who were granted option, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant Diluted Earnings Per Share (EPS) pursuant to the issue of shares on exercise of option calculated in accordance with Accounting Standard (AS) 20 ‘Earnings per share’ Where the company has calculated the employee compensation cost using the intrinsic value of the stock options, the difference between the employee compensation cost so computed and the employee compensation cost that shall have been recognized if it had used the fair value of the options. The impact of this difference on profits and on EPS of the company is: 11 12 13 14 ESOP 2000 ESOP 2005 476,902 144,000 70,380 70,380 As mentioned above As mentioned above 70,323 112,875 65,408 6,055,240 112,875 285,398 50,950 None 310 8000 - - - - - NIL NIL NIL NIL NIL NIL N.A NIL NIL None 156 - 2360 1130 2030 1950 1400 NIL NIL Rs. 18.13 Rs. 18.13 (7,664,830) Black Scholes method of valuation 6.43% 3 Years 55.765% 0.42% 473.18 Weighted-average exercise prices and weighted-average fair values of options separately for options whose exercise price either equals or exceeds or is less than the market price of the stock. Weighted Weighted average exercise average exercise price is Rs. 442.80 price is Rs. 342.55 A description of the method used during the year to estimate the fair values of options, including the following weighted-average information : 1. 2. 3. 4. 5. 24 risk-free interest rate expected life expected volatility expected dividends the price of the underlying share in market at the time of option grant VERNANCE VERNANCE TE GO TE GO CORPORA CORPORA VERNANCE TE GOVERNANCE CORPORATE GO VERNANCE TE GO CORPORA CORPORA Your company is committed to ensure good corporate governance practices in its operations. In achieving this objective, the company has always endeavored to operate as a responsible and law abiding corporate citizen. Your company strives to implement the best corporate governance model at par with the best companies. During the year under review, your company has been selected as one among the top-25 companies in India in terms of practicing best corporate governance norms by the Institute of Company Secretaries of India. Your company has complied with the requirements of the new Clause 49 of the listing agreement of the Stock Exchanges. The auditors’ certificate on compliance with Clause 49 is annexed to this report. In addition, your company has documented its internal policies in line with the corporate governance guidelines. The management’s discussion & analysis of the financial position of the company is provided in this annual report and is mentioned hereby for reference. Subex Azure Limited (formerly Subex Systems Limited) Engineering and Applied Physics from Harvard College, an MS in Mechanical Engineering from Stanford University and an MBA from Stanford University, where he was named an Arjay Miller Scholar. He is a past president of the Stanford Business School Alumni Association and member of the Board of Advisors. Mr. Harry Berry is Managing Partner of New Venture Partners, which was formed from a combination from Lucent Ventures Technologies and BT’s corporate venturing arm, BT Brightstar. With over 30 years experience in the telecommunications industry, Mr. Harry Berry has held a wide range of senior positions. He has a depth of experience in dealing with companies in the OSS space and a strong background in product and service delivery within the telecommunications field. FIXED DEPOSITS Your company has not accepted any fixed deposits from the public. AUDITORS’ REPORT PARTICULARS OF EMPLOYEES 6 0 - 5 0 0 2 t r o p e R l a u n n A There were no qualifications observed in the auditor’s report for the Financial Year 2005-06. AUDIT COMMITTEE The audit committee presently has 5 directors as members viz. Mr. V. Balaji Bhat, Mr. K. Bala Chandran, Mr. Vinod R Sethi, Mr. Subash Menon and Mr. S.N. Rajesh. Except Mr. Subash Menon, all other members of the audit committee are non-executive independent directors. Mr. Balaji Bhat is the Chairman of the audit committee. The role, terms of reference, the authority and powers of the audit committee are in conformity with the requirements of the Companies Act, 1956 and Clause 49 of the listing agreement. More details of the audit committee are provided in the report on corporate governance attached to this annual report. AUDITORS The auditors, M/s. Deloitte Haskins & Sells, Chartered Accountants, retire at the ensuing Annual General Meeting and have confirmed their eligibility and willingness to accept office, if re-appointed. DIRECTORS The Board of Directors at their meeting held on 25th April, 2006 re-appointed Mr. Sudeesh Yezhuvath as Whole-time Director of the Company for a further period of 5 years with effect from 1st April, 2006, which was subsequently approved by the members in their extra-ordinary general meeting held on 29th May, 2006. As per Article 87 of the Articles of Association of the Company, Mr. P. P. Prabhu and Mr. Sudeesh Yezhuvath retire by rotation and being eligible, offer themselves for re-appointment in the forthcoming Annual General Meeting. Mr. Alex Puthenchira has resigned from the Board with effect from 30th August, 2005. Your directors place on record their deep appreciation for the service rendered by Mr. Alex Puthenchira during his tenure as a director of the company. Mr. Andrew Garman and Mr. Harry Berry were inducted on the Board as directors by the members in their extra-ordinary general meeting held on 29th May, 2006. Mr. Andrew Garman is Managing Partner of New Venture Partners. He focuses on the firm’s Software & Services and Networking & Communications investment areas. Mr. Garman holds an AB in As required under the provisions of section 217(2A) of the Companies Act, 1956 read with the Companies (Particulars of Employees) Rules, 1975, the names and other particulars of employees are set out in the annexure included in this report. As per the amendment made to Companies (Particulars of Employees) Rules, 1975, the particulars of employees of companies engaged in Information Technology sector posted and working outside India, not being directors or their relative, drawing more than Rs. 24 lakhs per financial year or Rs. 2 lakhs per month, as the case may be, need not be included in the statement. Accordingly, the statement included in this report does not contain the particulars of employees who are posted and working outside India. INFORMATION UNDER SECTION 217 (1)(e) OF THE COMPANIES ACT, 1956 READ WITH COMPANIES (DISCLOSURES OF PARTICULARS IN THE REPORT OF BOARD OF DIRECTORS) RULES, 1988 A CONSERVATION ENERGY The operations of your company are not energy-intensive. However, significant measures are taken to reduce energy consumption by using energy-efficient computers and by the purchase of energy-efficient equipment. Your company constantly evaluates new technologies and invests to make its infrastructure more energy-efficient. Currently your company uses CFL fittings and electronic ballasts to reduce the power consumption of fluorescent tubes. Air conditioners with energy efficient screw compressors for central air conditioning and air conditioners with split air conditioning for localized areas are used. B TECHNOLOGY ABSORPTION, ADOPTION AND INNOVATION Your company has not imported any technology. However, the telecommunications domain, in which your company operates, is subject to high level of obsolescence and rapid technological changes. Your company has developed inherent skills to keep pace with these changes. Since Software products are the significant line of business of your company, the company incurs expenses on product related Research & Development on a continuous basis. These expenses are charged to revenue under the respective heads and are not segregated and accounted separately. C FOREIGN EXCHANGE EARNINGS AND OUTGO Your company has over the years shifted its focus from software services to Software products. This has resulted in substantial foreign 25 Subex Azure Limited (formerly Subex Systems Limited) exchange earnings as compared to previous years. During the year 2005-06 total foreign exchange inflow and outflow is as follows: 31st March, 2006, the applicable accounting standards have been followed and there are no material departures there from. i) Foreign exchange earnings Rs. 1378.70 million (previous year Rs. 1042.08 million) ii) Foreign exchange outgo Rs. 1000.91 million (previous year Rs. 632.41 million) SOCIAL RESPONSIBILITIES - SUBEX CHARITABLE TRUST The trust was set up with to provide for welfare activities for underprivileged and the needy in the society. The trust is managed by trustees elected from amongst the Subexians. During the year the trust has provided active support for rural heath care initiatives and for education of underprivileged children. HUMAN RESOURCE MANAGEMENT One of the major initiatives for your company this year has been an initiative termed ‘Creating History’. The key message is that each Subexian is Creating History by being a part of an organization who is a world leader in its area of focus. Your company has done this by developing fully home-grown products. Creating History also emphasizes the point that everyone in the organization has a chance to contribute innovative ideas and create Subexian History. This in turn, would mean better career opportunities for every Subexian. During the forthcoming year, as your company grows larger, the biggest asset will be the uniqueness of Subexians because of their accessibility to each other and commitment towards the organization. DIRECTORS’ RESPONSIBILITY STATEMENT b) That the accounting policies have been selected and applied consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company as at 31st March, 2006 and of the profit of the company for the year ended on that date. c) That proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provision of the Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities. d) That the accounts for the year ended 31st March, 2006 has been prepared on a going concern basis. APPRECIATIONS / ACKNOWLEDGEMENTS We thank our clients, vendors, investors and bankers for their continued support during the year. We place on record our appreciation for the co-operation and assistance provided by the Central and State Government authorities particularly software technology park - Bangalore, customs and central excise authorities, Registrar of Companies, Karnataka, the Income Tax Department Reserve Bank of India and various authorities under the Government of Karnataka. Your directors also wish to place on record their deep appreciation to Subexians at all levels for their hard work, solidarity, co-operation and support as they are instrumental in your company scaling new heights, year after year. for and on behalf of the Board Subash Menon Founder Chairman, Managing Director & CEO In accordance with the provision of Section 217(2AA) of the Companies Act 1956, the Board of Directors affirms; a) That in the preparation of the accounts for the year ending Place : Bangalore Date : 26th June, 2006 Managing director& ceo ANNEXURE TO THE DIRECTORS’ REPORT ANNEXURE TO THE DIRECTORS’ REPORT ANNEXURE TO THE DIRECTORS’ REPORT ANNEXURE TO THE DIRECTORS’ REPORT ANNEXURE TO THE DIRECTORS’ REPORT Information as per Section 217(2A) of the Companies Act, 1956 read with the Companies (Particulars of employees) Rules, 1975 and being part of the Directors’ Report for the year ended 31st March, 2006. Name Designation Qualification Age Experience Date of Remuneration Previous employment (No. of years) commencement of employment received Rs. Subash Menon Founder Chairman, Managing Director & CEO B.E Sudeesh Yezhuvath Executive President B.Tech Sekharan Yezhuvath Sr. VP - PSO Dakshinamurthy Karra* Chief Techonolgy Officer Anuradha Sr. VP - Engg. P. Vinodkumar Sr. VP - Sales Instru- mentation Engg. B.Sc MS B.Tech Sanjay Paul Antony* VP - Human Resources BE,PM&IR * Worked for part of the year. 41 37 39 42 41 36 40 18 16 20 18 17 14 December 1994 12,405,236 Eltel Industries December 1994 11,003,930 Transmatic Systems Limited September 1996 2,479,655 Yokogawa Blue Star February 1999 1,927,515 Powertel Boca Ltd June 2003 2,814,406 Mistral Software Pvt Ltd October 1997 4,049,143 Crompton Greaves Ltd 15.8 October 2005 1,683,819 Goldman Sachs Notes : Remuneration comprises basic salary, allowances and taxable value of perquisites. 26 Sudeesh Yezhuvath is the brother of Subash Menon and except this, none of the other employees are related to any of the other Directors of the company. VERNANCE VERNANCE TE GO TE GO T ON CORPORA T ON CORPORA REPOR REPOR VERNANCE TE GOVERNANCE T ON CORPORATE GO REPORT ON CORPORA VERNANCE TE GO T ON CORPORA REPOR REPOR ORPORATETETETETE ORPORA ORPORA ODE OF C ODE OF C OSOPHY ON C OSOPHY ON C ’S PHIL COMPANYANYANYANYANY’S PHIL ’S PHIL COMP COMP I.I.I.I.I. COMP ODE OF CORPORA OSOPHY ON CODE OF C ’S PHILOSOPHY ON C ORPORA ODE OF C OSOPHY ON C ’S PHIL COMP GOVERNANCE GOVERNANCE GOVERNANCE GOVERNANCE GOVERNANCE Corporate governance is about commitment to values and ethical business conduct. It is about how an organization is managed. Therefore situation, performance, ownership and governance of the company are all equally important as regards to the structure, activities and policies of the organization. This helps the organization to attract investors and enhance the trust and confidence of the stakeholders. Subex Azure’s compliance with the corporate governance guidelines as stipulated by the stock exchange is described in this section. The company believes that sound corporate governance is critical to enhance and retain investors’ trust. Subex Azure respects minority rights in its business decisions. Subex Azure’s corporate governance philosophy is based on the following principles: 1. Satisfy the spirit and not just the letter of the law. 2. Be transparent and maintain high degree of disclosure levels. 3. Communicate externally, in a truthful manner, about how the Subex Azure Limited (formerly Subex Systems Limited) practices. Consistent with this commitment, Subex Azure seeks to achieve a high level of responsibility and accountability in its internal systems and policies. Subex Azure respects the inalienable rights of the shareholders to information on the performance of the company. The company’s corporate governance policies ensures, among others, the accountability of the Board of Directors and the importance of its decisions to all its participants viz., customers, employees, investors, regulatory bodies etc. Subex Azure’s Code of corporate governance has been drafted in compliance with the code of “Corporate Governance” as promulgated by the Securities and Exchange Board of India (SEBI) on 25th January, 2000 and amendments made thereto. II. BOARD OF DIRECTORS II. BOARD OF DIRECTORS II. BOARD OF DIRECTORS II. BOARD OF DIRECTORS II. BOARD OF DIRECTORS The Board of Directors of Subex Azure consists of 9 directors out of which 2 are executive directors and 7 are non-executive independent directors. Details of the composition of the Board of Directors and their attendance and other particulars are given below: A. Composition and category of directors as on 26th June, 2006 6 0 - 5 0 0 2 t r o p e R l a u n n A company is run internally. Category Category Category Category Category No. of directors No. of directors No. of directors No. of directors No. of directors 4. Comply with the laws in all the countries in which the company operates. Subex Azure Limited is committed to good corporate governance Promoter directors Non-executive Independent directors Other executive directors Total 1 7 1 9 %%%%% 11.1% 77.8% 11.1% 100% B. Attendance of directors at the Board meetings and the last AGM and details about their directorships and membership in committees as on March 31, 2006. Director Position No. of Board No. of Board Last AGM attendance meetings meetings attended held No. of directorships in other companies ▲ No. of committees in which the director is No. of committees in which the director is Chairman ■ ▲ member ■ ▲ Mr. Subash Menon Chairman & Managing Director Non-Executive Director Mr. Alex J Puthenchira* Mr. K. Bala Chandran Non-Executive Mr. V. Balaji Bhat Mr. Vinod R. Sethi Independent Director Non-Executive Independent Director Non-Executive Independent Director Mr. Sudeesh Yezhuvath Wholetime Director Mr. S. N. Rajesh Mr. P. P. Prabhu Mr. Harry Berry+ Non-Executive Independent Director Non-Executive Independent Director Non Executive Independent Director Mr. Andrew Garman+ Non Executive Independent Director 4 4 4 4 4 4 4 4 4 4 4 - 3 4 2 2 2 4 - - Yes No Yes Yes No Yes No Yes No No 1 - 1 5 7 1 3 3 - - - - 1 3 - - - 1 - - 1 - 3 1 3 1 3 1 - - ▲ Excluding private limited companies & overseas companies. ■ Including only audit committee and shareholder’s grievance committee. Memberships in committees in Subex Azure Ltd are included. * Mr. Alex J Puthenchira resigned as director with effect from 30th August, 2005. + Mr. Harry Berry and Mr. Andrew Garman were inducted on the Board with effect from 29th May, 2006. 27 Subex Azure Limited (formerly Subex Systems Limited) C. Number and dates of Board meetings 4 (Four) Board meetings were held during the year. The dates on which meetings were held are as follows 28th April, 2005; 28th July, 2005; 28th October, 2005; 27th January, 2006. D. Brief details of directors seeking re-appointment 1. Sudeesh Yezhuvath, B. Tech, Executive President, has been with the company since 1993 and has considerable experience in the telecom industry. Sudeesh Yezhuvath, who joined the company as Manager Sales & Marketing, was promoted as the Chief Operating Officer in 2001. Over the years, he has built up a strong sales and marketing team in the company. 2. P. P. Prabhu, I.A.S (Retd) joined the Indian Administrative Service (IAS) in 1964. He held various positions with Govt. of Karnataka and Govt. of India including the positions of Chairman & Managing Director of Vikrant Tyres, Managing Director of Karnataka State Road Transport Corporation, Managing Director of Karnataka Power Corporation, Chairman of Coffee Board, Secretary to the Government of India, Ministry of Food Processing Industry and Commerce Secretary, Government of India. He was till recently Chairman of UTI Venture Funds Management Private Limited. AUDIT COMMITTEE AUDIT COMMITTEE III. III. AUDIT COMMITTEE III. AUDIT COMMITTEE III. AUDIT COMMITTEE III. A. Terms of reference The audit committee has, interalia, the following mandate: • Overseeing the company’s financial reporting process and disclosure of its financial information to ensure that the financial statements are correct, sufficient and credible • Recommendation of appointment and removal of external auditor, fixation of audit fee and also approval for payment for any other services • Review of annual financial statements before submission to the Board • Review of adequacy of internal control systems • Review of adequacy of internal audit function, including the reporting structure coverage and frequency of internal audit • Review of the company’s financial and risk management policies The current charter of the audit committee is in line with international best practices and the regulatory changes formulated by SEBI and the listing agreements with the stock exchanges on which Subex Azure is listed. B. Composition of audit committee Composition Composition Composition Composition Composition Category Category Category Category Category Mr. Balaji Bhat,Chairman Mr. K. Bala Chandran Mr. Vinod R. Sethi Mr. S. N. Rajesh Mr. Subash Menon Non-Executive Independent Director Non-Executive Independent Director Non-Executive Independent Director Non-Executive Independent Director Founder Chairman, Managing Director & CEO The Company Secretary is the secretary of the audit committee. C. Meetings and attendance during the year During the financial year 2005-06, four audit committee meetings were held. The audited financial results for the year ended 31st March, 2005 were taken on record at the meeting held on 28th April, 2005. At their meetings held on 28th July, 2005, 28th October, 2005 and 27th January, 2006, the accounts for the respective quarters were taken on record. Attendance of committee members at the audit committee meetings held during the year: Member Mr. V. Balaji Bhat Mr. K. Bala Chandran Mr. Vinod R. Sethi Mr. S. N. Rajesh Mr. Subash Menon IVIVIVIVIV..... OMMITTEETEETEETEETEE OMMIT OMMIT TION C TION C REMUNERA REMUNERA TION COMMIT REMUNERATION C OMMIT TION C REMUNERA REMUNERA Composition of the committee Mr. S. N. Rajesh - Chairman Mr. Vinod R. Sethi Mr. K. Balachandran No. of audit committee meetings held No. of audit committee meetings attended 4 4 4 4 4 4 3 2 2 4 with effect from 15th May, 2006. The committee looks into remuneration of executive directors. The committee considers the performance of the company as well as general industry trends while fixing the remuneration of executive directors. During the year under review, the committee had one meeting on 28th April, 2005. All the members of the committee were present in the meeting. Mr. V. Balaji Bhat has been inducted as a member of the committee Details of remuneration to directors Amount in Rs. Name Name Name Name Name Designation Designation Designation Designation Designation Salary Salary Salary Salary Salary Commission Commission Commission Commission Commission TTTTTotalotalotalotalotal Mr. Subash Menon Mr. Sudeesh Yezhuvath Mr. K. Bala Chandran Mr. V. Balaji Bhat Mr. Vinod R. Sethi Mr. S. N. Rajesh Mr. P. P. Prabhu Chairman & Managing Director Whole time Director Non-Executive Independent Director Non-Executive Independent Director Non-Executive Independent Director Non-Executive Independent Director Non-Executive Independent Director 69,05,236 65,03,930 - - - - - 55,00,000 45,00,000 3,00,000 3,00,000 3,00,000 - 3,00,000 1,24,05,236 1,10,03,930 3,00,000 3,00,000 3,00,000 - 3,00,000 28 Note: The above figures are excluding the sitting fees, which are within the limits specified in the Companies Act, 1956. The company compensates Non-Executive Independent Directors keeping in view of the time and attention devoted by them for the company. Subex Azure Limited (formerly Subex Systems Limited) The following directors have been allotted stock options under the employee stock options scheme of the company. Name Designation No. of options No. of shares vested and exercised as on 31st March, 2006 Mr. K. Bala Chandran Mr. V. Balaji Bhat Mr. Vinod R. Sethi Mr. P. P. Prabhu Non–Executive Director Non–Executive Director Non–Executive Director Non–Executive Director 7,500 7,500 7,500 7,500 2625 4875 2625 1125 The above stock options were granted at the same terms and conditions as mentioned in the ESOP scheme-2000 of the company. The Remuneration Committee determines and recommends to the Board the compensation payable to the directors. All Board level compensation is approved by the shareholders, and separately disclosed in the financial statements. Remuneration of executive directors consists of a fixed component and a performance based commission. The compensation, however, shall be within the parameters set by the shareholders meetings and the provisions of the Companies Act, 1956. The executive directors have entered into service contracts with the company. Both the executive directors have 3 months notice period with the company if they decide to terminate the contract. If the termination is from the company, the notice period shall be 12 months. They have voluntarily opted out of the stock options plans of the company. In case of severance from the company the executive directors are eligible for getting compensation not less than five times the total remuneration of the preceding 12 months from the date of the notice and the notice period amount. The non-executive directors are eligible for commission not exceeding 0.5% of the profits of the company subject to a maximum of Rs.2 million in aggregate per year and also stock options of the company subject to the terms of the stock options schemes of the company. VVVVV..... SHARE TRANSFER COMMITTEE SHARE TRANSFER COMMITTEE SHARE TRANSFER COMMITTEE SHARE TRANSFER COMMITTEE SHARE TRANSFER COMMITTEE A. Composition of the committee Mr. Sudeesh Yezhuvath, Chairman Mr. Subash Menon Authorised Representative of share transfer agents. B. Meetings during year The company holds share transfer committee meetings upto three times a month, as may be required, for approving the transfers/ transmissions of equity shares. The company has appointed M/s. Canbank Computer Services Limited, a SEBI recognised transfer agent, as its share transfer agent with effect from 6th November, 2001. The Share Transfer Committee has met four times during the financial year 2005-06 on the following dates: Date of the meeting No. of transfer deeds received Shares involved 28th October, 2005 2nd January, 2006 6th January, 2006 31st January, 2006 2 2 1 4 400 300 100 800 6 0 - 5 0 0 2 t r o p e R l a u n n A The members of the company’s investor grievance committee are: Mr. K. Bala Chandran, Chairman Mr. Sudeesh Yezhuvath This committee looks into redressal of shareholders’ and investors’ complaints. The company secretary is the compliance officer of the company. B. Meetings during the year The committee has met 4 (Four) times during the current financial year on these dates: 28th April, 2005; 28th July, 2005; 28th October, 2005; 27th January, 2006 Details of the grievances of the investors are provided in the “Shareholders’ Information” section of this report. (compensation committee) (compensation committee) VII. ESOP COMMITTEE VII. ESOP COMMITTEE (compensation committee) VII. ESOP COMMITTEE (compensation committee) (compensation committee) VII. ESOP COMMITTEE VII. ESOP COMMITTEE The company has instituted employee stock options scheme in line with the SEBI Guidelines. In order to grant options under the scheme to eligible employees, a compensation committee has been formed. A. Composition of the committee The committee comprises the following members: Mr. V. Balaji Bhat, Chairman Mr. K. Bala Chandran Mr. Subash Menon B. Meetings during the year The committee met 4 (Four) times during the financial year on the following dates: 1st April, 2005, 1st July, 2005, 1st October, 2005, 2nd January, 2006 VIII. GENERAL BODY MEETINGS VIII. GENERAL BODY MEETINGS VIII. GENERAL BODY MEETINGS VIII. GENERAL BODY MEETINGS VIII. GENERAL BODY MEETINGS A. Location and timings of the last three AGMs Year Date of AGM Venue Time 2002-2003 9th September, 2003 Le Meridien – 3:00 p.m. The company ensures that the share transfers are effected within one month of the receipt of request for transfer. 2003-2004 24th August, 2004 VI.VI.VI.VI.VI. INVES INVES INVES INVESTTTTTOR GRIEV OR GRIEV OR GRIEV ANCE C ANCE C OMMIT OMMIT OMMITTEETEETEETEETEE OR GRIEVANCE C ANCE COMMIT INVES OR GRIEV ANCE C OMMIT A. Composition of the committee 2004-2005 28th July, 2005 Bangalore Le Meridien – 3:00 p.m. Bangalore Le Meridien – 3:00 p.m. Bangalore 29 Subex Azure Limited (formerly Subex Systems Limited) Location and timings of the last three EGMs A. The Board Year Date of EGM Venue Time 2005 2nd December, 2005 2006 25th February, 2006 Corporate office 4:00 p.m. Corporate office 4:00 p.m. 2006 29th May, 2006 Le Meridien - Bangalore 3:00 p.m. B. Postal ballot No special resolutions were required to be put through the postal ballot in the previous year. IX. DISCLOSURES IX. DISCLOSURES IX. DISCLOSURES IX. DISCLOSURES IX. DISCLOSURES A. There are no materially significant related party transactions of the company of material nature, with the promoters, the directors or the management, their subsidiaries or relatives etc that may have potential conflict with the interests of the company at large. B. The company has not been subjected to any penalties, strictures by stock exchange(s)/SEBI or any statutory authorities on any matter related to capital markets, during the last three years. The company has been complying with the listing conditions. OMMUNICAAAAATIONTIONTIONTIONTION OMMUNIC OMMUNIC X. MEANS OF C X. MEANS OF C X. MEANS OF COMMUNIC OMMUNIC X. MEANS OF C X. MEANS OF C A. Annual/ Half Yearly and Quarterly results The annual/half yearly/quarterly audited/un-audited results are generally published in all editions of Business Standard and Udayavani. The complete financial statements are posted on the Company’s website www.subexazure.com. Subex Azure also regularly provides information to the Stock Exchanges as per the requirements of the listing agreements and updates the website periodically to include information on new developments and business opportunities. B. Management’s discussion and analysis section is part of the Annual Report. XI.XI.XI.XI.XI. General shareholder information is provided in the “Shareholders’ Information” section of the annual report. XII.XII.XII.XII.XII. Auditors’ certificate in respect of compliance of conditions of corporate governance as per Clause 49 of the listing agreement with the Stock Exchanges is enclosed in this annual report. XIII.XIII.XIII.XIII.XIII. Compliance with non-mandatory requirements of Clause 49 of the listing agreement. Clause 49 further states that the non-mandatory requirements may be implemented as per the company’s discretion. However the disclosures of compliance with mandatory requirements and adoption (and compliance)/ non adoption of non-mandatory requirements shall be made in the section on corporate governance in the annual report. We comply with the following non-mandatory requirements. We have an Executive Chairman and as such maintenance of office by a Non-Executive Chairman does not arise. None of our independent directors have served for a tenure exceeding nine years from the date when the new Clause 49 became effective. B. Remuneration Committee We have instituted a Remuneration Committee. A detailed note on the Remuneration Committee is provided elsewhere in the report. C. Shareholder’s rights We communicate with investors regularly through emails, telephones and face to face meetings either investor conferences, company visits or on road shows. We announce quarterly financial results within four weeks of the close of a quarter. The company publishes the quarterly financial results in leading business newspaper(s) as well as put on the company’s website. However, we have not initiated sending half-yearly declaration of financial performance to the household of shareholders so far. D. Audit Qualifications The company does not have any audit qualification for the year under review. We always endeavor to move towards a regime of un-qualified financial statements. E. Training of Board Members All new non-executive directors inducted into the Board are given adequate orientation on the company’s businesses, group structure, risk management strategy and policies. F. Mechanism for evaluating non-executive Board Members The company compensates non-executive directors keeping in view of the time and attention devoted by them for the company. While doing so, we evaluate the performance of the non-executive directors using various parameters. However we are yet to formalize this evaluation by peer group comprising entire Board of Directors, excluding the director being evaluated. G. Whistle Blower Policy We have established a mechanism for employees to report concerns about unethical behaviour, actual or suspected fraud or violation of our code of conduct. The mechanism also provides for adequate safeguards against victimization of employees who avail of the mechanism and also provide for direct access to the Chairman of the Audit Committee in exceptional cases. Our employees are informed of this policy through appropriate internal communications. None of our employees has been denied access to this facility. Place : Bangalore Date : 26th June, 2006 for Subex Azure Limited Subash Menon Founder Chairman, Managing Director & CEO 30 Subex Azure Limited (formerly Subex Systems Limited) TE TTE TO THE MEMBERS OF SUBEX AZURE LIMITED O THE MEMBERS OF SUBEX AZURE LIMITED O THE MEMBERS OF SUBEX AZURE LIMITED TE TTE T OMPLIANCE CERTIFICTIFICTIFICTIFICTIFICAAAAATE T OMPLIANCE CER CCCCCOMPLIANCE CER OMPLIANCE CER O THE MEMBERS OF SUBEX AZURE LIMITED O THE MEMBERS OF SUBEX AZURE LIMITED OMPLIANCE CER 1. We have examined the compliance of conditions of Corporate Governance by Subex Azure Limited (formerly Subex Systems Limited) [‘the Company’], for the year ended 31st March, 2006, as stipulated in clause 49 of the Listing Agreement of the said Company with the Stock Exchanges. 2. The compliance of conditions of Corporate Governance is the responsibility of the management. Our examination has been limited to a review of the procedures and implementations thereof, adopted by the Company for ensuring compliance with the conditions of the Corporate Governance. It is neither an audit nor an expression of opinion of the financial statements of the Company. 3. In our opinion and to the best of our information and according to the explanations given to us and the representations made by the Directors and the management, we certify that the Company has complied with the conditions of Corporate Governance as stipulated in Clause 49 of the above mentioned Listing Agreement. 4. We further state that such compliance is neither an assurance as to the future viability of the Company nor the efficiency or effectiveness with which the management has conducted the affairs of the Company. Place : Bangalore Date : 26th June, 2006 for Deloitte Haskins & Sells Chartered Accountants V. Srikumar Partner Membership No. 84494 6 0 - 5 0 0 2 t r o p e R l a u n n A DECLDECLDECLDECLDECLARAARAARAARAARATION BY THE CEO UNDER CL O THE O THE GREEMENT REGARDING ADHERENCE T GREEMENT REGARDING ADHERENCE T TING A TING A USE 49 I (D) OF THE LIS TION BY THE CEO UNDER CLAAAAAUSE 49 I (D) OF THE LIS USE 49 I (D) OF THE LIS TION BY THE CEO UNDER CL TION BY THE CEO UNDER CL O THE GREEMENT REGARDING ADHERENCE TO THE TING AGREEMENT REGARDING ADHERENCE T USE 49 I (D) OF THE LISTING A O THE GREEMENT REGARDING ADHERENCE T TING A USE 49 I (D) OF THE LIS TION BY THE CEO UNDER CL CODE OF CONDUCT CODE OF CONDUCT CODE OF CONDUCT CODE OF CONDUCT CODE OF CONDUCT To, The Members of Subex Azure Limited In accordance with Clause 49 sub-clause I (D) of the Listing Agreement with the Stock Exchanges, I hereby confirm that, all the Directors and the Senior Management personnel including me, have affirmed compliance to their respective Codes of Conduct, as applicable for the Financial Year ended 31st March, 2006. Place : Bangalore Date : 26th June, 2006 for Subex Azure Limited Subash Menon Founder Chairman, Managing Director & CEO 31 Subex Azure Limited (formerly Subex Systems Limited) GEMENT’S DISCUSSION AND ANALYSISYSISYSISYSISYSIS GEMENT’S DISCUSSION AND ANAL MANAMANAMANAMANAMANAGEMENT’S DISCUSSION AND ANAL GEMENT’S DISCUSSION AND ANAL GEMENT’S DISCUSSION AND ANAL OVERVIEW OVERVIEW OVERVIEW OVERVIEW OVERVIEW Subex Azure Limited (Subex Azure) is listed on the National Stock Exchange of India Limited (NSE), Bombay Stock Exchange Limited (BSE) and the Bangalore Stock Exchange Limited (BgSE). The Global Depository Receipts of the company are listed on the Luxembourg Stock Exchange. Until recently, the company was called Subex Systems Limited. Consequent to the acquisition of Azure Solutions Limited, UK, by Subex Systems Limited, the name of the company was changed to Subex Azure limited. The management of Subex Azure is committed to improve the levels of transparency and disclosure. Keeping this in mind, an attempt has been made to disclose hereunder, information about the company, its business, operations, outlook, risks and financial condition. The financial statements have been prepared in compliance with the requirements of the Companies Act, 1956, and the Generally Accepted Accounting Principles (GAAP) in India. The management of Subex Azure accepts responsibility for the integrity and objectivity of these financial statements, as well as for various estimates and judgments used therein. The estimates and judgments relating to the financial statements have been made on a prudent and reasonable basis, in order that the financial statements reflect the form and substance of transactions in a true and fair manner, and reasonably present the state of affairs and profits for the year under review. In addition to the historical information contained herein, the following discussion may include forward looking statements which may involve risks and uncertainties, including but not limited to the risks inherent in the company’s growth strategy, dependency on certain clients, dependency on availability of qualified technical personnel and other factors discussed in this report. 1. INDUSTRY STRUCTURE AND DEVELOPMENTS 1. INDUSTRY STRUCTURE AND DEVELOPMENTS 1. INDUSTRY STRUCTURE AND DEVELOPMENTS 1. INDUSTRY STRUCTURE AND DEVELOPMENTS 1. INDUSTRY STRUCTURE AND DEVELOPMENTS 1.1 Subex Azure operates in a niche market providing Revenue Maximization solution to telecommunications service providers (telcos) worldwide. These solutions improve the revenues and profits of the communications service providers through identification and elimination of leakages in their revenue chain. Subex Azure conceptualizes and develops software products at its facilities in Bangalore and is focused on the telecom business segment. Subex Azure has sales and support offices in the United States, Canada, UK and China. Subex Azure is the global leader in its’ chosen area of operation – namely revenue maximization for communications service providers. The causes for leakages can be broadly classified into two – deliberate and non deliberate. The former occurs due to fraud perpetrated by subscribers on the telcos. The latter occurs due to a variety of issues like lack of processes, improper processes, technical errors, equipment malfunction, human errors etc. The former accounts for about 4% and the latter about 8% of the revenues of the telcos. Given the total revenue of about US$ 1.3 trillion, the losses add upto about US$ 150 billion globally. Needless to say, this is a major cause of worry for the telcos and has resulted in a growing market for our solutions. 2 .2 .2 .2 .2 . OPPOR OPPOR TUNITIES AND THREA TUNITIES AND THREA TUNITIES AND THREATSTSTSTSTS OPPORTUNITIES AND THREA OPPOR OPPOR TUNITIES AND THREA 32 2.1 GROWTH STRATEGY – ORGANIC AND INORGANIC We have been growing at a frenetic pace as a result of a carefully balanced combination of organic and inorganic routes. In the world of software products, particularly in an area of high technology, depending solely on organic growth is suicidal. Hence our balanced approach. Being in the telecom space, there are several ways to grow organically and we employ all of them extensively. As our revenues are linked to the size of operations of our customers, we grow with them. Given the number of products that we have, cross selling is another avenue for growth. A unique feature of the telecom sector is the presence of large groups with operations in multiple geographies. We take advantage of this phenomenon to spread our footprint. Finally, the carriers constantly evolve through the provision of new services. We endeavor to extend our products to cover all these services and thereby create a larger market for ourselves. About half of the current base of customers were acquired in an organic manner over the course of six years. Inorganic means is a key element of our growth strategy. Our approach here is to be proactive and the same has resulted in our identifying and acquiring a few key companies and divisions of companies in the past. The latest one, Azure Solutions Limited of UK, is a case in point. Azure enhances our brand, domain expertise, product set and customer base. These are apart from the fact that we have now achieved global leadership with the help of this acquisition. The first step in our approach is to chart out the plan for the future with regard to all the key areas of business – namely products, markets, penetration etc. The next step is to conduct a gap analysis and pin point the main areas for improvement or corrective action. This then leads to the employment of acquisition as a strategy to address the issues that come to the surface, through the process of identification of suitable targets and endeavoring to conclude transactions. We have concluded six successful acquisitions during the past seven years and will continue to scout for more such opportunities at the appropriate time. 2.2 MARKET OPPORTUNITY With the conclusion of the transaction with Azure, and the formation of the enlarged entity Subex Azure, our stature has undergone a dramatic change. This, we believe, opens up a plethora of opportunities for us in a market that is growing rapidly. Further, we now address a new space called interconnect and inter-party management. Thus the market opportunity for us encompasses four product sets, including these two and our traditional areas of fraud management and revenue assurance. Carriers the world over are facing an increasing threat on the revenue maximization front. A significant reason for that is the morphing of their business model coupled with the increasing complexities and scale. While the conventional business model was to serve products – voice, data etc. – that were generated by their own networks, the new model is to offer products – like ring tones, music downloads, video clippings, commercial products etc. – from other providers thereby functioning as a channel. This brings with it an added element of risk if revenue leakage happens. For example, if a carrier misses out to bill for a music download, they will still need to pay the provider for that download while not collecting from their customer. This, in effect, is a “double whammy”. Thus, revenue maximization solutions are fast becoming key investments for all communications service providers leading to an unprecedented demand for these solutions. However, there are widely ranging estimates about the size of the market. While the loss due to revenue leakages has been established fairly accurately by Analysys of UK at about 13% of the revenue of a carrier, the size of the resultant market for tools to address this loss is yet to be ascertained precisely. Given to conservative estimates, we put the figure at US$ 250 million during the current year growing at about 15 to 20% annually and that gives us a market share of about 25%. As regards the market for interparty management and interconnect, while the market for the latter is growing only at about 5%, that for the former is growing at 39% although from a lower base. The data, as per our estimates, is presented below. ) M $ ( ) M $ ( 120 100 80 60 40 20 0 120 100 80 60 40 20 0 Market size 92.6 96.9 102.2 2005-06 2006-07 2007-08 Interconnect Market size 27.9 40.7 53.7 2005-06 2006-07 2007-08 Inter-Party Management 3 .3 .3 .3 .3 . BUSINESS SEGMENTS AND INDUSTRY OUTLOOK. BUSINESS SEGMENTS AND INDUSTRY OUTLOOK. BUSINESS SEGMENTS AND INDUSTRY OUTLOOK. BUSINESS SEGMENTS AND INDUSTRY OUTLOOK. BUSINESS SEGMENTS AND INDUSTRY OUTLOOK. 3.1 BUSINESS SEGMENTS Subex Azure operates in two business segments – telecom software products and telecom software services. The former is the key focus area for the company and will be discussed in detail. The latter is staff augmentation services for telcos in the United States and is fast losing its’ significance as can be seen from the business mix data provided herein. Revenue Mix n n o o i i l l l l i i m m n n i i . . s s R R 1400 12000 1000 800 600 400 200 0 Subex Azure Limited (formerly Subex Systems Limited) Profit Mix 600 500 400 300 200 100 0 n o i l l i m n i . s R 6 0 - 5 0 0 2 t r o p e R l a u n n A 2001-02 2002-03 2003-04 2004-05 2005-06 Profit from Products Profit from Services 3.2 TELECOM SOFTWARE PRODUCTS Subex Azure’s defined space of operation for products is revenue maximization for telcos. The objective is to develop and market products that belong to this category. Towards this end, Subex Azure has developed and is marketing Ranger™, a fraud management system; INcharge™, a revenue assurance system and ONtrack™, a subscriber risk management system. Further, the interparty solutions from Azure have also been added to the product portfolio. These products form a suite in the revenue maximization space, called RevMax™. During the year ended 31st March, 2006, we launched a new concept called Revenue Operations Center (ROC). This concept calls for a facility with four major components – software, hardware, processes and people. The company provides the software portion (RevMax™) of the facility and hence considers itself to be powering the ROC. This positioning has been brought forward in our logo. Going forward, the conceptualization and launch of new products within the RevMax™ suite will be guided by the proposition of powering the ROC. Ranger™ Fraud Management System Ranger™ Fraud Management System Ranger™ Fraud Management System Ranger™ Fraud Management System Ranger™ Fraud Management System Fraud is a global malaise in telecom networks and has a very significant impact in the bottom lines of telecom operators. Fraudsters, who are proving to be extremely innovative, are devising advanced techniques to defraud networks and the losses can be quite huge. Surveys show that about 4% of the industry’s revenue is lost to fraud. Though digital technologies like GSM and CDMA are secure to a large extent from technical frauds, subscription related and behavioral frauds are on the upswing. A very focused approach is essential to combat these frauds in telecom networks. The types of fraud that are generally encountered by the telcos are: ● Subscription fraud ● Call selling fraud ● Premium rate service fraud ● Cloning fraud ● Internal fraud ● PABX hacking fraud ● Clip-on fraud ● Pre-paid fraud ● Roaming fraud ● Roaming subscription fraud 2001-02 2002-03 2003-04 2004-05 2005-06 Revenue from Products Revenue from Services Combating fraudsters, who are proving to be extremely innovative, calls for high-end preventive solutions. Successful management of fraud depends upon the ability of the solution to pre-empt the occurrence of fraud rather than reacting after the fraud has 33 Subex Azure Limited (formerly Subex Systems Limited) occurred in a large scale. Ranger™ finds fraud in the network as early as possible and thus limits the revenue loss that may be suffered by the operator. Ranger™ employs a unique mix of events, rules, profiling, pattern matching, subscriber pre-check and credit management to identify and curb fraudulent activity. The call data of each subscriber is mapped and analyzed to furnish accurate alarms and reports to the operator. Comprehensive information on the case provided by Ranger™ enables the investigator to quickly settle a case, which reduces the exposure to fraud considerably. Ranger™ comprises closely integrated modules that allow telecom operators to constantly keep a track on the usage pattern of their subscribers and detect fraud in their network. INcharge™ Revenue Assurance System INcharge™ Revenue Assurance System INcharge™ Revenue Assurance System INcharge™ Revenue Assurance System INcharge™ Revenue Assurance System Revenue leakage in a carrier’s network can occur at any point in the billing chain. Errors and mismatches across switches, inventory, provisioning, mediation, rating and billing systems result in revenue losses from incorrect billing, unused assets and unbilled usage, among other things. Some of the most common causes of revenue leakage include: ● ● ● Unbilled usage or facilities due to provisioning system errors Incomplete, missing, duplicate and inaccurate CDRs (Call Detail Record) from switches Incorrect identification and Mis-handling of CDRs within mediation and billing systems ● Mismatches between inventory and billing systems ● Billing and rating errors Further, increasing competition in telecommunications markets and the emergence of a growing number of new services has led to a substantial increase in interconnection (IC) traffic. The fee paid out to other carriers for traffic passed to their network account for roughly half of a carrier’s operating costs, and thus deserves a much closer scrutiny. Yet another area of concern has evolved due to the new revenue models being deployed by telcos. In these new revenue models, telcos are fast emerging as sales channels and payment gateways for a variety of products like ring tones, music downloads, video downloads utility payments etc. In these instances, the potential loss to the telcos who fail to recognise and collect revenues from their customers is considerably high as they will have to payout to those who provided the content and services. Thus, irrespective of whether the telcos collected any revenue or not, they will end up paying out, leading to a significant loss. A revenue assurance tool helps the operators to automate their revenue leakage detection and resolution process. It provides benefits to the revenue assurance analysts in the following ways: ● ● ● The right tool provides an end-to-end revenue assurance capability, allowing analysts to progressively extend revenue assurance to all areas of operation. The tool performs automatic processing and reconciliation of large data volumes, thus offering larger coverage. The tool includes powerful analysis tools that help revenue assurance analysts quickly zero in on root cause of a detected revenue leakage. ● Workflow to help prioritise the most critical issues and lead on ONtrack™ Subscriber Risk Management System ONtrack™ Subscriber Risk Management System ONtrack™ Subscriber Risk Management System ONtrack™ Subscriber Risk Management System ONtrack™ Subscriber Risk Management System Subscriber delinquency and bad debt is a serious problem faced by almost every operator in the world today. On an average, around 5% of an operator’s revenue is written off as bad debt. Further, subscriber entry qualification criteria is becoming less stringent than before as operators aggressively pursue subscriber growth. While use of credit assessment and scoring methodologies have helped tackle the problem prior to activation, a significant portion of risk exists post activation. Operators need to monitor the liability and outstanding against each subscriber on a continuous and real-time basis, in order to detect delinquency risks early-on in the billing cycle to limit instances of bad debt. A successful risk management strategy would aim to close the gap through pre- emptive techniques such as seeking part payments from subscribers with unusually high usage or identify subscribers with whom the post invoice follow up needs to be done with greater urgency . ONtrackTM continuously monitors and tracks the possibility of a subscriber going delinquent in the network and thus enables operators to minimize their losses eary-on and pre-empt a potential write-off. ONtrackTM uses a very flexible rule driven risk modelling core that allows the system to profile, segment and define highly focussed risk management strategies. Monitoring the build-up of unbilled amounts is one such strategy; another would be to detect subscriber behaviour changes which suggest that the subscriber would not be able to pay his bills. ONtrackTM employs an integrated usage tracking and rating mechanism that enables the operator to use a subscriber’s usage details to achieve near-real time risk assessment, thereby negating any delay imposed by conventional methods on revenue recovery. Further, ONtrack’s flexible workflow helps the operator to better prioritise cases and even automate monotonous routine tasks like sending out reminders. Thus, ONtrackTM reduces the time taken to work on a case thereby allowing the operator to work more actively in controlling their losses from bad-debt. Interparty Settlement Solutions Interparty Settlement Solutions Interparty Settlement Solutions Interparty Settlement Solutions Interparty Settlement Solutions Inter-Party is a modular billing and DWH solution that provides retail/reseller, wholesale and IP/Content provider solutions for one or multiple business lines on a single modular platform. Its unique architecture enables the calculation of multiple charges for each transaction, and the correlation of reseller revenues with content provider costs/out payments. This approach not only helps organizations to realize a reduced cost of ownership, but also leverages the consolidated data through enhanced corporate- wide business analysis and reporting capabilities. As product bundles and their related tariff plans become ever more complex, this ability to see all revenues and related costs is vital to ensuring a healthy bottom line. Interparty provides support for a wide range of business models where revenue and cost is shared across parties based on a transaction including: ● ● ● ● ● Revenue sharing Self-billing Reverse billing Sponsorship Advertising 34 to structured resolution and tracking of issues. ● MVNO All Inter-Party settlement implementations are underpinned by a highly functionally rich billing framework that supports end-to-end billing workflow. The aforementioned business models and associated service ‘plug-ins’ are then incorporated into the solution to support bespoke needs. The billing framework provides the foundations of all billing implementations including, but limited to, reseller and content provider account management, product management, discounts, invoice presentation and generation, out payment report generation, billing cycles, bill hierarchies and audit trails. 3.3 CUSTOMER BASE With the acquisition of Azure Solutions, the company serves 150 customers across 60 countries. Further, we now have 23 of the world’s Top 40 telcos as our customers. Needless to say, this adds to our superior position in the market thereby enabling us to increase our market share and grow significantly with time. BT is the largest customer contributing a very large portion of our revenue 3.4 REVENUE MODEL Subex Azure licenses its software solutions on a per subscriber or per transaction basis resulting in continuous growth in license revenues depending on the growth of the networks where the solutions are installed. Another sustainable revenue stream is the support revenue calculated as a function of the license revenue. These three streams of revenue – new license, additional license and support – are expected to lend stability to the overall revenue of the company. Further, we also have a fourth stream of revenue namely, customization. The following graph gives the revenue from each of the streams and from Third Party during FY04, FY05 and FY06. Revenue Revenue Revenue Revenue Revenue Stream Stream Stream Stream Stream License & Addl. License Support Customization Third Party % of total % of total % of total % of total % of total FY04 FY04 FY04 FY04 FY04 % of total % of total % of total % of total % of total FY05 FY05 FY05 FY05 FY05 % of total % of total % of total % of total % of total FY06 FY06 FY06 FY06 FY06 88% 10% 0 2% 64% 18% 13% 5% 67% 19% 5% 9% Subex Azure Revenue Stream 90 80 70 60 50 40 30 20 10 0 e g a t n e c r e P Subex Azure Limited (formerly Subex Systems Limited) 3.5 GEOGRAPHICAL MIX Our revenues from developed markets (particularly from the Americas) have been growing steadily. This indicates that even developed markets are far from a point of saturation for our products and that emerging markets will turn out to be excellent markets for us in the coming years when they start maturing. Thus, the long term potential of our space is obvious from the revenue split among the various geographies given below. % of Rev..... % of Rev % of Rev % of Rev % of Rev in FY04 in FY04 in FY04 in FY04 in FY04 % of Rev..... % of Rev % of Rev % of Rev % of Rev FY05 FY05 FY05 FY05 FY05 % of Rev % of Rev % of Rev % of Rev % of Rev FY06 FY06 FY06 FY06 FY06 54% 23% 23% 52% 34% 14% 55% 36% 9% Revenue break-up based on geographies 6 0 - 5 0 0 2 t r o p e R l a u n n A AreaAreaAreaAreaArea EMEA Americas APAC e g a t n e c r e P 60 50 40 30 20 10 0 % of Rev. in FY 04 % of Rev. in FY 04 % of Rev. in FY 04 EMEA Americas APAC 3.6 AVERAGE REVENUE PER CONTRACT The progression in Average Revenue Per Contract (ARPC), a key measure that leads to increased profitability, is given below. We expect this to continue its’ progression in the years to come. Average Revenue Per Contract 0 0 0 ‘ $ S U 1000 900 800 700 600 500 400 300 200 100 0 % of total revenue in FY 04 % of total revenue in FY 05 % of total revenue in FY 06 License & Addl. Licnese Support Customization Third Party FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 3.7 AVERAGE REVENUE PER SUBEXIAN In the Products business, our Average Revenue Per Subexian (ARPS), another key measure that leads to increased profitability, has been increasing steadily. The following graph shows the progression on this front. 35 Subex Azure Limited (formerly Subex Systems Limited) Average Revenue Per Subexian 0 0 0 ‘ $ S U 90 80 70 60 50 40 30 20 10 0 FY 04 FY 05 FY 06 3.8 QUALITY Subex Azure is dedicated to maintain the highest levels of quality standards throughout its operations. Towards this, Subex Azure has been accredited ISO 9001:2000 certification. may not be able to adapt to these challenges or respond successfully or in a cost-effective way. Our failure to do so would adversely affect our ability to compete and retain customers or market share. Launching new products is a key element of our growth and an inability to bring new products with high demand to the market in a timely manner will reduce our growth and profitability. Subex Azure has set up processes and methodologies to address this threat and to turn it into a strategic advantage by being in the forefront of technological evolution. Regular skill upgradation programs and training sessions that include attending global conferences, employing specialized consultants etc. are undertaken. Retention of software personnel is another major risk being faced by Subex Azure. Towards this, it provides an empowered atmosphere with extensive mentoring, career counseling and constant learning opportunities in cutting edge and challenging technologies. 4 .4 .4 .4 .4 . RISKS AND CONCERNS RISKS AND CONCERNS RISKS AND CONCERNS RISKS AND CONCERNS RISKS AND CONCERNS 4.4 INTELLECTUAL PROPERTY Any business has several risks related to that. Our business is no different. Following are the risks that we are cognizant of. 4.1 MARKET The communications industry continues to experience consolidation and an increased formation of alliances among communications service providers and between communications service providers and other entities. Should one of our significant customers consolidate with a service provider using a competing product and decide to discontinue the use of our product(s), this could have a negative material impact on our business. These consolidations and alliances may cause us to lose customers or require us to reduce prices as a result of enhanced customer leverage, which would have a material adverse effect on our business. We may not be able to offset the effects of any price reductions. We may not be able to expand our customer base to make up any revenue declines if we lose customers. Subex Azure is fully dependant on the telecom industry. So, any vagaries in the telecom business environment will considerably impact the fortunes of the company. Further, the revenue maximization market is evolving resulting in uncertainties on the size of the market, opportunities etc. 4.2 DEBTORS The extremely competitive nature of the industry has led to an abnormally high debtor position that has been detrimental to cashflow. While the situation has been improving, it could take us a few more quarters to bring normalcy. Certain markets in which Subex Azure sells its products are subject to foreign exchange repatriation and economic risks, which may result in either delayed recovery or even non-realisation of revenue. Subex Azure conducts adequate due diligence while venturing into such markets. 4.3 TECHNOLOGY AND PERSONNEL Our industry is characterized by rapid technological changes and frequent new service offerings. Significant technological changes could make our technology and services obsolete, less marketable or less competitive. We must adapt to our rapidly changing market by continually improving the features, functionality, reliability and capability of our products to meet changing customer needs. We Our success depends to a significant degree upon the protection of our software and other proprietary technology rights. We rely on trade secret, copyright and trademark laws and confidentiality agreements with Subexians and third parties, all of which offer only limited protection. The steps we have taken to protect our intellectual property may not prevent misappropriation of our proprietary rights or the reverse engineering of our solutions. Legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in several countries are uncertain and may afford little or no effective protection of our proprietary technology. Consequently, we may be unable to prevent our proprietary technology from being exploited abroad, which could require costly efforts to protect our technology. Policing the unauthorized use of our products, trademarks and other proprietary rights is expensive, difficult and, in some cases, impossible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of management resources, either of which could harm our business. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property. 4.5 INFRINGEMENT Third parties could claim that our current or future products or technology infringe their proprietary rights. Any claim of infringement by a third party, even those without merit, could cause us to incur substantial costs defending against the claim, and could distract our management from our business. Third parties may also assert infringement claims against our customers. These claims may require us to initiate or defend protracted and costly litigation on behalf of our customers, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of our customers. We also generally indemnify our customers if our services infringe the proprietary rights of third parties. If anyone asserts a claim against us relating to proprietary technology or information, while we might seek to license their intellectual property, we might not be able to obtain a license on commercially reasonable terms or on any terms. 36 4.6 ACQUISITION 4.11 TAXATION Subex Azure Limited (formerly Subex Systems Limited) Acquisition has always been a significant element of our strategy. After concluding several small acquisitions, we have now consummated the biggest in our history. While we have considerable experience in handling acquisitions spread over the past 6 years, the scale of the latest one (that of Azure Solutions Limited) increases the risk by manifold. It is critical to achieve seamless integration with the acquired entity as our ability to serve the customers to the expected levels and meet the expectations of all Subexians will depend heavily on this integration. Until the acquisition, Azure was a loss making organization. Converting that operation into a profitable one is another key aspect that could jeopardize our plans. Further, we need to leverage the strengths of the combined entity to ensure growth in the future. Thus, this new acquisition poses several risks that were not perceived with the acquisitions in the past. While we believe that adequate planning and strategizing have taken place, the results of the execution will be known only by the end of the financial year 2006 – 07. 4.7 VARIABILITY OF QUARTERLY OPERATING RESULTS The quarterly operating results of the company have varied in the past due to reasons like seasonal pattern of hardware and software capital spending by customers, information technology investment trends, achievement of milestones in the execution of projects, hiring of additional staff and timing and integration of acquired businesses. Hence, the past operating results and period to period comparisons may not indicate future performance. The management is attempting to mitigate this risk through expansion of client base geographically and increase of steady annuity revenue. Despite those efforts, the variability could continue. The company constantly endeavors to safeguard itself against the above mentioned risks by adopting best practices, advanced processes, future proof investments and up-gradation of skills and capabilities. Consequently, we believe that we are reasonably well protected against the risks. 4.8 STATUTORY OBLIGATIONS Subex Azure has registered with Software Technology Parks of India for software development activities and has availed Customs Duties, Sales Tax and Central Excise exemptions. The non- fulfillment of export obligations may result in penalties as stipulated by the Government and this may have an impact on future profitability. 4.9 ENVIRONMENTAL MATTER Software development, being a pollution-free industry, is not subject to any environmental regulations. 4.10 FOREIGN EXCHANGE Subex Azure has substantial exposure to foreign exchange related risks on account of revenue earnings from export of software. These are hedged with banks and risks mitigated to the extent possible. Significant tax benefits have been given to the software companies in India. These benefits are presently available to Subex Azure. However, the policies are subject to change. Any change may adversely affect its’ post tax profits. India, having been among the signatories to the World Trade Organization, there exist a commitment to reducing the import tariff levels, thereby exposing the Indian entrepreneurs to global competition. 4.12 LITIGATION There is an increasing trend in litigation regarding intellectual property rights, patents and copyrights in the software industry. There also exist other corporate legal risks. Subex Azure has no material litigation pending against it in any court in India or abroad. 4.13 CONTRACTUAL OBLIGATION In terms of the contracts entered into by Subex Azure with its customers in the ordinary course of business, it is obliged to perform and act according to the contractual terms and regulations. Failure to fulfill the contractual obligations arising out of such contracts may expose Subex Azure to financial and other risks. The management has taken sufficient measures to cover all of its contractual risks and does not foresee any major liability due to its non - fulfillment of any contractual terms and conditions. 5 .5 .5 .5 .5 . INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY Management maintains internal control systems designed to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with management’s authorization and properly recorded, and accounting records are adequate for preparation of financial statements and other financial information. The internal audit function also carries out Operations Review Audits to improve the processes and strengthen control of the existing processes. The audit committee periodically reviews the functions of internal audit. Pursuant to the revised Clause 49 of the Listing Agreement, the CEO and CFO have to accept responsibility for establishing and maintaining internal controls for financial reporting and that they have evaluated the effectiveness of internal control systems of the company pertaining to financial reporting and that they have disclosed to the auditors and the audit committee, deficiencies in the design or operation of such internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies. An internal steering committee has been formed, under the supervision of audit committee and a dedicated team of professionals are engaged in assessing the adequacy of the company’s internal controls over financial reporting, developing remediation plans for control deficiencies, if any, identified during the assessment, and validate through testing that the controls are functioning as documented. 6 0 - 5 0 0 2 t r o p e R l a u n n A 37 Subex Azure Limited (formerly Subex Systems Limited) TIONAL PERFORMANCE TIONAL PERFORMANCE O OPERA 6. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TT TT TT TT TO OPERA O OPERA 6. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPEC 6. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPEC TIONAL PERFORMANCE O OPERATIONAL PERFORMANCE 6. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPEC TIONAL PERFORMANCE O OPERA 6. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPEC 6.16.16.16.16.1 Key financials and ratio analysis Key financials and ratio analysis Key financials and ratio analysis Key financials and ratio analysis Key financials and ratio analysis Amount in Rs million, except key indicators Financial Highlights / Financial Highlights / Financial Highlights / Financial Highlights / Financial Highlights / ear ending 31ststststst Mar ear ending 31 ear ending 31 YYYYYear ending 31 Marchchchchch Mar Mar ear ending 31 Mar Total income Export sales Operating Profits (EBDIT) Depreciation & Amortization Profit before tax Profit after tax Equity Dividend % Share Capital Reserves & Surplus Net Worth Gross fixed Assets Net Fixed Assets Total Assets Key Indicators Key Indicators Key Indicators Key Indicators Key Indicators 2006 2005 2004 2003 2002 2001 1,841.19 1,787.39 539.44 90.79 422.23 391.50 25% 217.58 1,597.75 1,816.20 653.06 391.61 1,172.35 1,086.40 356.74 71.43 261.10 253.03 30% 100.67 1,132.05 1,233.04 555.42 367.83 891.94 828.53 246.02 42.68 189.04 177.50 20% 73.54 540.94 799.39 209.61 89.66 706.41 676.01 162.19 37.98 101.75 96.12 10% 73.44 403.26 628.85 161.55 77.84 592.51 573.79 95.67 35.68 47.92 41.84 10% 71.23 458.01 367.11 163.81 109.53 557.89 479.59 126.90 20.80 103.94 102.77 20% 71.26 421.82 488.39 109.82 85.53 2,159.76 1,745.12 1,085.76 997.68 896.16 672.06 Earning per Share (Year end) 17.99 25.13 24.14 13.09 5.87 14.42 Cash Earning per Share (Year end) 22.17 32.23 29.94 18.26 10.88 17.34 Book value per Share 83.47 122.48 108.70 85.63 51.54 68.54 Debt (including Working capital) Equity Ratio EBDIT / Sales - % Net Profit Margin - % Return on year end Net Worth % Return on year end Capital Employed % 0.01 0.23 0.21 0.32 0.46 29% 22% 22% 30% 30% 22% 21% 23% 28% 20% 22% 26% 23% 14% 15% 20% 16% 7% 11% 18% 0.01 23% 18% 21% 26% Note: Earning per share, Cash Earning per share and Book Value of share are in Rupees. 7 .7 .7 .7 .7 . Y ON FINANCIAL STTTTTAAAAATEMENTS TEMENTS TEMENTS Y ON FINANCIAL S OMMENTARARARARARY ON FINANCIAL S Y ON FINANCIAL S OMMENT CCCCCOMMENT OMMENT TEMENTS TEMENTS Y ON FINANCIAL S OMMENT 7.2 RESERVES AND SURPLUS 7.1 SHARE CAPITAL 7.1.1 Of the equity paid-up capital, the company had issued the following shares towards consideration other than cash. ● ● ● ● 115,000 shares of Rs.10 each, towards the balances in the current account of partners, Mr. Subash Menon and Mr. Alex J. Puthenchira, on the takeover of Subex Systems, a partnership firm, by the company during 1993-94. 4,626,940 shares of Rs.10 each to all eligible shareholders as on 31st March, 1999 in the ratio of 1:1 by capitalizing the General Reserves. 12,840 shares of Rs.10 each to the erstwhile owners of M/s. IVth Generation Inc., towards part consideration of the cost of acquisition of that company at Rs.1,023 per share during 1999-2000. 10,878,784 shares of Rs.10 each to all eligible shareholders as on 6th January, 2006 in the ratio of 1:1 by capitalizing the securities premium. 7.1.2 During 2005-06 the company issued 65,408 shares of Rs.10 each to various employees on exercise of Stock Options granted under the Employee Stock Option Plan (ESOP – II). 38 7.1.3 There are no calls in arrears. 7.2.1 Capital Reserve of Rs.13 million was created by credit of the notional premium on 12,840 equity shares of Rs.10 each valued at a price of Rs.1,023 per share and issued to the owners of IVth Generation Inc, USA as part consideration for the transfer of their shareholding to Subex Systems Ltd. 7.2.2 Share Premium Account represents the premium collected on: ● ● ● ● ● 971,000 equity shares issued at a premium of Rs.65 per share through an Initial Public Offer in 1999-2000. 330,800 equity shares issued at a premium of Rs.740 per share to mutual funds and bodies corporate on a preferential basis during 1999-2000. 1,887,000 equity shares issued at a premium of Rs. 88 per share to holders of ROCCPS on conversion of preferential shares of Rs. 98 each, namely Intel Capital, Toronto Dominion Bank and UTI Venture Funds. 1,538,459 equity shares issued at a premium of Rs.290 per share to holders of FCCBs on conversion of the bonds at a price of Rs.300 per share. 65,408 equity shares allotted to the employees under ESOP II Scheme as per the provisions of the Scheme. 7.2.3 A sum of Rs.158,956,637 being the cost of Intellectual Property Rights acquired from Magardi, Inc, in 2001-02, has been written off against the Share Premium Account, in terms of the approval of the Shareholders in an Extraordinary General Meeting and the subsequent confirmation of the Honourable High Court of Karnataka under section 78 and 100 of the Companies Act, 1956. 7.2.4 The company has transferred Rs.39.50 million (Previous year, Rs.25.5 million) to General Reserves during the year. 7.2.5 In accordance with the guidelines issued by the Institute of Chartered Accounts of India on Accounting for Deferred Taxes, a net gain of Rs.3.94 million have been recorded in the P&L A/c on account of recognition of deferred tax asset as at year end, amounting to Rs. 7.91 million. 7.2.6 In accordance with the guidelines issued by SEBI under the ESOS & ESPS Scheme 1999, the company has created a Reserve towards the excess of market price of the underlying equity shares as on the date of the grant of the option over the exercise price of the option, to be adjusted over the period of vesting. The amount of reserves as at 31st March, 2006 is Rs.8.88 million (Previous year, Rs.4.763 million). 7.3 SECURED LOANS The secured loan of Rs. 11.12 million (Previous Year, Rs. 73.28 million) outstanding in the books as at 31st March, 2006 pertains to motorcars financed by the company through Hire purchase scheme with the financiers and is secured by hypothecation of the vehicles. 7.4 UNSECURED LOANS Pursuant to conversion of all the Fully Convertible Cumulative Bonds (FCCB) issued in the previous year, there are no unsecured loans outstanding. 7.5 DEFERRED PAYMENT CONSIDERATION The amount of deferred payment consideration outstanding at the beginning of the year; amounting to Rs.22.75 million represents the portion of consideration payable to Alcatel UK for transfer of IPRs pertaining to their FMS business. During the year, this has been fully discharged by the company. 7.6 FIXED ASSETS 7.6.1 The company acquired business contracts, Intellectual Property Rights (comprising of trademarks, patents, copyrights) hardware and software connected with the fraud management software businesses from Mantas, Inc. USA in an all cash deal of US$ 2.10 million, on 1st March, 2006. The same has been capitalized along with the expenses incurred in connection with the said acquisition. 7.6.2 The value of intangible assets, based on the valuation report by independent valuers, is being depreciated over 5 years in accordance with the company’s assessment of useful life thereof. Accordingly, an amount of Rs.1,696,053 (pro-rated for the month of March, 2006) has been depreciated in the financial year under review. 7.6.3 Consequent to the acquisition, revenues recorded for the year include revenues arising from these acquisitions as well, pro-rated for the month of March, 2006. 7.6.4 During the year, the company added Rs.121.47 million to its gross block, including the FMS business assets of Mantas, as above. Subex Azure Limited (formerly Subex Systems Limited) The company disposed off certain assets no longer required. The company has assets worth Rs.24.20 million (Previous year Rs. 21.75 million) under hire purchase agreements and - none (Previous year - Nil) under lease finance. 7.6.5 The company has disposed of its land located at Yeshwantpur Industrial Area during the year for a sum of Rs.17,667,000. 7.7 INVESTMENTS 7.7.1 During 1999, the company had acquired the whole of the outstanding common stocks numbering 3,000 of no par value of IVth Generation, Inc., New Jersey, USA, Consequent to the acquisition, IVth Generation Inc, a wholly owned subsidiary of the company, has been renamed as “Subex Technologies, Inc.” The investments are carried at cost, including advisory fees, brokerage and syndication fees for facilitating the investment. 7.7.2 The company has received an independent valuation report of Subex Technologies, Inc., based on which there is no impairment in the value of the Investment. 7.7.3 The company has subscribed to the entire share capital of Subex Technologies Limited, a wholly owned subsidiary company to the extent of Rs 10 million. 7.8 SUNDRY DEBTORS 7.8.1 During the year, the company has securitized a portion of its receivables amounting to US$ 8.76 million with UTI Bank Ltd. 7.8.2 The major customers of the company are the telecom and cellular operators overseas and in India. The receivables are spread over a large customer base. There is no significant concentration of credit risk on a single customer, but for the majority of the services business coming from AT&T, USA. 7.8.3 All the debtors are generally considered good and realizable and necessary provision has been made for debts considered to be bad and doubtful. The level of sundry debtors is normal and is in tune with business trends and requirements. 7.8.4 Sundry debtors as a percentage of total revenue is 53% as against 63% in the previous year. 7.8.5 The age profile is as given below : Amount in million Rs. Period in days 31st March, 2006 31st March, 2005 Value % Value % Less than 90 days 421.80 43.93 314.14 42.98 90 – 180 days 284.24 29.60 210.07 28.74 More than 180 days 254.15 26.47 206.74 28.28 Total 960.19 100.00 730.95 100.00 7.8.6 The management believes that the overall composition and condition of sundry debtors is satisfactory. The company has made fresh provisions for doubtful debts during the year amounting to Rs. 35.58 million (Previous Year Rs. 4.30 million). 7.8.7 Dues from companies under the same management ● Subex Technologies, Inc towards dues from certain customers serviced by Subex Systems - Nil (Previous year - Nil). ● Maximum due during the year -Nil (Previous year, Nil) 6 0 - 5 0 0 2 t r o p e R l a u n n A 39 Subex Azure Limited (formerly Subex Systems Limited) ● Bad debts pertaining to services products division activity written off during the year Rs.0.14 million (Previous Year, Rs.0.45 million towards services) 7.9 CASH AND BANK BALANCES 7.9.1 The bank balances in India includes both rupee accounts and foreign currency accounts. Fixed deposit of Rs.333.67 million is funded out of book debts securitized. 7.9.2 Cash and bank balances constitute 22.20% of the total assets as against 18.02% in the previous year. 7.10 LOANS AND ADVANCES 7.10.1 Advances recoverable in cash, kind or value to be received are primarily towards prepayments for value to be received. Advance income tax, net of provision for taxation represents payments made towards tax liability pending assessment and refunds due. 7.10.2 Dues from companies under the same management. - Rs. 11.53 million from Subex Technologies Limited (Previous Year, Rs. 0.28 million). 7.10.3 Deposits represent electricity deposit, telephone deposits and advances of like nature. The company has taken on lease several buildings for operations and facilities in various cities and also for housing its staff upon payment of Rs. 26.18 million (Previous Year, Rs.8.99 million) as rental and maintenance deposits. 7.11 CURRENT LIABILITIES 7.11.1 Sundry creditors for capital goods represent amount payable to vendors for supply of capital assets and to financiers for supply of capital assets on hire purchase basis. 7.11.2 Sundry creditors for goods represent amount payable to vendors for supply of goods. 7.11.3 Sundry creditors - others include creditors for operational expenses, accrued salaries and benefits and advances received from clients for delivery of future sales. 7.12 PROVISIONS Provisions for taxation represent income tax, dividend tax and wealth tax liability. The provision would be set off upon payment of tax. The proposed dividend represents the final dividend recommended to the shareholders by the Board, which would be paid after the Annual General Meeting. 7.13 FINANCIAL INSTRUMENTS 7.13.1 Letters of credit The company has Letters of credit amounting to Rs.3.58 (Previous Year, Rs.5.24 million) million outstanding as at year-end. 7.13.2 Guarantees The company has outstanding guarantees for various purposes amounting to Rs.10.08 million as at 31st March, 2006. (Previous year, Rs.5.17 million). These guarantees are in the nature of performance guarantees and bid bonds and are subject to the risk of performance by the company. 7.14 PROFIT & LOSS ACCOUNT 7.14.1 Income segment wise break up of income is given below; Amount in Rs. million except percentages Particulars 2005-2006 2004-2005 Software services Value 645.32 Software products 1166.82 % 35.61 64.39 Value 537.53 627.97 % 46.12 53.88 Total 1812.16 100.00 1165.50 100.00 7.14.2 Geographically, the company earns income from export of software services to USA and software products to all countries. 7.15 NON OPERATING INCOME 7.15.1 Non-operating income consists of income derived by the company by way of interest on deposit with Bank, insurance claims received towards damages of assets, VAT refund, rental from sub-lease of premises and write-back of provisions no longer required and exchange fluctuation. 7.16 EXPENDITURE 7.16.1 The staff cost increased to Rs.946.13 million from Rs.675.73 million during the previous year on account of new recruitment, increments and increase in onsite consultancy services in US. 7.16.2 The company incurred administration and other expenses at 12.29% of its total Income during the year as compared to 9.22% during the previous year. 7.17 OPERATING PROFITS During the year, the company earned an operating profit (profit before interest, depreciation and tax) of Rs. 539.44 million being 29% of total income as against Rs.356.74 million at 30% during the previous year. 7.18 INTEREST & BANK CHARGES The company incurred an expenditure of Rs.26.42 million as against Rs.24.22 million during the previous year. The interest paid is related to temporary overdrawals and securitised receivables. 7.19 DEPRECIATION 7.19.1 The provision for depreciation for the year increased to Rs.90.79 million as compared to Rs. 71.17 million. The increases mainly on account of the incidence of an entire year’s depreciation on the Alcatel, and Lightbridge assets acquired in the previous year. The depreciation provision for FY 2006-07 is expected to be higher on account of acquisition of Mantas, Inc., on 1st March, 2006. 7.19.2 The intangible assets i.e. IPRs and goodwill are being depreciated over 5 years in accordance with the company’s assessment of useful life thereof. Accordingly, an amount of Rs. 64,198,915 (Previous year, Rs. 30,831,458) has been depreciated in the financial year under review. 7.20 PROVISION FOR TAX The company has provided for its tax liability in India and overseas after considering the exemptions for income from software services and products under the various applicable tax enactments. 7.21 NET PROFIT The company derives its income from providing software development services and licensing of software products. The The net profit of the company amounted to Rs.391.50 million as against Rs.253.03 million during the previous year. The company 40 earned a net profit margin of 22% to total income as against the same percentage in the previous year. 7.22 EARNINGS PER SHARE Earnings per share computed on the basis of number of common stock outstanding, as on the balance sheet date was Rs. 18.23 as against Rs.13.89 per share for the previous year. The Earnings per share diluted, for the year was Rs.18.13 as against Rs.13.19 for the previous year. Shares available with Subex Foundation under ESOP 1999 have been fully considered in the calculation of basic EPS. 7.23 FOREIGN EXCHANGE DIFFERENCE An amount of Rs. 0.85 million has been accounted for as loss during the current year compared to gain of Rs. 0.87 million during the previous year, on account of foreign exchange differences arising due to timing differences between accrual of income / expense and receipt / payment of the same. 7.24 DEPRECIATION ON SOFTWARE AND ASSETS COSTING LESS THAN Rs. 5,000 EACH During the year, the company charged depreciation at one hundred percent in respect of assets costing less than Rs. 5,000 each, amounting to Rs. 0.06 million. (Previous year, Rs. 0.10 million). Cost of software charged off to revenue during the year amounted to Rs.1.50 million (Previous year, Rs.1.05 million). 8. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES / INDUSTRIAL RELATIONS FRONT, INCLUDING NUMBER OF PEOPLE EMPLOYED. Subexians As of 31st March, 2006, we had 325 Subexians on our rolls. These highly trained and motivated people are critical to the success of our business. We focus on attracting and retaining the best talent with us. Our human resources department is centralized at the corporate headquarters in Bangalore and oversees HR functions across all the geographies where the company operates. We have Subex Azure Limited (formerly Subex Systems Limited) implemented corporate-wide recruiting, training, performance evaluation and compensation programs that are tailored to address the needs of each of our business segments. Recruiting Subex Azure hires entry level graduates from the top engineering and management universities in India. The company also hires through Subexian referral programs, advertisements, placement consultants, our website postings and walk-ins. To facilitate the growth of Subexians within the company, all new openings are first offered to the current Subexians. The nature of work, skill sets requirements and experience level are highlighted to the prospective Subexians. Training Each of our new recruits must attend a compulsory induction program when they begin working with us. New or recent graduates must also attend additional training programs that are tailored to their area of technology. We also have a training program for all subexians to improve their technical as well as their soft skills. We supplement continuing education program by sponsoring special programs for Subexians at leading educational institutions, such as the Birla Institute of Technology & Science, Pilani etc., to provide them cutting-edge skill sets. Performance Management System Subex Azure has a competency based appraisal system. Key result areas of Subexians are assessed through a process of appraisals involving self, peers and managers. The scores obtained in this cycle will undergo a normalisation and a moderation process to bring it in line with the organisation-wide scores. Compensation Subex Azure continually provides Subexians with competitive and innovative compensation packages. The packages include a combination of salary, stock options, health and disability insurance. The company measures its compensation packages against industry standards and strives to match or exceed the same. 6 0 - 5 0 0 2 t r o p e R l a u n n A 41 Subex Azure Limited (formerly Subex Systems Limited) AUDITORS’ REPORT TO THE MEMBERS OF SUBEX SYSTEMS LIMITED AUDITORS’ REPORT TO THE MEMBERS OF SUBEX SYSTEMS LIMITED AUDITORS’ REPORT TO THE MEMBERS OF SUBEX SYSTEMS LIMITED AUDITORS’ REPORT TO THE MEMBERS OF SUBEX SYSTEMS LIMITED AUDITORS’ REPORT TO THE MEMBERS OF SUBEX SYSTEMS LIMITED Subex Subex 1. We have audited the attached Balance Sheet of Subex Subex Subex Systems Limited Systems Limited Systems Limited, as at 31st March, 2006, the Profit and Loss Systems Limited Systems Limited Account and the Cash Flow Statement of the Company for the year ended on that dated annexed thereto. These financial statements are the responsibility of the management of the company. Our responsibility is to express an opinion on these financial statements based on our audit. 2. We conducted our audit in accordance with generally accepted auditing standards in India. These Standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatements. An audit includes, examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. 3. As required by the Companies (Auditor’s Report) Order, 2003 issued by the Government of India, in terms of Section 227 (4A) of the Companies Act 1956, we give in the Annexure, a statement on the matters specified in paragraphs 4 and 5 of the said Order to the extent applicable to this Company. 4. Further, to our comments in the Annexure referred to above, we report that: (a) we have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purpose of our audit. (b) in our opinion, proper books of account as required by law have been kept by the Company, so far as it appears from our examination of the books and proper returns adequate for the purpose of our audit have been received from the Company’s branch, in the United States of America (US Branch) not visited by us. (c) the report on the accounts of the US Branch audited by the Branch Auditors’ has been forwarded to us and has been dealt with by us in preparing this report. (d) (e) in our opinion, the Balance Sheet, Profit and Loss Account and Cash Flow Statement dealt with by this report are in compliance with the Accounting Standards referred to in Section 211(3C) of the Companies Act, 1956. the Balance Sheet, Profit and Loss Account and Cash Flow Statement dealt with by this report are in agreement with the books of account and the audited branch returns. (f) on the basis of written representations received from the directors of the Company, as at 31st March, 2006 and taken on record by the Board of Directors, we report that none of the directors is disqualified as on 31st March, 2006 from being appointed as a director in terms of clause (g) of sub-section (1) of Section 274 of the Companies Act 1956. 5. (a) (b) (c) in our opinion and to the best of our information and according to the explanations given to us, the said accounts read together with the notes thereon, give the information required by the Companies Act 1956, in the manner so required, give a true and fair view in conformity with the accounting principles generally accepted in India: in the case of the Balance Sheet, of the state of affairs of the Company as at 31st March, 2006; and in the case of the Profit and Loss Account of the profit for the year ended on that date, in the case of the Cash Flow Statement, of the cash flows for the year ended on that date. Place : Bangalore Date : 25th April, 2006 for Deloitte Haskins & Sells Chartered Accountants V. Srikumar Partner Membership No. 84494 O THE MEMBERS OF SUBEX O THE MEMBERS OF SUBEX TE T T OF EVEN DAAAAATE T TE T T OF EVEN D T OF EVEN D O IN OUR REPOR O IN OUR REPOR T (REFERRED T T (REFERRED T ORS’ REPOR ORS’ REPOR O THE AUDIT O THE AUDIT ANNEXURE T ANNEXURE T O THE MEMBERS OF SUBEX TE TO THE MEMBERS OF SUBEX O IN OUR REPORT OF EVEN D T (REFERRED TO IN OUR REPOR ORS’ REPORT (REFERRED T O THE AUDITORS’ REPOR ANNEXURE TO THE AUDIT ANNEXURE T O THE MEMBERS OF SUBEX TE T T OF EVEN D O IN OUR REPOR T (REFERRED T ORS’ REPOR O THE AUDIT ANNEXURE T SYSTEMS LIMITED) SYSTEMS LIMITED) SYSTEMS LIMITED) SYSTEMS LIMITED) SYSTEMS LIMITED) 1. The provisions of clauses i(c), iii (d) to (g), (vi), (viii), (x), (xii), (xiii), (xiv), (xv), (xvi), (xviii), (xix), as contained in para 4 and 5 of the Companies (Auditors’ Report) Order, 2003, are not applicable to the Company for the current year. 2. In respect of its fixed assets: (a) The Company has maintained proper records showing full particulars, including quantitative details and situation of fixed assets. (b) The fixed assets were physically verified during the year by the management in accordance with a programme of verification, which in our opinion provides for physical verification of all the fixed assets at reasonable intervals. According to the information and explanations given to us no material discrepancies were noticed on such verification. 3. In respect of its inventories: (a) As explained to us, inventories were physically verified during the year by the management at reasonable intervals. (b) (c) In our opinion and according to the information and explanations given to us, the procedures of physical verification of inventories followed by the management were reasonable and adequate in relation to the size of the Company and the nature of its business. In our opinion and according to the information and explanations given to us, the Company has maintained proper records of its inventories and no material discrepancies were noticed on physical verification. 4. In respect of loans, secured or unsecured, granted or taken by the Company to or from companies, firms or other parties 42 covered in the register maintained under section 301 of the Companies Act, 1956, according to the information and explanations given to us: (a) (b) the Company has granted loans to one party. At the year end, the outstanding balances of such loans granted aggregated to Rs. 11,533,049 and the maximum amount involved during the year was Rs. 17,322,380. in our opinion, having regard to the explanation that the loan is granted to the subsidiary with an intention of providing financial support, the terms and conditions of the interest free loan are, prima facie, not prejudicial to the interest of the Company. (c) no principal was due during the year ending 31st March, 2006. 5. 6. In our opinion and according to the information and explanations given to us, there are adequate internal control procedures commensurate with the size of the Company and the nature of its business with regard to the purchase of inventory and fixed assets and for the sale of goods and services and we have not observed any continuing failure to correct major weaknesses in such internal controls. In respect of contracts and arrangements entered in the register maintained in pursuance of section 301 of the Companies Act 1956, to the best of our knowledge and belief, and according to the information and explanations given to us: (a) the particulars of contracts or arrangements referred to in Section 301 that needed to be entered into the register, Subex Azure Limited (formerly Subex Systems Limited) maintained under the said section have been so entered. (b) where each of such transactions (excluding loans reported under paragraph 4 above), made in pursuance of contracts or arrangements, is in excess of Rs. 5 lakhs in respect of any party, the transactions have been made at prices which are, prima facie, reasonable having regard to the prevailing market prices at the relevant time. 7. In our opinion, the internal audit functions carried out during the year by a firm of Chartered Accountants appointed by the management have been commensurate with the size of the Company and the nature of its business. 8. In respect of Statutory dues: (a) according to the information and explanations given to us, the Company has been generally regular in depositing undisputed statutory dues including Provident Fund, Employees’ State Insurance, Investor Education and Protection Fund, Income Tax, Wealth Tax, Service Tax, Excise Duty, Customs Duty, Sales Tax, cess and any other material statutory dues with the appropriate authorities during the year and there are no undisputed statutory dues as noted above that are outstanding for a period more than six months from the date they became payable. (b) according to the information and explanations given to us, details of disputed sales tax, income tax, customs duty, wealth tax, service tax, excise duty and cess which have not been deposited as on 31st March, 2006, on account of any dispute are given below: 6 0 - 5 0 0 2 t r o p e R l a u n n A Name of statute Nature of the dues Amount (Rs.) Period to which the amount relates Forum where dispute is pending Income Tax Act, 1961 Income tax 9,352,609 2002-03 We are informed that the Assessment order was received on 31st March, 2006 and that the company is in the process of filing an appeal with the Appellate authorities against the order. 9. In our opinion and according to the information and explanations given to us, the Company has not defaulted in the (re)payment of dues to financial institutions and banks. 10. According to the information and explanations given to us and the records examined by us, the Company has not raised funds on short term basis. 11. During the period covered by our audit report, the Company has not raised any money by public issue. 12. To the best of our knowledge and belief and according to the information and explanations given to us, no fraud on or by the Company was noticed or reported during the year. Place : Bangalore Date : 25th April, 2006 for Deloitte Haskins & Sells Chartered Accountants V. Srikumar Partner M. No. 84494 43 Subex Azure Limited (formerly Subex Systems Limited) Financial Review Financial Review Financial Review Financial Review Financial Review Subex Azure Limited (Standalone) Subex Azure Limited (Standalone) Subex Azure Limited (Standalone) Subex Azure Limited (Standalone) Subex Azure Limited (Standalone) 44 ANCE SHEET AS AS AS AS AS ATTTTT ANCE SHEET A BALBALBALBALBALANCE SHEET A ANCE SHEET A ANCE SHEET A SOURCES OF FUNDS SOURCES OF FUNDS SOURCES OF FUNDS SOURCES OF FUNDS SOURCES OF FUNDS Shareholders’ funds Share capital Share application money Reserve and surplus Loan Funds Loan Funds Loan Funds Loan Funds Loan Funds Secured loans Unsecured loans Deferred payment consideration towards acquisition - Alcatel, FMS Division TTTTTotalotalotalotalotal APPLICAAAAATION OF FUNDS TION OF FUNDS TION OF FUNDS APPLIC APPLIC TION OF FUNDS TION OF FUNDS APPLIC APPLIC Fixed assets Gross block Less : Depreciation Net block Capital work in progress Investments Deferred tax asset (Net) CURRENT ASSETS, LOANS & ADVANCES Inventories Sundry debtors Cash & bank balances Loans & advances Less: Current liabilities & provisions Net current assets TTTTTotalotalotalotalotal Notes on accounts Subex Azure Limited (formerly Subex Systems Limited) Schedule Schedule Schedule Schedule Schedule 3131313131ststststst March, 2006 March, 2006 March, 2006 March, 2006 March, 2006 3131313131ststststst March, 2005 March, 2005 March, 2005 March, 2005 March, 2005 Amount in Rs. 217,575,680 878,089 100,672,230 318,640 1,597,751,141 1,816,204,910 1,132,054,073 1,233,044,943 73,282,446 212,987,750 11,119,920 22,754,000 309,024,196 1,827,324,830 1,827,324,830 1,827,324,830 1,827,324,830 1,827,324,830 1,542,069,139 1,542,069,139 1,542,069,139 1,542,069,139 1,542,069,139 6 0 - 5 0 0 2 t r o p e R l a u n n A 555,422,291 188,059,593 367,362,698 11,119,920 - - 653,064,906 265,950,677 387,114,229 4,495,298 391,609,527 465,431 367,828,129 318,017,947 7,912,000 308,518,947 3,975,809 - 960,193,124 405,677,943 76,355,395 1,442,226,462 332,441,106 62,589 730,950,484 277,911,743 55,871,375 1,064,796,191 203,049,937 1,109,785,356 1,827,324,830 1,827,324,830 1,827,324,830 1,827,324,830 1,827,324,830 861,746,254 1,542,069,139 1,542,069,139 1,542,069,139 1,542,069,139 1,542,069,139 AAAAA BBBBB CCCCC DDDDD EEEEE F F F F F G G G G G H H H H H I I I I I J J J J J K K K K K R R R R R The Schedules referred to above form an integral part of the Balance Sheet In terms of our report of even date for Deloitte Haskins & Sells Chartered Accountants Subash Menon Chairman & Managing Director Sudeesh Yezhuvath Wholetime Director V. Balaji Bhat Director V. Srikumar Partner Membership No. 84494 Bangalore 25th April, 2006 Rajkumar C Company Secretary & Legal Counsel V. R. Suresh Rao General Manager - Accounts & Finance 45 Subex Azure Limited (formerly Subex Systems Limited) PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED Schedule Schedule Schedule Schedule Schedule 3131313131ststststst March, 2006 2006 March, March, 2006 March, 2006 2006 March, 3131313131ststststst March, 2005 2005 March, March, 2005 March, 2005 2005 March, Amount in Rs. Income Income Income Income Income Sales & Services Other Income TTTTTotalotalotalotalotal EXPENDITURE : EXPENDITURE : EXPENDITURE : EXPENDITURE : EXPENDITURE : Direct Cost Personnel Costs Other Operating, Selling and Administrative Expenses Financial Costs Miscellaneous Expenses amortised Depreciation TTTTTotalotalotalotalotal PrPrPrPrProfit Befor ofit Before Te Te Te Te Taxation axation axation ofit Befor ofit Befor axation axation ofit Befor Provision for taxation LLLLL MMMMM NNNNN OOOOO PPPPP Q Q Q Q Q - Current - Fringe Benefit Tax - Deferred PrPrPrPrProfit After T axation axation ofit After T ofit After T axation ofit After Taxation axation ofit After T Add: Balance brought forward from Previous year Profit Available for Appropriation Profit Available for Appropriation Profit Available for Appropriation Profit Available for Appropriation Profit Available for Appropriation TION : TION : APPROPRIA APPROPRIA TION : APPROPRIATION : APPROPRIA TION : APPROPRIA Transfer to General Reserve Dividend 32,775,000 1,891,637 (3,936,191) - Equity Shares - Interim Dividend 2005-06 (FY) - Equity Shares - Final Dividend 2004-05 (FY) - Equity Shares - proposed - Dividend 2005-06 (FY) - Dividend on Preference Shares 16,283,564 547,764 21,757,568 - Tax on distributed profits Surplus carried to Balance Sheet Surplus carried to Balance Sheet Surplus carried to Balance Sheet Surplus carried to Balance Sheet Surplus carried to Balance Sheet Earnings Per Share (Face value of Rs.10 each) - Basic - Diluted Notes on accounts R R R R R 1,812,162,302 29,027,758 1,841,190,060 1,841,190,060 1,841,190,060 1,841,190,060 1,841,190,060 132,850,266 946,131,783 222,772,709 26,419,291 - 90,789,585 1,418,963,634 1,418,963,634 1,418,963,634 1,418,963,634 1,418,963,634 422,226,426 422,226,426 422,226,426 422,226,426 422,226,426 30,730,446 391,495,980 448,497,788 839,993,768 839,993,768 839,993,768 839,993,768 839,993,768 1,165,502,087 6,847,334 1,172,349,421 1,172,349,421 1,172,349,421 1,172,349,421 1,172,349,421 32,210,959 675,730,785 107,668,070 24,216,276 256,942 71,168,952 911,251,984 911,251,984 911,251,984 911,251,984 911,251,984 261,097,437 261,097,437 261,097,437 261,097,437 261,097,437 8,069,019 253,028,418 259,548,226 512,576,644 512,576,644 512,576,644 512,576,644 512,576,644 13,614,828 - (5,545,809) 39,500,000 25,500,000 9,274,917 20,134,446 - 4,651,061 34,060,424 4,518,432 448,497,788 512,576,644 512,576,644 512,576,644 512,576,644 512,576,644 13.89 13.19 38,588,896 5,604,376 756,300,496 839,993,768 839,993,768 839,993,768 839,993,768 839,993,768 18.23 18.13 The Schedules referred to above form an integral part of the profit & loss account In terms of our report of even date for Deloitte Haskins & Sells Chartered Accountants Subash Menon Chairman & Managing Director Sudeesh Yezhuvath Wholetime Director V. Balaji Bhat Director V. Srikumar Partner Membership No. 84494 46 Bangalore 25th April, 2006 Rajkumar C Company Secretary & Legal Counsel V. R. Suresh Rao General Manager - Accounts & Finance CASH FLOW STATEMENT FOR THE YEAR ENDED flow from operating activities flow from operating activities Cash Cash flow from operating activities Cash flow from operating activities Cash flow from operating activities Cash Net profit before tax and before extraordinary items Adjustments for Adjustments for Adjustments for Adjustments for Adjustments for a) Depreciation and amortization b) Interest / dividend Income c) Interest on borrowings d) Assets written off / loss on sale e) Profit on sale of assets f) Employee compensation expenses g) Provision for doubtful debts h) Unrealised exchange fluctuations i) Direct taxes paid Operating profit before working capital changes Operating profit before working capital changes Operating profit before working capital changes Operating profit before working capital changes Operating profit before working capital changes Adjustments for Adjustments for Adjustments for Adjustments for Adjustments for a) Sundry debtors b) Loans and advances c) Inventories d) Trade and other payables Cash generated from operations Cash generated from operations Cash generated from operations Cash generated from operations Cash generated from operations Cash flow from investing activities Cash flow from investing activities Cash flow from investing activities Cash flow from investing activities Cash flow from investing activities a) Purchase of fixed assets b) Sale / disposal of fixed assets c) Sale / purchase of investments d) Deferred payment consideration towards acquisition e) Reversal of investment carrying value f) Interest received Net cash from investing activities Net cash from investing activities Net cash from investing activities Net cash from investing activities Net cash from investing activities Cash flow from financing activities Cash flow from financing activities Cash flow from financing activities Cash flow from financing activities Cash flow from financing activities a) Proceeds from issue of share capital/options b) Proceeds from/(repayment) of short term borrowings - Net c) Proceeds from long term borrowings d) Repayment of long term borrowings e) Dividends & dividend tax paid f) Interest paid on borrowings Net cash from financing activities Net cash from financing activities Net cash from financing activities Net cash from financing activities Net cash from financing activities Net increase in cash or cash equivalents [A + B + C] Cash or cash equivalents at the start of the year ts at the close of the year ts at the close of the year Cash or cash equivalen Cash or cash equivalen ts at the close of the year Cash or cash equivalents at the close of the year ts at the close of the year Cash or cash equivalen Cash or cash equivalen AAAAA B B B B B CCCCC Subex Azure Limited (formerly Subex Systems Limited) 3131313131ststststst March, 2006 2006 March, March, 2006 March, 2006 2006 March, 3131313131ststststst March, 2005 2005 March, March, 2005 March, 2005 2005 March, Amount in Rs. 422,226,426 261,097,437 90,789,585 (17,485,876) 26,419,291 1,922,880 (11,976,780) 4,115,709 35,583,448 3,632,964 (21,068,323) 534,159,324 534,159,324 534,159,324 534,159,324 534,159,324 (292,387,910) (11,546,176) 62,589 93,266,223 323,554,050 323,554,050 323,554,050 323,554,050 323,554,050 (110,095,990) 21,058,612 (9,499,000) - - 16,352,692 (82,183,686) (82,183,686) (82,183,686) (82,183,686) (82,183,686) 18,753,800 (59,387,250) 3,318,000 (6,093,275) (43,776,147) (26,419,292) (113,604,164) (113,604,164) (113,604,164) (113,604,164) (113,604,164) 127,766,200 277,911,743 405,677,943 405,677,943 405,677,943 405,677,943 405,677,943 6 0 - 5 0 0 2 t r o p e R l a u n n A 71,425,894 (1,681,501) 24,216,276 829,470 (114,895) 1,008,361 4,295,276 7,954,119 (7,554,024) 361,476,413 361,476,413 361,476,413 361,476,413 361,476,413 (147,001,976) (17,588,983) 75,436 81,122,502 278,083,392 278,083,392 278,083,392 278,083,392 278,083,392 (350,824,055) 768,732 (499,940) 3,870,381 18,883,619 1,681,501 (326,119,762) (326,119,762) (326,119,762) (326,119,762) (326,119,762) 217,939,080 (61,389,471) 469,263,000 (270,554,902) (43,304,005) (19,612,907) 292,340,795 292,340,795 292,340,795 292,340,795 292,340,795 244,304,425 33,607,318 277,911,743743743743743 277,911, 277,911, 277,911, 277,911, Note : Note : Note : Cash & cash equivalents include balance with scheduled banks on dividend account and GIC deposit account of Rs. 963,793 Note : Note : (previous year Rs. 895,009) which are not available for use by the company. In terms of our report of even date for Deloitte Haskins & Sells Chartered Accountants V. Srikumar Partner Membership No. 84494 Bangalore 25th April, 2006 Subash Menon Chairman & Managing Director Sudeesh Yezhuvath Wholetime Director V. Balaji Bhat Director Rajkumar C Company Secretary & Legal Counsel V. R. Suresh Rao General Manager - Accounts & Finance 47 Subex Azure Limited (formerly Subex Systems Limited) SCHEDULES TO THE BALANCE SHEET AS AT 3131313131ststststst March, 2006 2006 March, March, 2006 March, 2006 2006 March, 3131313131ststststst March, 2005 2005 March, March, 2005 March, 2005 2005 March, Amount in Rs. ScScScScSchedule - A hedule - A hedule - A hedule - A hedule - A Share capital Share capital Share capital Share capital Share capital Authorised 30,140,000 (Previous year, 12,500,000) equity shares of Rs. 10 each 200,000 (Previous year, 2,000,000) Redeemable Optionally Convertible Cumulative Preference Shares (ROCCPS) of Rs.98 each TTTTTotalotalotalotalotal Issued, subscribed and paid up A) Equity 21,757,568 (Previous year, 10,067,223) equity shares of Rs. 10 each Of the above a) 115,000 shares of Rs.10 each were allotted for consideration other than for cash; b) 4,626,940 shares of Rs.10 each are allotted as Bonus shares by capitalisation of General Reserve; c) 12,840 shares of Rs.10 each are allotted in part settlement of cost of acquisition of subsidiary d) 10,878,784 (previous year: Nil) shares of Rs.10 each are allotted as bonus shares by capitalisation of securities premium; 301,400,000 19,600,000 125,000,000 196,000,000 321,000,000 321,000,000 321,000,000 321,000,000 321,000,000 321,000,000 321,000,000 321,000,000 321,000,000 321,000,000 217,575,680 100,672,230 TTTTTotalotalotalotalotal Schedule - B Schedule - B Schedule - B Schedule - B Schedule - B Reserves and surplus Reserves and surplus Reserves and surplus Reserves and surplus Reserves and surplus Capital reserve General reserve - opening balance Add : Additions during the year Securities premium account - opening balance Add : Additions during the year Less: Utilised towards issue of bonus shares Employees stock options outstanding Less: Deferred employees compensation expenses Profit & loss account TTTTTotalotalotalotalotal Schedule - C Schedule - C Schedule - C Schedule - C Schedule - C Secured Loans Secured Loans Secured Loans Secured Loans Secured Loans State Bank of India - FCNR (B) Loan [Amount repayable within one year: Rs. Nil) (Previous Year, Rs. 59,387,250) (Secured by first charge on all fixed assets of the company, both present and future, book debts, stock, personal guarantee of two directors and equitable mortgage of industrial land) Hire Purchase (Secured by hypothecation of motor cars) [Amount repayable within one year: Rs. 3,761,855) (Previous Year, Rs. 4,568,531) TTTTTotalotalotalotalotal Scheduled - D Scheduled - D Scheduled - D Scheduled - D Scheduled - D Unsecured loans Unsecured loans Unsecured loans Unsecured loans Unsecured loans Foreign Currency Convertible Bonds 48 217,575,680 217,575,680 217,575,680 217,575,680 217,575,680 100,672,230 100,672,230 100,672,230 100,672,230 100,672,230 123,802,608 39,500,000 541,983,360 223,066,491 (108,787,840) 22,738,130 13,859,024 13,006,920 163,302,608 656,262,011 8,879,106 756,300,496 1,597,751,141 1,597,751,141 1,597,751,141 1,597,751,141 1,597,751,141 98,302,608 25,500,000 166,327,505 375,655,855 - 10,428,860 5,665,463 13,006,920 123,802,608 541,983,360 4,763,397 448,497,788 1,132,054,073 1,132,054,073 1,132,054,073 1,132,054,073 1,132,054,073 - 59,387,250 11,119,920 13,895,196 11,119,920 11,119,920 11,119,920 11,119,920 11,119,920 73,282,446 73,282,446 73,282,446 73,282,446 73,282,446 - - 212,987,750 212,987,750 212,987,750 212,987,750 212,987,750 212,987,750 . s R n i t n u o m A k k k k k c c c c c o o o o o b b b b b l l l l l t t t t t e e e e e N N N N N i i i i i n n n n n o o o o o i i i i i t t t t t a a a a a c c c c c e e e e e r r r r r p p p p p e e e e e D D D D D l l l l l k k k k k c c c c c o o o o o b b b b b s s s s s s s s s s o o o o o r r r r r G G G G G 5 5 5 5 5 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 , 3 0 1 9 1 8 5 , - 6 6 6 6 6 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 - 6 6 6 6 6 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 t t t t t a a a a a s s s s s A A A A A t t t t t a a a a a s s s s s A A A A A o o o o o t t t t t p p p p p U U U U U n n n n n O O O O O , , , , , h h h h h c c c c c r r r r r a a a a a M M M M M t t t t t s s s s s 1 1 1 1 1 3 3 3 3 3 , , , , , h h h h h c c c c c r r r r r a a a a a M M M M M t t t t t s s s s s 1 1 1 1 1 3 3 3 3 3 , , , , , h h h h h c c c c c r r r r r a a a a a M M M M M t t t t t s s s s s 1 1 1 1 1 3 3 3 3 3 s s s s s n n n n n o o o o o i i i i i t t t t t e e e e e e e e e e d d d d d l l l l l r r r r r a a a a a e e e e e y y y y y e e e e e h h h h h t t t t t r r r r r o o o o o F F F F F 5 5 5 5 5 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 o o o o o t t t t t p p p p p U U U U U , , , , , l l l l l i i i i i r r r r r p p p p p A A A A A t t t t t s s s s s 11111 6 6 6 6 6 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 t t t t t a a a a a s s s s s A A A A A , , , , , h h h h h c c c c c r r r r r a a a a a M M M M M t t t t t s s s s s 1 1 1 1 1 3 3 3 3 3 r r r r r a a a a a e e e e e y y y y y g g g g g n n n n n i i i i i r r r r r u u u u u d d d d d s s s s s n n n n n o o o o o i i i i i t t t t t e e e e e e e e e e D D D D D l l l l l r r r r r a a a a a e e e e e y y y y y s s s s s n n n n n o o o o o i i i i i t t t t t i i i i i d d d d d d d d d d A A A A A e e e e e h h h h h t t t t t g g g g g n n n n n i i i i i r r r r r u u u u u d d d d d - - - - 3 0 1 , 9 1 8 , 5 - , 1 0 4 2 3 1 5 1 6 9 8 , , 3 6 8 5 2 7 0 5 3 7 7 7 , 5 0 4 , 8 2 8 0 8 , 4 7 4 , 1 8 7 4 , 5 1 8 8 0 7 , 7 3 8 7 7 9 , 5 4 5 5 5 5 5 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 t t t t t a a a a a s s s s s A A A A A , , , , , l l l l l i i i i i r r r r r p p p p p A A A A A t t t t t s s s s s 11111 3 0 1 , 9 1 8 , 5 9 0 2 , 7 0 6 , 1 , 0 8 9 5 6 5 3 , , 9 2 4 6 0 1 3 , , 2 8 5 1 6 4 7 , , 5 9 5 9 8 8 6 5 , , 2 6 7 8 3 3 8 4 , , 9 3 4 0 6 4 7 4 1 , , 3 6 8 6 9 3 4 , 2 6 1 , 1 5 7 3 8 2 , 7 0 1 , 1 1 1 1 0 , 8 6 5 , 0 1 2 3 3 , 1 5 7 , 4 0 8 0 , 6 4 6 3 6 2 , 3 7 6 , 4 1 s e r u t x i f & e r u t i n r u F 2 0 4 2 9 5 , 5 1 3 , 9 9 7 , 9 1 6 2 5 , 3 5 2 , 8 2 1 1 0 2 , 9 9 7 , 5 9 1 4 1 0 , 0 3 0 , 1 4 9 0 , 6 8 6 , 1 1 1 2 1 , 3 4 1 , 5 8 1 s r e t u p m o C , 3 5 6 7 3 0 4 , , 1 4 4 1 1 5 3 , , 5 9 2 4 3 7 4 , , 2 6 6 6 8 4 1 , 5 1 3 4 1 1 , - - , 1 0 3 6 7 6 1 , 1 2 2 , 4 8 0 , 1 6 3 7 , 6 3 1 , 5 6 3 7 , 5 4 2 , 8 5 1 9 , 5 1 7 , 1 2 6 2 , 7 8 7 9 8 3 , 4 7 1 , 9 - 1 0 3 , 6 7 6 , 1 - 5 1 6 , 0 9 7 , 1 - 5 1 6 , 0 9 7 , 1 s n o i t a l l a t s n i l a c i r t c e E l i s t n e m p u q e e c i f f O , 1 8 0 2 7 4 8 1 , , 1 6 4 7 5 6 3 1 , , 5 2 1 8 3 5 0 1 , , 0 8 5 9 6 8 3 , 7 9 1 , 5 5 8 , 4 8 0 5 , 2 5 5 , 9 6 8 5 , 5 9 1 , 4 2 2 6 7 , 7 5 8 , 7 9 5 7 , 8 2 0 , 4 9 8 5 , 4 2 0 , 8 2 r a c r o t o M 0 2 4 1 , - - 3 7 9 6 2 , - 3 7 9 , 6 2 - 3 9 3 , 8 2 - 3 9 3 , 8 2 s t e s s a d e x i f r e h t O , 9 4 3 8 1 8 3 7 2 , , 7 2 7 8 0 6 6 0 3 , , 9 4 2 5 6 0 3 9 , , 1 0 8 1 1 5 4 , , 4 9 7 1 0 8 1 1 , , 4 2 1 5 6 9 1 , , , , , , 8 8 8 8 8 9 9 9 9 9 6 6 6 6 6 2 2 2 2 2 6 6 6 6 6 3 3 3 3 3 7 7 7 7 7 6 6 6 6 6 3 3 3 3 3 , , , , , , , , , , 9 9 9 9 9 2 2 2 2 2 2 2 2 2 2 4 4 4 4 4 1 1 1 1 1 1 1 1 1 1 7 7 7 7 7 8 8 8 8 8 3 3 3 3 3 , , , , , , , , , , 7 7 7 7 7 7 7 7 7 7 6 6 6 6 6 0 0 0 0 0 5 5 5 5 5 9 9 9 9 9 5 5 5 5 5 6 6 6 6 6 2 2 2 2 2 , , , , , , , , , , 1 1 1 1 1 3 3 3 3 3 1 1 1 1 1 6 6 6 6 6 2 2 2 2 2 8 8 8 8 8 2 2 2 2 2 1 1 1 1 1 , , , , , 5 5 5 5 5 1 1 1 1 1 2 2 2 2 2 , , , , , 7 7 7 7 7 1 1 1 1 1 7 7 7 7 7 , , , , , 0 0 0 0 0 9 9 9 9 9 3 3 3 3 3 9 9 9 9 9 5 5 5 5 5 , , , , , 9 9 9 9 9 5 5 5 5 5 0 0 0 0 0 , , , , , 8 8 8 8 8 8 8 8 8 8 1 1 1 1 1 6 6 6 6 6 0 0 0 0 0 9 9 9 9 9 , , , , , 4 4 4 4 4 6 6 6 6 6 0 0 0 0 0 , , , , , 3 3 3 3 3 5 5 5 5 5 6 6 6 6 6 2 2 2 2 2 4 4 4 4 4 8 8 8 8 8 , , , , , 0 0 0 0 0 3 3 3 3 3 8 8 8 8 8 , , , , , 3 3 3 3 3 2 2 2 2 2 8 8 8 8 8 5 5 5 5 5 4 4 4 4 4 , , , , , 3 3 3 3 3 7 7 7 7 7 4 4 4 4 4 , , , , , 1 1 1 1 1 2 2 2 2 2 1 1 1 1 1 0 0 0 0 0 9 9 9 9 9 2 2 2 2 2 , , , , , 2 2 2 2 2 2 2 2 2 2 4 4 4 4 4 , , , , , 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 - - 6 7 5 , 3 3 7 , 2 6 3 7 6 , 1 3 3 , 0 3 6 7 9 , 3 7 6 , 9 9 3 9 3 3 , 5 6 4 , 1 5 8 7 , 9 9 4 8 1 9 , 6 6 7 , 3 1 - - 2 3 3 , 5 5 7 , 8 6 8 5 , 1 1 0 , 5 4 5 9 , 3 2 5 , 5 9 2 2 0 , 0 5 1 , 4 0 3 y t r e p o r p l a u t c e l l e t n I s t h g i r l l i w d o o G 0 1 l a t o T Subex Azure Limited (formerly Subex Systems Limited) , , , , , 5 5 5 5 5 2 2 2 2 2 2 2 2 2 2 9 9 9 9 9 1 1 1 1 1 2 2 2 2 2 9 9 9 9 9 8 8 8 8 8 , , , , , , , , , , 8 8 8 8 8 9 9 9 9 9 6 6 6 6 6 2 2 2 2 2 6 6 6 6 6 3 3 3 3 3 7 7 7 7 7 6 6 6 6 6 3 3 3 3 3 , , , , , , , , , , 3 3 3 3 3 9 9 9 9 9 5 5 5 5 5 9 9 9 9 9 5 5 5 5 5 0 0 0 0 0 8 8 8 8 8 8 8 8 8 8 1 1 1 1 1 , , , , , , , , , , 0 0 0 0 0 2 2 2 2 2 0 0 0 0 0 8 8 8 8 8 5 5 5 5 5 0 0 0 0 0 3 3 3 3 3 , , , , , 2 2 2 2 2 5 5 5 5 5 9 9 9 9 9 , , , , , 8 8 8 8 8 6 6 6 6 6 1 1 1 1 1 , , , , , 1 1 1 1 1 7 7 7 7 7 1 1 1 1 1 6 6 6 6 6 6 6 6 6 6 , , , , , 8 8 8 8 8 4 4 4 4 4 9 9 9 9 9 , , , , , 9 9 9 9 9 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 9 9 9 9 9 2 2 2 2 2 , , , , , 2 2 2 2 2 2 2 2 2 2 4 4 4 4 4 , , , , , 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 9 9 9 9 9 1 1 1 1 1 2 2 2 2 2 , , , , , 4 4 4 4 4 0 0 0 0 0 1 1 1 1 1 , , , , , 4 4 4 4 4 4 4 4 4 4 2 2 2 2 2 6 6 6 6 6 , , , , , 8 8 8 8 8 5 5 5 5 5 3 3 3 3 3 , , , , , 0 0 0 0 0 5 5 5 5 5 3 3 3 3 3 6 6 6 6 6 8 8 8 8 8 8 8 8 8 8 , , , , , 7 7 7 7 7 6 6 6 6 6 1 1 1 1 1 , , , , , 9 9 9 9 9 0 0 0 0 0 2 2 2 2 2 R R R R R A A A A A E E E E E Y Y Y Y Y S S S S S U U U U U O O O O O V V V V V E E E E E R R R R R P P P P P I I I I I 6 0 - 5 0 0 2 t r o p e R l a u n n A i l , d t L s e g o o n h c e T x e b u S m o r f e s n e p x e e b a c o l l l a o t e u d 9 6 3 , 2 7 . s R f o t n e t x e e h t o t r e h g h s i i r a e y t n e r r u c e h t r o f t n u o c c a s s o L & t i f o r P r e p s a n o i t a c e r p e D i : e t o N ( ) l R e u d e h c S f o B . 2 1 . 1 1 e t o N r e f e R 49 i y r e n h c a m & t n a P l d n a l l d o h e e r F E E E E E - - - - - l l l l l e e e e e u u u u u d d d d d e e e e e h h h h h c c c c c S S S S S s t e s s a d e x F i s s s s s r r r r r a a a a a u u u u u c c c c c l l l l l i i i i i t t t t t r r r r r a a a a a P P P P P . . . . . o o o o o N N N N N . . . . . l l l l l S S S S S 1 2 3 4 5 6 7 8 9 Subex Azure Limited (formerly Subex Systems Limited) SCHEDULES TO THE BALANCE SHEET AS AT ScScScScSchedule - F hedule - F hedule - F hedule - F hedule - F Investments (Unquoted at cost) Long term - Non trade In Government securities - I.V.P Long term - trade Subex Technologies, Inc (Wholly owned subsidiary, incorporated in U.S.A, common stock 3,000 shares, fully paid up, of no par value) Long term - trade Subex Technologies, Ltd (Wholly owned subsidiary, incorporated in India, common stock 999,994 (previous year: 49,994) shares, fully paid up, at par value of Rs.10 each) TTTTTotalotalotalotalotal Schedule - G Schedule - G Schedule - G Schedule - G Schedule - G Inventories Traded goods TTTTTotalotalotalotalotal Schedule - H Schedule - H Schedule - H Schedule - H Schedule - H Sundry debtors (Unsecured) Outstanding for more than six months - Considered good - Considered doubtful Less: Provision for doubtful debts Others TTTTTotalotalotalotalotal (considered good) Schedule - I Schedule - I Schedule - I Schedule - I Schedule - I Cash & bank balances Cash & bank balances Cash & bank balances Cash & bank balances Cash & bank balances Cash on hand Balance with scheduled banks - - - in Current account in Indian Rupees in Deposit account in Indian Rupees in EEFC account in foreign currency Balance with non-scheduled banks - Deposit with Royal Bank of Canada - in current account with Royal Bank of Canada, Canada (Maximum outstanding during the year Rs. 2,205,145) in checking account with First Union Bank, New Jersey (Maximum outstanding during the year Rs.48,103,089) - - Deposit with money market account with First Union Bank, New Jersey - - - - - - (Maximum outstanding during the year Rs. 47,686,579) in Hellinic Bank - CYP Account, Cyprus (Maximum outstanding during the year Rs. 1,502) in Hellinic Bank - USD Account - Cyprus (Maximum outstanding during the year Rs. 8,077) in Bank of China - RMB account - China (Maximum outstanding during the year Rs.1,789,772) in Bank of China - USD Account - China (Maximum outstanding during the year Rs. 1,541,775) in First National Bank of Colardo - USD Account - CO (Maximum outstanding during the year Rs. 11,017,675) in HSBC Bank - GBP Account - Slough, London (Maximum outstanding during the year Rs. 12,132,108) 3131313131ststststst March, 2006 2006 March, March, 2006 March, 2006 2006 March, 3131313131ststststst March, 2005 2005 March, March, 2005 March, 2005 2005 March, Amount in Rs. - 1,000 308,018,007 308,018,007 9,999,940 499,940 318,017,947 318,017,947 318,017,947 318,017,947 318,017,947 308,518,947 308,518,947 308,518,947 308,518,947 308,518,947 - ----- 62,589 62,589 62,589 62,589 62,589 62,589 254,146,370 58,786,098 312,932,468 58,786,098 206,737,371 23,938,870 230,676,241 23,938,870 206,737,371 524,213,113 730,950,484 730,950,484 730,950,484 730,950,484 730,950,484 254,146,370 706,046,754 960,193,124 960,193,124 960,193,124 960,193,124 960,193,124 342,020 9,776,111 333,665,660 43,245,394 963,793 503,094 11,793,295 - 1,395 1,663 22,595 892,680 1,773,861 2,696,382 425,892 10,350,189 219,021,499 2,438,103 895,009 576,781 18,108,364 23,423,122 1,548 7,593 495,853 766,318 1,398,966 2,506 50 TTTTTotalotalotalotalotal 405,677,943 405,677,943 405,677,943 405,677,943 405,677,943 277,911,743 277,911,743 277,911,743 277,911,743 277,911,743 SCHEDULES TO THE BALANCE SHEET AS AT Schedule - J Schedule - J Schedule - J Schedule - J Schedule - J Loans & advances Loans & advances Loans & advances Loans & advances Loans & advances (Unsecured, considered good, subject to confirmation) Loans and advances recoverable in cash or in kind or for value to be received Due from Subex Technologies Ltd. (Net) (Wholly owned subsidiary) Advance Income Tax including TDS Other Deposits TTTTTotalotalotalotalotal Schedule - K : Schedule - K : Schedule - K : Schedule - K : Schedule - K : Current liabilities & provisions : Current liabilities & provisions : Current liabilities & provisions : Current liabilities & provisions : Current liabilities & provisions : Sundry creditors : Sundry creditors (other than Small Scale Industrial Undertaking) Advance received from customers Duties & taxes Subex Technologies, Inc. (Net) (Wholly owned subsidiary) Subex Azure Limited (formerly Subex Systems Limited) 3131313131ststststst March, 2006 2006 March, March, 2006 March, 2006 2006 March, 3131313131ststststst March, 2005 2005 March, March, 2005 March, 2005 2005 March, Amount in Rs. 21,342,369 25,088,751 10,042,277 17,718,857 27,251,892 76,355,395 76,355,395 76,355,395 76,355,395 76,355,395 283,079 9,841,828 20,657,717 55,871,375 55,871,375 55,871,375 55,871,375 55,871,375 6 0 - 5 0 0 2 t r o p e R l a u n n A 124,128,357 64,884,807 13,211,952 64,277,408 46,408,428 68,936,388 9,655,614 36,686,755 Unclaimed dividends (Refer Note II.18.3) 300,627 266,803,151 301,227 161,988,412 Provisions Taxation Dividends Tax on proposed dividends Warranty TTTTTotalotalotalotalotal Schedule - L : Schedule - L : Schedule - L : Schedule - L : Schedule - L : Other Income : Other Income : Other Income : Other Income : Other Income : Interest Received (Gross - TDS Rs. 3,794,118, Previous Year Rs. 194,853) Other income received Profit on sale of fixed assets (Net) Creditors no longer payable written back Exchange Fluctuation Account (Net) Rent received TTTTTotalotalotalotalotal 37,359,715 22,069,429 3,051,499 3,157,312 15,884,372 22,071,631 2,631,572 65,637,955 473,950 41,061,525 332,441,106 332,441,106 332,441,106 332,441,106 332,441,106 203,049,937 203,049,937 203,049,937 203,049,937 203,049,937 17,485,876 1,487,982 10,053,900 - - - 29,027,758 29,027,758 29,027,758 29,027,758 29,027,758 1,681,501 3,550,504 - 128,861 869,400 617,068 6,847,334 6,847,334 6,847,334 6,847,334 6,847,334 51 Subex Azure Limited (formerly Subex Systems Limited) SCHEDULES TO THE PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED SSSSSchedule - M chedule - M chedule - M chedule - M chedule - M Direct cost a. Purchased systems & solutions (Increase)/ decrease in finished goods Opening stock - finished goods Closing stock - finished goods b. Commission on sales TTTTTotalotalotalotalotal Schedule - N Schedule - N Schedule - N Schedule - N Schedule - N Personnel costs Salaries, wages & allowances Contribution to provident fund and other funds Other staff related costs Sub contract charges TTTTTotalotalotalotalotal Schedule - O Schedule - O Schedule - O Schedule - O Schedule - O Other operating, selling and administrative expenses Other operating, selling and administrative expenses Other operating, selling and administrative expenses Other operating, selling and administrative expenses Other operating, selling and administrative expenses Software purchases Rent Power, fuel and water charges Repairs & maintenance others Insurance Communication costs Printing & stationery Travelling & conveyance Directors sitting fees Rates & taxes including filing fees Advertisement & business promotion Consultancy charges Bad Debts written off Warranty expenses Provision for doubtful debts Loss on sale of assets & assets written off (Net) Exchange Fluctuation Account (Net) Miscellaneous expenses TTTTTotalotalotalotalotal Schedule - P Schedule - P Schedule - P Schedule - P Schedule - P Financial costs Interest on fixed loans Other interest & bank charges TTTTTotalotalotalotalotal 62,589 - 3131313131ststststst March, 2006 2006 March, March, 2006 March, 2006 2006 March, 3131313131ststststst March, 2005 2005 March, March, 2005 March, 2005 2005 March, Amount in Rs. 76,932,834 31,751,699 62,589 55,854,843 132,850,266 132,850,266 132,850,266 132,850,266 132,850,266 321,347,918 8,163,941 20,027,863 596,592,061 946,131,783 946,131,783 946,131,783 946,131,783 946,131,783 1,496,013 30,415,017 6,207,953 4,213,304 2,099,094 20,332,862 1,376,270 70,443,729 27,500 962,070 16,120,996 20,909,065 135,104 2,683,362 35,583,448 - 853,205 8,913,717 222,772,709 222,772,709 222,772,709 222,772,709 222,772,709 - 26,419,291 26,419,291 26,419,291 26,419,291 26,419,291 26,419,291 138,025 62,589 75,436 383,824 32,210,959 32,210,959 32,210,959 32,210,959 32,210,959 166,374,038 4,737,399 16,765,149 487,854,199 675,730,785 675,730,785 675,730,785 675,730,785 675,730,785 1,047,017 11,882,243 3,418,257 3,310,730 1,459,299 10,347,307 1,075,134 40,360,808 32,500 3,787,731 15,407,617 5,073,993 448,425 - 4,295,276 277,467 - 5,444,266 107,668,070 107,668,070 107,668,070 107,668,070 107,668,070 1,126,721 23,089,555 24,216,276 24,216,276 24,216,276 24,216,276 24,216,276 52 Schedule – R Schedule – R Schedule – R Schedule – R Schedule – R I.I.I.I.I. Significant accounting policies Significant accounting policies Significant accounting policies Significant accounting policies Significant accounting policies I.1. Basis for preparation of financial statements The financial statements have been prepared under the historical cost convention in accordance with the applicable Accounting Principles in India, the Accounting Standards issued by the Institute of Chartered Accountants of India and the relevant provisions of the Companies Act, 1956, as adopted consistently by the company. Revenues are recognised and expenses accounted on their accrual, including provisions/ adjustments for committed obligations and amounts determined as payable or receivable during the year. I.2. Use of estimates The preparation of the financial statements in conformity with India GAAP requires that management makes estimates and assumption that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities as at the date of the financial statements and the reported amount of revenue and expenses during the reported period. Actual results could differ from those estimates. I.3. Revenue recognition Sales are recognised on the dispatch of goods to customers and are recorded net of discounts, rebates for price adjustment, rejections, shortages in transit, taxes and duties but include wherever applicable, export incentives. Revenue from software development is recognised on the basis of chargeable time or achievement of prescribed milestones as relevant to each contract. Contracts for sale of software licences include fees for transfer of software licences (which normally coincides with delivery), installation and commissioning. Activities relating to installation and commissioning involve minimal time and cost and are not subject to uncertainties. Revenues from composite contracts wherein fees for software licenses and implementation/ commissioning fees are not identifiable separately are recognized on transfer of the software licenses and a provision is made for the estimated costs relating to the installation and commissioning. In the case of contracts, where the fees for software licenses and implementation costs are identified separately, revenues from software licenses are recognized on transfer of software licenses and revenues from implementation are recognized on completion of implementation and commissioning. Interest on investments and deposits are booked on a time proportion basis taking into account the amounts invested and the rate of interest. Agency commission is accrued on shipment of consignment by principal. Maintenance and service income is recognised on accrual basis. I.4. Fixed assets Fixed assets are stated at cost of acquisition inclusive of freight, duties, taxes and interest on borrowed money allocated to and utilised for fixed assets up to the date of capitalisation and other direct expenditure incurred on ongoing projects. Assets acquired on hire purchase are capitalised at gross value and interest thereon is charged to revenue. I.5. Depreciation Fixed assets are depreciated using the straight-line method over Subex Azure Limited (formerly Subex Systems Limited) the useful lives of assets. Depreciation is charged on pro-rata basis for assets purchased/ sold during the year. The rates of depreciation adopted on the assets of the company are as under Particulars Plant & machinery Computers Vehicles Furniture & fixtures Intangible assets Goodwill Depreciation Rates 20.00 % 25.00 % 20.00 % 20.00 % 20.00 % 20.00 % Individual assets costing less than Rs. 5,000 are depreciated in full, in the year of purchase. I.6. Inventories Inventories are valued at lower of cost or net realizable value, after providing for cost of obsolescence and other anticipated losses, wherever considered necessary. Cost includes the aggregate of all expenditure incurred in bringing the inventories to the present condition and situation. I.7. Employee Stock Option Plans For the shares granted/ allocated under Employee Stock Option Plan - I (ESOP - I), the Securities Exchange Board of India (SEBI) guidelines are not followed, since the scheme was formulated prior to the promulgation of the guidelines. Employee stock options under Employees Stock Option Plan - II (ESOP - II) are accounted in accordance with the guidelines stipulated by SEBI. The difference between the market price of the shares underlying the options granted on the date of grant of option and the option price is expensed as “Employees’ Compensation” over the period of vesting. Company has floated ESOP III in the current financial year which is on the same lines as ESOP II. I.8. Retirement benefits to employees The company’s liability towards retirement benefits in the form of provident fund is fully provided and charged to expenditure. The company has entered into an agreement with LIC of India for managing the gratuity liability through a fund, the premium for which is funded by the company and charged to expenditure on accrual basis. Leave encashment benefits is accounted for an estimated liability as at the date of the balance sheet. I.9. Research and development Expenses incurred on research and developments are charged to revenue in the same year. Fixed asset purchased for research and development are capitalized and depreciated as per the company’s policy. I.10. Foreign currency transactions and translation Transactions denominated in foreign currencies are recorded at the exchange rates prevailing on the date of the transaction. Monetary items denominated in foreign currencies at year end are restated at the exchange rate prevailing on the date of the Balance Sheet. Exchange differences on settlement/restatement of foreign currency transactions relating to fixed assets are adjusted to the cost of the respective assets. Exchange differences relating 6 0 - 5 0 0 2 t r o p e R l a u n n A 53 Subex Azure Limited (formerly Subex Systems Limited) to other transactions are charged to the profit and loss account. Premium or discount on forward contracts is amortised over the life of such contract and is recognized as income or expense, except in respect of the liabilities for the acquisition of fixed assets, where such amortization is adjusted in the carrying cost of the fixed assets. Any profit or loss arising on cancellation or renewal or retirement of forward contract is recognized in profit and loss account / other accounts as appropriate. Assets (other than fixed assets) and liabilities of the foreign branches are translated into Indian rupees at the rate of exchange prevailing as at the Balance Sheet date. Fixed assets of foreign branches are restated at the exchange rate prevailing on the date of the transaction. Revenue and expenses are translated into Indian rupees at yearly average exchange rates prevailing during the year. I.11. Investments Long term Investments are stated at cost. Diminution in the value of investments other than temporary in nature is provided for. I.12. Income Taxes Income Tax comprises the current tax provision under the tax payable method and the net change in the deferred tax asset or liability in the year. Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying values of the assets and liabilities and their respective tax bases. Deferred tax assets are recognized and carried forward to the extent that there is a reasonable/virtual certainity that sufficient future taxable income will be available against which such deferred tax assets can be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be received or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the income statement in the period of enactment of the change. I.13. Cash Flow Statement Cash flow statement has been prepared in accordance with the indirect method prescribed in Accounting Standard 3, issued by the Institute of Chartered Accountants of India. I.14. Securities issue expenses Expenses incurred during the Initial Public Offer, follow on offer and issue of bonus shares are amortised over 5 years. Other issue expenses are charged to the securities premium account. I.15. Provisions A provision is recognized when an enterprise has a present obligation as a result of past event; it is probable that an outflow of resources will be required to settle the obligation, in respect of which a reliable estimate can be made. Provisions are not discounted to its present value and are determined based on best estimate required to settle the obligation at the balance sheet date. These are reviewed at each balance sheet date and adjusted to reflect the current best estimates. II.II.II.II.II. Notes to accounts Notes to accounts Notes to accounts Notes to accounts Notes to accounts II.1. Deferred income taxes 54 a) Provision for income taxes has been made in terms of Accounting Standard 22 “Accounting for Taxes on Income”. Deferred tax assets are subject to a valuation allowance that reduces the amount recognized to that which is more likely than not to be realized. Movement in deferred tax asset (Liability) Net deferred tax asset/ (liability) at beginning of the year Add: Tax benefits/ (charge) for current year Net deferred tax asset/ Net deferred tax asset/ Net deferred tax asset/ Net deferred tax asset/ Net deferred tax asset/ (liability) at end of the year (liability) at end of the year (liability) at end of the year (liability) at end of the year (liability) at end of the year 2005-06 2004-05 3,975,809 (1,570,000) 3,936,191 5,545,809 7,912,000 7,912,000 7,912,000 7,912,000 7,912,000 3,975,809 3,975,809 3,975,809 3,975,809 3,975,809 b) The net deferred tax asset as at 31st March, 2006 comprises the tax impact arising from the timing differences on account of: As at 31st March, 2006 31st March, 2005 As at - Depreciation 7,912,000 3,975,809 II.2. Contingent liabilities Debts factored – Rs. 389,264,166 (Previous year, Rs. 218,862,500) Claims against the company not acknowledged as debt – Rs. 9,352,609 (Previous year: NIL) (This relates to Income Tax matter relating to FY 2002-03. The demand is being disputed by the company.) II.3. Investment in Subex Technologies, Inc.USA. The management has received an independent valuation of the subsidiary, which indicates that there is no decline in the value of the investment. II.4. Acquisition of Tangible and Intangible Assets – Lightbridge Inc and Alcatel, UK During 2004-05, the company acquired Intellectual Property Rights comprising of technology, know how, source code and software connected with the Fraud Management software businesses from Alcatel, UK and Lightbridge, USA for an amount of Rs. 172,812,313 and Rs. 141,685,665 respectively, including expenses incurred in connection with the said acquisitions. During the year an amount of US$ 25,307 (Rs.1,102,753) has been paid to Lightbridge as additional consideration and is capitalized as Goodwill. The intangible assets based on the valuation report by independent valuers, are being amortised over 5 years in accordance with the company’s assessment of useful life thereof. Accordingly, an amount of Rs. 62,502,860 has been amortised in the financial year under review. Out of the amount of Rs. 172,812,313 accounted for the Alcatel acquisition, a portion of the consideration amounting to Rs. 22,754,000 (Euros 400,000) was to be discharged by way of discounts allowable to Alcatel on sales of software licenses prospected by them over a period of 18 months commencing from 1st October, 2004, as a part of their obligations under the reseller agreement entered into with the company. This liability, reflected as deferred payment liability in the previous year’s Balance sheet, has been fully discharged by the company during the year. II.5 Foreign Currency Convertible Bonds (FCCB) During the year 2004-05, the company issued Foreign Currency Convertible Bonds (FCCBs) aggregating to US$ 10 million to Institutional Investors to finance the above acquisition. The Bonds carried interest of 200 basis points above 6-month LIBOR and were redeemable by December 2009, if not converted in to equity as per terms of issue In the previous year FCCB’s amounting to US$ 5,150,000 were converted at a price of Rs.300 per share. The balance amount of FCCBs amounting to US$ 485,000 have been converted during the year at the same price. II.6 Subex Technologies Ltd (STL) has been incorporated on 28th March, 2005 with the objective of pursuing software service business. The subscribed Share Capital of the company is Rs.100 lacs. This is a wholly owned domestic subsidiary of Subex Systems Limited. II.7 Acquisition of Tangible and Intangible Assets –Mantas Inc The company acquired business contracts, hardware, intellectual property rights (comprising of trademarks, patents, copyrights and software) connected with the fraud management software businesses from Mantas, Inc. USA in an all cash deal of US$ 2.l0 million, on 1st March, 2006. The same has been capitalized along with the expenses incurred in connection with the said acquisition. The intangible assets accounted for based on the valuation report by independent valuers, are being depreciated over 5 years in accordance with the company’s assessment of useful life thereof. Accordingly, an amount of Rs.1,696,053 has been amortised in the financial year under review. II.8 On 9th April, 2006, the company has issued Global Depository Receipts (GDRs) priced at Rs. 400 per GDR and representing one share each, amounting to US$ 10 million, which has been listed in the Luxembourg Stock Exchange. Consequent to the issue, subscribed equity share capital has gone up by 1,109,878 shares and this issue has resulted in accretion to the securities premium account by Rs. 432,852,420 post the balance sheet date. II.9 Bonus issue During the year, the company has declared bonus shares in the ratio of 1:1. The bonus shares (10,878,784) have been issued by capitalizing an amount of Rs.108,787,840 from the Securities premium account. II.10 Operating leases 6 0 - 5 0 0 2 t r o p e R l a u n n A Subex Azure Limited (formerly Subex Systems Limited) As of 31st March, 2006 future minimum lease payments for non- cancellable operating leases for the next five fiscal years are: Amount in Rs. For the year ending 31st March, 2006 31st March, 2005 Within one year from 18,281,307 8,107,127 Due in a period between one year and five years from 44,188,721 15,980,935 Due after five years from — — II.11. Employees Stock Option Plan (ESOP) ESOP – I The Company had issued 120,000 Equity Shares at Rs.10 each to Subex Foundation, an employee welfare Trust, constituted to operate an Employees Stock Option Plan. Consequent to the issue of Bonus Shares in earlier years, the total shares available with the trust had increased to 240,000. As per the Scheme in force, the trust allocates shares to those employees deemed eligible by the advisory Board constituted for the purpose. The shares are allocated at a price, which is not less than 50% of the fair market price. The original Shares granted are subject to a minimum lock-in period of three years and the bonus shares are subject to a minimum lock-in of 1 year, where after the shares granted can be sold/en-cashed. As at 31st March, 2006,174,440 shares (which includes 87,220 bonus shares allotted on 6th January, 2006) are available with the trust. Since the scheme was formulated prior to the promulgation of SEBI guidelines on ESOP dated 19th June, 1999, the company has discontinued the scheme. ESOP – II During 1999-2000, the Company established a Stock Option Scheme under which 500,000 options have been allocated for grant to the employees. Each option comprises of one underlying equity share of Rs.10 each and carries an entitlement of bonus shares if and when declared. This scheme has been formulated in accordance with the SEBI guidelines on ESOP & ESPS dated 19th June, 1999. As per the scheme, the compensatory committee grants the options to the employees deemed eligible by the Advisory Board constituted for the purpose. The options are granted at a price, which is not less than 85% of the average market price of the underlying shares based on the quotation on the Stock Exchange where the highest volume of shares are traded for 15 days prior to the date of grant. The shares granted vest over a period of 1 to 4 years and can be exercised over a maximum period of 3 years from the date of vesting. Under this scheme 476,902 option have been granted to 310 employees as at 31st March, 2006. Out of the above options 70,323 options have been vested. The difference between the market price of the share underlying the options granted on the date of grant of option and the exercise price of the option are expensed over the vesting period as per the SEBI guidelines. The net impact of the movement in option grants during the period ended resulted in a debit of Rs. 4,910,159 (previous year: debit of Rs. 1,744,455) to the Profit & Loss account for the year. ESOP – III The company has various operating leases for office facilities and residential premises for employees which include leases that are renewable on a yearly basis, cancelable at its option and other long term leases. Rental expenses for operating leases included in the Income statement for the year is Rs. 30,415,017 (Previous year, Rs. 11,882,243). During 2005-2006, the company established a new stock option scheme under which 500,000 options have been allocated for grant to the employees. Each option comprises of one underlying equity share of Rs.10 each. This scheme has been formulated in accordance with the SEBI guidelines on ESOP & ESPS dated 19th June, 1999. As per the scheme, the compensatory committee grants 55 Subex Azure Limited (formerly Subex Systems Limited) the options to the employees deemed eligible by the advisory board constituted for the purpose. The options are granted at a price, which is not less than 85% of the average market price of the underlying shares based on the quotation on the stock exchange where the traded volume is the highest for the 15 days prior to the date of grant. The shares granted vest over a period of 1 to 4 years can be exercised over a maximum period of 3 years from the date of vesting. As on 31st March, 2006, 70,380 options have been granted to 156 employees under this scheme. The difference between the market price of the share underlying the options granted on the date of grant of option and the exercise price of the option are expensed over the vesting period as per the SEBI guidelines. The net impact of the movement in option grants during the period ended resulted in a debit of Rs. 497,664 (previous year: Nil) to the Profit & Loss account for the year. Fair Value Methodology The fair value of options used to compute pro forma net income and earnings per equity share have been estimated on the date of grant using Black-Scholes model. The key assumptions used in Black-Scholes model for calculating fair value are: risk-free interest rate of 6.43%, expected life : 3 years, expected volatility of shares : 55.80% and expected divi- dend yield: 0.42%. The variables detailed herein represent the average of the assumptions during the pendency of the grant dates. The impact on the EPS of the company if fair value method is adopted is given below. Particulars 31st March,2006 Rs. 391,495,980 Employees stock options details as on the balance sheet date are ; Net Profit (as reported) ESOP – I : Nil ESOP – II : As at 31st March, 2006 31st March 2005 As at Options outstanding at the beginning of the year Granted Forfeited/ cancelled Exercised 336,385 144,000 50,950 65,408 301,440 101,800 32,749 34,106 Balance at end of the year Balance at end of the year Balance at end of the year Balance at end of the year Balance at end of the year 364,027 364,027 364,027 364,027 364,027 336,385 336,385 336,385 336,385 336,385 ESOP – III Add: Stock-based employee compensation relating to grants after 1st April, 2005 3,516,774 Less: Stock based compensation expenses determined under fair value based method for the above grants (11,181,604) Net Profit (proforma) 383,831,150 Basic earning per share (as reported) Basic earning per share (proforma) Diluted earning per share (as reported) Diluted earning per share (proforma) 18.23 17.87 18.13 17.78 Options granted during the year and outstanding at the end of the year - 70,380 II.12. Related party information A) Related parties Method used for accounting for share based payment plan: Wholly Owned Subsidiaries controlled by the Company: The company has used intrinsic value method to account for the compensation cost of stock option to employees of the company. Intrinsic value is the amount by which the quoted market price of the underlying share exceeds the exercise price of the option Subex Technologies Inc., USA Subex Technologies Ltd, India Particulars Options (Nos) Weighted average exercise price per stock options (Rs.) Options outstanding at the beginning of the year 336,385 168.52 Granted during the year ESOP - II ESOP - III Exercised during the year 144,000 70,380 65,408 442.80 342.55 Cancelled & Lapsed during the year 50,950 Options outstanding at the end of the year ESOP – II ESOP - III Options exercisable at the end of the year 364,027 70,380 70,323 284.25 342.55 56 The Company issued 10,878,784 bonus shares with a record date of 6th January, 2006. The options under ESOP III totaling to 70,380 options were granted on 13th March, 2006, (post issue of Bonus shares referred above). Subex Azure Limited (formerly Subex Systems Limited) Companies under same management Key Management Personnel Cellcomm Solutions Ltd (formerly known as Subex Cellcomm Ltd) Subex Holdings Private Limited (SHPL) Subash Menon, Chairman & Managing Director Sudeesh Yezhuvath, Wholetime Director B) Details of the transactions with the related parties other than employees who are related to the Directors of the Company is as under: e of Trrrrransaction ansaction ansaction e of T e of T Natur Natur ansaction Nature of T ansaction e of T Natur Natur Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Companies under same Companies under same Companies under same Companies under same Companies under same management management management management management Key Management Key Management Key Management Key Management Key Management Personnel Personnel Personnel Personnel Personnel 2005-06 2005-06 2005-06 2005-06 2005-06 2004-05 2004-05 2004-05 2004-05 2004-05 2005-06 2005-06 2005-06 2005-06 2005-06 2004-05 2004-05 2004-05 2004-05 2004-05 2005-06 2005-06 2005-06 2005-06 2005-06 2004-05 2004-05 2004-05 2004-05 2004-05 a) Purchase of services: i) ii) STI* STL** b) Inter Corporate Deposits received(SHPL) c) Interest paid on Inter Corporate Deposit(SHPL) d) Repayment of Inter Corporate Deposit /Loan (SHPL) e) Salary, perquisites & commission f) Amount due as at year end from 596,592,061 487,854,199 9,967,322 - - - - - - - - - i) ii) STI* STL** 104,173,846 85,017,124 11,533,049 283,079 g) Amount due as at year end to - - i) ii) STI* STL** h) Sharing of expenses related to services business (STL) see Note – 1 i) Commission paid on Service Business * STI = Subex Technologies, Inc. ** STL = Subex Technologies Ltd 168,451,255 121,703,879 1,490,772 4,225,051 1,164,280 - - - - - - - - - - - - - - - - - 325,000 187,702 2,073,508 - - - - - - - - - - 6 0 - 5 0 0 2 t r o p e R l a u n n A - - - - - - - 23,409,166 15,670,746 - - - - 10,000,000 4,975,500 - - - - - - Note –1 - Sharing of expenses is in relation to expenses borne by Subex Technologies Ltd towards software services business of Subex Systems Ltd as agreed between both companies. These have been accounted under depreciation, personnel cost and various heads included under Schedule -O II.13. Earnings per share: a) Basic Profits after tax Less: Dividend on preference shares & distribution tax Net profit available to equity shareholders – basic b) Diluted Profits after tax Add: Interest on FCCB Net profit available to equity shareholders – diluted Weighted average number of shares – basic Weighted average number of shares – diluted Earnings per share – basic Earnings per share – diluted A B C D E F B / E B / E B / E B / E B / E D / FD / FD / FD / FD / F 2005-06 2005-06 2005-06 2005-06 2005-06 391,495,980 - 391,495,980 2004-05 2004-05 2004-05 2004-05 2004-05 253,028,418 (5,288,001) 247,740,417 391,495,980 253,028,418 - 5,380,279 391,495,980 21,480,220 21,590,084 18.23 18.23 18.23 18.23 18.23 18.13 18.13 18.13 18.13 18.13 258,408,697 17,833,474 19,584,306 13.89 13.89 13.89 13.89 13.89 13.19 13.19 13.19 13.19 13.19 Earning per share has been recomputed for the previous year taking into account bonus issue during the current year. 57 Subex Azure Limited (formerly Subex Systems Limited) II.14. a. Managerial Remuneration to Managing Director and Whole-time Directors: Amount in Rs. Salary Contribution to Provident Fund Perquisites Commission (as computed below) Total Year ended March 31, 2006 Year ended March 31, 2005 11,694,610 1,402,896 311,660 10,000,000 23,409,166 7,035,509 638,571 496,666 7,500,000 15,670,746 b. Computation of Net Profit in accordance with Section 349 of the Companies Act, 1956 Profit before tax as per the Profit & Loss Account Add: Directors’ Sitting Fees Remuneration to Directors (including Commission) Less: Surplus on sale of Fixed Assets (Net) Profits for Computation of Directors’ Commission Maximum Remuneration of Whole-time Directors under provisions of the Companies Act, 1956 @ 10% Remuneration including commission, paid Maximum Commission to Non- Wholetime Directors under provision of the Companies Act, 1956 @ 1% Commission paid II.15. Auditors remuneration Miscellaneous expenditure includes remuneration to auditors: Audit fees ( inclusive of service tax) For tax matters Other Services Reimbursement of expenses Total II.16. Details of Warranty 2005-06 2005-06 2005-06 2005-06 2005-06 2004-05 2004-05 2004-05 2004-05 2004-05 422,226,426 261,097,437 27,500 24,609,166 32,500 16,470,746 24,636,666 10,053,901 436,809,191 43,680,920 23,409,166 4,368,090 1,200,000 16,503,246 (114,895) 277,485,788 27,748,579 15,670,746 2,774,858 800,000 Year ended 31st March, 2006 Year ended 31st March 2005 1,346,880 55,600 - 3,097 1,405,577 994,400 55,100 800,000 10,929 1,860,429 Year 2005-06 2004-05 Opening balance Additions During the year Utilisation / reversal during the year Closing balance 473,950 2,212,498 3,157,312 473,950 (473,950) (2,212,498) 3,157,312 473,950 Probable period of outflow in case of warranty is 6-12 months. II.17. Quantitative details None of the traded items are in excess of 10% of revenues and it is not practicable to give quantitative information in the absence of common expressible units. II.18. Others 1. The Company is availing non-fund based limits and overdrafts against lien on the fixed deposits. However, there are no loans outstanding as on 31st March, 2006. 58 2. Estimated amount of contracts, remaining to be executed on capital account and not provided for (net of advances paid) Rs.Nil (Previous year Rs. Nil). 3. Amount of Rs.300,627 represents the unclaimed dividend for the period from 1999-2006. No part thereof has remained unpaid or unclaimed for a period of seven years from the date they become due for payment requiring a transfer to the ‘Investor Education and Protection Fund’. 4. Personnel Cost for the year includes expenditure on research and development of Rs. 6,549,332 (Previous Year, Rs. 6,000,318). This is as certified by the management and relied on by the auditors. 5. Company has disposed of its land located at Yeshwantpur Industrial Area during the year for a sum of Rs.17,667,000 and has paid long term capital gains of Rs.2,003,792 on the profits arising from this transaction. 6. The company has entered into the following derivative instruments for the purposes of hedging the risks associated with foreign exchange exposures as at 31st March, 2006 : (a) Forward Exchange Contracts: Total Particulars US$ Buy/Sell Amount (INR) Option contracts (to the extent there is an unhedged foreign currency exposure) Subex Azure Limited (formerly Subex Systems Limited) b. Derivative Instruments F C (US$) Buy / Sell Rate Amount (INR) 300,000 100,000 100,000 500,000 600,000 200,000 200,000 Buy Buy Buy Sell Sell Sell 44.12 44.26 44.30 44.12 44.26 44.30 13,236,000 4,426,000 4,430,000 22,092,000 26,472,000 8,852,000 8,860,000 44,184,000 2,650,000 Buy 118,605,250 Total 1,000,000 The above disclosures have been made consequent to an announcement by the Institute of Chartered Accountants of India in December, 2005, which is applicable to the financial periods ending on or after 31st March, 2006. Therefore, figures for the previous year have not been disclosed. 7. Previous year’s figures have been regrouped to conform to the classifications for the current year. The year end foreign currency exposures that have not been hedged by a derivative instrument or otherwise are given below: Amounts receivable in foreign currency on account of: Export of goods Rs. Foreign currency 8,966,994 60,605,178 GBP 115,980 Euro 1,125,183 847,508,032 US$ 19,069,765 Amounts payable in foreign currency on account of: Import of goods and services Capital Imports [including Intangibles] Rs. Foreign currency 75,58,595 39,776,660 10,619,700 US$ 168,794 US$ 888,268 Euro 195,000 64,277,408 US$ 1,417,738 696,329 US$ 15,550 6 0 - 5 0 0 2 t r o p e R l a u n n A 59 Subex Azure Limited (formerly Subex Systems Limited) II.19. Other Information pursuant to Schedule VI of the Companies Act, 1956. CIF value of imports : CIF value of imports : CIF value of imports : CIF value of imports : CIF value of imports : Import of systems and solutions Capital goods Expenditure in foreign currency Expenditure in foreign currency Expenditure in foreign currency Expenditure in foreign currency Expenditure in foreign currency Traveling expenses Interest expense Consideration for acquired assets Product marketing expense and other expenditure incurred overseas for software development Earnings in foreign exchange Earnings in foreign exchange Earnings in foreign exchange Earnings in foreign exchange Earnings in foreign exchange Income from software development services and products on receipt basis Remittance in Foreign Currency on account of dividend Remittance in Foreign Currency on account of dividend Remittance in Foreign Currency on account of dividend Remittance in Foreign Currency on account of dividend Remittance in Foreign Currency on account of dividend Amount remitted during the year in foreign currency on account of dividends for the year No. of Non-resident shareholders for the year Shares held by non-resident shareholders on which dividend was due for the year 2005-06 2004-05 2003-04 2005-06 2004-05 2003-04 2005-06 2004-05 2003-04 Amount in Rs. YYYYYear ended YYYYYear ended ear ended ear ended ear ended ear ended ear ended ear ended ear ended ear ended March, 2006 31 31 31 31 31st st st st st March, 2005 3131313131st st st st st March, 2006 March, 2005 March, 2005 March, 2006 March, 2006 March, 2005 March, 2005 March, 2006 24,951,522 7,468,007 800,616 13,000,271 16,187,638 5,110,082 108,692,786 8,508,837 5,331,718 - 838,504,812 604,766,727 1,378,695,807 1,042,081,071 808,628 1,085,890 - 2 3 - 539,085 542,945 - - 547,645 463,780 - 3 4 - 547,645 231,890 Signature to the Schedules A – R Signature to the Schedules A – R Signature to the Schedules A – R Signature to the Schedules A – R Signature to the Schedules A – R Subash Menon Chairman & Managing Director Sudeesh Yezhuvath Wholetime Director V. Balaji Bhat Director Place : Bangalore Date : 25th April, 2006 Rajkumar C Company Secretary & Legal Counsel V. R. Suresh Rao General Manager - Accounts & Finance 60 Subex Azure Limited (formerly Subex Systems Limited) T AND COMPANYANYANYANYANY’S GENERAL BUSINESS PROFILE ’S GENERAL BUSINESS PROFILE ’S GENERAL BUSINESS PROFILE T AND COMP ANCE SHEET ABSTRATRATRATRATRACCCCCT AND COMP T AND COMP ANCE SHEET ABS BALBALBALBALBALANCE SHEET ABS ANCE SHEET ABS ’S GENERAL BUSINESS PROFILE ’S GENERAL BUSINESS PROFILE T AND COMP ANCE SHEET ABS COMPANYANYANYANYANY: SUBEX AZURE LIMITED : SUBEX AZURE LIMITED : SUBEX AZURE LIMITED COMP COMP : SUBEX AZURE LIMITED : SUBEX AZURE LIMITED COMP COMP YEAR : 2005-2006 YEAR : 2005-2006 YEAR : 2005-2006 YEAR : 2005-2006 YEAR : 2005-2006 I.I.I.I.I. Registration details Registration details Registration details Registration details Registration details Registration No. 1 6 6 6 3 State code Balance sheet date 3 1 - 0 3 - 2 0 0 6 II.II.II.II.II. Capital raised during the year (Rupees in thousands) Capital raised during the year (Rupees in thousands) Capital raised during the year (Rupees in thousands) Capital raised during the year (Rupees in thousands) Capital raised during the year (Rupees in thousands) Public issue Bonus issue - Rights issues 1 0 8 7 8 7 . 8 4 Private placements - Equity - Preference Preferential offer of shares under Employee Stock Option Plan* - Equity 0 8 - 6 5 4 III. III. III. III. III. Position of the mobilisation and development of funds (Rupees in thousands) Position of the mobilisation and development of funds (Rupees in thousands) Position of the mobilisation and development of funds (Rupees in thousands) Position of the mobilisation and development of funds (Rupees in thousands) Position of the mobilisation and development of funds (Rupees in thousands) Total liabilities 1 8 2 7 3 2 4 Total assets 1 8 2 7 3 2 4 Source of funds Source of funds Source of funds Source of funds Source of funds Paid up capital Secured loans 2 1 7 5 7 6 Share application money 1 1 1 1 9 Reserves & surplus 8 7 8 1 5 9 7 7 5 1 Unsecured loans Deferred tax liability - - 6 0 - 5 0 0 2 t r o p e R l a u n n A Application of funds Application of funds Application of funds Application of funds Application of funds Net fixed assets Net current assets Miscellaneous expenditure 3 9 1 6 0 9 Investments 1 1 0 9 7 8 5 Deferred tax assets - Accumulated lossess IVIVIVIVIV..... Performance of company (Rupees in thousands) Performance of company (Rupees in thousands) Performance of company (Rupees in thousands) Performance of company (Rupees in thousands) Performance of company (Rupees in thousands) Turnover Profit before tax Earnings per share from ordinary activities (basic) (Rs.) Interim dividend rate % Final dividend rate % 1 8 4 1 1 9 0 Total expenditure 4 2 2 2 2 6 Profit after tax 18.23 Earnings per share from ordinary activities (diluted) (Rs.) 1 5 1 0 3 1 8 0 1 8 7 9 1 2 - 1 4 1 8 9 6 4 3 9 1 4 9 6 18.13 V. Generic name of three principal products/ services of the company (As per monetary terms) Generic name of three principal products/ services of the company (As per monetary terms) Generic name of three principal products/ services of the company (As per monetary terms) Generic name of three principal products/ services of the company (As per monetary terms) Generic name of three principal products/ services of the company (As per monetary terms) Item code no. (ITC code no.) 8 5 / 2 4 Product C O M P U T E R S O F T W A R E Description *Issue of shares arising of the exercise of option granted to employees under the company’s ESOP II (2000) Subash Menon Chairman & Managing Director Sudeesh Yezhuvath Wholetime Director V. Balaji Bhat Director Place : Bangalore Date : 25th April, 2006 Rajkumar C Company Secretary & Legal Counsel V. R. Suresh Rao General Manager - Accounts & Finance 61 Subex Technologies, Inc. 62 Financial Review Financial Review Financial Review Financial Review Financial Review echnologies, Inc. echnologies, Inc. Subex T Subex T echnologies, Inc. Subex Technologies, Inc. echnologies, Inc. Subex T Subex T Subex Technologies, Inc. O SUBSIDIARY CY CY CY CY COMPOMPOMPOMPOMPANYANYANYANYANY O SUBSIDIAR O SUBSIDIAR TING T , 1956, RELAAAAATING T TING T , 1956, REL ANIES ACTTTTT, 1956, REL , 1956, REL ANIES AC ANIES AC TION 212 OF THE COMP TION 212 OF THE COMP O SEC O SEC ANT T ANT T TEMENT PURSU STSTSTSTSTAAAAATEMENT PURSU TEMENT PURSU TING TO SUBSIDIAR TION 212 OF THE COMPANIES AC O SECTION 212 OF THE COMP ANT TO SEC TEMENT PURSUANT T O SUBSIDIAR TING T , 1956, REL ANIES AC TION 212 OF THE COMP O SEC ANT T TEMENT PURSU 1. Name of the subsidiary 2. Financial year ended 3. Holding company’s interest : Subex Technologies, Inc. : 31st March, 2006 : 100% in common stock 4. Shares held by the holding company in the subsidiary : 3,000 numbers of common stock fully paid, no par value 5. The net aggregate of profits or losses for the current financial year of the subsidiary so far as it concerns the members of the holding company dealt with or provided for in the acounts of the holding company a. Dealt with or provided for in the accounts of the holding company b Not dealt with or provided for in the accounts of the holding company : Rs. 2,539,218 : Nil 6. The net aggregate of profits or losses for previous financial years of the subsidiary so far as it concerns the members of the holding company a. Dealt with or provided for in the accounts of the holding company b. Not dealt with or provided for in the accounts of the holding company : Profit Rs. 2,539,218 : Nil Subash Menon Subash Menon Subash Menon Subash Menon Subash Menon Director ezhuvath ezhuvath Sudeesh Y Sudeesh Y ezhuvath Sudeesh Yezhuvath Sudeesh Y ezhuvath Sudeesh Y Director Place : Bangalore Date : 15th May, 2006 DIRECTORS’ REPORT DIRECTORS’ REPORT DIRECTORS’ REPORT DIRECTORS’ REPORT DIRECTORS’ REPORT Your directors have the pleasure in presenting the results of operations for the financial year 2006 Financial Results: Amount in Rs. 2006 2005 Total revenue Gross margin Income before taxes Net income 596,592,061 38,292,189 4,667,920 2,539,218 487,854,199 37,509,244 5,201,790 4,179,838 During the financial year 2005-06 your company’s revenue has gone up from US$ 10,842,595 to US$ 13,403,054, a growth of 23.61% Your Directors are confident of maintaining the growth level in the coming years. for Subex Technologies, Inc., Place : Bangalore Date : 15th May, 2006 Subash Menon Director Sudeesh Yezhuvath Director ANTSANTS OUNTOUNTANTS ANTSANTS OUNTOUNT TIFIED PUBLIC ACCCCCCCCCCOUNT TIFIED PUBLIC A TIFIED PUBLIC A T OF CER T OF CER REPOR REPOR T OF CERTIFIED PUBLIC A REPORT OF CER TIFIED PUBLIC A T OF CER REPOR REPOR Subex Technologies, Inc. Piscataway, New Jersey We have audited the accompanying balance sheets of Subex Technologies, Inc. as of 31st March, 2006 and 2005, and the related statements of income, retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material mis-statement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles 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 our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Subex Technologies, Inc. as of 31st March, 2006 and 2005, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Flackman, Goodman & Potter, P. A. Certified Public Accountants Place : Ridgewood, New Jersey Date : 24th April, 2006 6 0 - 5 0 0 2 t r o p e R l a u n n A 63 Subex Technologies, Inc. BALANCE SHEET FOR THE YEAR ENDED ASSETS ASSETS ASSETS ASSETS ASSETS CURRENT ASSETS Cash Accounts receivable Employee advances Other current assets TOTAL CURRENT ASSETS EQUIPMENT Equipment Furniture and fixtures Accumulated depreciation TOTAL EQUIPMENT OTHER ASSETS Goodwill Security deposit TOTAL OTHER ASSETS TTTTTOOOOOTTTTTAL AAL AAL AAL AAL ASSETS SSETS SSETS SSETS SSETS LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable Accrued expenses and payroll Corporate income tax payable Due to related entity TOTAL CURRENT LIABILITIES SHAREHOLDERS’ EQUITY Capital stock, no par value, 10,000 shares authorized, 3,000 shares issued and outstanding Additional paid in capital Retained earnings TOTAL SHAREHOLDER’S EQUITY AL LIABILITIES AND SHAREHOLDERS’ EQUITYYYYY AL LIABILITIES AND SHAREHOLDERS’ EQUIT AL LIABILITIES AND SHAREHOLDERS’ EQUIT TTTTTOOOOOTTTTTAL LIABILITIES AND SHAREHOLDERS’ EQUIT AL LIABILITIES AND SHAREHOLDERS’ EQUIT The accompanying notes are an integral part of the financial statements. 3131313131st st st st st March, 2006 March, 2006 March, 2006 March, 2006 March, 2006 3131313131st st st st st March, 2005 March, 2005 March, 2005 March, 2005 March, 2005 Amount in US$. 3,761,752 15,700 57,451 3,834,903 150,753 2,554 (132,145) 21,162 5,129,176 1,238 5,130,414 8,986,479 8,986,479 8,986,479 8,986,479 8,986,479 632,656 679,330 18,506 2,344,015 3,674,507 2,000 5,211,829 98,143 5,311,972 8,986,479 8,986,479 8,986,479 8,986,479 8,986,479 2,804,701 17,195 16,882 2,838,778 138,483 2,554 (113,063) 27,974 5,129,176 3,038 5,132,214 7,998,966 7,998,966 7,998,966 7,998,966 7,998,966 315,107 459,978 6,800 1,950,606 2,732,491 2,000 5,211,829 52,646 5,266,475 7,998,966 7,998,966 7,998,966 7,998,966 7,998,966 64 STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEAR ENDED REVENUES REVENUES REVENUES REVENUES REVENUES Consulting fees EXPENSES EXPENSES EXPENSES EXPENSES EXPENSES Reimbursement of expenses Salaries and wages Subcontracting expense Payroll expense Payroll tax expense Bank service charges Depreciation expense Bad debt expense Insurance expense Miscellaneous expense Office supplies and expense Postage and delivery Professional fees Rent Provision for taxes Telephone expense Travel and entertainment Recruiting and relocation expenses TOTAL EXPENSES NET INCOME RETAINED EARNINGS (ACCUMULATED DEFICIT) – beginning RETAINED EARNINGS – ending The accompanying notes are an integral part of the financial statements. Subex Technologies, Inc. 3131313131st st st st st March, 2006 March, 2006 March, 2006 March, 2006 March, 2006 3131313131st st st st st March, 2005 March, 2005 March, 2005 March, 2005 March, 2005 Amount in US$. 13,403,054 10,842,595 4,725 10,261,695 1,232,298 54,065 975,318 6,133 19,082 33,347 249,229 9,115 24,885 9,154 176,253 43,221 47,857 22,099 163,128 25,953 6 0 - 5 0 0 2 t r o p e R l a u n n A 15,226 7,887,325 1,399,287 42,273 669,893 3,525 11,185 - 274,908 32,187 17,585 6,861 135,751 45,368 26,482 14,720 167,814 11,335 13,357,557 10,761,725 45,497 52,646 98,143 80,870 (28,224) 52,646 65 Subex Technologies, Inc. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED CASH FLOWS FROM OPERATING ACTIVITIES Net income Non cash expenses included in net income: Depreciation Change in operating assets and liabilities: Accounts receivable Other assets Accounts payable Accrued expenses Other current liabilities NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets CASH FLOWS FROM FINANCING ACTIVITIES Paid in capital Advances from related entity NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES NET DECREASE IN CASH CASH – beginning of year CASH – end of year SUPPLEMENTAL DISCLOSURES Cash paid during the year for: Interest Income taxes The accompanying notes are an integral part of the financial statements. 3131313131st st st st st March, 2006 March, 2006 March, 2006 March, 2006 March, 2006 3131313131st st st st st March, 2005 March, 2005 March, 2005 March, 2005 March, 2005 Amount in US$. 45,497 19,082 (957,051) (37,274) 317,549 219,352 11,706 (381,139) (12,270) - 393,409 393,409 - - - 1,082 20,295 78,870 11,185 171,844 56,948 (287,901) 46,708 4,800 82,454 (10,463) (402,175) 330,184 (71,991) - - - - 17,204 66 NOTES TO FINANCIAL STATEMENTS 31st March, 2006 and 2005 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of operations Subex Technologies, Inc. “the Company” is a wholly owned subsidiary of Subex Systems Limited - India “the Parent”. The Company is a placement company for computer personnel and maintenance. Customers are located throughout the United States. Credit is granted to substantially all customers. Cash equivalents The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Accounts receivable - Recognition of bad debts The Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is provided. Property and equipment Property and equipment is stated at cost, less accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets as follows: Method Estimated useful life Equipment Declining balance 5 years Subex Technologies, Inc. assets can be recovered. If it is determined that the carrying value of goodwill will not be recovered from the undiscounted future cash flows of the acquired business, the carrying value of such intangible assets would be considered impaired and reduced by a charge to operations in the amount of the impairment. An impairment charge is measured any deficiency in the amount of estimated undiscounted future cash flows of the acquired business available to recover the carrying value related to the intangible assets. Based on this assessment, there was no impairment to goodwill. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain reclassifications have been made for the prior years’ financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings. 2. INCOME TAXES The (benefit) provision for income taxes for the years ended 31st March, 2006 and 2005 consists of current tax expense. 6 0 - 5 0 0 2 t r o p e R l a u n n A Furniture and Equipment Advertising costs Declining balance 5-7 years Federal State 2006 $32,018 15,839 $47,857 2005 $ 9,778 12,961 $22,739 Advertising costs are expensed as incurred. Advertising expense for the years ended 31st March, 2006 and 2005 was $0 and $0, respectively. Income taxes Deferred income taxes are recognized for differences between the basis of assets and liabilities for financial statement and income tax purposes. Deferred tax assets and liabilities represent future tax consequences of those differences that will either be taxable or deductible when the related assets and liabilities are recovered or settled. At 31st March, 2006 and 2005 there were no material temporary differences giving rise to deferred tax assets and liabilities. Goodwill Goodwill represents the purchase price and transaction costs associated with business acquisitions in excess of estimated fair value of the net assets of the business. The FASB issued SFAS No. 142, “Goodwill and Intangible Assets”. SFAS No. 142 eliminates the amortization of goodwill, requires annual impairment testing of goodwill and introduces the concept of indefinite life intangible assets. Management annually reviews the carrying value of goodwill to determine whether an impairment may exist. The Company considers relevant cash flow and profitability information, including estimated future operating results, trends, and other available information, in assessing whether the carrying value of intangible 3. EMPLOYEE BENEFIT PLAN The Company maintains a 401(k) Savings Plan for qualified employees. The terms of the plan define qualified employees as those over 21 years of age, with at least six months of service with the Company. Employee contributions are discretionary to a maximum of 15% of compensation. The Company matches 50% of the employees contributions up to 6% of compensation. 401(k) expenses for the years ended 31st March, 2006 and 2005 were $31,463 and $33,616, respectively. 4. DEBT The Company has available a revolving line of credit with a bank. Borrowings under this line of credit bear interest at the bank’s prime rate plus 1.0%. The outstanding balances at 31st March, 2006 and 2005 was $0 and $0, respectively. 5. RELATED PARTY The Company bills the parent company on a cost plus basis for manpower requirements. Revenue from parent company for the years ended 31st March, 2006 and 2005 was $13,403,054 and $10,842,595, respectively. The Company has advanced and received funds from SSL for working capital purposes. At 31st March, 2006 and 2005 the Company owed SSL (a branch of the parent) $2,344,015 and $1,950,606, respectively. 67 Subex Technologies, Inc. Accounts receivable at 31st March, 2006 and 2005 include $3,761,752 and $2,771,351 respectively due from the parent company. guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. The Company has not experienced any losses in such accounts. 6. CONCENTRATION OF CREDIT RISK 7. COMMITMENTS Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company controls credit risk through credit approvals, credit limits, and monitoring procedures. The Company generally does not require collateral to support accounts receivable. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are The Company leases office space under a four year lease expiring 31st December, 2006. Rent expense for the years ended 31st March, 2006 and 2005 was $43,221 and $45,367, respectively. Future minimum lease payments are as follows for the years ended March 31: 2007 $29,435 68 AUDITOR’S REPORT AUDITOR’S REPORT AUDITOR’S REPORT AUDITOR’S REPORT AUDITOR’S REPORT To The Board of Directors of Subex Technologies, Inc., Bangalore We have audited the attached balance sheet of SUBEX TECHNOLOGIES, INC (the ‘Company’) as at 31st March, 2006 and the related profit and loss accounts for the period ended on that date annexed thereto. These financial statements are prepared in United States of America and translated into Indian Rupees for the purpose of incorporation thereof in the consolidated financial statements of the ultimate holding company, Subex Systems Limited. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. 1. We conducted our audit in accordance with the auditing standards generally accepted in India. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material mis-statement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An Audit also includes assessing the accounting principles 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 our opinion. 2. We report that : We have obtained all the information and explanations, which to the best of our knowledge and belief, were necessary for the purpose of our audit. Subex Technologies, Inc. In our opinion, proper books of accounts as required by law, have been kept by the Company so far as appears from our examination of those books. The balance sheet and profit and loss account dealt with by this report are in agreement with the books of account. In our opinion the balance sheet and profit and loss account dealt with by this report have been prepared in compliance with the applicable accounting standards referred to in section 211(3C) of the Companies Act,1956. 3. In our opinion and to the best of our information and according to the explanations to us, the said accounts read with the notes thereon give in the prescribed manner, the information required by the Act and give a true and fair view in conformity with the accounting principles generally accepted in India. a. In the case of the balance sheet, of the state of affairs of the Company as at 31st March, 2006 b. In the case of the profit and loss account, of the loss for the period 31st March, 2006 Place: Bangalore Date: 15th May, 2006 For M/s. P. Chandrasekar & Co., Chartered Accountants 6 0 - 5 0 0 2 t r o p e R l a u n n A P. Chandrasekaran Partner Membership No. 26037 69 Subex Technologies, Inc. BALANCE SHEET AS AT SOURCES OF FUNDS : SHAREHOLDERS’ FUNDS : Share Capital Reserve and Surplus LOAN FUNDS : Secured Loans Unsecured Loans TTTTTOOOOOTTTTTALALALALAL APPLICATION OF FUNDS : FIXED ASSETS : Gross Block Less : Depreciation Net Block Capital work in progress DEFERRED TAX ASSET (Net): CURRENT ASSETS, LOANS & ADVANCES : Inventories Sundry Debtors Cash & Bank balances Loans & Advances Less: Current liabilities & Provisions Net Current Assets TTTTTOOOOOTTTTTALALALALAL NOTES ON ACCOUNTS 3131313131st st st st st March, 2006 March, 2006 March, 2006 March, 2006 March, 2006 3131313131st st st st st March, 2005 March, 2005 March, 2005 March, 2005 March, 2005 Amount in Rs. 87,070 318,339,908 318,426,978 87,070 315,874,202 315,961,272 - - 318,426,978 318,426,978 318,426,978 318,426,978 318,426,978 315,961,272 315,961,272 315,961,272 315,961,272 315,961,272 310,281,844 316,034,432 6,060,463 309,973,969 - - 168,451,255 - 3,306,017 171,757,272 163,304,263 309,973,969 315,564,961 5,283,115 310,281,844 - - 123,157,395 - 1,617,614 124,775,009 119,095,581 8,453,009 318,426,978 318,426,978 318,426,978 318,426,978 318,426,978 5,679,428 315,961,272 315,961,272 315,961,272 315,961,272 315,961,272 The Schedules referred to above form an integral part of the balance sheet In terms of our report of even date For M/s.P. Chandrasekar & Co., Chartered Accountants P. Chandrasekaran Partner Membership No. 26037 70 Place : Bangalore Date : 15th May, 2006 Subash Menon Director Sudeesh Yezhuvath Director PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED Subex Technologies, Inc. 3131313131st st st st st March, 2006 March, 2006 March, 2006 March, 2006 March, 2006 3131313131st st st st st March, 2005 March, 2005 March, 2005 March, 2005 March, 2005 Amount in Rs. INCOME : Consulting Fees TTTTTotalotalotalotalotal EXPENDITURE : Personnel Costs Other Operating, Selling and Administrative Expenses Financial Costs Depreciation TTTTTotalotalotalotalotal Profit Before Taxation Provision for taxation - Current - Deferred Profit After Taxation Add: Balance brought forward from Previous year Profit Available for Appropriation Surplus carried to Balance Sheet 2,128,702 - NOTES ON ACCOUNTS The Schedules referred to above form an integral part of the Profit & Loss Account 596,592,061 596,592,061 596,592,061 596,592,061 596,592,061 596,592,061 487,854,199 487,854,199 487,854,199 487,854,199 487,854,199 487,854,199 558,299,872 450,344,955 32,496,482 272,605 855,182 591,924,141 591,924,141 591,924,141 591,924,141 591,924,141 4,667,920 2,128,702 2,539,218 16,921,667 19,460,885 19,460,885 19,460,885 19,460,885 19,460,885 19,460,885 19,460,885 19,460,885 19,460,885 19,460,885 19,460,885 6 0 - 5 0 0 2 t r o p e R l a u n n A 31,632,964 158,423 516,067 482,652,409 482,652,409 482,652,409 482,652,409 482,652,409 5,201,790 1,021,952 4,179,838 12,741,829 16,921,667 16,921,667 16,921,667 16,921,667 16,921,667 16,921,667 16,921,667 16,921,667 16,921,667 16,921,667 16,921,667 1,021,952 - In terms of our report of even date For M/s.P. Chandrasekar & Co., Chartered Accountants P. Chandrasekaran Partner Membership No. 26037 Place : Bangalore Date : 15th May, 2006 Subash Menon Director Sudeesh Yezhuvath Director 71 Subex Technologies, Inc. SCHEDULES SCHEDULES SCHEDULES SCHEDULES SCHEDULES SIGNIFICANT ACCOUNTING POLICIES SIGNIFICANT ACCOUNTING POLICIES SIGNIFICANT ACCOUNTING POLICIES SIGNIFICANT ACCOUNTING POLICIES SIGNIFICANT ACCOUNTING POLICIES I.1. Basis for preparation of financial statements The Financial statements have been prepared under the historical cost convention in accordance with the applicable Accounting Principles in India, the Accounting Standards issued by the Institute of Chartered Accountants of India and the relevant provisions of the Companies Act, 1956, as adopted consistently by the Company. Revenues are recognized and expenses accounted on their accrual, including provisions/adjustments for committed obligations and amounts determined as payable or receivable during the year. I.2. Use of Estimates The preparation of the financial statements in conformity with India GAAP requires that management makes estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities as at the date of the financial statements and the reported amount of revenue and expenses during the reported period. Actual results could differ from those estimates. I.3. Revenue recognition For Contracts where the only deliverable is services, revenue is recognized based on effort certified by customers and on fulfillment of contractual obligations with customers. For other contracts which are milestone based, revenue is recognized based on proportionate contract completion method as prescribed by Institute of Chartered Accountants of India. I.4. Fixed Assets Fixed assets are capitalized at acquisition cost including directly attributable costs such as freight, insurance and specific installation charges for bringing the assets to its working condition for use. Assets acquired on hire purchase are capitalised at gross value and interest thereon is charged to revenue. I.5. Depreciation Fixed assets are depreciated using the W D V Method over the estimated useful lives of the asset. Equipment Furniture I.6. Employee Benefit Plan Method Useful Life WDV WDV 5 years 5 -7 Years The Company maintains a 401(k) savings plan for qualified employees. The terms of the plan define qualified employees as those over 21 years of age, with at least six months of service with the company. Employee contributions are discretionary to a maximum of 15% of compensation. The company matches 50% of the employee’s contributions up to 6% of Compensation. I.7. Foreign currency transactions and translation Transactions denominated in foreign currencies are recorded at the exchange rates prevailing on the date of the transaction. Monetary items denominated in foreign currencies at year end are translated at the exchange rate prevailing on the date of the Balance Sheet. Non monetary items denominated in foreign currencies are carried at cost. Exchange differences on settlement or restatement are adjusted in the profit & loss account. I.8. Income taxes Income Tax comprises the current tax provision under the tax payable method and the net change in the deferred tax asset or liability in the year. Deferred Tax Assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying values of the assets and liabilities and their respective tax basis. Deferred tax assets are recognized subject to management’s judgment that realization is virtually certain. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be received or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the income statement in the period of enactment of the change. I.9. Provisions A provision is recognized when an enterprise has a present obligation as a result of past event; it is probable that an outflow of resources will be required to settle the obligation, in respect of which a reliable estimate can be made. Provisions are not discounted to its present value and are determined based on best estimate required to settle the obligation at the balance sheet date. These are reviewed at each balance sheet date and adjusted to reflect the current best estimates. II. NOTES TO ACCOUNTS II.1. Deferred Income taxes Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be received or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the income statement in the period of enactment of the change. As at 31st March 2006 and 2005 there were no material temporary differences giving rise to deferred tax assets and liabilities. II.2. Related Party Information A) Related Parties Companies under same management Subex Systems Ltd B) Details of the transactions with the related parties other than employees who are related to the Directors of the Company are as under: 72 Subex Technologies, Inc. (Amounts in Rs.) e of Trrrrransaction ansaction ansaction e of T e of T Natur Natur ansaction Nature of T ansaction e of T Natur Natur Holding Company Holding Company Holding Company Holding Company Holding Company Companies under same Companies under same Companies under same Companies under same Companies under same management management management management management Key Management Key Management Key Management Key Management Key Management Personnel Personnel Personnel Personnel Personnel TTTTTotalotalotalotalotal ear ended YYYYYear ended ear ended ear ended ear ended ear ended YYYYYear ended ear ended ear ended ear ended YYYYYear ended ear ended ear ended ear ended YYYYYear ended ear ended ear ended ear ended YYYYYear ended ear ended ear ended ear ended YYYYYear ended ear ended ear ended ear ended YYYYYear ended ear ended ear ended YYYYYear ended ear ended ear ended ear ended ear ended ear ended ear ended ear ended ear ended ear ended ear ended 2005-06 2005-06 2005-06 2005-06 2005-06 2004-05 2004-05 2004-05 2004-05 2004-05 2005-06 2005-06 2005-06 2005-06 2005-06 2004-05 2004-05 2004-05 2004-05 2004-05 2005-06 2005-06 2005-06 2005-06 2005-06 2004-05 2004-05 2004-05 2004-05 2004-05 2005-06 2005-06 2005-06 2005-06 2005-06 2004-05 2004-05 2004-05 2004-05 2004-05 a) Sale of Services 596,592,061 487,854,199 b) Amount due to as at March 31,2006 b) Amount due from as at March, 31,2006 104,173,877 85,003,135 168,451,255 123,157,395 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil 596,592,061 487,854,199 Nil 104,173,877 85,003,135 Nil 168,451,255 123,157,395 1. Estimated amount of contracts, remaining to be executed on capital account and not provided for (net of advances paid) Rs.Nil (Previous year Rs. Nil). Signature to the Schedules A - J Signature to the Schedules A - J Signature to the Schedules A - J Signature to the Schedules A - J Signature to the Schedules A - J For M/s.P. Chandrasekar & Co., Chartered Accountants P. Chandrasekaran Partner Membership No. 26037 Place : Bangalore Date : 15th May, 2006 Subash Menon Director Sudeesh Yezhuvath Director 6 0 - 5 0 0 2 t r o p e R l a u n n A 73 Subex Technologies Limited 74 Financial Review Financial Review Financial Review Financial Review Financial Review echnologies Limited echnologies Limited Subex T Subex T echnologies Limited Subex Technologies Limited echnologies Limited Subex T Subex T Subex Technologies Limited Y COMPANYANYANYANYANY Y COMP Y COMP O SUBSIDIAR O SUBSIDIAR TING T , 1956, RELAAAAATING T TING T , 1956, REL ANIES ACTTTTT, 1956, REL , 1956, REL ANIES AC ANIES AC TION 212 OF THE COMP TION 212 OF THE COMP O SEC O SEC ANT T ANT T TEMENT PURSU STSTSTSTSTAAAAATEMENT PURSU TEMENT PURSU O SUBSIDIARY COMP TING TO SUBSIDIAR TION 212 OF THE COMPANIES AC O SECTION 212 OF THE COMP ANT TO SEC TEMENT PURSUANT T Y COMP O SUBSIDIAR TING T , 1956, REL ANIES AC TION 212 OF THE COMP O SEC ANT T TEMENT PURSU 1 Name of the subsidiary 2 Financial year ended 3 Holding company’s interest 4 Shares held by the holding company in the subsidiary 5 The net aggregate of profits or losses for the current financial year of the subsidiary so far as it concerns the members of the holding company dealt with or provided for in the acounts of the holding company : : : : Subex Technologies Limited 31st March, 2006 100% in equity shares 1,000,000 equity shares of Rs. 10 each fully paid a. Dealt with or provided for in the accounts of the holding company b Not dealt with or provided for in the accounts of the holding company : Nil : (Rs. 15,260,591) 6 The net aggregate of profits or losses for previous financial years of the subsidiary so far as it concerns the members of the holding company a. Dealt with or provided for in the accounts of the holding company b. Not dealt with or provided for in the accounts of the holding company : Nil : (Rs. 15,260,591) Subash Menon Subash Menon Subash Menon Subash Menon Subash Menon Director ezhuvath ezhuvath Sudeesh Y Sudeesh Y ezhuvath Sudeesh Yezhuvath Sudeesh Y ezhuvath Sudeesh Y Director 6 0 - 5 0 0 2 t r o p e R l a u n n A Place : Bangalore Date : 24th April, 2006 DIRECTORS’ REPORT To the members, Your directors have pleasure in presenting the financial results of the company for the period ended 31st March, 2006. FINANCIAL RESULTSTSTSTSTS FINANCIAL RESUL FINANCIAL RESUL FINANCIAL RESUL FINANCIAL RESUL (Rs. in million) For the period ended 31st March, 2006 Total Revenue Loss before Interest, Depreciation & Amortization Interest, Depreciation & Amortization Loss before tax Provision for taxes Loss after tax 12.26 (14.07) 0.77 (14.84) 0.42 (15.26) TIONS TIONS APPROPRIA APPROPRIA TIONS APPROPRIATIONS TIONS APPROPRIA APPROPRIA Interim Dividend Preference Dividend Dividend proposed a) on equity shares b) on preference shares Provision for tax on Dividends Transfer to General Reserve Surplus carried to Balance Sheet RESULTS OF OPERATIONS Nil Nil Nil Nil Nil Nil Nil Your company was incorporated on 28th March, 2005. During the period under review, your company has clocked a turnover of Rs. 12.26 million and a net loss of Rs. 15.26 million. Your Directors expect growth in the business of the company during the FY 2006-07. Under this scheme a corpus of 1,00,000 options was created for grant to the eligible employees. Each option is convertible into one fully paid-up equity share of Rs.10. As per the scheme the Compensation Committee grants options to the eligible employees. The options granted will be vested over a period of 1 to 4 years and can be exercised over a period of 3 years from the date of vesting. AUDITORS M/s. P. Chandrasekar & Co, the auditors retire at the ensuing Annual General Meeting and have confirmed their eligibility as per Sec 224 of the Companies Act, 1956 and their willingness to accept office, if re appointed. AUDITORS’ REPORT There were no qualifications observed in the auditors’ report for the Financial Year 2005-06. DIVIDEND In view of the losses, no dividend has been declared during the period under review. DIRECTORS Mr. Subash Menon, Mr. Sudeesh Yezhuvath and Mr. V. Balaji Bhat are the directors of the company. As per Regulation 89 of the Articles of Association of the company, Mr. Sudeesh Yezhuvath and Mr. V. Balaji Bhat, Directors, retire by rotation and being eligible, offer themselves for re-appointment. SHARE CAPITAL During the year the paid up share capital of the company has increased to Rs. 10 million from Rs.0.05 million. The additional shares were issued to Subex Azure Limited, the holding company. EMPLOYEE STOCK OPTIONS SCHEME SECRETARIAL COMPLIANCE CERTIFICATE Your company has introduced a Stock Option plan for its employees on 1st December, 2005. As required under section 383A of the Companies Act 1956, Secretarial Compliance Certificate issued by Ms. K. Padmavathi, Practicing Company Secretary is annexed to this report. 75 Subex Technologies Limited Name Designation Qualification Age Experience Dt of commencement Of Employment (No.of yrs) Remuneration received Previous Employment S.Ramakrishnan CEO B.E. 35 14 4th April, 2005 3,927,693.00 Tata Elxsi Ltd PARTICULARS OF EMPLOYEES Companies Act 1956, the Board of Directors affirms; As required under the provisions of section 217(2A) of the Companies Act, 1956 read with the Companies (Particulars of Employees) Rules, 1975, the names and other particulars of employees as given herewith. INFORMATION UNDER SECTION 217 (1)(e) OF THE COMPANIES ACT, 1956 READ WITH COMPANIES (DISCLOSURES OF PARTICULARS IN THE REPORT OF BOARD OF DIRECTORS) RULES, 1988 A CONSERVATION ENERGY The operations of your company are not energy-intensive. However, significant measures are taken to reduce energy consumption by using energy-efficient computers and by the purchase of energy-efficient equipment. Your company constantly evaluates new technologies and invests to make its infrastructure more energy-efficient. a) That in the preparation of the accounts for the year ending 31st March, 2006, the applicable accounting standards have been followed and there are no material departures there from. b) That the accounting policies have been selected and applied consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company as at 31st March, 2006 and of the profit of the company for the year ended on that date. c) That proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provision of the Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities. d) That the accounts for the period ended 31st March, 2006 has been prepared on a going concern basis. B TECHNOLOGY ABSORPTION, ADOPTION AND INNOVATION. APPRECIATIONS / ACKNOWLEDGEMENTS. Your company has not imported any technology. However, the telecommunications domain, in which your company operates, is subject to high level of obsolescence and rapid technological changes. Your company has developed inherent skills to keep pace with these changes. C FOREIGN EXCHANGE EARNINGS AND OUTGO Your company is focussed on servicing overseas clients in the software services sector. During the year 2005-06 total foreign exchange inflow and outflow is as follows: i) Foreign Exchange earnings Rs. 8.87 millions ii) Foreign Exchange outgo Rs. 2.97 millions DIRECTORS’ RESPONSIBILITY STATEMENT In accordance with the provision of Section 217(2AA) of the Your directors acknowledge and thank the co-operation and assistance received from the Central and State Government authorities & Banks for their consistent support to the company and look forward to their continued support in the future. Your directors also wish to place on record their deep appreciation to the employees at all levels for their hard work, solidarity, co- operation and support as they are instrumental in your company scaling new heights, year after year. Your involvement as shareholders is greatly valued. Your directors look forward to your continued support. for and On Behalf of the Board Place : Bangalore Date : 24th April, 2006 Subash Menon Director Sudeesh Yezhuvath Director ANNEXURE TO THE DIRECTORS’ REPORT ANNEXURE TO THE DIRECTORS’ REPORT ANNEXURE TO THE DIRECTORS’ REPORT ANNEXURE TO THE DIRECTORS’ REPORT ANNEXURE TO THE DIRECTORS’ REPORT COMPLIANCE CERTIFICATE CIN – U74140KA2005PLC035905 To, The Members M/S. SUBEX TECHNOLOGIES LIMITED I have examined the registers, records, books and papers of M/S. SUBEX TECHNOLOGIES LIMITED (the Company) as required to be maintained under the Companies Act, 1956, (the Act) and the Rules made there-under and also the provisions contained in the Memorandum and Articles of Association of the Company for the financial year ended 31st March, 2006. In my opinion and to the best of my information and according to the examinations carried out by me and explanations furnished to me by the Company, the officers and agents, I certify that in respect of the aforesaid financial year: 1. The Company has kept and maintained all registers as stated in Annexure ‘A’ to this Certificate as per the provisions of the Act and the Rules made there-under and recorded all necessary entries therein. 76 2. The Company has filed the forms and returns as stated in Annexure ‘B’ to this Certificate with the Registrar of Companies as required under the Act and the Rules made there-under. However, the Company has not filed any forms and returns with the Regional Director, Central Government, Company Law Board or other authorities since there was no requirement for the same as evidenced by the transactions executed by the Company during the year and as informed by the Company Management to me. 3. The Company being an Un-listed Public Limited Company, has the minimum prescribed Paid-up Share Capital and its maximum number of Members during the said financial year were Seven (7). 4. The Board of Directors duly met Seven (7) times on 30th March, 2005; 28th April, 2005; 9th June, 2005; 24th June, 2005; 28th July, 2005; 28th October, 2005 and 27th January, 2006 in respect of which Meetings, proper notices were given and the proceedings were properly recorded and signed in the Minutes Book maintained for the purpose. Further, during the year under certification, the Company has passed Circular Resolution and has confirmed the same at the Board Meetings held subsequent to the date of such passing and has been properly recorded and signed in the Minutes Book maintained for the purpose. 5. Being the first financial year, there was no occasion for the Company to close its Register of Members and hence violation of the provisions of Section 154 of the Act does not arise. 6. Current year being the very first financial year (date of Incorporation being 28th March, 2005), the Company did not hold any Annual General Meeting during the current year ended 31st March, 2006 and hence recording the Resolutions passed thereat in the Minutes Book maintained for the purpose does not arise. 7. The Company has held Two (2) Extraordinary General Meetings during the current financial year on 28th July, 2005 and 27th March, 2006 respectively, after giving due notice to the Members of the Company and the Resolutions passed thereat were duly recorded in the Minutes Book maintained for the purpose. 8. The Company has not advanced loans to its directors and/or persons, firms or companies referred to in Section 295 of the Act and hence, the provisions of Section 295 of the Act do not apply to the Company. 9. The Company has complied with the provisions of Section 297 of the Act in respect of contracts specified in that Section. 10. The Company has made necessary entries in the Register maintained under Section 301 of the Act to the extent applicable. 11. It has been observed that the Company had no occasion to obtain approvals for complying with the provisions of Section 314 of the Act during the year ended 31st March, 2006. 12. The Company did not issue any duplicate share certificates during the year under review. 13. The Company has: i. allotted fresh shares during the current year and has recorded transfer of shares in both cases, the Company has generally complied with the provisions of the Act. However, the Company has not received any Share Certificates for recording transmission and hence, delivering share certificates after transmission or any other purpose in accordance with the provisions of the Act do not arise; ii. The year of certification being the very first year of Company’s existence, the issue of declaration of final dividend does not arise. Further, the Company has not declared any interim dividend during the financial year 2005-06 and hence, depositing the amount of interim dividend in a separate Bank Account within statutory period prescribed therefor does not arise; iii. For the above-stated reason, payment/posting of dividend warrants or interim dividend warrants within a period of thirty days from the date of declaration, transfer of all unclaimed/unpaid dividend to unpaid dividend or interim dividend account of the Company in a separate Bank Account and other statutory obligations in connection therewith does not arise; iv. no amounts in unpaid dividend account, application money due for refund, matured deposits, matured debentures and interest accrued thereon which have remained unclaimed or unpaid for a period of seven years, and hence, transfer of such moneys to Investor Education and Protection Fund does not arise; v. as the current year being the first year of operation, compliance with the requirements of Section 217 of the Act during the year of certification did not arise. 14. The Board of Directors of the Company is duly constituted, and the year of certification being the very first year of Company’s existence, the provisions of Sections 255, 256 and 257 read with Article 88 of the Articles of Association of the Company in respect of retirement of Directors by rotation and filling of vacancy thereof do not apply. However, during the year under certification, fresh Subex Technologies Limited appointment of Directors, Additional Directors, Alternate Directors and Directors to fill casual vacancies have not been made. 15. The Company has not appointed and/or paid remuneration to Managing Director/Whole-time Director/Manager and hence, the provisions of Section 269 read with Schedule XIII of the Act with regard to appointment of Managing Director/Whole-time Director/ Manager and seeking approval of Central Government in respect of appointments not being in terms of Schedule XIII of the Act are not applicable to the Company. 16. The Company has informed that it did not appoint any sole- selling agents during the year under report. 17. From the transactions carried out by the Company during the year under certification, there was no occasion for the Company to obtain approvals of the Central Government, Company Law Board, Regional Director, Registrar of Companies or such other authorities as may be prescribed under various provisions of the Act. 18. The Directors have disclosed their interest in other firms/ companies to the Board of Directors pursuant to the provisions of the Act and the Rules made there-under. 19. The Company has issued Equity Shares during the financial year and has generally complied with the provisions of the Act. However, the Company has not issued Preference Shares, Debentures or any other form of Securities during the financial year and hence, complying with the provisions of the Act and the rules framed there under in relation thereto do not arise. 20. The Company has not bought back any shares during the financial year ending 31st March, 2006. 21. The Company has not issued any debentures and hence, redemption thereof during the year does not arise. 22. The Company has received a transfer request during the year under certification. However, as the Company has not declared any dividend, rights shares and bonus shares, keeping in abeyance rights thereto pending registration of transfer of shares does not arise. 23. The Company has accepted deposits which are exempt categories as per Section 58A of the Act read with the Companies (Acceptance of Deposit) Rules, 1975 during the year ending 31st March, 2006. Hence, compliance of the provisions of Sections 58A and 58AA read with the said Rules/applicable directions issued by the Reserve Bank of India/ any other authority in respect of deposits and filing copy of Advertisement/ Statement in lieu of Advertisement/ Return of Deposit/ necessary particulars as required with the Registrar of Companies/ Reserve Bank of India/ any other authority does not arise. 24. The Company has obtained necessary approvals of the shareholders to borrow loans beyond the aggregate of paid up share capital and Free Reserves of the Company pursuant to the provisions of Section 293(1)(d) of the Act, at the Extraordinary General Meeting held on 27th March, 2006 and have generally complied with the provisions of the Act. 25. The Company has neither made investments in other Companies nor has made loans or given guarantees or provided securities to other bodies corporate during the year under report and hence, the provisions of Section 372A of the Act do not apply. 26. The Company has not altered the provisions of Memorandum with respect to situation of the Company’s Registered Office from one State to another during the year under scrutiny. 27. The Company has not altered the provisions of Memorandum with respect to Objects of the Company during the year under scrutiny. 28. The Company has not altered the provisions of Memorandum 6 0 - 5 0 0 2 t r o p e R l a u n n A 77 Subex Technologies Limited with respect to Name of the Company during the year under scrutiny. 29. The Company has not altered the provisions of Memorandum with respect to Share Capital of the Company during the year under scrutiny. 30. The Company has not altered its Articles of Association during the year under scrutiny. 31. From the books, records, registers, papers, files etc., produced before me for the purposes of this certification, it may be stated that the Company has not received any show cause notices and also fines and penalties (except fixed rates of additional fees u/S 611(2) of the Companies Act, 1956, levied in respect of delayed submission of document/s as mentioned in Annexure ‘B’ to this Certificate) or any other punishment for alleged offences under the Companies Act, 1956 and no prosecution has been initiated against the Company under any of the provisions of the said Act. 32. From the records, it has been observed that the Company has not received any moneys as security from its employees during the year under certification and hence, depositing the same as per the provisions of Section 417(1) of the Act does not arise. 33. As per circular No. F. No. 8/58 (418)/ 63-PR issued by the Department of Company Affairs, where the provisions of the Employees Provident Fund Act, 1952 are applicable to the Provident Fund constituted by a Company, the provisions of Section 418 of the Act need not be complied with. Since the Company has registered itself under the Employees Provident Fund Act, 1952, the provisions of Section 418 of the Act are per se not applicable to the Company. However, based on the records, challans etc, produced before me, I state that the Company has been depositing employees’ and employer’s contribution to Provident Fund from the date of its applicability, with prescribed authorities. Place : Bangalore Date : 20th April, 2006 (K. Padmavathi) Practicing Company Secretary C.P.No : 3963 ANNEXURE ‘A’ ANNEXURE ‘A’ ANNEXURE ‘A’ ANNEXURE ‘A’ ANNEXURE ‘A’ No. Name of the Register 1 2 3 4 5 6 7 Register of Members Register of Directors, Managers & Secretary Register of Directors’ Shareholdings Register of Companies and Firms in which Directors, etc., are interested Register of Contract Board Meeting Minutes Book General Meeting Minutes Book Optional Registers & Books Maintained by the Company 1 2 3 4 Share Applications and Allotment Register Register of Share Transfer Register of Documents Sealed Directors’ Attendance Book Relevant sections 150 303 307 301(3) 297,299 & 301 193 193 75(1) & (2) ANNEXURE ‘B’ ANNEXURE ‘B’ ANNEXURE ‘B’ ANNEXURE ‘B’ ANNEXURE ‘B’ Forms and Returns filed by the Company during the financial year ending on 31st March, 2006 A. With Registrar of Companies (in addition to Incorporation documents): No. Name of the documents with relevent section numbers Date of document Whether filed within Whether filed after the expiry the specified period of specified period with additional fees Date of filing 1 2 3 4 5 6 Form III u/S 187-C in respect of Beneficial Interest Statement in Lieu of Prospectus in Schedule-III u/S 70 Form No. 20 u/S 149(2)(c) in respect of Declaration of Compliance Form No. 22 u/S 165 in respect of Statutory Report Form No. 2 u/S 75(1) in respect of Allotment of Equity Shares Form III u/S 187-C in respect of Beneficial Interest 28th March, 2005 25th April, 2005 25th April, 2005 27th June, 2005 28th October, 2005 15th November, 2005 NO YES YES NO YES YES YES N.A. N.A. YES N.A. N.A. 1st June, 2005 6th May, 2005 6th May, 2005 4th July, 2005 24th November, 2005 28th November, 2005 B. C. D. With Regional Director, Central Government, Company Law Board or Other Authorities: Documents Pertaining to Previous Year, filed during the Current Year: NONE Documents filed with other Authorities, as referred to in the Certificate: NONE NONE 78 Place : Bangalore Date : 20th April, 2006 (K. Padmavathi) Practicing Company Secretary C.P.No : 3963 AUDITOR’S REPORT AUDITOR’S REPORT AUDITOR’S REPORT AUDITOR’S REPORT AUDITOR’S REPORT To The Shareholders, Subex Technologies Limited, Bangalore We have audited the attached Balance Sheet of SUBEX TECHNOLOGIES LIMITED as at 31st March, 2006 and also the Profit and Loss Account for the year ended on that date annexed thereto. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in India. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An Audit also includes assessing the accounting principles 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 our opinion. As required by the companies (Auditors Report) order, 2003, issued by the Company Law Board in terms of Section 227(4A) of the Companies Act, 1956, we give in the Annexure, a statement on the matters specified in paragraph 4 & 5 of the said Order, to the extent applicable to the Company. Further to our comments in the annexure attached hereto, we report that: 1. We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit ANNEXURE TO AUDIT REPORT ANNEXURE TO AUDIT REPORT ANNEXURE TO AUDIT REPORT ANNEXURE TO AUDIT REPORT ANNEXURE TO AUDIT REPORT (i) (a) The company is maitaining proper records showing full particilars, including quantitativ details and situation of fixed assets. (b) These fixed assets have been physically verified by the management at reasonable intervals and no material discrepancies were noticed on such verification. (c) No substantial part of fixed assets have been disposed off during the year, to effect the going concern. (ii) (a) The Company has not granted, secured or unsecured loans to companies, firms or other parties covered in the register maintained under section 301 of the Act. (b) The Company has taken interest free unsecured loans from one companies, firms or other parties covered in the register maintained under section 301 of the Act from one part amounting to Rs. 115.33 Lakhs and the term and conditions of loan taken by the company, unsecured, are prima facie not prejudicial to the interest of the company. There ia no amount overdue for more than Rupees One Lakh. (iii) In our opinion and according to information and explanations given to us, there are adequate internal control procedures commensurate with the size of the company and the nature of its business, for the purchase of inventory and fixed assets and for the sale of goods and there os no continuing failure to correct major weaknesses in internal control. Subex Technologies Limited 2. In our opinion proper books of accounts as required by law have been kept by the Company, so far as appears from our examination of those books 3. The balance sheet and profit and loss account dealt with by this report are in agreement with the books of account 4. In our opinion the balance sheet and profit and loss account comply with the accounting standards referred to in subsection (3C) of Section 211 of the Companies Act,1956 5. In our opinion and to the best of our information and according to the explanations given to us, none of the Directors of the Company are disqualified from being appointed as Directors under clause (g) of sub section (1) of Section 274 of the Companies Act, 1956. 6. In our opinion and to the best of our information and according to the explanations given to us, the said accounts read together with the notes thereon, and other notes, give the information required by the Companies Act, 1956 in the manner so required, and give a true and fair view in conformity with the accounting principles generally accepted in India a. In the case of the Balance Sheet, of the state of affairs of the Company as at 31st March, 2006 b. In the case of the Profit and Loss Account, of the Loss of the Company for the period ended on that date. 6 0 - 5 0 0 2 t r o p e R l a u n n A Place : Bangalore Date : 24th April, 2006 for M/s.P. Chandrasekar Chartered Accountants Lakshmy Chandrasekaran Partner Membership No. 28508 (iv) (a) All transactions that need to be entered into a register in pursuance of section 301 of the Act have been so entered. However we were informed by the management, the above provisions are not applicable to the company. (b) In our opinion and according to the information and explanation given to us, there are not transactions made in pursuance of contracts or arrangements entered in the register maintained under section 301 of the Companies Act, 1956 and exceeding the value of Rs. 5.00 Lakhs, in respect of any party during the year have been made at prices which are reasonable having regard to the prevailing market price at the relevant time; (v) The company has not accepted deposites from the public, under the directives issued by the Reserve Bank if India and the provisions of sections 58 A and 58 AA of the Act and the ruled framed there under. (vi) The company has no Internal Audit System, which in our opinion commensurate with its nature of business and size of the company. (vii) The maintenance of cost records has not been prescribed by the Central Government under clause (d) of sub-section (1) of section 209 of the Act. (viii) The company has no accumulated losses at the beginning of the year and has sustained cash losses during the current financial year covered under our audit. 79 Subex Technologies Limited (ix) The company has not defaulted in repayment of dues to the financial institutions and banks (x) The company has not granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities. (xi) The provisions of any special statue applicable to chit fund/ nidhi/ mutual benefit fund/ societies are not applicable to the Company and therefore the provisions of clause 4 (xii) of the companies (Auditor’s Report) Order, 2003 are not applicable to the company. (xiii) As the company is not dealing or trading in shares, securities, debentures and other investments, the maintenance of proper records of the transactions and contracts and making timely entries of the shares, securities, debentures, and other securities held by the company, are not applicable. (xiv) The company has not given guarntee for loand taken by others from bank or financial institutions, the terms and conditions whereof are prejudicial to the interest of the company. (xv) According ti information and explanations given to us, and an overall examination of the Balnace Sheet and fund flow statement of the Company; we report that the funds raised on short-term basis have not been used long-term investment and vice versa. (xvi) The company has not made any preferencial allotment of shares to parties and conpanies covered in the Register maintained under section 301 of the Act. (xvii) According to information and explanations given to us, the company has not issued any debentures during the year and no securities were created by the company. (xviii) The company has not raised money on public issue. (xix) On the basis of our examination of the books of accounts and other relevant record and information made available to us, prima- facie have not noticed and fraud on or by the Company, during the year. Further, the management has represented to us that no fraud on or by the Company has bee reported during the year. However, we are unable to determine/ verify as to whetjer such reporting has been made, during the year. (xx) All other provisions of the said order are not applicable to the above Company Place : Bangalore Date : 24th April, 2006 for M/s.P. Chandrasekar Chartered Accountants Lakshmy Chandrasekaran Partner Membership No. 28508 80 BALANCE SHEET AS AT Sources of funds Sources of funds Sources of funds Sources of funds Sources of funds Shareholders’ Funds: Shareholders’ Funds: Shareholders’ Funds: Shareholders’ Funds: Shareholders’ Funds: Share Capital Reserves & Surplus Loan Funds Loan Funds Loan Funds Loan Funds Loan Funds Secured Loans Unsecured Loans Deferred tax liabilities (net) TTTTTotalotalotalotalotal APPLICAAAAATION OF FUNDS TION OF FUNDS TION OF FUNDS APPLIC APPLIC TION OF FUNDS TION OF FUNDS APPLIC APPLIC Fixed Assets:- Gross Block Less: Depreciation Net block Capital Work-in-progress Current Assets, Loans and Advances Sundry Debtors Cash and Bank Balances Loans & advances Less: Current Liabilities & Provisions Net current assets Miscellaneous expenditure Miscellaneous expenditure Miscellaneous expenditure Miscellaneous expenditure Miscellaneous expenditure Preliminary Expenses (To the extent not written off or adjusted) Profit and Loss account TTTTTotalotalotalotalotal Notes on Accounts Notes on Accounts Notes on Accounts Notes on Accounts Notes on Accounts Subex Technologies Limited Schedule Schedule Schedule Schedule Schedule 3131313131ststststst March, 2006 March, 2006 March, 2006 March, 2006 March, 2006 3131313131ststststst March, 2005 March, 2005 March, 2005 March, 2005 March, 2005 Amount in Rs. 10,000,000 - 500,000 - 10,000,000 500,000 2,575,629 11,533,049 184,486 24,293,164 24,293,164 24,293,164 24,293,164 24,293,164 5,546,681 714,202 4,832,479 - 4,832,479 2,933,916 336,811 4,010,664 7,281,391 3,307,760 - - - - - 500,000 - 500000 - 6 0 - 5 0 0 2 t r o p e R l a u n n A 283,079 783,079 783,079 783,079 783,079 783,079 - 3,973,631 500,000 226,463 283,079 15,260,591 15,487,054 - 24,293,164 24,293,164 24,293,164 24,293,164 24,293,164 283,079 783,079 783,079 783,079 783,079 783,079 A B C D E J The Schedules referred to above form an integral part of the balance sheet In terms of our report of even date In terms of our report of even date For M/s.P. Chandrasekar & Co., Chartered Accountants Lakshmy Chandrasekaran Partner Membership No. 28508 Place : Bangalore Date : 24th April, 2006 Subash Menon Director Sudeesh Yezhuvath Director 81 Subex Technologies Limited PROFIT & LOSS ACCOUNTS FOR THE YEAR ENDED INCOME INCOME INCOME INCOME INCOME Service Income Other income TTTTTotalotalotalotalotal EXPENDITURE EXPENDITURE EXPENDITURE EXPENDITURE EXPENDITURE Personnel costs Other operating, selling and administrative expenses Financial costs Depreciation TTTTTotalotalotalotalotal Profit before taxation Provision for taxation - Current tax - Fringe benefit tax - Deferred tax (asset)/liability Profit afer tax Loss carried to balance sheet Earnings per share - Basic Earnings per share - Diluted Notes on Accounts Schedule Schedule Schedule Schedule Schedule 3131313131ststststst March, 2006 March, 2006 March, 2006 March, 2006 March, 2006 3131313131ststststst March, 2005 March, 2005 March, 2005 March, 2005 March, 2005 Amount in Rs. 12,147,258 108,933 12,256,191 12,256,191 12,256,191 12,256,191 12,256,191 15,992,917 10,336,605 113,809 656,394 27,099,725 27,099,725 27,099,725 27,099,725 27,099,725 (14,843,534) - 232,571 184,486 (15,260,591) (15,260,591) (15.26) (15.26) F G H I C J - - ----- - - - ----- - - - - - - The Schedules referred to above form an integral part of the profit & loss account In terms of our report of even date In terms of our report of even date For M/s.P. Chandrasekar & Co., Chartered Accountants Lakshmy Chandrasekaran Partner Membership No. 28508 82 Place : Bangalore Date : 24th April, 2006 Subash Menon Director Sudeesh Yezhuvath Director SCHEDULES FORMING PART OF THE ACCOUNTS Schedule - A Schedule - A Schedule - A Schedule - A Schedule - A Share capital Share capital Share capital Share capital Share capital 1. Authorised 30,00,000 (Previous year 30,00,000 ) Equity shares of Rs.10/- each 2. Issued, subscribed and Paid up: 1,000,000 (Previous year 50,000) Equity shares of Rs.10/- each fully paid TTTTTotalotalotalotalotal Schedule - B Schedule - B Schedule - B Schedule - B Schedule - B LOAN FUNDS LOAN FUNDS LOAN FUNDS LOAN FUNDS LOAN FUNDS Secured Loans Hire purchase (Secured by Hypothecation of Motor cars) (Amount repayable within one year: Rs.576,956) (Previous Year: Rs.Nil) Unsecured Loans Subex Technologies Limited 3131313131ststststst March, 2006 March, 2006 March, 2006 March, 2006 March, 2006 3131313131ststststst March, 2005 March, 2005 March, 2005 March, 2005 March, 2005 Amount in Rs. 30,000,000 30,000,000 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000 500,000 500,000 500,000 500,000 500,000 500,000 6 0 - 5 0 0 2 t r o p e R l a u n n A 2,575,629 - Unsecured Loan from Subex Systems Ltd (Holding Company) 11,533,049 14,108,678 283,079 TTTTTotalotalotalotalotal 14,108,678 14,108,678 14,108,678 14,108,678 14,108,678 283,079 283,079 283,079 283,079 283,079 283,079 83 Subex Technologies Limited . s R n i t n u o m A K K K K K C C C C C O O O O O L L L L L B B B B B T T T T T E E E E E N N N N N N N N N N O O O O O I I I I I T T T T T A A A A A S S S S S I I I I I T T T T T R R R R R O O O O O M M M M M A A A A A N N N N N O O O O O I I I I I T T T T T A A A A A C C C C C E E E E E R R R R R P P P P P E E E E E D D D D D / / / / / I I I I I TTTTT S S S S S O O O O O C C C C C T T T T T A A A A A K K K K K C C C C C O O O O O L L L L L B B B B B S S S S S S S S S S O O O O O R R R R R G G G G G / / / / / s s s s s n n n n n o o o o o i i i i i t t t t t i i i i i d d d d d d d d d d A A A A A C C C C C - - - - - l l l l l e e e e e u u u u u d d d d d e e e e e h h h h h c c c c c S S S S S S S S S S T T T T T E E E E E S S S S S S S S S S A A A A A D D D D D E E E E E X X X X X I I I I I F F F F F 84 , , , , , h h h h h c c c c c r r r r r a a a a a M M M M M t t t t t s s s s s 1 1 1 1 1 3 3 3 3 3 , , , , , h h h h h c c c c c r r r r r a a a a a M M M M M t t t t t s s s s s 1 1 1 1 1 3 3 3 3 3 , , , , , h h h h h c c c c c r r r r r a a a a a M M M M M t t t t t s s s s s 1 1 1 1 1 3 3 3 3 3 n n n n n o o o o o i i i i i t t t t t a a a a a i i i i i c c c c c e e e e e r r r r r p p p p p e e e e e D D D D D e e e e e h h h h h t t t t t r r r r r o o o o o f f f f f , , , , , l l l l l i i i i i r r r r r p p p p p A A A A A . . . . . t t t t t s s s s s 11111 , , , , , h h h h h c c c c c r r r r r a a a a a M M M M M t t t t t s s s s s 1 1 1 1 1 3 3 3 3 3 6 6 6 6 6 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 6 6 6 6 6 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 6 6 6 6 6 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 n n n n n o o o o o i i i i i t t t t t e e e e e l l l l l e e e e e d d d d d n n n n n o o o o o r r r r r a a a a a e e e e e y y y y y 5 5 5 5 5 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 6 6 6 6 6 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 g g g g g n n n n n i i i i i r r r r r u u u u u d d d d d r r r r r a a a a a e e e e e y y y y y e e e e e h h h h h t t t t t e e e e e h h h h h t t t t t g g g g g n n n n n i i i i i r r r r r u u u u u d d d d d , , , , , l l l l l i i i i i r r r r r p p p p p A A A A A . . . . . t t t t t s s s s s 11111 r r r r r a a a a a e e e e e y y y y y e e e e e h h h h h t t t t t 5 5 5 5 5 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 t t t t t a a a a a s s s s s A A A A A t t t t t a a a a a s s s s s A A A A A t t t t t a a a a a s s s s s A A A A A d d d d d e e e e e t t t t t a a a a a l l l l l u u u u u m m m m m u u u u u c c c c c c c c c c A A A A A i i i i i d d d d d e e e e e d d d d d v v v v v o o o o o r r r r r P P P P P t t t t t a a a a a s s s s s A A A A A t t t t t a a a a a s s s s s A A A A A s s s s s n n n n n o o o o o i i i i i t t t t t c c c c c u u u u u d d d d d e e e e e D D D D D s s s s s t t t t t n n n n n e e e e e m m m m m t t t t t s s s s s u u u u u j j j j j d d d d d a a a a a t t t t t a a a a a s s s s s A A A A A s s s s s r r r r r a a a a a u u u u u c c c c c l l l l l i i i i i t t t t t r r r r r a a a a a P P P P P . . . . . o o o o o N N N N N . . . . . l l l l l S S S S S - - - - - 3 3 5 , 3 2 1 2 4 , 7 0 1 1 5 5 , 7 8 4 , 1 4 7 9 , 3 1 2 , 3 2 9 5 , 4 7 7 2 , 1 7 2 6 8 7 , 3 1 7 4 5 , 4 2 4 - - - 0 6 5 , 4 1 2 9 5 , 4 7 3 8 , 5 8 2 6 8 7 , 3 1 7 4 5 , 4 2 4 9 7 4 , 2 3 8 , 4 2 0 2 , 4 1 7 0 6 5 , 4 1 2 6 7 , 8 2 7 - - - - - - - - - - - 5 2 1 , 8 2 - 5 2 1 , 8 2 8 2 8 , 8 5 7 , 1 1 3 5 , 3 3 1 9 5 3 , 2 9 8 , 1 7 0 2 , 1 2 1 1 2 5 , 8 3 6 , 3 - - 7 0 2 , 1 2 1 1 2 5 , 8 3 6 , 3 1 8 6 , 6 4 5 , 5 1 3 5 , 3 3 1 2 1 2 , 0 8 6 , 5 - - - - - - ) l i N , r a e y i s u o v e r P ( d n e r a e y t a s a e c r o f n i e r a s t c a r t n o c e s a h c r u p e r i h h c h w i t c e p s e r n i 0 0 0 , 9 2 9 , 2 . s R g n i t s o c s r a c r o t o m s e d u c n l i s t n e m p u q E i e c i f f O s r e t u p m o C s e r u t x i f r a C r o t o M l a t o T r a e Y i s u o v e r P . 2 . 3 . 4 d n a e r u t i n r u F . 1 6 0 0 2 , h c r a M t s 1 3 t a s a k c o b s s o r G l 8 6 3 , 2 7 y b s s e l s i t n u o c c a s s o l d n a t i f o r p n i i n w o h s n o i t a c e r p e d e c n e h , s e s n e p x e f o e r a h s a s a y n a p m o c g n d o H o t d e t a c o l i l l a s i i n o i t a c e r p e D SCHEDULES FORMING PART OF THE ACCOUNTS Schedule - D Schedule - D Schedule - D Schedule - D Schedule - D ANS AND ADVVVVVANCES ANCES ANCES ANS AND AD SSETS, LOOOOOANS AND AD ANS AND AD SSETS, L SSETS, L CURRENT A CURRENT A ANCES CURRENT ASSETS, L CURRENT A ANCES ANS AND AD SSETS, L CURRENT A Current Assets, Loans & Advances Current Assets, Loans & Advances Current Assets, Loans & Advances Current Assets, Loans & Advances Current Assets, Loans & Advances (a) Current Assets: (a) Current Assets: (a) Current Assets: (a) Current Assets: (a) Current Assets: Sundry Debtors: Unsecured: Outstanding for more than six months Considered good Due from Holding Company Due from others Considered doubtful Less: Provision for doubtful debts Others Considered good Due from Holding Company Due from others Cash and Bank Balances: Cash on hand Balances with Scheduled Banks on Current Account - in Current Account in Indian Rupees - in EEFC Account in foreign Currency (b) Loans and Advances: (b) Loans and Advances: (b) Loans and Advances: (b) Loans and Advances: (b) Loans and Advances: (Unsecured, considered good, subject to confirmation) Loans and advances recoverable in cash or in kind or for value to be received Advance Income Tax including TDS Other Deposits TTTTTotalotalotalotalotal Schedule - E Schedule - E Schedule - E Schedule - E Schedule - E CURRENT LIABILITIES AND PROVISIONS CURRENT LIABILITIES AND PROVISIONS CURRENT LIABILITIES AND PROVISIONS CURRENT LIABILITIES AND PROVISIONS CURRENT LIABILITIES AND PROVISIONS Liabilities: Liabilities: Liabilities: Liabilities: Liabilities: Sundry Creditors (other than Small Scale Industrial Undertaking) Duties & Taxes TTTTTotalotalotalotalotal Subex Technologies Limited 3131313131st st st st st March, 2006 March, 2006 March, 2006 March, 2006 March, 2006 3131313131st st st st st March, 2005 March, 2005 March, 2005 March, 2005 March, 2005 Amount in Rs. 500,000 336,811 - 500,000 - - - - 2,933,916 1,567,487 1,366,429 - 242,654 94,157 21,812 473,852 3,515,000 4,010,664 7,281,391 7,281,391 7,281,391 7,281,391 7,281,391 2,718,404 589,356 3,307,760 3,307,760 3,307,760 3,307,760 3,307,760 3,307,760 6 0 - 5 0 0 2 t r o p e R l a u n n A - - - - - - - - - - - - - - - 500,000 500,000 500,000 500,000 500,000 - - 85 Subex Technologies Limited SCHEDULES FORMING PART OF THE ACCOUNTS Schedule - F Schedule - F Schedule - F Schedule - F Schedule - F OTHER INCOME OTHER INCOME OTHER INCOME OTHER INCOME OTHER INCOME Exchange fluctuation TTTTTotalotalotalotalotal Schedule - G Schedule - G Schedule - G Schedule - G Schedule - G PERSONNEL COSTS PERSONNEL COSTS PERSONNEL COSTS PERSONNEL COSTS PERSONNEL COSTS Salaries wages and allowances Contribution to provident and other funds Other staff related cost TTTTTotalotalotalotalotal Schedule - H Schedule - H Schedule - H Schedule - H Schedule - H Other operation, selling and administrative expenses Other operation, selling and administrative expenses Other operation, selling and administrative expenses Other operation, selling and administrative expenses Other operation, selling and administrative expenses Software purchases Rent Power, fuel and water charges Repairs & maintenance others Insurance Communication costs Printing and stationery Travelling and conveyance Rates and taxes including filing fees Placement consultancy Fee Miscellaneous expenses TTTTTotalotalotalotalotal Schedule - I Schedule - I Schedule - I Schedule - I Schedule - I FINANCE CHARGES FINANCE CHARGES FINANCE CHARGES FINANCE CHARGES FINANCE CHARGES Interest on car loan Bank charges TTTTTotalotalotalotalotal 3131313131st st st st st March, 2006 March, 2006 March, 2006 March, 2006 March, 2006 3131313131st st st st st March, 2005 March, 2005 March, 2005 March, 2005 March, 2005 Amount in Rs. 108,933 108,933 108,933 108,933 108,933 108,933 14,543,650 662,514 786,753 15,992,917 15,992,917 15,992,917 15,992,917 15,992,917 341,891 3,498,253 464,726 602,401 4,819 510,857 103,980 2,379,959 52,657 1,506,087 870,975 10,336,605 10,336,605 10,336,605 10,336,605 10,336,605 105,283 8,526 113,809 113,809 113,809 113,809 113,809 - ----- - - - ----- - - - - - - - - - - - ----- - - ----- 8686 SCHEDULE – J SCHEDULE – J SCHEDULE – J SCHEDULE – J SCHEDULE – J I. SIGNIFICANT ACCOUNTING POLICIES I. SIGNIFICANT ACCOUNTING POLICIES I. SIGNIFICANT ACCOUNTING POLICIES I. SIGNIFICANT ACCOUNTING POLICIES I. SIGNIFICANT ACCOUNTING POLICIES I.1. Basis for preparation of financial statements The Financial statements have been prepared under the historical cost convention in accordance with the applicable Accounting Principles in India, the Accounting Standards issued by the Institute of Chartered Accountants of India and the relevant provisions of the Companies Act, 1956, as adopted consistently by the company. Revenues are recognized and expenses accounted on their accrual, including provisions/adjustments for committed obligations and amounts determined as payable or receivable during the year. I.2. Use of Estimates The preparation of the financial statements in conformity with India GAAP requires that management makes estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities as at the date of the financial statements and the reported amount of revenue and expenses during the reported period. Actual results could differ from those estimates. I.3. Revenue recognition For contracts where the only deliverable is services, revenue is recognized based on effort certified by customers and on fulfillment of contractual obligations with customers. For other contracts which are milestone based, revenue is recognized based on proportionate contract completion method as prescribed by Institute of Chartered Accountants of India. I.4. Fixed Assets Fixed assets are capitalized at acquisition cost including directly attributable costs such as freight, insurance and specific installation charges for bringing the assets to its working condition for use. Assets acquired on hire purchase are capitalised at gross value and interest thereon is charged to revenue. I.5. Depreciation Fixed assets are depreciated using the straight-line method over the useful lives of assets. Depreciation is charged on pro-rata basis for assets purchased/sold during the year. The rates of depreciation adopted on the assets of the company are as under; Particulars Plant & machinery Computers Vehicles Furniture & fixtures Intangible assets Depreciation Rates 20.00 % 25.00 % 20.00 % 20.00 % 20.00 % Individual assets costing less than Rs. 5,000 are depreciated in full, in the year of purchase. I.6. Retirement benefits to employees The company’s liability towards retirement benefits in the form of provident fund is fully provided and charged to expenditure. Gratuity benefit is accounted for as an estimated liability as at the date of the balance sheet. I.7. Foreign currency transactions and translation Transactions denominated in foreign currencies are recorded at the exchange rates prevailing on the date of the transaction. Monetary items denominated in foreign currencies at year end are translated at the exchange rate prevailing on the date of the 6 0 - 5 0 0 2 t r o p e R l a u n n A Subex Technologies Limited Balance Sheet. Non-monetary items denominated in foreign currencies are carried at cost. Exchange differences on settlement or restatement are adjusted in the profit & loss account. I.8. Income taxes Income Tax comprises the current tax provision under the tax payable method and the net change in the deferred tax asset or liability in the year. Deferred Tax Assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying values of the assets and liabilities and their respective tax basis. Deferred tax assets are recognized subject to management’s judgment that realization is virtually certain. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be received or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the income statement in the period of enactment of the change. I.9. Cash Flow Statement Cash flow statement has been prepared in accordance with the indirect method prescribed in Accounting Standard 3, issued by the Institute of Chartered Accountants of India. I.10. Provisions A provision is recognized when an enterprise has a present obligation as a result of past event; it is probable that an outflow of resources will be required to settle the obligation, in respect of which a reliable estimate can be made. Provisions are not discounted to its present value and are determined based on best estimate required to settle the obligation at the balance sheet date. These are reviewed at each balance sheet date and adjusted to reflect the current best estimates. II. NOTES TO ACCOUNTS II.1. Deferred Income taxes a) Provision for income taxes has been made in terms of Accounting Standard 22 “Accounting for Taxes on Income”. Deferred tax assets are subject to a valuation allowance that reduces the amount recognized to that which is more likely than not to be realized. Movement in deferred tax liability Amount in Rs. 2005-06 2004-05 Net deferred tax asset/ (liability) at 1st April , 2005 Add: Tax benefits/ (charge) for current year Net deferred tax asset/ (liability) at 31st March, 2006 Nil (184,486) (184,486) Nil Nil Nil b) The net deferred tax asset as at 31st March, 2005 comprises the tax impact arising from the timing differences on account of: Amount in Rs. As at 31st March, 2006 As at 31st March, 2005 Depreciation Gratuity Net deferred asset/(liability) relating to above (705,880) 157,792 (184,486) Nil Nil Nil 8787 Subex Technologies Limited II.2. Operating leases The Company has various operating leases for office facilities which include leases that are renewable on a yearly basis, cancelable at its option and other long term leases. Rental expenses for operating leases included in the Income statement for the year is Rs. 3,135,600 As of March 31, 2006 future minimum lease payments for non- cancelable operating leases for the next five fiscal years are: Amount in Rs. For the year ending 31st March, 2006 31st March, 2005 Within one year from the date of the Balance Sheet Due in a period between one year and five years Due after five years 4,180,800 9,978,176 Nil Nil — Nil II.3. Related Party Information A) Related Parties Companies under same management Subex Systems Ltd Key Management Personnel S. Ramakrishnan, CEO B) Details of the transactions with the related parties other than employees who are related to the Directors of the company are as under: e of Trrrrransaction ansaction ansaction e of T e of T Natur Natur ansaction Nature of T ansaction e of T Natur Natur Holding Company Holding Company Holding Company Holding Company Holding Company Companies under same Companies under same Companies under same Companies under same Companies under same management management management management management Key Management Key Management Key Management Key Management Key Management Personnel Personnel Personnel Personnel Personnel TTTTTotalotalotalotalotal 2005-06 2005-06 2005-06 2005-06 2005-06 2004-05 2004-05 2004-05 2004-05 2004-05 2005-06 2005-06 2005-06 2005-06 2005-06 2004-05 2004-05 2004-05 2004-05 2004-05 2005-06 2005-06 2005-06 2005-06 2005-06 2004-05 2004-05 2004-05 2004-05 2004-05 2005-06 2005-06 2005-06 2005-06 2005-06 2004-05 2004-05 2004-05 2004-05 2004-05 (Amounts in Rs.) a) Sale of Services 9,967,322 Nil 533,049 283,079 b) Amount due to as at 31st March, 2006 c) Amount due from as at 31st March, 2006 1,567,487 d) Sharing of expenses- Note -1 5,389,331 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil 9,967,322 Nil Nil 11,533,049 283,079 Nil 1,567,487 Nil 5,389,331 Nil Nil Note-1 Sharing of expenses in relation to expenses borne by Subex Technologies Ltd towards software services business of Subex Systems Ltd, as agreed between both companies. II.4. Earnings per Share: a) Basic: Profits after Tax Less: Dividend on Preference Shares & distribution tax Net Profit Available to Equity Shareholders – b) Diluted: Profits after Tax Add: Interest on FCCB Net Profit Available to Equity Shareholders – Diluted Weighted Average Number of Shares - Basic Weighted Average Number of Shares – Diluted Earnings per Share – Basic Earnings per Share – Basic Earnings per Share – Basic Earnings per Share – Basic Earnings per Share – Basic Earnings per Share - Diluted Earnings per Share - Diluted Earnings per Share - Diluted Earnings per Share - Diluted Earnings per Share - Diluted 88 A B A B C D B / CB / CB / CB / CB / C A / DA / DA / DA / DA / D 2005-06 (15,260,591) Nil (15,260,591) (15,260,591) 2004-05 Nil Nil Nil Nil Nil Nil (15,260,591) 1,000,000 1,000,000 (15.26) (15.26) (15.26) (15.26) (15.26) (15.26) (15.26) (15.26) (15.26) (15.26) Nil Nil Nil Nil Nil Nil Nil Nil II.5. Auditors’ remuneration Miscellaneous expenditure includes remuneration to auditors’: Audit fees (inclusive of service tax) For tax matters Other Consultancy Reimbursement of expenses Subex Technologies Limited Year ended 31st March, 2006 Year ended 31st March, 2005 28,060 16,836 Nil Nil 44,896 Nil Nil Nil Nil Nil II.6. Employee Stock Option Plans (ESOP) II.8. Others The Company established a stock option scheme during the current year, under which 22,900 options have been granted to the employees and all the options granted are outstanding as on 31st March, 2006. II.7. Segment Report Currently Company is operating only one single business segment. Hence the requirement under AS-17 is not applicable 1. Estimated amount of contracts, remaining to be executed on capital account and not provided for (net of advances paid) Rs.Nil (Previous year, Rs. Nil). 2. Preliminary expenses are amortized equally over 5 years II.9. Other Information pursuant to Schedule VI of the Companies Act, 1956. 6 0 - 5 0 0 2 t r o p e R l a u n n A Year ended 31st March, 2006 Year ended 31st March, 2005 Amount in Rs. CIF value of imports Expenditure in foreign currency Traveling expenses Other expenses Earnings in foreign exchange Income from software development services on receipt basis 1,664,587 1,091,518 211,489 8,868,626 Nil Nil Nil Nil Signature to the Schedules A – J Signature to the Schedules A – J Signature to the Schedules A – J Signature to the Schedules A – J Signature to the Schedules A – J For M/s.P. Chandrasekar & Co., Chartered Accountants Lakshmy Chandrasekaran Partner Membership No. 28508 Place : Bangalore Date : 24th April, 2006 Subash Menon Director Sudeesh Yezhuvath Director 89 Subex Azure Limited (formerly Subex Systems Limited) Financial Review Financial Review Financial Review Financial Review Financial Review Subex Azure Limited (Consolidated) Subex Azure Limited (Consolidated) Subex Azure Limited (Consolidated) Subex Azure Limited (Consolidated) Subex Azure Limited (Consolidated) 90 Subex Azure Limited (formerly Subex Systems Limited) AUDITOR’S REPORT TO THE BOARD OF DIRECTORS OF SUBEX SYSTEMS LIMITED 1. We have audited the attached Consolidated Balance Sheet of Subex Systems Limited (“the Company”) and it’s subsidiaries (the Company and its subsidiaries constitute “the group”) as at 31st March, 2006, the Consolidated Profit and Loss Account and the Consolidated Cash Flow Statement for the year then ended, both annexed thereto. These financial statements are the responsibility of the Company’s management and have been prepared by the management on the basis of separate financial statements and other financial information regarding components. Our responsibility is to express an opinion on these financial statements based on our audit. 2. We conducted our audit in accordance with generally accepted auditing standards in India. These Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes, examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion. 3. We did not audit the financial statements of the subsidiaries, Subex Technologies Inc and Subex Technologies Limited, whose financial statements reflect gross total assets of Rs. 184,857,132 as at 31st March, 2006, total revenues of Rs. 608,739,319 and cash flows of (Rs. 163,189) for the year then ended and the financial statements of the Company’s branch, in the United States of America (US branch). These financial statements and other financial information have been audited by other auditors, whose report/returns have been furnished to us, and our opinion, insofar as it relates to the amounts included in respect of the subsidiaries and the US branch, is based solely on the report of the other auditors. 4. We report that the consolidated financial statements have been prepared by the Company in accordance with the requirements of Accounting Standard (AS) 21, Consolidated Financial Statements, issued by the Institute of Chartered Accountants of India and on the basis of the separate audited financial statements of Subex Systems Limited and its subsidiaries included in the consolidated financial statements. 5. On the basis of the information and explanation given to us and on the consideration of the separate audit reports on individual financial statements and on the other financial information of the components of Subex Systems Limited and its subsidiaries, we are of the opinion that the attached consolidated financial statements give a true and fair view in conformity with the accounting principles generally accepted in India: a) b) c) in the case of the Consolidated Balance Sheet, of the consolidated state of affairs of Subex Systems Limited and its subsidiaries as at 31st March, 2006; and in the case of the Consolidated Profit and Loss Account, of the consolidated results of operations of Subex Systems Limited and its subsidiaries for the year then ended. in the case of the consolidated Cash Flow Statement of the consolidated cash flows of Subex Systems Limited and its subsidiaries for the year then ended. 6 0 - 5 0 0 2 t r o p e R l a u n n A for Deloitte Haskins & Sells Chartered Accountants V. Srikumar Partner Membership No. 84494 Place : Bangalore Date : 15th May, 2006 91 Subex Azure Limited (formerly Subex Systems Limited) CONSOLIDATED BALANCE SHEET AS AT Schedule Schedule Schedule Schedule Schedule 3131313131ststststst March, 2006 March, 2006 March, 2006 March, 2006 March, 2006 3131313131ststststst March, 2005 March, 2005 March, 2005 March, 2005 March, 2005 Amount in Rs. SOURCES OF FUNDS SOURCES OF FUNDS SOURCES OF FUNDS SOURCES OF FUNDS SOURCES OF FUNDS Shareholders’ funds Share capital Share application money Reserve and surplus Loan funds Secured loans Unsecured loans Deferred payment consideration towards acquisition - Alcatel, FMS Division TTTTTotalotalotalotalotal APPLICAAAAATION OF FUNDS TION OF FUNDS TION OF FUNDS APPLIC APPLIC TION OF FUNDS TION OF FUNDS APPLIC APPLIC Fixed assets Gross block Less : Depreciation Net block Capital work in progress GOODWILL GOODWILL GOODWILL GOODWILL GOODWILL Investments Investments Investments Investments Investments Deferred tax asset (net) Current assets, loans & advances Inventories Sundry debtors Cash & bank balances Loans & advances Less: Current liabilities & provisions Net current assets Net current assets Net current assets Net current assets Net current assets Miscellaneous expenditure Miscellaneous expenditure Miscellaneous expenditure Miscellaneous expenditure Miscellaneous expenditure (To the extent not written off or adjusted) TTTTTotalotalotalotalotal Notes on accounts AAAAA BBBBB CCCCC DDDDD EEEEE FFFFF GGGGG HHHHH IIIII JJJJJ K K K K K LLLLL R R R R R 217,575,680 878,089 100,672,230 318,640 1,592,684,945 1,811,138,714 1,139,997,336 1,240,988,206 13,695,549 - - 665,735,874 272,803,176 392,932,698 73,282,446 212,987,750 13,695,549 1,824,834,263 1,824,834,263 1,824,834,263 1,824,834,263 1,824,834,263 22,754,000 309,024,196 1,550,012,402 1,550,012,402 1,550,012,402 1,550,012,402 1,550,012,402 561,999,271 193,342,709 368,656,562 4,495,298 397,427,996 465,431 369,121,993 308,987,980 - 7,727,514 308,987,980 1,000 3,975,809 - 961,559,552 406,014,754 73,718,402 1,441,292,708 330,601,935 62,589 732,404,000 278,411,743 57,205,909 1,068,084,241 200,441,700 1,110,690,773 867,642,541 - 1,824,834,263 1,824,834,263 1,824,834,263 1,824,834,263 1,824,834,263 283,079 1,550,012,402 1,550,012,402 1,550,012,402 1,550,012,402 1,550,012,402 The schedules referred to above form an integral part of the balance sheet In terms of our report of even date for Deloitte Haskins & Sells Chartered Accountants Subash Menon Chairman & Managing Director Sudeesh Yezhuvath Wholetime Director V. Balaji Bhat Director V. Srikumar Partner Membership No. 84494 92 Bangalore 15th May, 2006 Rajkumar C Company Secretary & Legal Counsel V. R. Suresh Rao General Manager - Accounts & Finance Subex Azure Limited (formerly Subex Systems Limited) CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED Schedule Schedule Schedule Schedule Schedule 3131313131ststststst March, 2006 March, 2006 March, 2006 March, 2006 March, 2006 3131313131ststststst March, 2005 March, 2005 March, 2005 March, 2005 March, 2005 Amount in Rs. INCINCINCINCINCOMEOMEOMEOMEOME Sales & services Other income TTTTTotalotalotalotalotal EXPENDITURE EXPENDITURE EXPENDITURE EXPENDITURE EXPENDITURE Direct cost Personnel costs Other operating, selling and administrative expenses Financial costs Miscellaneous expenses amortised Depreciation TTTTTotalotalotalotalotal Profit before taxation Provision for taxation - Current - Fringe benefit tax - Deferred Profit after taxation Profit after taxation Profit after taxation Profit after taxation Profit after taxation Add: Balance brought forward from previous year Profit available for appropriation APPROPRIATIONTIONTIONTIONTION APPROPRIA APPROPRIA APPROPRIA APPROPRIA Transfer to general reserve Dividend - Equity shares - interim dividend 2005-06 (FY) - Equity shares - final dividend 2004-05 (FY) - Equity shares - proposed dividend 2005-06 (FY) - Dividend on preference shares Tax on distributed profits Surplus carried to balance sheet Surplus carried to balance sheet Surplus carried to balance sheet Surplus carried to balance sheet Surplus carried to balance sheet Earnings Per Share (Face value of Rs.10 each) - Basic - Diluted Notes on accounts MMMMM NNNNN OOOOO PPPPP QQQQQ EEEEE RRRRR 1,814,342,238 28,908,788 1,843,251,026 1,843,251,026 1,843,251,026 1,843,251,026 1,843,251,026 132,850,266 915,371,277 263,876,813 26,805,705 283,079 92,301,159 1,431,488,299 1,431,488,299 1,431,488,299 1,431,488,299 1,431,488,299 411,762,727 411,762,727 411,762,727 411,762,727 411,762,727 33,276,205 378,486,522 446,344,814 824,831,336 824,831,336 824,831,336 824,831,336 824,831,336 1,165,502,087 6,847,334 1,172,349,421 1,172,349,421 1,172,349,421 1,172,349,421 1,172,349,421 32,210,959 638,221,540 139,301,033 24,374,699 256,942 71,685,019 906,050,192 906,050,192 906,050,192 906,050,192 906,050,192 266,299,229 266,299,229 266,299,229 266,299,229 266,299,229 6 0 - 5 0 0 2 t r o p e R l a u n n A 14,636,780 - (5,545,809) 9,090,971 257,208,258 253,215,412 510,423,670 510,423,670 510,423,670 510,423,670 510,423,670 39,500,000 25,500,000 9,274,917 20,134,446 - 4,651,061 34,060,424 4,518,432 446,344,814 510,423,670 510,423,670 510,423,670 510,423,670 510,423,670 14.13 13.41 38,588,896 5,604,377 741,138,063 824,831,336 824,831,336 824,831,336 824,831,336 824,831,336 17.62 17.53 34,903,702 2,124,208 (3,751,705) 16,283,564 547,764 21,757,568 - The schedules referred to above form an integral part of the Profit and Loss account In terms of our report of even date for Deloitte Haskins & Sells Chartered Accountants Subash Menon Chairman & Managing Director Sudeesh Yezhuvath Wholetime Director V. Balaji Bhat Director V. Srikumar Partner Membership No. 84494 Bangalore 15th May, 2006 Rajkumar C Company Secretary & Legal Counsel V. R. Suresh Rao General Manager - Accounts & Finance 93 Subex Azure Limited (formerly Subex Systems Limited) CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED Cash flow from operating activities Cash flow from operating activities Cash flow from operating activities Cash flow from operating activities Cash flow from operating activities Net profit before Tax Adjustments for : a) Depreciation and amortization b) Interest income c) Interest and other charges d) Assets written off / loss on sale e) Profit on sale of assets f) Employee compensation expenses g) Provision for doubtful debts h) Unrealised exchange fluctuations i) Direct taxes paid Operating profit before working capital changes Operating profit before working capital changes Operating profit before working capital changes Operating profit before working capital changes Operating profit before working capital changes Adjustments for : a) Sundry debtors b) Loans and advances c) Inventories d) Trade and other payables Cash generated from operations Cash generated from operations Cash generated from operations Cash generated from operations Cash generated from operations Cash flow from Investing activities Cash flow from Investing activities Cash flow from Investing activities Cash flow from Investing activities Cash flow from Investing activities a) Purchase of fixed assets b) Preliminary expense c) Sale / disposal of fixed assets d) Sale / (purchase) of investments e) Deferred payment consideration towards acquisition f) Interest received Net cash from investing activities Net cash from investing activities Net cash from investing activities Net cash from investing activities Net cash from investing activities Cash flow from financing activities Cash flow from financing activities Cash flow from financing activities Cash flow from financing activities Cash flow from financing activities a) Proceeds from issue of share capital b) Proceeds from/(repayment) of short term borrowings c) Proceeds from long term borrowings d) Repayment of long term borrowings e) Dividends and dividend tax paid f) Interest and other charges paid Net Cash from financing activities Net Cash from financing activities Net Cash from financing activities Net Cash from financing activities Net Cash from financing activities Exchange fluctuation reserve on account of consolidation Net increase in cash or cash equivalents [A + B + C] Cash or cash equivalents at the start of the year Cash or cash equivalents at the close of the year Cash or cash equivalents at the close of the year Cash or cash equivalents at the close of the year Cash or cash equivalents at the close of the year Cash or cash equivalents at the close of the year In terms of our report of even date AAAAA BBBBB CCCCC 3131313131ststststst March, 2006 March, 2006 March, 2006 March, 2006 March, 2006 3131313131ststststst March, 2005 March, 2005 March, 2005 March, 2005 March, 2005 Amount in Rs. 411,762,727 266,299,229 92,584,238 (17,485,876) 26,805,705 2,041,851 (11,976,780) 4,115,709 35,583,448 3,632,964 (23,451,823) 523,612,163 523,612,163 523,612,163 523,612,163 523,612,163 (292,300,823) (6,939,824) 62,589 93,495,061 317,929,166 317,929,166 317,929,166 317,929,166 317,929,166 (116,323,509) - 21,058,613 1,000 - 16,352,692 (78,911,204) (78,911,204) (78,911,204) (78,911,204) (78,911,204) 18,753,800 (59,387,250) 6,247,000 (6,446,647) (43,776,148) (26,805,705) (111,414,950) (111,414,950) (111,414,950) (111,414,950) (111,414,950) - 127,603,012 278,411,742 406,014,754 406,014,754 406,014,754 406,014,754 406,014,754 71,941,961 (1,681,501) 24,374,699 829,470 (114,895) 1,008,361 4,295,276 (8,279,599) 358,673,001 358,673,001 358,673,001 358,673,001 358,673,001 (121,530,664) (14,885,633) 75,436 74,979,824 297,311,964 297,311,964 297,311,964 297,311,964 297,311,964 (351,296,338) (283,079) 768,732 - 3,870,381 1,681,501 (345,258,803) (345,258,803) (345,258,803) (345,258,803) (345,258,803) 430,926,830 (61,389,471) 256,275,250 (270,554,902) (43,304,005) (19,771,331) 292,182,371 292,182,371 292,182,371 292,182,371 292,182,371 568,892 244,235,532 33,607,318 278,411,742 278,411,742 278,411,742 278,411,742 278,411,742 for Deloitte Haskins & Sells Chartered Accountants Subash Menon Chairman & Managing Director Sudeesh Yezhuvath Wholetime Director V. Balaji Bhat Director V. Srikumar Partner Membership No. 84494 94 Bangalore 15th May, 2006 Rajkumar C Company Secretary & Legal Counsel V. R. Suresh Rao General Manager - Accounts & Finance Subex Azure Limited (formerly Subex Systems Limited) 3131313131ststststst March, 2006 March, 2006 March, 2006 March, 2006 March, 2006 3131313131ststststst March, 2005 March, 2005 March, 2005 March, 2005 March, 2005 Amount in Rs. 301,400,000 19,600,000 125,000,000 196,000,000 321,000,000 321,000,000 321,000,000 321,000,000 321,000,000 321,000,000 321,000,000 321,000,000 321,000,000 321,000,000 217,575,680 100,672,230 6 0 - 5 0 0 2 t r o p e R l a u n n A SCHEDULES TO THE CONSOLIDATED BALANCE SHEET AS AT Schedule - A Schedule - A Schedule - A Schedule - A Schedule - A Share capital : Authorised : 30,140,000 (Previous year, 12,500,000) Equity Shares of Rs. 10 each 200,000 (Previous year, 2,000,000) Redeemable Optionally Convertible Cumulative Preference Shares (ROCCPS) of Rs.98 each TTTTTotalotalotalotalotal Issued, subscribed and paid up: A) Equity : 21,757,568 (Previous year, 10,067,223) equity shares of Rs. 10 each of the above: a) 115,000 shares of Rs.10 each were allotted for consideration other than for cash; b) 4,626,940 shares of Rs.10 each are allotted as bonus shares by capitalisation of general reserve; c) 12,840 shares of Rs.10 each are allotted in part settlement of cost of acquisition of subsidiary d) 10,878,784 (Previous year, Nil) shares of Rs.10 each are allotted as bonus shares by capitalisation of securities premium; TTTTTotalotalotalotalotal Schedule - B Schedule - B Schedule - B Schedule - B Schedule - B Reserves and surplus : Capital reserve General reserve - opening balance Add: Additions during the year Securities premium account - opening balance Add: Additions during the year Less: Utilised towards issue of bonus shares Employees stock options outstanding Less: Deferred employees compensation expenses Exchange reserve on consolidation Profit & loss account TTTTTotalotalotalotalotal Schedule - C Schedule - C Schedule - C Schedule - C Schedule - C Secured Loans : State Bank of India - FCNR (B) Loan (Amount repayable within one year: Rs. nil) (Previous Year, Rs. 59,387,250) (Secured by first charge on all fixed assets of the company, both present and future, book debts, stock, personal guarantee of two directors and equitable mortgage of industrial land) Hire purchase (secured by hypothecation of motor cars) (Amount repayable within one year: Rs. 5,190,507) (Previous Year, Rs. 4,568,531) TTTTTotalotalotalotalotal Schedule - D Schedule - D Schedule - D Schedule - D Schedule - D Unsecured loans : Foreign currency convertible bonds Total 123,802,608 39,500,000 541,983,360 223,066,491 (108,787,840) 22,738,130 13,859,024 217,575,680 217,575,680 217,575,680 217,575,680 217,575,680 100,672,230 100,672,230 100,672,230 100,672,230 100,672,230 13,006,920 163,302,608 656,262,011 8,879,106 10,096,237 741,138,063 1,592,684,945 1,592,684,945 1,592,684,945 1,592,684,945 1,592,684,945 98,302,608 25,500,000 166,327,505 375,655,855 - 10,428,860 5,665,463 13,006,920 123,802,608 541,983,360 4,763,397 10,096,237 446,344,814 1,139,997,336 1,139,997,336 1,139,997,336 1,139,997,336 1,139,997,336 - 59,387,250 13,695,549 13,895,196 13,695,549 13,695,549 13,695,549 13,695,549 13,695,549 73,282,446 73,282,446 73,282,446 73,282,446 73,282,446 - ----- 212,987,750 212,987,750 212,987,750 212,987,750 212,987,750 212,987,750 95 Subex Azure Limited (formerly Subex Systems Limited) . s R n i t n u o m A k k k k k c c c c c o o o o o b b b b b l l l l l t t t t t e e e e e N N N N N i i i i i n n n n n o o o o o i i i i i t t t t t a a a a a c c c c c e e e e e r r r r r p p p p p e e e e e D D D D D l l l l l k k k k k c c c c c o o o o o b b b b b s s s s s s s s s s o o o o o r r r r r G G G G G s s s s s t t t t t e e e e e s s s s s s s s s s a a a a a d d d d d e e e e e x x x x x i i i i i F F F F F E E E E E - - - - - l l l l l e e e e e u u u u u d d d d d e e e e e h h h h h c c c c c S S S S S 96 5 5 5 5 5 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 , 3 0 1 9 1 8 5 , - 6 6 6 6 6 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 - 6 6 6 6 6 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 t t t t t a a a a a s s s s s A A A A A t t t t t a a a a a s s s s s A A A A A o o o o o t t t t t p p p p p U U U U U n n n n n O O O O O , , , , , h h h h h c c c c c r r r r r a a a a a M M M M M t t t t t s s s s s 1 1 1 1 1 3 3 3 3 3 , , , , , h h h h h c c c c c r r r r r a a a a a M M M M M t t t t t s s s s s 1 1 1 1 1 3 3 3 3 3 , , , , , h h h h h c c c c c r r r r r a a a a a M M M M M t t t t t s s s s s 1 1 1 1 1 3 3 3 3 3 s s s s s n n n n n o o o o o i i i i i t t t t t e e e e e e e e e e d d d d d l l l l l r r r r r a a a a a e e e e e y y y y y e e e e e h h h h h t t t t t r r r r r o o o o o F F F F F 5 5 5 5 5 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 o o o o o t t t t t p p p p p U U U U U , , , , , l l l l l i i i i i r r r r r p p p p p A A A A A t t t t t s s s s s 11111 6 6 6 6 6 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 t t t t t a a a a a s s s s s A A A A A , , , , , h h h h h c c c c c r r r r r a a a a a M M M M M t t t t t s s s s s 1 1 1 1 1 3 3 3 3 3 g g g g g n n n n n i i i i i r r r r r u u u u u d d d d d r r r r r a a a a a e e e e e y y y y y e e e e e h h h h h t t t t t s s s s s n n n n n o o o o o i i i i i t t t t t e e e e e e e e e e D D D D D l l l l l r r r r r a a a a a e e e e e y y y y y s s s s s n n n n n o o o o o i i i i i t t t t t i i i i i d d d d d d d d d d A A A A A e e e e e h h h h h t t t t t g g g g g n n n n n i i i i i r r r r r u u u u u d d d d d - - - - 3 0 1 , 9 1 8 , 5 - 1 0 4 2 3 1 , 5 1 6 9 8 , 3 6 8 5 2 7 , 0 5 3 7 7 7 , 5 0 4 , 8 2 8 0 8 , 4 7 4 , 1 8 7 4 , 5 1 8 8 0 7 , 7 3 8 7 7 9 , 5 4 5 5 5 5 5 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 t t t t t a a a a a s s s s s A A A A A , , , , , l l l l l i i i i i r r r r r p p p p p A A A A A t t t t t s s s s s 11111 3 0 1 , 9 1 8 , 5 9 0 2 , 7 0 6 , 1 i y r e n h c a m & t n a P l d n a l l d o h e e r F s s s s s r r r r r a a a a a u u u u u c c c c c l l l l l i i i i i t t t t t r r r r r a a a a a P P P P P . . . . . o o o o o N N N N N . . . . . l l l l l S S S S S , 0 8 9 5 6 5 3 , , 2 6 9 9 2 1 3 , , 4 4 3 5 8 5 7 , , 0 6 4 3 8 1 8 5 , , 3 0 3 2 1 8 0 5 , , 3 4 8 0 5 7 3 5 1 , , 3 6 8 6 9 3 4 , 4 5 7 , 5 5 7 3 5 4 , 6 2 2 , 1 1 6 0 3 , 5 1 7 , 0 1 2 3 3 , 1 5 7 , 4 5 0 2 , 4 7 6 3 3 4 , 2 9 7 , 4 1 s e r u t x i f & e r u t i n r u F 2 6 9 6 0 6 , 4 3 3 , 0 4 9 , 0 2 1 7 4 , 7 1 4 , 3 3 1 6 4 1 , 3 6 5 , 4 0 2 5 4 5 , 3 6 1 , 1 0 6 7 , 5 2 1 , 4 1 1 3 9 , 0 0 6 , 1 9 1 s r e t u p m o C , 3 5 6 7 3 0 4 , , 2 6 8 8 1 6 3 , , 1 8 0 8 4 7 4 , , 2 6 6 6 8 4 1 , , 5 1 3 4 1 1 - - , 1 0 3 6 7 6 1 , 7 0 0 , 8 9 0 , 1 6 3 7 , 6 3 1 , 5 3 4 9 , 6 6 3 , 8 5 1 9 , 5 1 7 , 1 9 6 4 , 8 0 9 9 8 3 , 4 7 1 , 9 - 1 0 3 , 6 7 6 , 1 - 6 1 6 , 0 9 7 , 1 - 6 1 6 , 0 9 7 , 1 s n o i t a l l a t s n i l a c i r t c e E l i s t n e m p u q e e c i f f O , 1 8 0 2 7 4 8 1 , , 5 3 4 1 7 8 6 1 , , 2 7 6 2 6 9 0 1 , , 0 8 5 9 6 8 3 , 4 4 7 , 9 7 2 , 5 8 0 5 , 2 5 5 , 9 7 0 1 , 4 3 8 , 7 2 2 6 7 , 7 5 8 , 7 0 8 2 , 7 6 6 7 , 9 8 5 , 4 2 0 , 8 2 r a c r o t o M 9 1 4 1 , - - 4 7 9 6 2 , - 4 7 9 , 6 2 - 3 9 3 , 8 2 - 3 9 3 , 8 2 s t e s s a d e x i f r e h t O y t r e p o r p l a u t c e l l e t n I , , , , , 2 2 2 2 2 6 6 6 6 6 5 5 5 5 5 6 6 6 6 6 5 5 5 5 5 6 6 6 6 6 8 8 8 8 8 6 6 6 6 6 3 3 3 3 3 , , , , , , , , , , 8 8 8 8 8 9 9 9 9 9 6 6 6 6 6 2 2 2 2 2 3 3 3 3 3 9 9 9 9 9 2 2 2 2 2 9 9 9 9 9 3 3 3 3 3 , , , , , , , , , , 6 6 6 6 6 7 7 7 7 7 1 1 1 1 1 3 3 3 3 3 0 0 0 0 0 8 8 8 8 8 2 2 2 2 2 7 7 7 7 7 2 2 2 2 2 , , , , , , , , , , 2 2 2 2 2 9 9 9 9 9 6 6 6 6 6 0 0 0 0 0 4 4 4 4 4 8 8 8 8 8 2 2 2 2 2 1 1 1 1 1 , , , , , , , , , , 3 3 3 3 3 7 7 7 7 7 8 8 8 8 8 6 6 6 6 6 5 5 5 5 5 5 5 5 5 5 0 0 0 0 0 9 9 9 9 9 , , , , , , , , , , 2 2 2 2 2 6 6 6 6 6 5 5 5 5 5 6 6 6 6 6 5 5 5 5 5 6 6 6 6 6 8 8 8 8 8 6 6 6 6 6 3 3 3 3 3 , , , , , , , , , , 9 9 9 9 9 0 0 0 0 0 7 7 7 7 7 2 2 2 2 2 4 4 4 4 4 3 3 3 3 3 3 3 3 3 3 9 9 9 9 9 1 1 1 1 1 , , , , , , , , , , 0 0 0 0 0 2 2 2 2 2 0 0 0 0 0 8 8 8 8 8 5 5 5 5 5 0 0 0 0 0 3 3 3 3 3 , , , , , 9 9 9 9 9 5 5 5 5 5 1 1 1 1 1 , , , , , 1 1 1 1 1 0 0 0 0 0 3 3 3 3 3 , , , , , 2 2 2 2 2 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 7 7 7 7 7 , , , , , 2 2 2 2 2 4 4 4 4 4 3 3 3 3 3 , , , , , 3 3 3 3 3 9 9 9 9 9 1 1 1 1 1 4 4 4 4 4 7 7 7 7 7 8 8 8 8 8 , , , , , 5 5 5 5 5 3 3 3 3 3 7 7 7 7 7 , , , , , 5 5 5 5 5 6 6 6 6 6 6 6 6 6 6 4 4 4 4 4 7 7 7 7 7 3 3 3 3 3 , , , , , 4 4 4 4 4 6 6 6 6 6 9 9 9 9 9 , , , , , 3 3 3 3 3 2 2 2 2 2 7 7 7 7 7 7 7 7 7 7 9 9 9 9 9 , , , , , 0 0 0 0 0 0 0 0 0 0 7 7 7 7 7 7 7 7 7 7 2 2 2 2 2 1 1 1 1 1 , , , , , 1 1 1 1 1 7 7 7 7 7 2 2 2 2 2 , , , , , 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 , , , , , 1 1 1 1 1 6 6 6 6 6 5 5 5 5 5 9 9 9 9 9 1 1 1 1 1 0 0 0 0 0 , , , , , 5 5 5 5 5 8 8 8 8 8 6 6 6 6 6 , , , , , 1 1 1 1 1 7 7 7 7 7 0 0 0 0 0 1 1 1 1 1 7 7 7 7 7 , , , , , 5 5 5 5 5 1 1 1 1 1 7 7 7 7 7 , , , , , 4 4 4 4 4 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 7 7 7 7 7 2 2 2 2 2 , , , , , 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 , , , , , 1 1 1 1 1 6 6 6 6 6 5 5 5 5 5 9 9 9 9 9 1 1 1 1 1 2 2 2 2 2 , , , , , 4 4 4 4 4 0 0 0 0 0 1 1 1 1 1 , , , , , 4 4 4 4 4 7 7 7 7 7 0 0 0 0 0 9 9 9 9 9 , , , , , 0 0 0 0 0 3 3 3 3 3 8 8 8 8 8 , , , , , 0 0 0 0 0 5 5 5 5 5 3 3 3 3 3 3 3 3 3 3 8 8 8 8 8 5 5 5 5 5 , , , , , 2 2 2 2 2 7 7 7 7 7 2 2 2 2 2 , , , , , 5 5 5 5 5 1 1 1 1 1 2 2 2 2 2 R R R R R A A A A A E E E E E Y Y Y Y Y S S S S S U U U U U O O O O O V V V V V E E E E E R R R R R P P P P P I I I I I , 9 4 3 8 1 8 3 7 2 , , 7 2 7 8 0 6 6 0 3 , , 9 4 2 5 6 0 3 9 , , 1 0 8 1 1 5 4 , , 4 9 7 1 0 8 1 1 , , 4 2 1 5 6 9 1 , - - 6 7 5 , 3 3 7 , 2 6 3 7 6 , 1 3 3 , 0 3 6 7 9 , 3 7 6 , 9 9 3 9 3 3 , 5 6 4 , 1 5 8 7 , 9 9 4 8 1 9 , 6 6 7 , 3 1 - - 2 3 3 , 5 5 7 , 8 6 8 5 , 1 1 0 , 5 4 5 9 , 3 2 5 , 5 9 2 2 0 , 0 5 1 , 4 0 3 s t h g i r l l i w d o o G 0 1 1 2 3 4 5 6 7 8 9 SCHEDULES TO THE CONSOLIDATED BALANCE SHEET AS AT Subex Azure Limited (formerly Subex Systems Limited) 3131313131ststststst March, 2006 March, 2006 March, 2006 March, 2006 March, 2006 3131313131ststststst March, 2005 March, 2005 March, 2005 March, 2005 March, 2005 Amount in Rs. ScScScScSchehehehehedule - F dule - F dule - F dule - F dule - F Investments (Unquoted at cost) Long term - non trade In Government securities - I.V.P TTTTTotalotalotalotalotal Schedule - G Schedule - G Schedule - G Schedule - G Schedule - G Inventories : (at cost) Traded goods TTTTTotalotalotalotalotal Schedule - H Schedule - H Schedule - H Schedule - H Schedule - H Sundry debtors (Unsecured) Outstanding for more than six months - considered good - considered doubtful Less: Provision for doubtful debts Others TTTTTotalotalotalotalotal (considered good) Schedule - I : Schedule - I : Schedule - I : Schedule - I : Schedule - I : Cash & Bank Balances : Cash on hand Balance with Scheduled Banks - - - in current account in indian rupees in deposit account in indian rupees in EEFC account in foreign currency Balance with Non Scheduled Banks - Deposit with Royal Bank of Canada - in Current account with Royal Bank of Canada, Canada (Maximum outstanding during the year Rs. 2,205,145) in checking account with first Union Bank, New Jersey (Maximum outstanding during the year Rs.48,103,089) - - Deposit with money market account with First Union Bank, New Jersey (Maximum outstanding during the year Rs. 47,686,579) in Hellinic Bank - CYP Account, Cyprus (Maximum outstanding during the year Rs. 1,502) in Hellinic Bank - USD Account - Cyprus (Maximum outstanding during the year Rs. 8,077) in Bank of China - RMB account - China (Maximum outstanding during the year Rs.1,789,772) in Bank of China - USD Account - China (Maximum outstanding during the year Rs.1,541,775) in First National Bank of Colardo - USD Account - CO (Maximum outstanding during the year Rs.11,017,675) in HSBC Bank - GBP Account - Slough, London (Maximum outstanding during the year Rs.12,132,108) - - - - - - 254,146,370 58,786,098 312,932,468 58,786,098 - - - - 254,146,370 707,413,182 961,559,552 961,559,552 961,559,552 961,559,552 961,559,552 342,020 10,018,765 333,665,660 43,339,550 963,793 503,094 1,000 1,000 62,589 62,589 6 0 - 5 0 0 2 t r o p e R l a u n n A 206,737,371 23,938,870 230,676,241 23,938,870 206,737,371 525,666,629 732,404,000 732,404,000 732,404,000 732,404,000 732,404,000 425,892 10,850,189 219,021,499 2,438,103 895,009 576,781 11,793,296 18,108,364 - 1,395 1,663 22,595 892,680 1,773,861 2,696,382 23,423,122 1,548 7,593 495,853 766,318 1,398,966 2,506 TTTTTotalotalotalotalotal 406,014,754 406,014,754 406,014,754 406,014,754 406,014,754 278,411,743 278,411,743 278,411,743 278,411,743 278,411,743 97 Subex Azure Limited (formerly Subex Systems Limited) SCHEDULES TO THE CONSOLIDATED BALANCE SHEET AS AT Schedule - J Schedule - J Schedule - J Schedule - J Schedule - J Loans & advances (Unsecured, considered good, subject to confirmation) Loans and advances recoverable in cash or in kind or for value to be received Advance income tax including TDS Other deposits TTTTTotalotalotalotalotal Schedule - K Schedule - K Schedule - K Schedule - K Schedule - K Current liabilities & provisions Sundry creditors Sundry creditors (other than Small Scale Industrial undertaking) Advance received from customers Duties & taxes Unclaimed dividends (Refer Note II.15.3 of Schedule R) Provisions Taxation Dividends Tax on proposed dividends Warranty Employee benfits TTTTTotalotalotalotalotal Schedule - L Schedule - L Schedule - L Schedule - L Schedule - L Miscellaneous expenditure (To the extent not written off or adjusted) Preliminary expenses TTTTTotalotalotalotalotal 3131313131ststststst March, 2006 March, 2006 March, 2006 March, 2006 March, 2006 3131313131ststststst March, 2005 March, 2005 March, 2005 March, 2005 March, 2005 Amount in Rs. 24,615,200 18,281,313 30,821,889 73,718,402 73,718,402 73,718,402 73,718,402 73,718,402 26,573,953 9,841,828 20,790,128 57,205,909 57,205,909 57,205,909 57,205,909 57,205,909 183,730,622 64,884,807 13,801,308 300,627 38,196,322 22,069,429 3,051,499 3,157,312 1,410,009 80,190,568 68,936,388 9,655,614 301,227 16,180,750 22,071,631 2,631,572 473,950 - 159,083,797 41,357,903 200,441,700 200,441,700 200,441,700 200,441,700 200,441,700 262,717,364 67,884,571 330,601,935 330,601,935 330,601,935 330,601,935 330,601,935 - ----- 283,079 283,079 283,079 283,079 283,079 283,079 98 SCHEDULES TO THE CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED Subex Azure Limited (formerly Subex Systems Limited) Schedule - M Schedule - M Schedule - M Schedule - M Schedule - M Other income Interest received (Gross TDS Rs. 3,794,118, Previous year, Rs. 194,853) Other income received Profit on sale of fixed assets (Net) Creditors no longer payable written back Exchange fluctuation account (Net) Rent received TTTTTotalotalotalotalotal Schedule - N Schedule - N Schedule - N Schedule - N Schedule - N Direct cost a. Purchase of systems & solutions (Increase)/ decrease in finished goods Opening stock - finished goods Closing stock - finished goods b. Commission on Sales TTTTTotalotalotalotalotal Schedule - O Schedule - O Schedule - O Schedule - O Schedule - O Personnel costs Salaries, wages & allowances Contribution to provident fund and other funds Other staff related costs Sub contract charges TTTTTotalotalotalotalotal 3131313131ststststst March, 2006 March, 2006 March, 2006 March, 2006 March, 2006 3131313131ststststst March, 2005 March, 2005 March, 2005 March, 2005 March, 2005 Amount in Rs. 6 0 - 5 0 0 2 t r o p e R l a u n n A 17,485,876 1,487,982 9,934,930 - - - 28,908,788 28,908,788 28,908,788 28,908,788 28,908,788 1,681,501 3,550,504 - 128,861 869,400 617,068 6,847,334 6,847,334 6,847,334 6,847,334 6,847,334 76,932,834 31,751,699 62,589 - 138,025 62,589 62,589 55,854,843 75,436 383,824 132,850,266 132,850,266 132,850,266 132,850,266 132,850,266 32,210,959 32,210,959 32,210,959 32,210,959 32,210,959 828,320,502 8,826,455 23,471,249 54,753,071 915,371,277 915,371,277 915,371,277 915,371,277 915,371,277 553,321,831 4,737,399 17,274,574 62,887,736 638,221,540 638,221,540 638,221,540 638,221,540 638,221,540 99 Subex Azure Limited (formerly Subex Systems Limited) SCHEDULES TO THE CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 3131313131ststststst March, 2006 March, 2006 March, 2006 March, 2006 March, 2006 3131313131ststststst March, 2005 March, 2005 March, 2005 March, 2005 March, 2005 Amount in Rs. 1,837,904 35,834,182 6,672,679 4,815,705 13,174,483 22,233,837 1,480,250 80,086,232 27,500 1,014,727 16,356,876 28,787,589 1,637,075 2,683,362 35,583,448 - 794,643 10,856,321 263,876,813 263,876,813 263,876,813 263,876,813 263,876,813 - 26,805,705 26,805,705 26,805,705 26,805,705 26,805,705 26,805,705 1,047,017 13,921,158 3,418,257 3,310,730 13,814,407 11,317,215 1,075,134 47,843,722 32,500 3,787,731 15,407,617 11,146,246 448,425 - 4,295,276 277,467 8,158,131 139,301,033 139,301,033 139,301,033 139,301,033 139,301,033 1,126,721 23,247,978 24,374,699 24,374,699 24,374,699 24,374,699 24,374,699 Schedule - P Schedule - P Schedule - P Schedule - P Schedule - P Other operating, selling and Administrative expenses Software purchases Rent Power, fuel and water charges Repairs & maintenance others Insurance Communication costs Printing & stationery Travelling & conveyance Directors sitting fees Rates & taxes including filing fees Advertisement & Business Promotion Consultancy charges Bad debts written off Warranty expenses Provision for doubtful debts Loss on sale of asset & assets written off Exchange fluctuation account (Net) Miscellaneous expenses TTTTTotalotalotalotalotal Schedule - Q Schedule - Q Schedule - Q Schedule - Q Schedule - Q Financial costs : Interest on fixed loans Other interest & bank charges TTTTTotalotalotalotalotal 100 SCHEDULE – R SCHEDULE – R SCHEDULE – R SCHEDULE – R SCHEDULE – R I. SIGNIFICANT ACCOUNTING POLICIES I. SIGNIFICANT ACCOUNTING POLICIES I. SIGNIFICANT ACCOUNTING POLICIES I. SIGNIFICANT ACCOUNTING POLICIES I. SIGNIFICANT ACCOUNTING POLICIES I.1. Basis for preparation of consolidated financial statements The consolidated financial statements relate to Subex Systems Limited (the company) and its wholly owned subsidiaries. The consolidated financial statements have been prepared under the historical cost convention in accordance with the applicable Accounting Principles in India, the Accounting Standards issued by the Institute of Chartered Accountants of India and the relevant provisions of the Companies Act, 1956, as adopted consistently by the company. Revenues are recognised and expenses accounted on their accrual, including provisions / adjustments for committed obligations and amounts determined as payable or receivable during the year. I.2. Use of Estimates The preparation of the financial statements in conformity with Indian GAAP requires that management makes estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities as at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. Subex Azure Limited (formerly Subex Systems Limited) chargeable time or achievement of prescribed milestones as relevant to each contract. Contracts for sale of software licences include fees for transfer of software licences (which normally coincides with delivery), installation and commissioning. Activities relating to installation and commissioning involve minimal time and cost and are not subject to uncertainties. Revenues from composite contracts wherein fees for software licenses and implementation/commissioning fees are not identifiable separately are recognized on transfer of the software licenses and a provision is made for the estimated costs relating to the installation and commissioning. In the case of contracts, where the fees for software licenses and implementation costs are identified separately, revenues from software licenses are recognized on transfer of software licenses and revenues from implementation are recognized on completion of implementation and commissioning. For contracts where the only deliverable is services, revenue is recognized based on effort certified by customers and on fulfillment of contractual obligations with customers. Interest on investments and deposits are booked on a time proportion basis taking into account the amounts invested and the rate of interest. Agency commission is accrued on shipment of consignment by principal. 6 0 - 5 0 0 2 t r o p e R l a u n n A I.3. Principles of Consolidation Maintenance and service income is recognised on accrual basis. The financial statements of the company and its wholly owned subsidiaries have been combined on a line by line basis by adding together like items of assets, liabilities, income and expense. The intra-group balances and intra-group transactions are eliminated. The excess of cost to the company of its investments in the subsidiary over it’s share of the equity of the subsidiary, at the date on which the investments in the subsidiary company was made, is recognized as ‘goodwill’ being an asset in the consolidated financial statements. The following entities are considered in the consolidated financial statements. Sl No Name of Entity 1 2 Subex Technologies, Inc Subex Technologies Ltd % of Country of % of Incorporation ownership ownership held at 31st March, 31st March, 2006 held at 2005 USA 100 100 India 100 100 The financial statements of the company and its subsidiaries are prepared under uniform accounting policies in accordance with the generally accepted accounting principles in India. I.4. Revenue recognition Sales are recognised on the dispatch of goods to customers and are recorded net of discounts, rebates for price adjustment, rejections, shortages in transit, taxes and duties but include wherever applicable, export incentives. Revenue from software development is recognised on the basis of I.5. Fixed Assets Fixed assets are stated at cost of acquisition inclusive of freight, duties, taxes and interest on borrowed money allocated to and utilised for fixed assets up to the date of capitalisation and other direct expenditure incurred on ongoing projects. Assets acquired on hire purchase are capitalised at gross value and interest thereon is charged to revenue. I.6. Depreciation Fixed assets are depreciated using the straight-line method over the useful lives of assets. Depreciation is charged on pro-rata basis for assets purchased/sold during the year. The rates of depreciation adopted on the assets of the company is as under ; Particulars Particulars Particulars Particulars Particulars Plant & machinery Computers Vehicles Furniture & fixtures Intangible assets Goodwill Rate of depreciation Rate of depreciation Rate of depreciation Rate of depreciation Rate of depreciation 20.00 % 25.00 % 20.00 % 20.00 % 20.00 % 20.00 % Individual assets costing less than Rs. 5,000 are depreciated in full, in the year of purchase. I.7. Inventories Inventories are valued at lower of cost or net realizable value, after providing for cost of obsolescence and other anticipated losses, wherever considered necessary. Cost includes the aggregate of all expenditure incurred in bringing the inventories to the present condition and situation. 101 Subex Azure Limited (formerly Subex Systems Limited) I.8. Employee Stock Option For the shares granted/ allocated under Employee Stock Option Plan - I (ESOP - I), the Securities Exchange Board of India (SEBI) guidelines are not followed, since the scheme was formulated prior to the promulgation of the guidelines. Employee stock options under Employee Stock Option Plan - II (ESOP - II) are accounted in accordance with the guidelines stipulated by SEBI. The difference between the market price of the shares underlying the options granted on the date of grant of option and the option price is expensed as “Employees’ Compensation” over the period of vesting. The company has floated ESOP - III in the current financial year, which is on the same lines has ESOP - II. Subex Technologies Limited has established a new stock option scheme during the year which is on the same lines as of the Subex Azure scheme. I.9. Retirement benefits to employees The company’s liability towards retirement benefits in the form of provident fund is fully provided and charged to expenditure. The company has entered into an agreement with LIC of India for managing the gratuity liability through a fund, the premium for which is funded by the company and charged to expenditure on accrual basis. Leave encashment benefits is accounted for an estimated liability as at the date of the balance sheet. In respect of Subex Technologies, Inc., the entity maintains a contribution scheme for qualified employees. Contribution payable under the scheme is charged to the profit & loss a/c on accrual basis. I.10. Research and development Expenses incurred on research and development are charged to revenue in the same year. Fixed asset purchased for research and development are capitalized and depreciated as per the company’s policy. I.11. Foreign currency transactions and translation Transactions denominated in foreign currencies are recorded at the exchange rates prevailing on the date of the transaction. Monetary items denominated in foreign currencies at year end are translated at the exchange rate prevailing on the date of the balance sheet. Non-monetary items denominated in foreign currencies are carried at cost. Exchange differences on settlement or restatement are adjusted in the profit & loss account. Premium or discount on forward contracts is amortized over the life of such contract and is recognized as income or expense, except in respect of the liabilities for the acquisition of fixed assets, where such amortization is adjusted in the carrying cost of the fixed assets. Any profit or loss arising on cancellation or renewal or retirement of forward contract is recognized in profit and loss account. Assets (other than fixed assets) and liabilities of the foreign branches are translated into Indian rupees at the rate of exchange prevailing as at the balance sheet date. Fixed assets of foreign branches are restated at the exchange rate prevailing on the date of transaction. Revenue and expenses are translated into Indian rupees at yearly average exchange rates prevailing during the year. The exchange difference arising out of the transactions pertaining to the branch/ subsidiary have been recognised as exchange gain (loss) in the profit & loss A/c. On consolidation, assets and liabilities (other than non-monetary items) are translated at the exchange rate prevailing on the balance sheet date. Non-monetary items are carried at historical cost. Revenue and expenses are translated at yearly average exchange rates prevailing during the year. Exchange differences arising out of these transactions are: - included under ‘Exchange reserve on consolidation’ under Reserves and Surplus in the case of Non-integral operations. - charged to the Profit and Loss account in the case of Integral operations. I.12. Investments Long term Investments are stated at cost. Diminution in the value of investments other than temporary in nature is provided for. I.13. Income Taxes Income Tax comprises the current tax provision under the tax payable method and the net change in the deferred tax asset or liability in the year. Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying values of the assets and liabilities and their respective tax bases. Deferred tax assets are recognized and carried forward to the extent that there is a reasonable/ virtual certainity that sufficient future taxable income will be available against which such deferred tax assets can be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be received or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the income statement in the period of enactment of the change. I.14. Cash Flow Statement Cash flow statement has been prepared in accordance with the indirect method prescribed in Accounting Standard 3, issued by the Institute of Chartered Accountants of India. I.15. Preliminary and Share issue expenses Expenses incurred during the Initial Public Offer, follow on offer and issue of bonus shares are amortised over 5 years. Other issue expenses are charged to the securities premium account. I.16. Provisions A provision is recognized when an enterprise has a present obligation as a result of past event; it is probable that an outflow of resources will be required to settle the obligation, in respect of which a reliable estimate can be made. Provisions are not discounted to its present value and are determined based on best estimate required to settle the obligation at the balance sheet date. These are reviewed at each balance sheet date and adjusted to reflect the currecurrent best estimates. II. NOTES TO ACCOUNTS II. NOTES TO ACCOUNTS II. NOTES TO ACCOUNTS II. NOTES TO ACCOUNTS II. NOTES TO ACCOUNTS II.1. Deferred income taxes a) Provision for income taxes has been made in terms of Accounting Standard 22 “Accounting for Taxes on Income”. Deferred tax assets are subject to a valuation allowance that reduces the amount recognized to that which is more likely than not to be realized. 102 Movement in deferred tax asset (Liability) Net deferred tax asset/ (Liability) at the beginning of the year Add: Tax benefits/(charge) for current year Net deferred tax asset/ (Liability) at the end of the year 2005-06 2004-05 3,975,809 (1,570,000) 3,751,705 5,545,809 Subex Azure Limited (formerly Subex Systems Limited) In the previous year FCCB’s amounting to US$ 5,150,000 were converted at a price of Rs. 300 per share. The balance amount of FCCBs amounting to US$ 485,000 have been converted during the year at the same price. II.5. Fixed assets in the books of Subex Technologies, Inc., have been depreciated on written down value basis. Gross block of such assets at 31st March, 2006 amount to Rs. 7,124,287 (1.07% of total gross block) and net block amounts to Rs. 985,989 (0.25% of total net block). 7,727,514 3,975,809 II.6. Acquisition of Tangible and Intangible Assets –Mantas, Inc b) The net deferred tax asset as at 31st March, 2006 comprises the tax impact arising from the timing differences on account of: As at 31st March, 2006 31st March, 2005 As at 7,674,401 53,113 3,975,809 - 7,727,514 3,975,809 - Depreciation - Gratuity Net deferred asset / (liability) relating to above II.2. Contingent liabilities Debts factored - Rs. 389,264,166 (Previous Year, Rs. 218,862,500) Debts not acknowledged by company - Rs. 9,352,609 (Previous Year, NIL) (This relates to Income Tax matter relating to FY 2002-03. The demand is being disputed by the company) II.3 Acquisition of Tangible and Intangible Assets – Lightbridge Inc and Alcatel, UK. During 2004-05, the company had acquired Intellectual Property Rights comprising of technology, know how, source code and software connected with the fraud management software businesses from Alcatel, UK and Lightbridge, USA for an amount of Rs. 172,812,313 and Rs. 141,685,665 respectively, including expenses incurred in connection with the said acquisitions. During the year an amount of US$ 25,307 (Rs.1,102,753) has been paid to Lightbridge as additional consideration and is capitalized as Goodwill. The intangible assets based on the valuation report by independent valuers, are being amortised over 5 years in accordance with the company’s assessment of useful life thereof. Accordingly, an amount of Rs. 62,502,860 has been amortised in the financial year under review. Out of the amount of Rs. 172,812,313 accounted for the Alcatel acquisition, a portion of the consideration amounting to Rs. 22,754,000 (Euros 400,000) was to be discharged by way of discounts allowable to Alcatel on sales of software licenses prospected by them over a period of 18 months commencing from 1st October, 2004, as a part of their obligations under the reseller agreement entered into with the company. This liability was reflected as deferred payment liability in the previous year’s Balance sheet and has been fully discharged by the company during the year. II.4. Foreign Currency Convertible Bonds (FCCB) During the year 2004-05, , , , , the company issued Foreign Currency Convertible Bonds (FCCBs) aggregating to US$ 10 million to Institutional Investors to finance the above acquisition. The Bonds carried interest of 200 basis points above 6-month LIBOR and were redeemable by December 2009, if not converted in to equity as per terms of issue. 6 0 - 5 0 0 2 t r o p e R l a u n n A The company acquired business contracts, hardware, intellectual property rights (comprising of trademarks, patents, copyrights and software) connected with the fraud management software businesses from Mantas, Inc. USA in an all cash deal of US$ 2.10 million, on 1st March, 2006. The same has been capitalized along with the expenses incurred in connection with the said acquisition. The intangible assets accounted for based on the valuation report by independent valuers, are being depreciated over 5 years in accordance with the company’s assessment of useful life thereof. Accordingly, an amount of Rs.1,696,053 has been depreciated in the financial year under review. II.7. On 9th April, 2006, the company has issued Global Depository Receipts (GDRs) priced at Rs. 400 per GDR and representing one share each, amounting to US$ 10 million, which has been listed in the Luxembourg Stock Exchange. Consequent to the issue, subscribed equity share capital has gone up by 1,109,878 shares and this issue has resulted in accretion to the securities premium account by Rs. 432,852,420 post the balance sheet date. II.8. Bonus issue During the year, the company has declared bonus shares in the ratio of 1:1. The bonus shares (10,878,784) have been issued by capitalizing an amount of Rs. 108,787,840 from the Securities premium account. II.9. Operating leases The company has various operating leases for office facilities and residential premises for employees which include leases that are renewable on a yearly basis, cancelable at its option and other long term leases. Rental expenses for operating leases included in the Income statement for the year is Rs. 35,834,182.(Previous Year Rs. 13,921,158) As of 31st March, 2006 future minimum lease payments for non- cancellable operating leases for the next five fiscal years are: Amount In Rs. For the year ending 31st March, 2006 31st March, 2005 Within one year from 23,770,250 9,817,664 Due in a period between one year and five years from 54,166,897 17,263,838 Due after five years from - - II.10. Employees Stock Option Plan (ESOP) ESOP – I The company had issued 120,000 Equity Shares at Rs.10 each to Subex Foundation, an employee welfare trust, constituted to operate an Employees Stock Option Plan. Consequent to the issue of Bonus Shares, the total shares available with the trust had increased to 103 Subex Azure Limited (formerly Subex Systems Limited) 240,000. As per the Scheme in force, the trust allocates shares to those employees deemed eligible by the advisory board constituted for the purpose. The shares are allocated at a price, which is not less than 50% of the fair market price. The original shares granted are subject to a minimum lock-in period of three years and the bonus shares are subject to a minimum lock-in of 1 year, where after the shares granted can be sold / en-cashed. As at 31st March, 2006, 174,440 shares (which includes 87,220 bonus shares allotted on 6th January, 2006) are available with the trust. Since the scheme was formulated prior to the promulgation of SEBI guidelines on ESOP dated 19th June, 1999, the company has discontinued the scheme. ESOP – II During 1999-2000, the company established a stock option scheme under which 500,000 options have been allocated for grant to the employees. Each option comprises of one underlying equity share of Rs. 10 each and carries an entitlement of bonus shares if and when declared. This scheme has been formulated in accordance with the SEBI guidelines on ESOP & ESPS dated 19th June, 1999. As per the scheme, the compensatory committee grants the options to the employees deemed eligible by the advisory board constituted for the purpose. The options are granted at a price, which is not less than 85% of the average market price of the underlying shares based on the quotation on the stock exchange where the highest volume of shares are traded for 15 days prior to the date of grant. The shares granted vest over a period of 1 to 4 years can be exercised over a maximum period of 3 years from the date of vesting. Under this scheme 477,259 options have been granted to 310 employees as at 31st March, 2006. Out of the above options 70,323 options have been vested. The difference between the market price of the share underlying the options granted on the date of grant of option and the exercise price of the option are expensed over the vesting period as per the SEBI guidelines. The net impact of the movement in option grants during the period ended resulted in a debit of Rs. 4,910,159 (previous year: debit of Rs. 1,744,455) to the Profit & Loss account for the year. ESOP – III During 2005-2006, the company established a new Stock Option Scheme under which 500,000 options have been allocated for grant to the employees. Each option comprises of one underlying equity share of Rs.10 each. This scheme has been formulated in accordance with the SEBI guidelines on ESOP & ESPS dated 19th June, 1999. As per the scheme, the compensatory committee grants the options Particulars to the employees deemed eligible by the advisory board constituted for the purpose. The options are granted at a price, which is not less than 85% of the average market price of the underlying shares based on the quotation on the stock exchange where the traded volume is the highest for the 15 days prior to the date of grant. The shares granted vest over a period of 1 to 4 years can be exercised over a maximum period of 3 years from the date of vesting. As on 31st March, 2006, 70,380 options have been granted to 156 employees under this scheme. The difference between the market price of the share underlying the options granted on the date of grant of option and the exercise price of the option are expensed over the vesting period as per the SEBI guidelines. The net impact of the movement in option grants during the period ended resulted in a debit of Rs. 497,664 (Previous year, Nil) to the Profit & Loss account for the year. Subex Technologies Ltd. has established a new stock option scheme during the year under which 22,900 options have been allocated for grant to the employees. The shares are allocated at a price, which is at par. Employee stock options details as on the balance sheet date are ; ESOP – I : Nil ESOP – II : As at 31st March, 2006 31st March, 2005 As at Options outstanding at the beginning of the year Granted Forfeited/ cancelled Exercised 336,385 144,000 50,950 65,408 year year Balance at end of the Balance at end of the year Balance at end of the year year Balance at end of the Balance at end of the 364,027 364,027 364,027 364,027 364,027 301,440 101,800 32,749 34,106 33333333336,385 ESOP – III Options granted during the year and outstanding at the end of the year - 70,380 Method used for accounting for share based payment plan: The company has used intrinsic value method to account for the compensation cost of stock option to employees of the company. Intrinsic value is the amount by which the quoted market price of the underlying share exceeds the exercise price of the option. Options (Nos) 336,385 Weighted average exercise price per stock options (Rs.) 168.52 442.80 342.55 364,027 70,380 70,323 284.25 342.55 Options outstanding at the beginning of the year Granted during the year ESOP - II ESOP - III Exercised during the year Cancelled & Lapsed during the year Options outstanding at the end of the year ESOP – II ESOP - III Options exercisable at the end of the year 144,000 70,380 65,408 50,950 104 The Company issued 10,878,784 bonus shares with a record date of 6th January, 2006. The options under ESOP III totaling to 70,380 options were granted on 13th March, 2006, (post issue of Bonus shares referred above). Subex Azure Limited (formerly Subex Systems Limited) II.11. Related Party Information A) Related parties Companies under same management Cellcomm Solutions Ltd (formerly known as Subex Cellcomm Ltd) Subex Holdings Private Limited (SHPL) Key Management Personnel Subash Menon, Chairman & Managing Director Sudeesh Yezhuvath, Whole Time Director Fair Value Methodology The fair value of options used to compute pro forma net income and earnings per equity share have been estimated on the date of grant using Black-Scholes model. The key assumptions used in Black-Scholes model for calculating fair value are: risk-free interest rate ranging between 6.43%, expected life : 3 years, expected volatility of shares : 55.80% and expected dividend yield: 0.42%. The variables detailed herein represent the average of the assumptions during the pendency of the grant dates. The impact on the EPS of the company if fair value method is adopted is given below. Particulars Net Profit (as reported) 31st March, 2006 Rs. 378,486,522 Add: Stock-based employee compensation relating to grants after 1.4.2005 3,516,774 Less: Stock based compensation expenses determined under fair value based method for the above grants (11,181,604) Net Profit (proforma) 370,821,692 Basic earning per share (as reported) Basic earning per share (proforma) Diluted earning per share (as reported) Diluted earning per share (proforma) 17.62 17.26 17.53 17.18 B) Details of the transactions with the related parties other than employees who are related to the directors of the company is as under: e of Trrrrransaction ansaction ansaction e of T e of T Natur Natur ansaction Nature of T ansaction e of T Natur Natur Companies under Companies under Companies under Companies under Companies under same management same management same management same management same management a) b) c) d) e) Inter corporate deposits received (SHPL) Interest paid on inter corporate deposit (SHPL) Repayment of Inter corporate deposit/ loan(SHPL) Salary, perquisites and commission Amount due to 2005-06 - - - - - Amounts in Rs. Key management personnel Key management personnel Key management personnel Key management personnel Key management personnel 2005-06 2004-05 - - - - - - - - 23,409,166 10,000,000 15,670,746 4,975,500 2004-05 325,000 187,702 2,073,508 6 0 - 5 0 0 2 t r o p e R l a u n n A 105 Subex Azure Limited (formerly Subex Systems Limited) II.12. Earnings per share a) Basic: Profits after tax Less: Dividend on preference shares & distribution tax Net profit available to equity shareholders - basic b) Diluted: Profits after tax Add: Interest on FCCB Net profit available to equity shareholders – diluted Weighted average number of shares - basic Weighted average number of shares – diluted Earnings per share – basic Earnings per share – basic Earnings per share – basic Earnings per share – basic Earnings per share – basic Earnings per share - diluted Earnings per share - diluted Earnings per share - diluted Earnings per share - diluted Earnings per share - diluted Amount in Rs. 2005-06 2005-06 2005-06 2005-06 2005-06 2004-05 2004-05 2004-05 2004-05 2004-05 378,486,522 257,208,258 - (5,288,001) 378,486,522 251,920,257 378,486,522 257,208,258 - 5,380,279 378,486,522 262,588,537 21,480,220 21,590,084 17.62 17.62 17.62 17.62 17.62 17.53 17.53 17.53 17.53 17.53 17,833,474 19,584,306 14.13 14.13 14.13 14.13 14.13 13.41 13.41 13.41 13.41 13.41 A B C D E F B / E B / E B / E B / E B / E D / FD / FD / FD / FD / F Earnings per share has been recomputed for the previous year taking into account bonus shares issued in the current year. II.13 Segmental Reporting The group’s operations comprises of software development, services and sale of telecom products. Primary segmental reporting comprises of products and services segment. Secondary segment is reported based on geographical location of customers. The accounting principles consistently used in the preparation of the financial statements are also consistently applied to record income and expenditure in individual segments. These are as set out in the note on significant accounting policies. Information about primary business segment: In primary segment, revenue and direct expenses, which relate to particular segment and which are identifiable, are reported, while certain expenses such as depreciation and interest, which form a significant component of total expenses, are not specifically allocable to specific segments as the underlying services are used interchangeably. The company believes that it is not practical to provide segment disclosures relating to those costs and expenses, and accordingly these expenses are separately disclosed as “unallocated” and directly charged against total income. Particulars Particulars Particulars Particulars Particulars Products Products Products Products Products Services Services Services Services Services Consolidated Consolidated Consolidated Consolidated Consolidated Revenues 1,166,818,957 627,968,982 647,523,281 537,533,105 1,814,342,238 1,165,502,087 2005-06 2005-06 2005-06 2005-06 2005-06 2004-05 2004-05 2004-05 2004-05 2004-05 2005-06 2005-06 2005-06 2005-06 2005-06 2004-05 2004-05 2004-05 2004-05 2004-05 2005-06 2005-06 2005-06 2005-06 2005-06 2004-05 2004-05 2004-05 2004-05 2004-05 Amounts in Rs. Segment results before interest, depreciation & taxes Add: Unallocable Income, net of unallocable expense Interest expense Depreciation and Amortization Profit before tax Provision for taxation: Current Fringe benefit tax Deferred Profit after tax 106 497,732,918 324,669,761 21,571,856 37,946,128 519,304,774 362,615,889 11,847,897 - 26,805,705 24,374,699 92,584,239 71,941,961 411,762,727 266,299,229 34,903,702 14,636,780 2,124,208 - (3,751,705) (5,545,809) 378,486,522 257,208,258 Particulars of Segment Assets & Liabilities Subex Azure Limited (formerly Subex Systems Limited) Products Products Products Products Products Services Services Services Services Services Unallocable Unallocable Unallocable Unallocable Unallocable Consolidated Consolidated Consolidated Consolidated Consolidated 2005-06 2005-06 2005-06 2005-06 2005-06 2004-05 2004-05 2004-05 2004-05 2004-05 2005-06 2005-06 2005-06 2005-06 2005-06 2004-05 2004-05 2004-05 2004-05 2004-05 2005-06 2005-06 2005-06 2005-06 2005-06 2004-05 2004-05 2004-05 2004-05 2004-05 2005-06 2005-06 2005-06 2005-06 2005-06 2004-05 2004-05 2004-05 2004-05 2004-05 656,180,448 474,397,763 305,379,105 258,068,826 858,879,837 694,897,817 1,820,439,390 1,427,364,406 292,405,609 159,557,687 292,405,609 159,557,687 Segment Assets Segment Liabilities Unallocable assets exclude Goodwill Investments Advance income taxes Miscellaneous expenditure Deferred tax asset Unallocable liabilities exclude Loans - secured Loans – unsecured Deferred consideration Provisions 6 0 - 5 0 0 2 t r o p e R l a u n n A 308,987,980 308,987,980 - 1,000 18,281,313 9,841,828 226,463 283,079 7,727,514 3,975,809 335,223,270 323,089,696 13,695,549 73,282,446 - - 212,987,750 22,754,000 38,196,323 40,883,953 51,891,872 349,908,149 Segment assets based on their location APAC EMEA AMERICAS Total Amount in Rs. 2005-06 2004-05 98,925,812 198,835,910 456,487,450 243,572,258 406,146,290 290,058,421 961,559,552 732,466,589 II.14. Quantitative details None of the traded items are in excess of 10% of revenues and it is not practicable to give quantitative information in the absence of common expressible units. 1. The company is availing non-fund based limits and overdrafts against lien on the fixed deposits. However, there are no loans outstanding as on 31st March, 2006. 2. Estimated amount of contracts, remaining to be executed on capital account and not provided for (net of advances paid) Rs.Nil (Previous year, Rs. Nil). 3. Amount of Rs. 300,627 represents the unclaimed dividend for the period from 1999-2006. No part thereof has remained unpaid or unclaimed for a period of seven years from the date they become due for payment requiring a transfer to the ‘Investor Education and Protection Fund’. 4. Personnel cost for the year include expenditure on research and development of Rs. 6,549,332 (Previous year, Rs. 6,000,318). 107 Fixed assets used in the company’s business or liabilities contracted have not been identified to any of the primary reportable segments, as the fixed assets and services are used interchangeably between segments. Significantly all the fixed assets of the company are located in India. The company believes that it is currently not practicable to provide segment disclosures relating to total assets and liabilities since a meaningful segregation of the available data is onerous. Information about secondary business segment Revenue attributable to location of customers is: Revenue APAC AMERICAS EMEA 2005-06 2005-06 2005-06 Software Products Software Services - 647,523,281 - Total 110,335,323 1,063,216,858 640,790,057 Revenue APAC AMERICAS EMEA 2004-05 2004-05 2004-05 Software Products Software Services 94,747,131 155,135,728 378,086,174 - 537,533,054 - Total 94,747,131 692,668,782 378,086,174 110,335,323 415,693,577 640,790,057 II.15. Others Subex Azure Limited (formerly Subex Systems Limited) 5. The company has disposed of its land located at Yeshwantpur Industrial Area during the year for a sum of Rs. 17,667,000 and has paid the relevant long term capital gains (Rs. 2,003,792) on the profits arising on this transaction. Signature to the Schedules A – R Signature to the Schedules A – R Signature to the Schedules A – R Signature to the Schedules A – R Signature to the Schedules A – R 6. The Previous year’s figures have been regrouped to conform to the classifications for the year. Subash Menon Chairman & Managing Director Sudeesh Yezhuvath Wholetime Director V. Balaji Bhat Director Place : Bangalore Date : 15th May, 2006 Rajkumar C Company Secretary & Legal Counsel V. R. Suresh Rao General Manager - Accounts & Finance 108 Subex Azure Limited (formerly Subex Systems Limited) The International Securities Identification Number (ISIN) for the Company’s Shares in dematerialized form is INE754A01014. CUSTODIAL FEE CUSTODIAL FEE CUSTODIAL FEE CUSTODIAL FEE CUSTODIAL FEE Pursuant to the Securities and Exchange Board of India (SEBI) Circular No. MRD/DoP/Stock Exchange/DEP/CIR-4/2005 dated 28th January, 2005, issuer companies are required to pay custodial fees to the depositories with effect from 1st April, 2005. Accordingly, the company has paid custodial fees for the year 2006-07 to NSDL and CDSL on the basis of the number of beneficial accounts maintained by them as on 31st March, 2006. REGISTERED OFFICE REGISTERED OFFICE REGISTERED OFFICE REGISTERED OFFICE REGISTERED OFFICE The Registered office of the company is at #721, 7th Main, Mahalaxmi Layout, Bangalore – 560 086 CCCCCORPORA TE OFFICE TE OFFICE ORPORA ORPORA TE OFFICE ORPORATE OFFICE TE OFFICE ORPORA The Corporate office of the company is at #372, Koramangala III Block, Sarjapur Road, Bangalore- 560 034. SHARE TRANSFER SHARE TRANSFER SHARE TRANSFER SHARE TRANSFER SHARE TRANSFER Process for the Transfer of Shares: Share transfers would be registered and returned within a period of 20 days from the date of receipt, if the documents are clear in all respects. The company holds Share Transfer Committee Meetings one/ two / three times a month, as may be required, for approving the transfers/transmissions of equity shares. Share transfers and other communication regarding Share certificates and change of address, etc., may be addressed to: 6 0 - 5 0 0 2 t r o p e R l a u n n A M/s Canbank Computer Services Ltd., R & T Centre Naveen Complex, 4th Floor, #14, M.G. Road, Bangalore -560 001 Phone : 91-80-25320541 / 542 / 543 Fax : 91-80-25320544 Email : ccslrnt@vsnl.com Website: www.canbankrta.com SHAREHOLDERS’ INFORMATION 1. Date and venue of the : 28th August, 2006 at Le Meridien, Annual General Meeting (AGM) 28, Sankey Road Bangalore - 560 052. 2. Dates of book closure : 22nd August, 2006 - 28th August, 3. Dividend payment 2006 (both days inclusive) : 25% (15% interim and 10% final dividend subject to the approval of the members for Equity shareholdersfor equity shareholders). On or after 28th August, 2006, but within the statutory time limit of 30 days, subject to shareholders’ approval 4. Financial year : 1st April to 31st March BOARD MEETINGS & FINANCIAL CALENDAR BOARD MEETINGS & FINANCIAL CALENDAR BOARD MEETINGS & FINANCIAL CALENDAR BOARD MEETINGS & FINANCIAL CALENDAR BOARD MEETINGS & FINANCIAL CALENDAR Calendar of Board Meetings to adopt the accounts (tentative and subject to change): For quarter ending 30th June, 2006 – on 27th July, 2006 For quarter ending 30th September, 2006 – on 27th October, 2006 For quarter ending 31st December, 2006 – on 29th January, 2007 For the year ending 31st March, 2007 – on 27th April, 2007 LISTING OF SHARES LISTING OF SHARES LISTING OF SHARES LISTING OF SHARES LISTING OF SHARES Shares of the Company have been quoting on National Stock Exchange of India Limited (NSE) from 5th September, 2003, on Bombay Stock Exchange Limited (BSE) from 31st July, 2000 and on The Bangalore Stock Exchange Limited (BgSE) from 3rd September 1999. Global Depository Receipts (GDRs) of the company are listed at The Luxembourg Stock Exchange. The company’s GDRs have been quoting on the Luxembourg Stock Exchange since 7th April, 2006. The Company’s equity shares were delisted from Hyderabad Stock Exchange (HSE) with effect from 19th January, 2005. Listing Fees have been paid to all the above Stock Exchanges for 2006-07. The stock codes of the company at the Stock Exchanges are as follows: Name and address of the stock exchange Stock code National Stock Exchange of India Limited, Exchange Plaza, 5th Floor, Bandra Kurla Complex, Mumbai- 400051 Bombay Stock Exchange Limited, Phiroze Jeejeebhoy Towers Dalal Street, Fort, Mumbai 400023 The Bangalore Stock Exchange Limited P. B. No. 27024, No. 51, Stock Exchange Towers, 1st Cross, J. C. Road BANGALORE SUBEX SUBEX SUBEXSYS 109 Subex Azure Limited (formerly Subex Systems Limited) Stock market data relating to shares listed in India Stock market data relating to shares listed in India Stock market data relating to shares listed in India Stock market data relating to shares listed in India Stock market data relating to shares listed in India Monthly high and low quotations as well as the volume of shares traded at National Stock Exchange of India Limited, The Bombay Stock Exchange Limited and The Bangalore Stock Exchange Limited for 2005-2006 are: Month Apr ‘05 May ‘05 Jun ‘05 Jul ’05 Aug ‘05 Sep’ 05 Oct ‘05 Nov ‘05 Dec ‘05 Jan ‘06 Feb ‘06 Mar ‘06 High Rs. 413.00 525.00 526.90 554.95 674.50 669.90 618.90 758.90 838.00 794.40 428.00 447.90 TOTAL NSE Low Rs. 366.00 380.20 464.00 480.15 514.00 563.00 545.75 586.25 697.25 380.00 391.15 386.00 Volume Nos. 393,421 1,375,784 679,759 234,190 777,306 569,723 303,179 209,756 725,613 625,595 668,638 768,748 7,331,712 BSE Low Rs. 343.50 378.00 465.00 471.00 535.20 561.60 550.00 582.00 694.05 380.00 393.00 386.00 High Rs. 415.80 504.00 526.00 559.00 694.00 680.00 623.70 739.00 887.00 793.00 424.00 456.00 TOTAL Volume Nos. 231,724 932,506 244,392 370,789 538,839 418,400 299,993 94,059 659,060 722,521 376,178 608,658 5,497,119 SUBEX AZURE SHARE PRICE VERSUS NSE S&P CNX NIFTY SUBEX AZURE SHARE PRICE VERSUS NSE S&P CNX NIFTY SUBEX AZURE SHARE PRICE VERSUS NSE S&P CNX NIFTY SUBEX AZURE SHARE PRICE VERSUS NSE S&P CNX NIFTY SUBEX AZURE SHARE PRICE VERSUS NSE S&P CNX NIFTY BgSE Low Rs. High Rs. Volume Rs. d e d a r t t o N 821.35 776.00 730.65 685.30 639.95 594.60 549.25 503.90 458.55 413.20 367.85 3419.00 3267.35 3115.70 2964.05 2812.40 2660.75 2509.10 2357.45 2205.80 2054.15 1902.50 01/04/05 09/06/05 22/08/05 01/11/05 13/01/06 31/-3/06 – Subex Azure share price – S&P CNX NIFTY Note: On 6th January, 2006 the company has declared a bonus in the ratio of one bonus equity share for every share held. INVESTOR GRIEVANCES Investor grievances received from 1st April, 2005 to 31st March, 2006: Nature of complaints Nature of complaints Nature of complaints Nature of complaints Nature of complaints Non-receipt of share certificates/refund orders/call money notice/allotment advice/dividend warrant Letters from NSDL, Banks etc. Correction/change of bank mandate of refund order, Change of address Postal returns of cancelled stock invests / refund orders/ share certificates / dividend warrants Other general query - Total Received Received Received Received Received Cleared Cleared Cleared Cleared Cleared 16 - - - - 16 16 - - - 16 During the year ended 31st March, 2006, the company has attended to all the investors’ grievances / correspondence within a period of 10 days from the date of receipt of the same. LEGAL PROCEEDINGS LEGAL PROCEEDINGS LEGAL PROCEEDINGS LEGAL PROCEEDINGS LEGAL PROCEEDINGS There is one pending case relating to dispute over title to shares, in which we had been made a party. However, this case is not material in nature. 110 6 0 - 5 0 0 2 t r o p e R l a u n n A Subex Azure Limited (formerly Subex Systems Limited) SHAREHOLDING PATTERN Distribution of shareholding: No. of Equity shares held No. of Equity shares held No. of Equity shares held No. of Equity shares held No. of Equity shares held 1 501 – – 1001 – 500 1000 5000 5001 – 10000 10001 and above Categories of Shareholders As on 31ststststst March, 2006 March, 2006 March, 2006 As on 31 As on 31 March, 2006 March, 2006 As on 31 As on 31 No. of shareholders No. of shareholders No. of shareholders No. of shareholders No. of shareholders 7177 % of shareholders % of shareholders % of shareholders % of shareholders % of shareholders 83.51 659 541 91 126 8594 8594 8594 8594 8594 7.67 6.30 1.06 1.46 100.00 100.00 100.00 100.00 100.00 As on 31st March, 2005 No. of shareholders % of shareholders 4,205 260 230 28 79 4,802 4,802 4,802 4,802 4,802 87.57 5.41 4.79 0.58 1.65 100.00 100.00 100.00 100.00 100.00 Cartegory Cartegory Cartegory Cartegory Cartegory Public & Others Companies Core Promoters Mutual Funds ESOP FII As on 31ststststst March, 2006 March, 2006 March, 2006 As on 31 As on 31 March, 2006 March, 2006 As on 31 As on 31 As on 31st March, 2005 No. of share No. of share No. of share No. of share No. of share holders holders holders holders holders VotiVotiVotiVotiVotingngngngng strength % strength % strength % strength % strength % No. of shares No. of shares No. of shares No. of shares No. of shares heldheldheldheldheld No. of share holders Voting strength No. of shares shares held 7903 7903 7903 7903 7903 565565565565565 22222 3535353535 6565656565 2424242424 8594 8594 8594 8594 8594 22.639 22.639 22.639 22.639 22.639 14.623 14.623 14.623 14.623 14.623 18.572 18.572 18.572 18.572 18.572 24.433 24.433 24.433 24.433 24.433 0.576 0.576 0.576 0.576 0.576 19.157 19.157 19.157 19.157 19.157 4925727 4925727 4925727 4925727 4925727 3181581 3181581 3181581 3181581 3181581 4040960 4040960 4040960 4040960 4040960 5315913 5315913 5315913 5315913 5315913 125278 125278 125278 125278 125278 4168109 4168109 4168109 4168109 4168109 100.00 100.00 100.00 100.00 100.00 2,17,57,568 2,17,57,568 2,17,57,568 2,17,57,568 2,17,57,568 4,300 417 3 18 50 14 4,802 25.90 20.34 27.02 11.32 0.34 15.08 2,607,391 2,047,556 2,720,480 1,139,268 34,701 1,517,827 100.00 10,067,223 DIVIDEND DIVIDEND DIVIDEND DIVIDEND DIVIDEND Procedure for claiming unpaid dividend. In terms of Section 205A (5) of the Companies Act, 1956, monies transferred to the Unpaid Dividend Account of the company, which remain unpaid or unclaimed for a period of seven years from the date of such transfer, shall be transferred by the company to the Investor Education and Protection Fund established by the Central Government. Brief particulars of dividend declared on the equity share capital, are given below: Which year the dividend pertains to 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 Declared at the AGM / Board meeting held on 24th April, 1999 17th March, 2000 19th June, 2000 13th July, 2001 15th November, 2002 9th September, 2003 24th August, 2004 27th January, 2005 28th July, 2005 28th October, 2005 Nature of dividend % of dividend Final Interim Final Final Final Final Final Interim Final Interim 35 5 20 10 10 20 10 20 15 Due date for transfer to the fund See note below* Before 16th April, 2007 Before 18th July, 2007 Before 12th August, 2008 Before 14th December, 2009 Before 8th October, 2010 Before 23rd September, 2011 Before 26th February, 2012 Before 27th August, 2012 Before 27th November, 2012 The company declared bonus at 1:1 in the years 2000-01 and 2005-06. * As the entire dividend declared in FY 1998-99 was claimed by the respective shareholders no amount was required to be transferred to the Investors Education and Protection Fund in respect of the said dividend. Members can claim the unpaid dividend from the company before transfer to the Investors Education and Protection Fund. It may be noted that after the unpaid dividend is transferred to the said Fund, the same cannot be claimed. Bank particulars for dividend warrants Bank particulars for dividend warrants Bank particulars for dividend warrants Bank particulars for dividend warrants Bank particulars for dividend warrants With a view to preventing fraudulent encashment of dividend warrants, members holding shares in physical form are advised to furnish to the company particulars of their bank account with a request to incorporate the same in the dividend warrant. 111 Subex Azure Limited (formerly Subex Systems Limited) Payment of dividend Payment of dividend Payment of dividend Payment of dividend Payment of dividend NOMINATIONTIONTIONTIONTION NOMINA NOMINA NOMINA NOMINA Dividend warrants are posted to members at their registered address within the statutory time limit. Dividend warrants in respect of shares held in electronic/ dematerialized form are posted to the beneficial owners to their addresses as per the information furnished by NSDL and CDSL as on the record date. Warrants for high value amounts are sent through registered post. ELECTRONIC CLEARING SERVICE ELECTRONIC CLEARING SERVICE ELECTRONIC CLEARING SERVICE ELECTRONIC CLEARING SERVICE ELECTRONIC CLEARING SERVICE The company makes payment of dividend through Electronic Clearing Service (ECS) to its members. Under this system of payment of dividend, the shareholders get the credit of dividend directly in their designated bank account. This ensures direct and immediate credit with no chance of loss of warrant in transit or its fraudulent encashment. However, the company may pay the dividend by issue of warrants. Members holding shares in physical form who wish to avail of the ECS facility, are requested to give the ECS mandate in the prescribed form. The form can be obtained from the R & T agents at the address mentioned above. SHARES HELD IN PHYSICAL FORM SHARES HELD IN PHYSICAL FORM SHARES HELD IN PHYSICAL FORM SHARES HELD IN PHYSICAL FORM SHARES HELD IN PHYSICAL FORM By a tripartite agreement dated 5th December, 2001 in respect of shares held with NSDL and by a tripartite agreement dated 27th November 2001 in respect of shares held with CDSL, Canbank Computers Services Limited, R & T Centre, Naveen Complex, 4th Floor, 14 M G Road, Bangalore–560 001, were appointed as ‘Registrar and Transfer Agent’ both in respect of shares held in physical form and dematerialized form. ANDING GDRs AND THEIR IMPAAAAACCCCCTTTTT ANDING GDRs AND THEIR IMP OUTSOUTSOUTSOUTSOUTSTTTTTANDING GDRs AND THEIR IMP ANDING GDRs AND THEIR IMP ANDING GDRs AND THEIR IMP As of 31st March, 2006 no GDRs were outstanding. The company has issued 1,109,878 GDRs on 7th April, 2006 and 11,728,728 GDRs on 21st June, 2006. The GDRs to equity share ratio is 1:1. Pursuant to the provisions of Section 109A of the Companies Act, 1956, members may file nomination in respect of their shareholdings. Any member willing to avail this facility may submit to the company the prescribed Form 2B (in duplicate), if not already filed. Form 2B can be obtained with the help of our R & T Agents. Members holding shares in electronic form are requested to give the nomination request to their respective Depository Participants directly. WEBSITE WEBSITE WEBSITE WEBSITE WEBSITE Company’s website www.subexazure.com contains comprehensive information about the company, products, press release and investor relations. It serves to inform the shareholders by providing key information like Board of Directors and the committees of the Board, financial results, shareholding pattern, distribution of shareholding, dividend etc. INVESTORS’ CORRESPONDENCE INVESTORS’ CORRESPONDENCE INVESTORS’ CORRESPONDENCE INVESTORS’ CORRESPONDENCE INVESTORS’ CORRESPONDENCE For any queries, please write to: Rajkumar. C Head - Legal and Company Secretary Subex Azure Limited, No. 372, Koramangala, 3rd Block, Sarjapur Road, Bangalore – 560 034, India, Telephone: 91 80 6659 8700 Email:rajkumar.c@subexazure.com investorrelations@subexazure.com 112 Subex Azure Limited 372, Koramangala III Block, Sarjapur Road, Bangalore - 560 034, India www.subexazure.com s n o i t c u d o r p e R Q 2 

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